Aspen Technology, Inc.
Q4 2020 Earnings Call Transcript

Published: 12 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Aspen Technology's Fourth Quarter 2020 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. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Karl Johnsen, Chief Financial Officer. Please go ahead, sir.

[Karl Eric Johnsen:]

Thank you. Good afternoon, everyone, and thank you for joining us to review our fourth quarter fiscal 2020 results for the period ending June 30, 2020. I'm Karl Johnsen, CFO of AspenTech, and with me on the call is Antonio Pietri, President and CEO. Before we begin, I will make the Safe Harbor statement that during the course of this call, we may make projections or other forward-looking statements about the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from such projections or statements. Factors that might cause such differences include, but are not limited to, those discussed in today's call and contained in our most recently filed Form 10-Q. Also, please note that the following information relates to our current business conditions and our outlook as of today, August 12, 2020. Consistent with our prior practice, we expressly disclaim any obligation to update this information. The structure of today's call will be as follows

[Antonio Jose Pietri:]

Thank you, Karl, and thank you all for joining us today. We hope all of you and your families are staying safe and healthy. Today, we're also celebrating AspenTech's 39th anniversary of its founding. AspenTech delivered solid fourth quarter results against one of the most uncertain economic environments we have experienced in our 39-year history. By utilizing AspenTech solutions, our customers were able to adapt quickly to unexpected and challenging circumstances, while continuing to operate their assets safely and efficiently. Our customers faced an unprecedented demand disruption in our fiscal fourth quarter, and we thank them for their continued trust in the AspenTech team and our products and solutions. We believe this illustrates the mission-critical nature of AspenTech as well as the resiliency of our operating and financial model. Our performance was made possible by the hard work and dedication of everybody on the AspenTech team who remain focused on our customer success from the very beginning of the pandemic amidst challenging circumstances. Looking quickly at our financial results for the fourth quarter, revenue was $199.3 million, GAAP EPS was $1.43 and non-GAAP EPS was $1.54. Annual spend was $593 million, up 3.1% in the quarter and 9.6% year-over-year, and free cash flow was $99.5 million. For the full year, total revenue was $590.2 million, GAAP EPS was $3.28 and non-GAAP EPS was $3.72. Free cash flow was $243.1 million, and we returned $150 million to shareholders by repurchasing approximately 1.3 million shares. While we were pleased with our performance in the quarter, our results reflect the impact of the economic downturn related to the COVID-19 pandemic. We have seen conditions in our end markets, showed some improvements in the late March-April timeframe, but our customers continue to operate in uncertain and challenging market conditions. In the energy sector, we had a good quarter with some notable wins amongst refining customers. Oil prices have stabilized by the end of the quarter from their trough in early May and are recently trading around the $40 per barrel level as supply cuts took effect and demand showed signs of improvement. Increased economic activity and automobile use in the May trough has resulted in improved fuel demand, creating a more stable operating environment in refining, driven by an increase in utilization rate, albeit still well below pre-COVID levels. Reduced air and ground travel levels are likely to persist at least in the near term, which could limit further improvements in end market demand. We also had a solid quarter with chemicals customers. This is a sector where some companies benefit and others are impacted from the significant changes in product demand patterns. Sometimes even in business units within the same company. The customer has been adversely impacted, are (00

[Karl Eric Johnsen:]

Thanks, Antonio. I will now review our financial results for the fourth quarter fiscal 2020. As a reminder, these results are being reported under Topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts. Our license revenue is heavily impacted by the timing of bookings, and more specifically, renewal bookings. A decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license contracts up for renewal is not an indicator of the health or growth of our business. The timing of renewals is not linear between quarters or fiscal years and this non-linearity will have a significant impact on the timing of our revenue. As a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods. In our view, annual spend will continue to be the most important metric in assessing the growth of our business, and annual free cash flow, the most important metric for assessing the overall value our business generates. Annual spend, which represents the accumulated value of all our current invoices for our term license agreements at the end of each period was approximately $593 million at the end of the fourth quarter. This represented an increase of approximately 9.6% on a year-over-year basis and 3.1%, sequentially. Total Contract Value, or TCV, which we define as the aggregate value of all payments received or to be received under all active term license agreements, including maintenance and escalation. We believe the TCV metric gives insight into the scale of our overall business. As of June 30, 2020, the total contract value was $2.76 billion. This compares to $2.57 billion at June 30, 2019. Total bookings, which we define as the total value of customer term license contract signed in the current period less the value of term license contract signed in the current period, but where the initial licenses are not yet deemed delivered under Topic 606. Plus term license contract signed in a previous period for which the initial licenses are deemed delivered in the current period was $236.2 million, a 2% decrease year-over-year. Total bookings in fiscal year 2020 were $610.1 million, a 6% decrease year-over-year. This decrease in the quarter and for the year was the result of a lower amount of renewal bookings for each period, versus the comparable year-ago period. As a reminder, the timing of renewal bookings is not an indicator of our growth or health of our company. Overall, we were pleased with our bookings' performance in the quarter, which reflected solid demand across all three products suite and attrition that was in line with our expectations Total revenue was $199.3 million for the fourth quarter, a 1.8% increase from the prior-year period. Turning to profitability, beginning on a GAAP basis. Operating expenses for the quarter were $70.5 million compared to $69.1 million in the year-ago period. Total expenses, including cost of revenue were $85.6 million, which was up from $84.5 million in the year-ago period, and down from $85.9 million last quarter. Operating income was $113.7 million, and net income for the quarter was $97.6 million, or $1.43 per share. Turning to non-GAAP results. Excluding the impact of stock-based compensation expense, amortization of intangibles associated with acquisitions and acquisition-related fees, we reported non-GAAP operating income for the fourth quarter of $122.9 million, representing a 61.7% non-GAAP operating margin, compared to non-GAAP operating income and margin of $119.9 million and 61.3%, respectively in the year-ago period. As a reminder, operating margin is heavily impacted by the timing of bookings and the recognition of license revenue, which is typically highest in the fourth quarter. We believe focusing on annual free cash flow as a percentage of annual spend is the most appropriate way to assess the efficiency of our performance in a period. Non-GAAP net income was $104.9 million, or $1.54 per share based on 68.2 million shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with $287.8 million of cash and cash equivalents, and $431.2 million outstanding under our term loan and revolving credit facility. We did not repurchase any stock in the fourth quarter and completed $150 million of stock buybacks during the fiscal year. In the fourth quarter, we generated $99.7 million of cash from operations and $99.5 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software, and acquisition-related payments. Our cash flow performance was generally in line with our expectations, but did reflect lower-than-usual cash collections as some customers were more cautious in managing their cash flow given the current macro environment. We had approximately $18 million of receivables due June 30 that were not collected until the first few weeks of July. Overall, we have not seen any material changes in contract or billing terms, or the collectability of our receivables since the pandemic began. For the full year 2020, we generated $243.3 million of cash from operations and $243.1 million of free cash flow. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is available on our website. I would now like to close with guidance. Consistent with fiscal years 2020 and 2019, we will be providing guidance on an annual basis. This year, we will also be providing renewal bookings on a quarterly basis to provide better insight into the quarterly cadence of our revenue. We expect bookings in the range of $770 million to $850 million, which includes $519 million of contracts that are up for renewal in fiscal year 2021. This includes $81 million of contracts up for renewal in the first quarter. From a linearity perspective, we currently anticipate 40% to 45% of fiscal year 2021 bookings coming in the first-half of the year with the remainder in the second-half. With respect to annual spend growth, as Antonio mentioned, we are now forecasting 6% to 9% annual spend growth. In terms of timing, we would expect the linearity of sequential growth to be similar to recent years. This means the majority of our annual spend growth will occur in the second-half of the fiscal year. We expect revenue in the range of $704 million to $754 million. We expect license revenue in the range of $485 million to $534 million, and maintenance revenue and service and other revenue of approximately $192 million and $28 million, respectively. From an expense perspective, we expect total GAAP expenses of $372 million to $377 million. Taken together, we expect GAAP operating income in the range of $332 million to $377 million for fiscal 2021, with GAAP net income of approximately $290 million to $327 million. We expect GAAP net income per share to be in the range of $4.29 to $4.83. From a non-GAAP perspective, we now expect non-GAAP operating income of $374 million to $420 million and non-GAAP income per share in the range of $4.78 and $5.32. From a free cash flow perspective, we now expect $260 million to $270 million. Our fiscal 2021 free cash flow guidance assumes cash tax payments in the range of $60 million to $70 million. To wrap up, our performance in the fourth quarter and our outlook for fiscal 2021 demonstrates AspenTech's ability to generate solid growth and profitability in trying circumstances. We are focused on continuing to deliver significant value to our customers and investing in the next-generation of products that will provide additional ways to improve the performance of their assets. With that, we would now like to begin the Q&A. Operator?

[Operator:]

Certainly. Our first question comes from the line of Matt Pfau from William Blair. Your question please.

[Antonio Jose Pietri:]

Hi, Matt.

[Matthew Pfau:]

Hey, guys. Thanks for taking my questions. First, wanted to start off with, when I look at the 2021 guidance and, specifically, around annual spend, maybe you can just help us understand what sort of macro impacts are factored into that, and just sort of a recovery then in the back half of your fiscal year factored in and necessary to come within that guidance range?

[Antonio Jose Pietri:]

Well, I mean, look, again, and this is a little bit back to what we saw in Q4, and that we continue to have good conversations with customers. But at the same time, we recognize the environment that these customers are operating in. The uncertainty around how economic growth is going to develop over the next two, three quarters based on the resolution or not of the pandemic. But what you see in our guidance is, again, a solid performance from our MSC suite. Certainly, an engineering business that will reflect increased attrition. But as you saw, we're guiding that to 5% to 6% from 4.2%, and an APM business that should perform in line or better than it did in fiscal year 2020, from a standpoint of point of growth contribution. The range is just a reflection of, I think, that uncertainty that we see, but also the positive conversations that we're seeing at the high-end of the attrition is associated with the low-end of our growth guidance and vice versa, and perhaps a little bit less gross growth from the engineering business that what we saw in fiscal year 2020. And while we hope the MSC business will perform at the same level, we also would expect perhaps a little bit of a slowdown in gross growth in that business. But overall, 6% to 9% is a range that we're very comfortable with for the fiscal year.

[Matthew Pfau:]

Got it. And one more for me. Just maybe you can give us a little bit more detail on how you're investing in sales capacity in the GEI industries. Are these resources dedicated to specific industries within GEI? And then your current GEI business, what's the split between direct or partner stores?

[Antonio Jose Pietri:]

Yeah. So yes, we do have, and we've talked about different industries in the past on GEIs. We've sort of pivoted away from a couple of them, power and water, I think water – forget the name exactly of it. But certainly, mining is core to our activities there. You can expect us to do more in pharmaceuticals. We believe there's also an opportunity in food and beverage. And there's one or two others that we're looking at. We'll give you much more clarity, uncertainty on exactly the industries that we're now going to be focusing on come the November Investor Day. But just know that we believe there's an opportunity there. We see it. And we're going to put more sales resources into these industries going forward.

[Matthew Pfau:]

Great. Thanks, guys. Appreciate it.

[Antonio Jose Pietri:]

And Matt, the other part of your question direct versus indirect. Certainly, we're seeing good traction from indirect but based on what we're seeing, we also feel that we need to step in with our own direct sales organization into some of these industries, and that's where our investment will go into.

[Matthew Pfau:]

Thanks, Antonio. Appreciate it.

[Antonio Jose Pietri:]

Yeah. No problem, Matt. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jackson Ader from JPMorgan. Your question please.

[Antonio Jose Pietri:]

Hi, Jack.

[Jackson E. Ader:]

Thanks. Hey, guys. Thanks for taking my question. So the MSC suite, really strong growth this year, and it sounds like another outlook for 2021 is calling for more growth. I think that's just surprising on the upside, given the pressure that we're seeing from refiners and chemicals customers. So what's kind of – what's driving this growth?

[Antonio Jose Pietri:]

Look, just – and we've always said that in a way, as economic – the macro environment margins get tightened and demand suffers for these customers, they focus more and more on efficiencies, on flexibility, on agility and that's what our products do. I told this story to investors during the sort of the call back that we had with you, all of you in May and June, one of the largest global chemical companies been using our multivariable control technology to drive more throughput through their units, their ethylene crackers and their propylene plants prior to COVID. Of course, with the demand destruction, the objective was no longer increased throughput through those plants. They shifted the objective function for our controllers to drive-in a stability in the plants, operational stability to drive-in better quality in their products. And this Executive Vice President was so excited because they could do this and sort of drive that sort of flexibility, have that sort of flexibility in our technology. So this is what we do. Look, our technology is not only to be used during a steady state and growth environment. As you can adjust the economic function of our products and to whatever objectives you're trying to accomplish. Supply chains get disrupted. Our supply chain solutions can be used to re-plan refineries, to optimize distribution logistics across multiple plants for demand and supply. So, this is what we do. And in a way, the conversations we've had since this all happened are much more real, and we expect they will continue to be. For a couple of years, we've said that digitalization is becoming front-and-center for this industry that we're in the early stages of technology adoption and automation. And we believe those trends will only accelerate going forward.

[Jackson E. Ader:]

Okay. That makes sense. A follow-up question, Karl for you on cash flow. If we normalize, maybe for that $18 million of cash that ended up being collected in July versus June kind of looks like flattish free cash flow between what you're expecting in 2021 versus 2020. With everything else looking, like it's going to grow. What's the main driver of that kind of flat normalized cash flow growth?

[Karl Eric Johnsen:]

Yes. So there's probably two pieces to it. One is, that $18 million, that's probably about a 3, 4 day increase in our DSO and we're carrying that forward. Just assuming that, that dynamic will hold for the year. So it's a little bit of that playing into it. But then also, you've got cash taxes are up considerably next year. Part of that is there's a little bit of – about $7.5 million of that is for catch up for Topic 605 adoption that we've been paying, you're allowed to pay over 3 years. So a little bit of that too. So I think if you look at those two pieces, that gives you your answer. And I think the collections are right in line with what we'd expect with that slight bump in the DSO and then the cash taxes.

[Jackson E. Ader:]

Got you. All right, makes sense, thank you.

[Karl Eric Johnsen:]

Yeah.

[Antonio Jose Pietri:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Rob Oliver from Baird. Your question please.

[Antonio Jose Pietri:]

Hi, Rob.

[Rob Oliver:]

Hi, great, thanks. Hi, Antonio. Hi, Karl. Thanks for taking my question. A couple. Just to start, I wanted to ask about the APM business, solid guidance and strong year-over-year growth. Could you maybe talk a little bit, Antonio, about how that selling environment may have evolved throughout the back half of the year for you guys? I know going back to January; there were some deals that were delayed even prior to China and COVID and you were pretty confident those deals were going to close. It sounds like there's still some deals that are being held up or maybe just for longer sales cycles. So can you maybe just talk a little bit about that environment and how that may have changed throughout the quarter or what you're seeing right now? And then I have one follow-up.

[Antonio Jose Pietri:]

Okay. Well, I mean, Rob, I think throughout last year, especially the first half of the year, we maintained that really most of our growth was going to come in Q3, Q4. We were prepared to deliver in my opinion a fantastic Q3 quarter until basically March 8 hit. And we did what we did in Q3. Our performance in Q4 on APM is just a reflection of what we felt was going to be the second half of fiscal 2020, which we're going to approve the breakout capacity of our APM business. It was a record quarter for APM in Q4. The fact is that it could have been even better, but certainly, some customers that were looking at the technology to sign up for the first time, hesitated. We had some good medium-large deals where customers at the very end decided to delay the decision. So we've explained that in the prepared remarks, it's an emerging set of technologies. And in a way, it's an easy decision to delay investment in something like that. But we're also very confident about the suite and the technologies in the suite is being validated by customers. We did some sizable deals in the quarter. And look, while it's hard to be patient. As the economic environment recovers, we'll see APM come back and give us opportunity to provide is breakout capacity. At the same time, like you said, fiscal year 2020, we're guiding for what I believe and we believe is solid guidance, solid growth in the context of the uncertainty and macro that we're seeing, and we'll go from there.

[Rob Oliver:]

Great. That's helpful. And then just one very quick follow-up. On that 2021 attrition guide. Is that going to be more skewed towards any one particular vertical as you guys look at the renewal profile of the large renewals that you guys have this year? Thanks very much. Appreciate it guys.

[Antonio Jose Pietri:]

Yeah. No. I mean, look, of course, a lot of it will come out of the engineering suite, the E&C vertical, we'll probably see some attrition as well in the energy vertical. But I think it will follow the historical pattern associated with the downturn that we saw in 2015 and 2016, not to the same level that it did back then, but certainly same pattern, same profile. That's what we expect.

[Operator:]

Thank you. Our next question comes from the line of Jason Celino from KeyBanc. Your question please.

[Antonio Jose Pietri:]

Hi, Jason.

[Jason Celino:]

Antonio, Karl, thanks for taking the question. Good to get all the color. As you, kind of, talked about your APM pipeline, I think you mentioned it was the biggest pipe that you've seen so far. How much of this confidence is maybe due to enterprise deal? Or is it just the number of opportunities?

[Antonio Jose Pietri:]

Yeah. I mean, Jason, that's a good point. I mean, when we started talking about the APM pipeline three years ago, it was all first-time deals in the pipeline. Now the pipeline also has much larger deals, enterprise-type deals based on the fact that we now have some customers that have been using the technology for one or two years, and we've been expanding into more sites, and we're having conversations with some of these customers about doing an enterprise transaction. So we did that with one of our customers in Q4, and one of the GEI industries. And our expectation is that we're going to have an opportunity to do more of those in the future.

[Jason Celino:]

Okay. And then one more APM question, if I can. So this is maybe the first downturn relative to when this new technology was developed. But relative to your competitors, have you noticed any change in competition? Are they doing maybe as well as you're doing, and that's reflective of more of the market? Or any other commentary you can provide?

[Antonio Jose Pietri:]

Yeah. I mean, look, we only worry about the competition when we're competing against them head-to-head. Otherwise, they have to worry about their own business. What we see when – in head-to-head competition is that we continue to hold our own. One of the vignettes talked about this Japanese customer evaluating seven technology providers and selecting AspenTech. By the way, we also have some of the global consulting and global implementation companies now. Not only partnering with AspenTech, but actually making APM and the Mtell product exclusive in their go-to-market activities with their own customers through the conviction that they are seeing in the market about the product. So the business continues to build, including the ecosystem around the APM suite and the Mtell product. So, this is all part of the success that I believe we continue to have with APM.

[Jason Celino:]

Great. Thank you. Appreciate it. I'll get back in queue.

[Antonio Jose Pietri:]

Thank you, Jason.

[Operator:]

Thank you. Our next question comes from the line of Andrew DeGasperi from Berenberg. Your question, please.

[Antonio Jose Pietri:]

Hi, Andrew.

[Andrew DeGasperi:]

Hi. Thanks for taking my question. I just had one on the deals that you said last quarter that were being delayed. Just wondering how many of those did they close in Q4, given the strong quarter? Or were some potentially delayed beyond this quarter into next year?

[Antonio Jose Pietri:]

Yes. No. I mean, look, some of the deals from Q3 closed in Q4. Some of them, sort of, crossed all of Q4, and they're now in Q1. There were some deals in Q4 that closed in Q4 and some deals in Q4 that moved out of Q4. In a way, what the last three weeks of March did was push the pipeline into the future. But the opportunities haven't disappeared. It's just that they all got pushed into the future. And we closed some of that in Q4, and now it's in fiscal year 2021. But, look, it's – like, we said in the prepared remarks, it's an emerging technology, there has to be a strong conviction by customers to spend the money. We're asking them to spend in the middle of this uncertainty. And some customers are pulling the trigger and others are deciding to sort of delay. But overall, we are happy. Look, it's a suite; it's a product that grew year-on-year, 64%. Yes, it didn't grow what we had hoped it would grow, but 64%, I still think is pretty decent in the context of everything that was going on in the last four months of our fiscal year.

[Andrew DeGasperi:]

That's helpful. And then, if I may, on the guidance for next fiscal year. I was wondering how conservative it would be, given the current economic environment. I mean, I think in the past, you mentioned that oil generally being below $50 per barrel for a sustainable amount of time was a negative, but it doesn't seem to be the case with this annual spend guidance. And I'm wondering are you baking in some significant improvement in execution versus the Q4 quarter?

[Antonio Jose Pietri:]

Well, let me look at – we gave a range of 6% to 9%. And again, we're not oblivious to the challenges in the market. But at the same time, Q4, if you look at the earnings result from our customers after – in the last few weeks, you could see how it was one of the most challenging quarters they've ever faced financially, and they still – we still saw the commitment to continue to drive efficiencies in their business. So while we are cognizant of the macro environment that reigns in out there, we also saw good traction with our customers and the implementation of our products. So that's why you have the range that you have. It's a wider range than we've ever given. But we've done a lot of analysis around our business, and well, we gave you the range that we gave you because we believe in it.

[Andrew DeGasperi:]

Great. Thanks, Antonio.

[Antonio Jose Pietri:]

Yeah.

[Operator:]

Thank you. Our next question comes from the line of Mark Schappel from Benchmark. Your question please.

[Antonio Jose Pietri:]

Hi, Mark.

[Mark W. Schappel:]

Hi. How are you doing? Thank you for taking my question. Just one, Antonio, with respect to APM, in the past, you've talked about incumbency being important to winning new deals or winning new business. I was wondering if you had any meaningful deal wins in the quarter where you weren't the incumbent?

[Antonio Jose Pietri:]

Well, no, look, actually, quite a bit. And when you talk about the GEI industries, that's the case, when you talk about mining, when you talk about pulp and paper, even specialty chemicals and other places. Now when we talk about energy and chemicals, incumbency from a standpoint that it's a customer of AspenTech, not incumbency in that, there's already some APM product in there. But certainly, the fact that we have a long time existing relationships gives us a leg up against the competition, but we're proven that we can go into other industries and equally show success with the APM suite. So, this is why we're stepping up our investment in our sales organization for the GEIs, and more to come on that when we do our Investor Day in November.

[Mark W. Schappel:]

Great. Thank you.

[Antonio Jose Pietri:]

Yeah.

[Operator:]

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Antonio Pietri for any further remarks.

[Antonio Jose Pietri:]

Yeah. Thank you. Look, I want to thank everyone for joining us today. I just want to take a minute to also thank the AspenTech team. Again, I believe they did a tremendous job pivoting in early April to apply the learnings that we gain from the 2015, 2016 downturn and the leadership they demonstrated. I think our Q4 results should be further proof of the financial model and operating resiliency of this business. I know there were a lot of questions from investors during the call backs in May and June about the resiliency of our business in the face of everything that was going on. I hope we've proven that our business has a resiliency to it that is real. And furthermore, that behind the scenes, over the last four, five years, we've worked to transform our organization, the execution, how we lead, and I believe what we achieved in Q4 and fiscal year 2020 is a reflection of that. And well, fiscal year 2021 is ahead of us. So, thank you, everyone.

[Operator:]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.