Aspen Technology, Inc.
Q4 2021 Earnings Call Transcript

Published: 11 Aug 2021

[Operator:]

Good day, and thank you for standing by. And welcome to the Q4 2021 Aspen Technology Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, your CFO, Chantelle Breithaupt. Thank you. Please go ahead, madam.

[Chantelle Breithaupt:]

Thank you. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the fourth quarter of fiscal 2021 ending June 30, 2021. I'm Chantelle Breithaupt, 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 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 11, 2021. 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 Pietri:]

Great. Thanks, Chantelle. And thanks to all of you for joining us today. Before turning to the quarter, I would like to acknowledge that tomorrow is the 40th anniversary of AspenTech's founding. Some of the renal team from MIT at AspenTech to this day, and I would like to congratulate them and all of our employees on this milestone. I would also like to thank our customers and investors for their continued support over the years. Now turning to the fourth quarter. Overall, our performance was in line with our expectations. While the macro environment has recovered considerably since our last earnings call, the spending environment by our customers remains constrained. However, we continue to have exciting and strategic conversations with customers. There is a clear interest in expanding adoption of AspenTech solutions to meet the objectives of increasing operational efficiency and sustainability. These conversations gives us continued confidence that we will return to double-digit annual spend growth over time as the macro environment continues to improve and spending budgets normalize. Looking quickly at our financial results, starting with the fourth quarter. Revenue was $198 million. GAAP EPS was $1.39 and non-GAAP EPS was $1.53. Annual spend was $621 million, up 1.9% in the quarter and 4.8% year-over-year, and free cash flow was $103.7 million. For the full year, total revenue was $709.4 million, an increase of 18%. GAAP EPS was $4.67 and non-GAAP EPS was $5.20, and free cash flow was $277.5 million. Looking at our fourth quarter results in more detail. We had a seasonally stronger performance, as you would expect, so the spending environment remains consistent with recent quarters. There continue to be a great deal of spending restraint in our core markets from the impact the pandemic had on the operating environment of our customers. As we have seen throughout fiscal year 2021, overall demand activity remained healthy with pipeline growth across all areas of the business. Conversely, the more difficult dynamic around transaction approval processes that we discussed last quarter was still prevalent, but we did start to see signs of normalization as the quarter went on. Overall, Asia-Pacific, North America and our SMB business were strong in the fourth quarter from a new business standpoint. At a high level, the overall economic backdrop improved during the quarter as many markets began to reopen and end market demand for fuel and chemicals approach or exceeded pre-COVID levels. However, this was not uniform across the world as the very recent shutdowns in Australia, India, Singapore and Japan illustrate. A positive outlook for consistent and sustained recovery from the pandemic, coupled with overall improvement in economic conditions should translate into greater confidence and readiness to deploy larger CapEx and OpEx budgets, supporting faster growth for AspenTech. As a reminder, our customers are operating with budgets that were set late last year in a more challenging and uncertain environment. We're cautiously optimistic that budget for calendar year 2022 will reflect the improved conditions we see today. But as we all know, the evolution of the pandemic and COVID infections is highly fluid. From a vertical perspective, refining margins improved to pre-pandemic levels in the U.S. in the fourth quarter and moved higher in Europe but remains under pressure in other parts of the world still dealing with COVID waves. Overall, end market demand and therefore, utilization rates and refining margins have been trending in the right direction in recent months. Financial results for refining customers or the refining businesses of integrated oil companies in the most recent quarter have improved to varying degrees, reflecting the asymmetrical recovery and evolving end market environment for these customers. We were encouraged in the fourth quarter by the increase in the number and quality of conversations we're having with customers focused on more strategic discussions about their future investment priorities. We believe this is a positive sign for future demand for AspenTech. Chemical customers saw record demand in some sectors in their most recent quarter with strong margins supporting solid financial results overall. Spending trends by customers in this sector are not back to pre-COVID levels, but remain healthy and were modestly better than the third quarter. AspenTech solutions are very well aligned to the chemicals customers' need for greater operational efficiency and sustainability. We expect chemicals will continue to be a source of strength for us going forward. Looking at our E&C business, our performance was better than expected, even as the E&C industry continues through a process of adjustment as a result of the reduced CapEx spending by their customers. CapEx budgets remain tight and this has led to reductions in backlog and projects on which to utilize our solutions over the last 12 months. But we did see a slight pickup in project awards going into the quarter and expect a slight upward trend in project awards going forward. We do not anticipate an accelerated improvement in this part of the market will continue to believe there's a longer-term opportunity in this industry. Especially as these customers continue to shift their focus to operations and maintenance activities and sustainability-related CapEx. Finally, in APM, we saw some improvement during the quarter in our core markets, but the trend is largely the same as we saw throughout fiscal 2021, high and growing customer interest. In the GI market, we continue to see more concrete purchasing decisions around Aspen Mtell. As we have discussed previously, APM has been an area where core customers have deferred buying decisions to preserve capital, given lower asset utilization rates and less need for maintenance. We're confident this is a temporary phenomenon and that as the operating conditions required, customers will begin to budget for operations and maintenance spending that will support increased growth in the future. A good example of the opportunity in APM was a low 7-figure expansion transaction we signed with a global mining customer, an existing APM user, this customer continues to expand its deployment of APM to other sites around the world. Overall, this customer is now spending more than $3 million annually on APM, which we believe is great validation of the opportunity in this market. Some other notable wins from the fourth quarter include

[Chantelle Breithaupt:]

Thank you, Antonio. I will now review our financial results for the fourth quarter of fiscal 2021. 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 nonlinearity 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 the current invoices for our term license agreements at the end of each period was $621 million at the end of the fourth quarter. This represented an increase of approximately 4.8% on a year-over-year basis and 1.9% sequentially. Total bookings, which we define as the total value of customer term license contracts signed in the current period, less the value of our term life contracts signed in the current period but where the initial licenses were not yet deemed delivered under Topic 606, plus hterm license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period was $225.6 million, a 4.5% decrease year-over-year. Total revenue was $198 million for the fourth quarter a 2% decrease from the prior year period. Turning to profitability, beginning on a GAAP basis. Operating expenses for the quarter were $77.8 million compared to $70.5 million in the year ago period. Total expenses, including cost of revenue, were $92.1 million, which was up from $85.6 million in the year ago period. Operating income was $105.9 million, and net income for the quarter was $95.4 million or $1.39 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 $118.4 million, representing a 59.8% non-GAAP operating margin compared to non-GAAP operating income and margin of $125.5 million and 62.2%, respectively, in the year ago period. As a reminder, margins will fluctuate period-to-period due to the timing of customer renewals and therefore, license revenue recognized during the quarter. Non-GAAP net income was $105.3 million or $1.53 per share based on 68.6 million shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with approximately $380 million of cash and cash equivalents and $293 million outstanding under our credit facility. In the fourth quarter, we generated $103.2 million of cash from operations and $103.7 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software and acquisition-related payments. In the full year 2021, we generated $276.1 million of cash from operations and $277.5 million of free cash flow. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website. From a capital allocation perspective, we resumed our share repurchase activity in the fourth quarter, buying 361,000 shares for $50 million. In addition, we recently announced a new share repurchase program for fiscal year 2022 to repurchase up to $300 million of stock. As part of the program, we entered into an accelerated share repurchase agreement for $150 million that we expect to complete later this quarter. The remaining $150 million are expected to occur over the balance of the year. Utilizing our balance sheet, whether through share repurchases or M&A to generate shareholder value is an important part of our strategy. I would now like to close with guidance. Consistent with fiscal years 2021 and 2020, we will continue to provide guidance on an annual basis. With respect to annual spend growth, as Antonio mentioned, we are forecasting 5% to 7% annual spend growth. We expect bookings in the range of $766 million to $890 million, which includes $486 million of contracts that are up for renewal in fiscal 2022. This includes approximately $58 million of contracts up for renewal in the first quarter. We expect revenue in the range of $702 million to $737 million. We expect license revenue in the range of $481 million to $515 million, and maintenance revenue and service and other revenue of approximately $192 million and $30 million, respectively. From an expense perspective, we expect total GAAP expenses of $386 million to $391 million. Taken together, we expect GAAP operating income in the range of $316 million to $346 million for fiscal 2022. -- with GAAP net income of approximately $288 million to $314 million. We expect GAAP net income per share to be in the range of $4.27 to $4.65. From a non-GAAP perspective, we expect non-GAAP operating income of $361 million to $391 million and non-GAAP income per share in the range of $4.80 to $5.17. From a free cash flow perspective, we expect free cash flow of $275 million to $285 million. Our fiscal 2022 free cash flow guidance assumes cash tax payments in the range of $60 million to $66 million. To summarize, we continue to produce growth and significant cash generation in a challenging environment. We are investing in our solutions to increase the value we deliver for our customers and ensure we are in the best position to accelerate growth as our customers' ability to spend with us improves. We have been through these cycles before and are confident we will return to double-digit annual spend growth over time. With that operator, let's begin the Q&A, please.

[Operator:]

Your first question comes from the line of David Robinson from William Blair. Your line is now open.

[David Robinson:]

The first question I had was about the kind of the budget improvements that you're expecting for the next upcoming fiscal year. Can you quantify kind of how much you expect the budgets to improve relative to 2021 in your customers' markets?

[Antonio Pietri:]

Well, let me -- let me frame it in the following manner. And of course, it will be up to customers to decide how much they're going to increase their budgets. But -- If you look at sort of the key metrics that we track for the performance of our customers, certainly, oil prices have been in a healthy range for the last few months. If you look at chemicals demand is back to pre-covid or above pre-covid levels if you look both at now at refining margins, they're back to pre-covid levels. Chemicals margins have exceeded pre-covid levels and in a way, are in some cases, sitting setting records. There's an expectation that CapEx investment will begin to grow, perhaps in the low single digits. But nonetheless, as well. So if you take all those metrics as a group, you think that we will have a better budget and spending environment next year. Now at the same time, look, the COVID pandemic and the Delta variant certainly introduce a question mark around where the outlook will be in the fall season. And that's something that may or may not have an impact on budget. But overall, we feel that our customers will be increasing their budgets for calendar 2022.

[David Robinson:]

And then one other question I had around the attrition. So you said you kind of came in within your expectations for the year. Was that kind of last customer that you referenced that disposed or disinvested in some assets? Was that kind of built into your original attrition expectations? I'm just trying to get a sense of kind of how that affected the overall rate for the rest of the year?

[Chantelle Breithaupt:]

Yes. So I just want to clarify, we came in somewhat above the range that we had given investors at the beginning of the year, 6.7% versus a range of $56 million -- What we saw in the last 12 months was an increase in M&A activity by customers, especially in the oil sector, where they were actually divesting assets, refining assets and that certainly led to greater attrition as a result of the divestiture -- This is not something that we had expected or planned for. But it's a result of the sort of reassessment of our oil customers of their businesses going forward. The sale of stand-alone refineries as they reposition their portfolios for the refining portfolios to be more integrated petrochemical sites. But to answer your question specifically, no, no, it was not something that we had expected.

[Operator:]

Your next question comes from the line of Jackson Ader from JPMorgan. Your line is now open.

[Jackson Ader:]

And Ken, we've looked for a long time that when customers are under pressure, is that a lot of times, that will drive some efficiency purchases or efficiency demand. I'm just curious why you think that didn't materialize this year for your chemicals or refinery customers that were particularly under pressure.

[Antonio Pietri:]

Sorry, and your question is why it will or did it materialize?

[Jackson Ader:]

Yes. Why didn't it materialize this past year in fiscal '20.

[Antonio Pietri:]

Okay. Yes. Well, look, we've now been engaged with customers, both virtually and in the last few months, I finally had some in-person meetings with customers, which was great. Look, as we said in the prepared remarks, the disruption that took place in the last 12 months was like nothing before, especially operating rate dropping into the low 60s for refineries and the impact that had in operational stability and their margins overall. When you're operating at those rates, your ability to create value from driving greater efficiencies in your operations is in there, okay? Because you are just not processing as much crude oil or or feedstock for your naphtha crackers to produce ethylene. So the need for technology to drive operational efficiencies is just is in there. anymore in such an environment. And frankly, in my entire career and I'm now getting to -- towards the end of it, I had not experienced a moment like this, where you have refineries operate at such low rates that their decision is whether to keep these assets operating at the edge of operational stability or shutting them down, which some of them had to do. So that incentive to drive more technology implementation, it just wasn't there equally with chemical companies. And our expectation going forward, though, is that as operating rates are now coming back to that 85%, 90% range. If you listen to Marathon Petroleum's earnings call, the CEO talked about their operating rates being at 94%. So that's all very healthy for them to start thinking about how to squeeze more efficiencies out of their operations, including chemicals. So including in the chemical sector. So I do think that we're now back to a range of operations where the incentive for technology adoption is back in play. And we'll see what happens going forward. So.

[Jackson Ader:]

And then another kind of maybe strategic follow-up as well for you, Antonio. I mean is it fair to wonder whether the planned investments in pharma or the other GEI industries are warranted or worth it? I mean, if they're not necessarily growing that much faster, if at all, than the core on a much smaller bas I mean I guess I just would have expected that harm the pharma revenue would have grown a little bit faster than 8%. And so if it's not growing that much faster at the moment, do you think it's worth creating all this kind of sales and go-to-market investments around it?

[Antonio Pietri:]

Look, Jackson, that's a fair question from you. But look, let me say the following. Fiscal '21 certainly was a very difficult year from a someone of our end markets. But at the same time, there was a lot happening inside the company as we put our foot to the pedal on investments. While fiscal '22 will be the largest investment year in 20 years, fiscal '21 was the second largest -- We launched our AIoT business unit on October 1 of last year. We launched our Pharmaceuticals business unit on April 1 and -- We hired a metals and mining executive that is now formulating a strategy and we're beginning to execute put the business in place for that strategy. We've been growing our GI sales organization that is actually the 1 that's going to market. In metals and mining, we've been standing up our pharmaceutical sales organization as well. So in the context of -- from an operational standpoint, everything that we were working on was really to set up for faster growth in fiscal '22 and going forward. I'm not disappointed on our results in pharma or metals and mining. As a matter of fact, and glad we had it. But we do expect better results in fiscal '22 and going forward. And absolutely, those investments will be merited.

[Operator:]

Your next question comes from the line of Andrew Obin from Bank of America. Your line is now open.

[Andrew Obin:]

Can you hear me?

[Antonio Pietri:]

Yes. Hi.

[Andrew Obin:]

So Hey. I completely appreciate having to guide on oil and gas budgets as your customers have not even really started the planning process for calendar '22. Having said that, I think a couple of your competitors are definitely talking about the fact that having good visibility into '22 and even '23. And I think our channel checks indicate some of that as well. Can you just talk about this longer-term visibility and what kind of conversations you are having with your customers that are giving you confidence into '22 and '23? .

[Antonio Pietri:]

Okay. Well, I mean, look, we in AspenTech, it's been our philosophy to only guide one year at a time. So I will not talk about. Okay. Look, I think you're also implying that we were claiming not full visibility into our customers' budgets for '22, but some of our competitors are. I won't talk about our competitors, but what I can tell you is that where we see today, -- And what we have experienced in the first half of this calendar year, gives us a certain sense for what the second half of the calendar year, the first half of our fiscal year will be we believe the budget will be the same. These customers will maintain their sort of their fiscal discipline and continue to spend through the budgets that they said last call. And then come '22, look, we do think that budget will improve, and we're having good conversations with customers. But we'd rather be more cautious with our guidance at this point in the fiscal year and the calendar year. and then wait until what customers tell us they plan to do for calendar '22. So.

[Andrew Obin:]

No, no. What I meant to imply is that, I think it's easier for your competitors to make more vague statements about '22 without having to formally guide. I was not implying that they have more visibility. No, no, no. Another question Yes. And then just -- it's tough to guide in the middle of the year, that's all I'm saying. Another thing, I just want to understand, as we think about annual spend and where we are for fiscal '21 and where you're guiding for fiscal '22. As you think about longer-term plan, do you think that the curve has prominently shifted down? Or do you think there's going to be a catch-up down the line to sort of to get back to you on this track of, I think, 12% CAGR that you were talking about at your February Analyst Day.

[Antonio Pietri:]

Yes. Well, I mean, look, first of all, we're very optimistic about our end markets going forward. If anything, an expectation that CapEx investments in upstream will increase over the next 2, 3 to 5 years. Certainly, the refining industry will probably be going through sort of a slow readjustment in that integrated refining and chemical site will be more profitable going forward. And you'll see some refinery rationalization. At the same time, refining capacity in Asia and the Middle East will continue to grow. And on a net-net basis, refining capacity will continue to increase around the world. Now what happens in 15, 20 years from now, we can have that be paid in a separate call. But no, we're very optimistic about the next 5 to 10 years. Look, our job in Aspen Technology is to help our customers be the best towards of those resources in order to drive more sustainable businesses by reducing CO2 emissions and plastic waste in the environment. That's what we've always done in AspenTech. It wasn't how we position ourselves, but it is absolutely what our customers are now looking to do with this company. And therefore, we see a lot of positive going forward.

[Operator:]

Your next question comes from the line of Jason Celino from KeyBanc. Your line is now open.

[Jason Celino:]

It sounds like the approval processes in your customers are still elongated, but it was interesting that you said that as the quarter kind of went on, it started to improve a little bit, but Help us understand the magnitude of that improvement, the end of the quarter versus maybe the beginning?

[Antonio Pietri:]

Yes. I think it's a tale of 2 sides, Jason. One, the larger the deal, the certainly scrutiny is still there. Look, we work on on some 7-figure deals in the quarter. And certainly, there were still a lot of scrutiny on that level of spend. But as you get to smaller deals, we saw a lot less friction in getting those deals approved. So I think there's a greater degree of comfort on the environment. All these -- our oil and chemical companies have reported incredible cash flow generation in the last quarter. And I think that's also been leading to a loosening of some of the approval processes for smaller spend. larger spend, yes, is still there, the approval processes. So -- but I think that will continue to evolve over the next few months.

[Jason Celino:]

And then when I look at the free cash flow guidance, it's basically flat year-over-year, and it's lower growth than the annual spend that we saw that you're forecasting. Maybe why is that?

[Antonio Pietri:]

Yes. I'll let Chantelle step in here. Go ahead, Chantelle.

[Chantelle Breithaupt:]

Yes. I think that there are 2 things, and this is really have a prudent free cash flow guidance, I would say that the 2 things I would take into consideration are the investments that we're making where we can play the big -- the largest investment as Antonio referred to in 20 years into those diverse kind of industries and our core. And two, we have a position on cash taxes that we're still working through to see. So I'd say cash tax assumptions and the investments are the 2 main factors we're working through in that guide.

[Jason Celino:]

And then maybe 1 quick follow-up on the big investments here. And how much is it headcount related versus other development or product type investment?

[Chantelle Breithaupt:]

Yes. I would say there's three main categories. We have talent, what you call it headcount, I'd call it talent investment. -- we have R&D investments. And then the third one would be our go-to-market, especially in some of the geographies that Antonio mentioned. So there's three main areas that we're focusing on.

[Antonio Pietri:]

Yes. Jason, I mean look, as we go into this new -- I mean, new industries, we've been in pharmaceuticals for a while, but certainly, we need to raise the visibility of AspenTech in pharmaceuticals, our visibility in pharma and our brand recognition. So some of those investments are onetime investments, but there's a lot of talent investment in there as well.

[Operator:]

Your next question comes from the line of Mark Schappel from Benchmark. Your line is now open.

[Mark Schappel:]

Antonio, last quarter, you called out a competitor that was giving away at software for free, I think, for like a 3-year period. Did you continue to see that type of intense pricing discount from competitors this quarter?

[Antonio Pietri:]

Look, now that I'm aware it wasn't raised or I heard of but something like that in our forecast call during the quarter. So maybe that competitor heard me talked about it in the last earnings call and was a little embarrassed and stopped the practice.

[Mark Schappel:]

And then with respect to your ESG products, right, you expect to launch in the coming year or so. You did mention in detail the work you're doing in the of hydrogen production. I was wondering if you could give another example or to of some of the other ESG areas that you're developing?

[Antonio Pietri:]

Great, and thank you for that question, Mark, because the fact of the matter is that there's so much functionality in a product today that is ESG or sustainability-related that in a way, a lot of our customers are not familiar with it because they really never had a need for it. But now, of course, this is front and center. But look, carbon capture and sequestration modeling. Some of the early pilot sites for carbon capture and sequestration were modeled using our Aspen technology, biomass processing modeling. You can talk about, well, okay, hygiene in production, but also advanced chemicals or chemical recycling. So there's a lot in our products. Look, you can optimize a refinery from the standpoint of reducing the amount of CO2 emissions. And we have customers that are now inquiring about that functionality in a product that they've been using for 25 years. But at the same time, we are going to enhance the capabilities of our products around all of this. Just so you know, look, when I was in Asia, based in Asia, one of the biggest users of our Aspen custom modeling technology, which is a layer product and Aspen Plus where Japanese automobile makers because they were modeling -- they were modeling electrical batteries for some of their hybrid automobiles back in the mid-2000. So we've had pockets of usage of these capabilities, and now it's all at the forefront and probably will drive certainly some of our growth in over the next 5, 10 years and beyond for sure.

[Operator:]

There are no further questions. At this time, I will turn the call over to our CEO, Antonio Pietri.

[Antonio Pietri:]

All right. Well, thank you, everyone, for participating in today's call. I look forward to hopefully have some in-person meetings here in the future. But nonetheless, thank you all.

[Operator:]

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