Aspen Technology Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 10 speakers on the call.

Operator

Please note that this conference is being recorded. I will now hand the conference over to your speaker host, Brian Danube. Please go ahead.

Speaker 1

Thank you, Olivia. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the Q4 of fiscal 2024 ending June 30, 2024. With me on the call today are Antonio Petri, AspenTech's President and CEO and Dave Baker, AspenTech's CFO. Please note, we have posted an earnings presentation on the IR website. This includes an explanation regarding the impact of ASC Topic 606 on our financial results.

Speaker 1

It also includes definitions of annual contract value or ACV, bookings and free cash flow among other metrics. We ask that an investor to refer to this presentation in conjunction with today's call. Starting on Slide 2, I'd like to take this opportunity to remind you that our remarks today will include forward looking statements. Actual results may differ materially from those contemplated by these forward looking statements. 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.

Speaker 1

Any forward looking statements 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. Antonio?

Speaker 2

Thanks, Brian, and welcome to everyone joining us today. AspenTech delivered a strong Q4 to finish fiscal 2024. We achieved these results on the strength of our innovation and focused execution on a solid pipeline of business. Despite the persistence of a dynamic macro environment and cautious customer spending in some of our end markets. We were also pleased to see the benefits of our efficiency and productivity initiatives in the second half of fiscal twenty twenty four come to fruition, delivering a favorable expense outcome for the full fiscal year.

Speaker 2

Our Q4 performance is a demonstration of what's possible as a result of our efforts over the past 2 years to integrate the Heritage AspenTech, DGM and SSE businesses, while also transforming the DGM and SSE businesses. We believe these efforts are now largely completed, which coupled with our broad portfolio of mission critical products, position AspenTech well to execute and deliver on an attractive combination of ACV growth and best in class profitability going forward. Additionally, we continue to make good progress in our commercial relationship with Emerson and we expect these efforts to lead to further benefits in fiscal 2025 beyond. Turning to Slide 3 for our Q4 and fiscal 2024 results. ACV was $968,000,000 in the 4th quarter, representing 9.4% year over year growth and 3.5% sequential growth.

Speaker 2

Free cash flow was $335,000,000 in fiscal 2024, slightly below our guidance and $153,000,000 in the 4th quarter. I would also like to provide an update on our exit from Russia announced earlier today. We're exiting Russia following the U. S. Government's recent announcement of expanded sanctions in the country prohibiting among other actions the sale, service, maintenance and support of enterprise management software and design and manufacturing software in the Russian market.

Speaker 2

As a result of these measures and our exit from the Russian market, we have written off certain assets that are related to our operations in the country. From an ACV perspective, we have written off all Russia ACV for a reduction of approximately $35,000,000 in our total ACV balance as of the end of fiscal 2024. Our new ACV balance is $933,000,000 after adjusting to reflect the impact of this reduction. We have included tables in the appendix of our earnings presentations to help bridge these numbers for investors. Dave will address the other related areas in his remarks.

Speaker 2

As you will remember, we moved to renewals only in Russia in fiscal 2024. The contribution from this business in fiscal 2023 made it apparent that it was no longer going to be a material was no longer going to be material to our overall growth profile resulting from the continued expansion of sanctions on the country. When removing Old Russia ACV from our results, our fiscal 2023 growth rate improved 60 basis points from 11.8% to 12.4% year over year, while our fiscal 2024 growth rate also improved 60 basis points from 9.4% to 10% year over year. Relatedly, attrition in fiscal 2024 was 5.6% when including Russia ACV compared to 4.7% in the same period when removing Russia ACV. Now returning to our results, I would like to emphasize the following regarding our Q4 and fiscal 2024 outcomes.

Speaker 2

1st, as I mentioned at the start, our performance in Q4 demonstrates the benefit of our transformation and integration efforts to bring together Heritage AspenTech, DGM and SSC and investments made over the past 2 years. The outcome achieved was execution driven, leveraging the platform built. We were also pleased to see the initial benefit from the sales expansion efforts made across the portfolio as we continue to advance and mature our business in these areas. 2nd, our innovation remains highly relevant and mission critical to customers in asset intensive industries. Throughout fiscal 2024, we work collaboratively with many leading players across our end markets to advance our product offerings and develop new solutions.

Speaker 2

By working alongside our customers and remaining focused on accelerating their operational excellence, sustainability goals while navigating a dynamic macro environment. 3rd and final, we remain committed to driving increased efficiency and productivity across organization. With this focus, we have delivered lower expenses in the second half of fiscal twenty twenty four relative to the first half of fiscal twenty 24. Looking ahead, we're confident in our ability to maintain expenses at current levels. We'll also continue to invest in strategic growth areas, including our DGM business.

Speaker 2

Turning to Slide 4, I will now provide an update on our suites performances in Q4 and fiscal 2024. Please note that all ACV growth figures referenced for suites will be based on our 9.4% year over year growth rate in fiscal 2024, which does not reflect the impact of the write off related to the suspension of commercial activities in Russia. The Digital Grid Management Suite or DGM grew by approximately 40% in fiscal 2024 to contribute 2.5 points of growth in line with our expectation. This outcome is a testament to the strength of our DGM suite and products and the early benefits from building out DGM's go to market capabilities to date. It also underscores how we remain well positioned to be a prime beneficiary of the substantial CapEx tailwinds to modernize, expand and cyber secure grids around the world.

Speaker 2

Power outages such as those recently experienced by the City of Houston due to Hurricane Beryl highlight the need to create a more resilient grid in the face of more frequent and impactful weather events, including the capability to recover faster from them. These are the use cases that are recently launched AspenTech OSI Outage Management System was developed for and is now being deployed by utilities in North America. We also saw good momentum with utilities outside of North America as part of our Q4 success. In Europe, we signed our largest term software deal ever for the region to upgrade a national grid operator's existing SCADA and EMS solution while displacing a competitor. This utility was in the market for a solution that is modern, adaptable and most importantly, capable of helping them to ensure reliable real time operations in the face of rapid renewables growth.

Speaker 2

In South America, we completed a significant term license deal with a long standing customer that is also one of the region's largest transmission utilities. With networks across multiple countries that continue to grow in complexity, this customer highly values our grid management capabilities and trust our ability to help them navigate an evolving landscape after more than a decade of working together. These are just a few of the successes we saw with DGM in international markets in Q4. As a core driver of this suite's growth, we're excited to build upon our successes globally going forward. The subsurface science and engineering suite or SSE contributed 1 point of growth in fiscal 2024 in line with our expectations.

Speaker 2

SSE had a strong Q4 as it benefited from solid execution as well as customers' positive reception to the tokenization of our SSE products. We continue to see solid demand across the upstream market. During the quarter, for example, we further expanded our business with a national oil company in Asia for our advanced petrophysical analysis capabilities in areas such as formation evaluation and reservoir characterization, while also converting them from their perpetual licensing arrangement to term software and tokens. This customer now has access to the full set of product capabilities in the SSE suite, which we expect will lead to use of other products resulting in increased usage and spend with AspenTech. Turning to Slide 5, our heritage AspenTech Suites contributed 6 points of growth in fiscal 2024, outperforming our expectations for 5.5 points of growth.

Speaker 2

The engineering suite represented 3.4 points of this total growth. Consistent with SSE, customer interest in our offerings remains solid in the upstream market. For example, we continue to expand our relationship with an upstream gas producer in Latin America that is leveraging our engineering suite capabilities to increase production from their gas fields by debottlenecking and optimizing their gas processing facilities. This equates to 100 of 1,000,000 of dollars in CapEx savings, resulting in one of the most important ongoing value creation use cases in our customer base. EPCs in particular are benefiting from growing backlogs driven by CapEx strength in traditional energy and sustainability.

Speaker 2

In Q4, for example, we won a large 7 figure deal with a long standing EPC customer. By expanding access to the engineering suite, this customer can now further optimize their engineering man hour costs, streamline their facilities design processes and provide their customers with even more highly relevant asset design options, thereby improving their overall bidding prospects success. We also signed important sustainability related wins in Q4, even as growth in this area moderated relative to the first half of the year. As an example, we expanded our business with a leading sustainable aviation fuel company that is using our engineering suite to meet its operational performance objectives while scaling up. We're excited about the opportunity to continue partnering with this company going forward as it continues to grow and explore additional AspenTech offerings.

Speaker 2

The Manufacturing and Supply Chain Suite or MSC contributed the other 2.6.0 hat growth in fiscal 2024. Customers continue to see our MSC suite capabilities as essential to improving operational and financial performance and achieving their sustainability goals. As a result, we saw solid uptake across MSC in the second half of fiscal twenty twenty four and especially in Q4. Despite this suite experiencing the most pronounced impact from the extended downturn in chemicals. In Q4, we won several deals for our new Aspen Unified Planning and Scheduling solution and leading multi unit optimization product, GDOT.

Speaker 2

For example, we signed a mid-seven figure deal with a leading refiner in North America based on the strength of our technology, domain expertise and dedication to co innovation to support them in increasing operational efficiencies and creating a standardization and real time visibility across their value change in their next phase of their digitalization journey. We also signed a large deal with a leading refinery in Europe. This represents a continuation of a deeply collaborative relationship with a customer who is now in the process of transforming their business from traditional refining to biofuels. Our ability to support bio component optimization through Unified was a key driver of our further expansion with this customer. Finally, the Asset Performance Management Suite or APM performed as expected, remaining flat year over year.

Speaker 2

As I mentioned last quarter, we have simplified APM's go to market strategy and are increasing our focus on certain market segments where the use cases lead to significant value capture for customers and produce high quality ACV for AspenTech. As a validation of our strategy calibration, we saw meaningful ACV growth contribution from this market segments in the Q4 quarter, which mitigated the attrition experience from customers in markets where we no longer focus on. We're in the early stages of our new strategy and plan for some moderate sales headcount investment focused on APM sales in the market segments targeted going forward. On Slide 6, I would now like to provide an update on our innovation. As I highlighted on our last call, we held a successful Optimize user conference in early May.

Speaker 2

With a robust turnout, Optimize24 was an excellent forum to reconnect with our users, align on shared visions of the future and drive further collaboration and co innovation opportunities. We were excited to have received lots of positive feedback from customers about the event, our strategy and the AspenTech mission, leading to additional engagement opportunities in the quarter and adding to our existing pipeline of business. After OPTIMIZE, we continue to engage with customers around industrial AI, which is how we refer to our unique blend of artificial intelligence, domain expertise and first principles based innovation. With a well established track record in the field, we're seeing an acceleration of interest from customers around our ability to deliver tangible value through our approach. This includes better modeling and optimization, decision support, predictive maintenance and more.

Speaker 2

As we drive further innovation around industrial AI, we believe that it will continue to serve as an important contributor to our growth. Finally, I'm also excited to announce that we plan to release our new micro grid solution under general availability this quarter as part of our V14.4 update. While this solution is part of the DGM suite, we see a significant opportunity to expand it into downstream chemicals and refining markets, where there's increasing focus on ensuring resilient and reliable power supply as renewable energy is incorporated into their electrical networks. Turning to Slide 7, I would now like to close with guidance. We start this year with a solid pipeline of business and a strong foundation from the integration and transformation work over the past 2 years.

Speaker 2

With this phase of work now largely completed, our teams will be able to focus on capturing the opportunity in front of us. For fiscal 2025, we're targeting ACV growth of approximately 9%. This is based on a total ACV balance of $933,000,000 as of the end of fiscal 2024, which reflects the removal of all Russia ACV. At the suite level, this includes expectations for approximately 5.5 points of growth from HAT, approximately 2.5 points of growth from DGM and approximately 1 point of growth from SSE. We also expect attrition to be approximately 4.5% in fiscal 2025, which improves on our ex Russia attrition rate of 4.7% in fiscal 2024.

Speaker 2

This guidance reflects the following macro assumptions. 1st, we expect end market demand trends to remain largely similar to what we saw in the second half of fiscal twenty twenty four. This includes continuing strength with utilities and energy, muted growth in chemicals and a more moderate sustainability CapEx environment. 2nd, we expect the macro environment in fiscal 2025 to remain dynamic. This includes expectations for the continuation of cautious customer spending in the face of an uncertain economic environment.

Speaker 2

For free cash flow, we expect approximately $340,000,000 in fiscal 2025. I would note that we expect underlying free cash flow growth in fiscal 2025 to be meaningfully stronger than our guidance indicates due to several one time factors that Dave will address in a moment. Finally, we aim to deliver flat expenses year over year. As I touched on at the beginning, we established solid traction in this area in the second half of fiscal twenty twenty four and this fiscal 20 25 expense plan further emphasizes our commitment to leading a best in class profitability business. As part of these efforts, we have identified additional opportunities to further streamline the organization and align resources across AspenTech.

Speaker 2

Today, we announced a workforce reduction of approximately 5% in the Q1 of fiscal 2025, including actions related to our Russia exit. We're supporting the departing employees with appropriate severance packages and other services to help them in their transition to new opportunities. These type of decisions are never easy to make. And on behalf of the company, I want to thank all impacted employees for their service and contributions to AspenTech over the years. With that, I will turn it over to Dave for a review of our financial results.

Speaker 2

Dave?

Speaker 3

Thank you, Antonio, and hello, everyone. It is a pleasure to join my first call with AspenTech. I'd like to start by thanking Chris Stagno for his excellent work in serving as the Interim CFO role and working with the team to deliver strong finish to our fiscal 2024. I'm excited to join such a talented team and to partner with Antonio, Chris, our finance leaders and the broader executive team to continue to drive value and focused execution for AspenTech. I look forward to speaking with many of you in the days ahead.

Speaker 3

Turning to Slide 8 to review our Q4 and fiscal 2024 results. We grew ACV 9.4 percent year over year in fiscal 2024 and 3.5% quarter over quarter in Q4. This outcome was 40 basis points above our guidance for fiscal 2024 as we benefited from strong execution on a solid pipeline of business to close out the year. Total bookings were $416,000,000 in Q4 and $1,160,000,000 in fiscal 2024, while revenue was $343,000,000 in Q4 and $1,130,000,000 in fiscal 2024. Please note that our revenue is recognized under ASC Topic 606 and bookings and revenue are heavily impacted by contract renewal timing.

Speaker 3

Also under ASC Topic 606, the impact of additional sanctions on Russia resulted in a modification of all existing contracts with customers in the country. For a net reduction of $5,500,000 in Q4 revenue. For profitability, on a non GAAP basis, we reported operating income of $173,000,000 in Q4, representing a 50.6 percent non GAAP operating margin. For fiscal 2024, we reported non GAAP operating income of $456,000,000 representing a non GAAP operating margin of 40.5%. As Antonio noted, we saw strong traction on cost savings in the second half of our fiscal twenty twenty four, following more elevated expense outlays in the first half of fiscal twenty twenty four to fuel our long term growth.

Speaker 3

Net GAAP net income was $151,000,000 in the quarter or $2.37 per share, compared to $138,000,000 or $2.13 per share a year ago. Non GAAP income was $422,000,000 or $6.59 per share in fiscal 2024. Turning to our balance sheet. We ended fiscal 2024 with approximately $237,000,000 of cash and cash equivalents and no debt. As of quarter end, we had approximately $23,000,000 of cash in Russia that we are unable to transfer to other countries due to sanctions in their impact on banking in the country.

Speaker 3

We plan to use roughly half of this amount as we wind down our Russia operations in fiscal 2025, mostly in Q1, with the remainder staying on our balance sheet as restricted cash in non current assets. We also entered into a new 5 year $200,000,000 credit facility in Q4. On share repurchases, we completed our $300,000,000 share repurchase authorization in Q4, repurchasing an additional 278,000 shares in for $57,000,000 We also announced today that our Board of Directors has approved a share repurchase authorization for up to $100,000,000 in fiscal 2025.

Speaker 2

We believe this is a

Speaker 3

prudent authorization amount that provides us flexibility to pursue M and A opportunities, which remains our top capital allocation priority, while also returning capital to shareholders. On a cash flows, we generated $155,000,000 of cash flow from operations and $153,000,000 of free cash flow in Q4. For the full year, we generated $340,000,000 of cash flow from operations and $335,000,000 of free cash flow, slightly below our expectations due to higher cash tax. Turning to Slide 9. I would like to now close with guidance.

Speaker 3

Consistent with our with prior fiscal years, we will continue to provide guidance on an annual basis. For fiscal 2025, we expect total ACV growth of approximately 9% year over year from our base of $933,000,000 as of the end of fiscal 2024. This includes expectations for attrition of approximately 4.5% and market conditions that are largely similar to what we experienced in the second half of fiscal twenty twenty four as Antonio noted. We expected total bookings of $1,170,000,000 revenue of approximately $1,190,000,000 GAAP net income of approximately $52,000,000 and non GAAP net income of approximately $478,000,000 From a cash flow perspective, we expect operating cash flows of approximately $357,000,000 and free cash flow of approximately $340,000,000 This includes expectations for cash tax payments of $135,000,000 and higher capital expenditures related to office build outs. Turning to Slide 10, we have included a chart to help bridge our free cash flow guidance investors.

Speaker 3

This includes 2 important considerations. First, we estimate that Russia free cash flow represented approximately $25,000,000 in fiscal 2024. 2nd, we expect to use an additional $10,000,000 in cash related to our Russia exit as well as $8,000,000 in cash related to our restructuring charge. Adjusting for these one time items, we expect to grow underlying free cash flow by 15% in fiscal 2025. For a complete review of our updated fiscal year 2025 guidance, please refer to our earnings presentation slides now available on our IR website.

Speaker 3

Turning to Slide 11, I will now address our linearity expectations for the year. First for ACV, we expect the cadence of new ACV to be similar to what we have seen historically. We also expect our Q1 sequential growth rate to be softer than we have seen in the past due to higher than normal concentration of attrition in the quarter. 2nd, the workforce reduction Antonio referenced earlier will impact our financials in the following ways. First, we expect to realize approximately $25,000,000 in annualized cost savings from this action.

Speaker 3

This is aligned with our goal to keep costs flat, while also investing in strategic growth areas. 2nd, we expect the restructuring charge to be between $7,000,000 to $9,000,000 and for the majority of this charge to occur in the Q1 of fiscal 2025. On free cash flow, we expect to generate the substantial majority of our free cash flow in the second half of our fiscal year, consistent with our historical results. We also expect free cash flow to be near breakeven in the Q1, which is consistent with our historical results and also due to the timing of one off items related to our restructuring in Russia exit. Finally, we expect bookings of $681,000,000 up for renewal in fiscal 2025 with $85,000,000 up for renewal in Q1.

Speaker 3

In closing, we delivered a strong Q4 to finish our fiscal year. Looking to fiscal 2025, we remain focused on driving further productivity and efficiency across the organization in line with our targets for solid top line ACV growth and profitability improvements. Additionally, with a strong foundation in place for our expanded portfolio, we are confident in our ability to deliver value for customers while also navigating the current dynamic macro environment. With that, I will turn the call back to Antonio for his closing remarks.

Speaker 2

Antonio? Thanks, Dave. Before we open it up to Q and A, I would like to announce that we will be holding an Investor Day on Tuesday, September 17, near our headquarters in Boston, Massachusetts. With 2 full years since our strategic transaction with Emerson and experience in operating our expanded portfolio, we're excited to come together for a more comprehensive discussion of what we have accomplished as well as how we're positioned for long term growth. For those interested in attending, please reach out to our Investor Relations team for additional information.

Speaker 2

We will also webcast the event live for those who are unable to make the trip. With that, we'll open it up to questions. Operator?

Operator

Thank you. Now first question coming from the line of Rob Oliver with Baird. Your line is open.

Speaker 2

Hi, Rob.

Speaker 4

Great. Hi, good afternoon. Hi, Antonio. Hi, Dave. I had two questions.

Speaker 4

Antonio, one for you and then one for Dave. So Antonio, I wanted to ask about some of the sales issues from last quarter, which you had cited that there was some sort of sales execution issues, I think largely pertaining to the Heritage Aspen business, but correct me if I'm wrong there. I just wanted to get an update from you now heading into the new fiscal year where you guys stand relative to the kind of sales leadership and your confidence in the ability to drive that organization? And then I had a follow-up. Thanks.

Speaker 2

Yes. Well, let me look, I'm very confident that addressed all the execution issues that we saw in Q3. And moving forward, it's about executing with excellence. We quickly did an analysis after the end of Q3 to understand where we had some of the challenges. Of course, there was a much deeper review of deals and strategies to close the deals.

Speaker 2

And the results that we achieved in the quarter are demonstration of what's possible here.

Speaker 4

Great. Thanks, Antonio. I appreciate that. And then, Dave, if you allow me just a 2 parter for you. 1, the I know you mentioned the attrition will be slightly higher in Q1 when you walked us through the linearity.

Speaker 4

Why is that? And then attrition is coming down for the year and what gives you the confidence that you're going to achieve that? And then the second is just more of an open question on yes, you've been in your seat now for a quarter and wanted to get a sense from you of kind of where you see you mentioned in your prepared remarks about value creation and we just love to hear where you what gets you most excited now that you have a sense of the organization? Thank you very much.

Speaker 3

Sure. So the attrition question first with Q1, it really is just the timing of the renewals and when they land in the year and this year there are more renewals land in Q1. And we are confident that we will see the attrition coming down just one with the exit from Russia that helps. And then secondly, just based on the renewals that we have and we can scope out. We have good line of sight there and are confident being able to deliver that.

Speaker 3

And then secondly, the 1st couple of months, it's been a lot of learning and working on partnering with Antonio, the executive team as well as finance to really understand. And as you look at going forward, it really is continued focus on the execution that we saw in Q4. There's still work for us to do around bring some of the back office systems together as well as some of the footprint consolidations and then just generally working with the team as we look at our operations and how we can continue to drive efficiency there across the entire organization.

Speaker 4

Very helpful. Thanks again guys.

Speaker 2

Thank you.

Operator

Thank you. And our next question coming from the line of Andrew Obin with Bank of America. Your line is open.

Speaker 2

Hi, Andrew.

Speaker 5

Hi, this is David Ridley Lane on for Andrew.

Speaker 6

Hi, David.

Speaker 5

Look, I think ACV growth rate ex Russia seems to have kind of bottomed here or stabilized with both Q3 and Q4 up 10% year over year. I guess with easier comparisons ahead, what factors are you kind of seeing or baking into guidance to have that slowing ACV growth for fiscal 2025?

Speaker 2

Yes. Well, let me look at it. As we said in our prepared remarks, certainly, we still believe that there is an uncertain macro environment out in the marketplace. But equally, we're more cautious on the demand that we would expect to see from sustainability CapEx. We had a strong first half of the year in fiscal twenty twenty four.

Speaker 2

We had a slower benefit from sustainability CapEx in the second half of fiscal twenty twenty four. I think we'll our assumption is that we'll continue to see that sort of environment in the second half of fiscal twenty twenty four into fiscal twenty twenty five. Therefore, there's sort of a half year impact there. And considering some of the reports that we've seen and uncertainty around demand, I think we're being more cautious around the refining demand. We saw very strong demand from refining in the second half of fiscal twenty twenty four.

Speaker 2

We've seen reports of compressed margins in refining. But overall, it's just a slightly lower expectation around refining demand. But overall, look, where we sit today, we feel very good about that 9%, and we'll certainly execute throughout the year to exceed that number.

Speaker 5

Got it. And then just touching on the commercial relationship with Emerson. As you went through the year, did the kind of ACV contribution that you've got through that channel improve? And how are you thinking about that within the fiscal 2025 guidance?

Speaker 6

Thank you.

Speaker 2

[SPEAKER MARTIN PEREZ DE SOLAY:] Yeah. Look, certainly, now that we've closed out fiscal 2024, we can see that some of the adjustments that we made on our joint go to market activities at the beginning of fiscal 2024 started to pay off, especially in the second half of the fiscal year. And now even here into Q1 fiscal 2025, we see some solid opportunities that are resulting from our joint go to market activities, and we would expect to see a greater benefit from really what is a developing comfort between the two companies on how we need to be operating in the marketplace, the strengths of each other and how we can leverage each other's capabilities and technology to create a 1 +1 equally 3.

Speaker 5

Thank you so much.

Speaker 2

Thank you.

Operator

Thank you. And our next question coming from the line of Dylan Becker with William Blair. Your line is open.

Speaker 2

Dylan?

Speaker 7

Hey, Antonio. Hi, Dave. Thanks for the questions here. Nice job. Maybe first for Antonio, you called out a customer realizing $100,000,000 plus in CapEx saving, pretty significant obviously ROI here.

Speaker 7

I wonder despite kind of that challenging macro backdrop you're seeing, how those customers are pairing the potential savings around some of their decisioning efforts, particularly if large kind of capital projects maybe are a bit more challenged to kick off throughout fiscal 2025?

Speaker 2

Well, let me look at this is the beauty of our technology in that the use case that I referenced and it's 100 of 1,000,000. I won't give you the specific number because it's actually, this customer did present at OPTIMIZE, I know you were there, Dylan, but and he presented this specific use case. In the face of a challenge CapEx, this customer is using our technology to find ways to debottleneck their existing gas processing facilities and optimize them for throughput. And therefore, they are generating incremental throughput through those facilities that saves them building a new facility that would cost them in the 100 of 1,000,000 of dollars. And that's how that use case comes about.

Speaker 2

So look, there's different ways that our customers innovate and use software to create value. And I think this is a great example of what's possible with our technology.

Speaker 7

Okay. That's great. That's helpful. Thanks, Antonio. And then maybe, somewhat for Dave, but maybe, Antonio, you've been here for a while too, calling for the significant kind of operating leverage growth on the back of some flat expenses.

Speaker 7

You've done this in the past, right? So how should we think about kind of where that leverage is coming from, sales efficiencies, synergies and maybe how to think about the potential balance here between that margin leverage and the ability as you guys kind of called out to optionally reinvest or use that as an optionality lever, if you will, in the potential situation where the environment does improve throughout the balance of the year? Thanks.

Speaker 2

Yes. Well, let me first speak to look, to my experience and Dave can chime in. Look, I've always believed and we know that one of the great strength of AspenTech is the leverage that we have in the model to increase sales with very little incremental spend as long as we're driving innovation into the market. So we continue to see that. And I would argue, I mean, Q4 had a big component of that.

Speaker 2

If you look at the DGM outcome that we achieved in the fiscal year and in Q4, a lot of the incremental ACV, the growth in ACV came from aftermarket sales to customers that already had an installed SCADA system from DGM, the Monarch system and an EMS solution. So the ability to expand sales with those customers. So ultimately, I think our relationship with customers, innovation and the token licensing model in that any innovation or new product that we develop or acquire and we can put into their suite and immediately is available to every customer of AspenTech creates a highly leverageable go to market model. And that's the basis for our belief that we can run a best in class profitability business here over time as as we scale the DGM SSE and we continue to grow the AspenTech business.

Speaker 7

That's great. Thanks, Antonio.

Operator

Thank you. Our next question coming from the line of Devin A. With KeyBanc Capital Markets. Your line is open.

Speaker 8

Hey, thanks. This is actually Jason. I was able to make it.

Speaker 2

Hey, Jason.

Speaker 8

Maybe a couple of clarifying questions. So if we look at the growth in Q4, Russia with Russia and without Russia, it looks like Russia is a tailwind, excluding the tailwind. Is that just because Russia just wasn't growing and it was kind of a drag?

Speaker 2

Yes. As we said, I mean, in fiscal and we said in the remarks, in fiscal 2023, it was clear that Russia wasn't going to be a contributor to growth based on the outcome that we achieved. And the fact is that more or less the same outcome was experienced in fiscal 2024. The benefit to the growth rate is that when you take out the ACV that existed in Russia, then your denominator becomes smaller and therefore your numerator produces a larger number, which is a faster or greater growth rate. That's the benefit of that.

Speaker 8

Okay, got it. Basic math. Yes, same thing. Yes. And then the restructuring, is that only impacting maybe your employees in Russia?

Speaker 8

Or is that restructuring other areas? Just wanted to clarify.

Speaker 2

No, this is broad based across the company. The fact is the Russia component is small. This is across every function and region.

Speaker 8

Okay. All right. Thank you.

Speaker 3

Thanks.

Operator

Thank you. And our next question coming from the line of Nason Neng with Berenberg. Your line is open.

Speaker 9

Hi. Thank you for giving me questions. I've got a couple, if I may. Firstly, starting with the chemicals verticals, please. It will be great to get an update on the macro dynamics there.

Speaker 9

We've now hit anniversary of when you guys started the macro cycle started affecting your numbers. So it'd be great to understand or if you feel like the down cycle has now hit a trough there going forward. And then secondly, this is now a few quarters that you're able to call out competitive wins in DGM. So it'd be great to hear from you, how you're able to achieve these competitive wins in this product market? That will be great.

Speaker 9

Thank you.

Speaker 2

Okay. All right. Well, let me first address the first question. Look, the chemicals market continues to be from an OpEx standpoint, continues to be depressed going through the trough. We have seen a couple positive announcements from chemical companies where they're starting to see a pickup in demand, but very preliminary and doesn't and in our opinion, doesn't change the trajectory of what we expect to see in fiscal 2025, which is more of the same that we saw in fiscal 2024.

Speaker 2

So our assumption for the fiscal year is that we will see little contribution from chemicals. And I just want to point out, I mean, chemicals is about 22% of our total ACD, which means that in a normal year, we will probably see about 20% of our growth coming from chemicals. So there's a significant component of our growth that is not producing of our business that is not producing. And when it starts to pick up, we would expect to see that benefit in a meaningful manner to our overall growth rate. When it comes to DGM, look, in a way, the OSI business prior to Emerson and AspenTech, even though it was a 30 year old business, was a new kid on the block and that they developed very contemporaneous technology with great capabilities, modern technology, great cybersecurity that when it's compared to the technology of the incumbents, it certainly out shines them from a capabilities, deployability, configurability, ease of use and so on and so forth.

Speaker 2

I have been in many control rooms of our customers in DGM over the last 18, 24 months. And you can see how these customers are with the dashboards and the user interfaces and everything that they use around DGM. So basically, it's just more contemporaneous technology, more modern, more cyber secure, more applications on top of the base SCADA system. In my remarks, I referenced outage management, which is faster. There's also capabilities around distributed energy resources, especially the use case around battery energy, battery storage or renewable energy.

Speaker 2

So it's a combination of factors. And just want to point out that when these utilities go out for to upgrade their systems, they're either upgrading their system with the incumbent or they're choosing someone else that therefore results in a displacement. And it is in those situations where an OSI is chosen that we displace because we're building our business, we're building our installed base and that will take many more years to accomplish, but it is the opportunity that we have ahead of us here.

Speaker 9

Thank you so much. That's really helpful. Thank you.

Speaker 2

Yes. You're welcome.

Operator

Thank you. And our next question coming from the line of Joshua Tilton with Wolfe Research. Your line is open.

Speaker 6

Josh? Hi. This is Arsenio on for Josh.

Speaker 2

So I just wanted to understand the 4Q bookings coming

Speaker 6

in ahead of think of expectations. What drove that? And then on the flat bookings guidance for 2025 on a reported basis, not adjusting for Russia and 'twenty four bookings and your renewal bookings $100,000,000 higher than 'twenty four, Does the guidance about any conservatism in new bookings in addition to reflecting the impact of discontinuing Russia operations? And just a quick follow-up.

Speaker 2

Yes. Well, let me no doubt that the guidance for fiscal 2025 assumes the discontinuation of Russian operations and the write off the ACV, which also means we're writing off equivalent amount of bookings associated with that ACV. So you have to adjust for that. I also want to remind you that our the profile, our bookings year to year is not consistent. It's a mountain range.

Speaker 2

And this year, we have coming up we have the bookings that we have. We have a concentration of bookings in Q1. But the important thing to note is that just because we have a certain amount of bookings doesn't mean necessarily that those bookings generate an equal and proportional amount of growth in ACV. In the bookings, there's a combination of attrition, there's a combination of flat renewals and there's a combination of growth from some of those bookings. And depending on the contracts that are coming up for renewal is we produce a certain outcome from the bookings that are coming up from renewal.

Speaker 2

And then we have to go generate incremental growth from the existing contracts that are not coming up for renewal. And the fact is that most of the growth that we experience in any given year is from contracts that are in the middle of the contract as opposed to coming up for renewal. I don't know if that answered your question.

Speaker 6

No, it's hit on the forward bookings estimate, but just in terms of 4Q bookings, I think it was above expectations unless I misunderstood something from the presentation. Just wanted to clarify that. What drove that outperformance?

Speaker 2

The Q4 outperformance, well, let me look at so this is the thing about giving you all the bookings number, whether it's in a quarter or for the year. The fact of the matter is that we can also do early renewals of contracts that are in the future. And there was a contract that wasn't supposed to renew until this fiscal year, fiscal year 2025 that was accelerated into Q4 as part of a bigger transaction for growth and that was signed in the Q4 quarter. So there was a we package incremental growth with an early renewal of a large contract, which then generated a larger amount of bookings that were not expected in the initial number that we gave you.

Speaker 6

Got it. Thank you. Yes. You're welcome.

Operator

Thank you. And I see there are no further questions in the Q and A queue at this time. I will now turn the call back over to Mr. Antonio Petri for any closing remarks.

Speaker 2

Thank you, operator, and thank you to everyone for joining the call today. We will be attending the Piper Sandler Growth Conference in the 2nd week of September. As I mentioned earlier, we will also be holding an Investor Day on September 17. Please reach out to our Investor Relations team for more information on this event. We look forward to catching up with many of you soon.

Speaker 2

Thank you everyone for joining and we will see you on the road. Thanks.

Operator

That does conclude our conference for today. Thank you for your participation and you may now disconnect.

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Key Takeaways

  • Q4 ACV reached $968 million, up 9.4% year-over-year and 3.5% sequentially, and fiscal 2024 free cash flow totaled $335 million.
  • Following expanded U.S. sanctions, AspenTech exited Russia and wrote off ~$35 million of ACV, boosting ex-Russia ACV growth to 10% in FY24 and lowering attrition from 5.6% to 4.7%.
  • The DGM suite grew ~40% (2.5 points of ACV growth) in FY24, while SSE added 1 point, heritage AspenTech suites contributed 6 points, MSC added 2.6 points, and APM stabilized under a recalibrated go-to-market strategy.
  • Second-half cost and productivity initiatives drove favorable expense outcomes, supporting a flat expense outlook; a ~5% workforce reduction in Q1 FY25 is expected to deliver ~$25 million of annualized cost savings.
  • For FY25, AspenTech targets ~9% ACV growth on a $933 million base, ~4.5% attrition, bookings of $1.17 billion, revenue of ~$1.19 billion, and ~ $340 million of free cash flow under stable end-market conditions.
A.I. generated. May contain errors.
Earnings Conference Call
Aspen Technology Q4 2024
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