Yahoo Finance Aspen Technology, Inc. (NASDAQ:AZPN) Q1 2024 Earnings Call Transcript
Aspen Technology, Inc. (NASDAQ:AZPN) Q1 2024 Earnings Call Transcript November 6, 2023
Aspen Technology, Inc. misses on earnings expectations. Reported EPS is $1.16 EPS, expectations were $1.41.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the AspenTech 2023 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Brian Denyeau from ICR. Please go ahead.
Brian Denyeau: Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the first quarter of fiscal 2024 ending September 30, 2023. With me on the call today are Antonio Pietri, AspenTech’s President and CEO; and Chantelle Breithaupt, AspenTech’s CFO. Please note, we have posted an earnings presentation on our IR website and we ask that investors refer to this presentation in conjunction with today's call. Starting on Slide 2, I want 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-K and other subsequent filings made with the SEC.
Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this presentation, we present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release and investor presentation, both of which are available on our website. With that, let me turn the call over to Antonio. Antonio?
Antonio Pietri: Thanks, Brian, and thanks to all of you for joining us today. Beginning on Slide 3, these are the four key takeaways for today's call. First, Q1 was a solid quarter, which once again delivered double digit ACV growth. We have hit the ground running to start the new fiscal year, shifting our focus from integration and transformation to execution and expansion. Second, demand remains strong in most end markets. More than ever, our products and solutions are mission critical and uniquely positioned to help customers meet their profitability and sustainability objectives. Third, we continue to see promising signs of growth across many different sustainability pathways that are expanding our market opportunity. We are highly encouraged about the potential to help new and existing customers achieve their sustainability objectives through partnership, collaboration and co-innovation in different use cases.
And fourth, we remain confident in our ability to deliver against our guidance targets for the full fiscal year. Our ability to generate double digit ACV growth and expand free cash flow margins while also making strategic investments for growth is a great example of the scalability of our business model. Looking at our quarterly results in more detail, Annual Contract Value or ACV was $898 million, increasing 10.9% year-over-year and free cash flow was $16 million. As I stated last quarter, our cash flow is generally lowest in Q1 due to the seasonality of cash collections in our business. Turning to Slide 4, I will now provide an update on the dynamics we're seeing in our end markets, where demand remains strong excluding chemicals. In upstream and midstream energy, customers are experiencing favorable market conditions and healthy demand growth with recent acquisition announcements by U.S. oil majors demonstrating their confidence in the industry's long-term prospects.
Strong demand combined with a persistently tight supply environment has led to higher oil prices and increased upstream CapEx investments, especially from national oil companies. CapEx investment is not only targeted at increasing oil supply, but also at sustaining existing production rates as the depletion rate of oil fields is a major area of focus. With the addition of the SEC suite, we can now offer an even more compelling lifecycle solution to manage and optimize the entire value chain. And we expect demand in these markets to remain positive for AspenTech going forward. In refining, while margins have fluctuated over the last three months, they remain strong as industry players benefit from a combination of increasing demand for fuels and capacity rationalization in Europe and North America.
These same owner-operators remain focused on extending asset lifespans and reducing emissions through CapEx and OpEx investments, targeting improvements in operational efficiencies where digitalization plays a fundamental role. We remain well positioned to support refiners with their initiatives through our ability to drive higher efficiency and therefore improve sustainability. E&C customers are benefiting from positive CapEx trends in both traditional energy and energy transition projects driving higher pipeline and industry optimism. As we have mentioned in the past we believe that sustainability initiatives will ultimately support faster and less cyclical growth than we have seen historically in this end market. We're encouraged by the trends we see with the with the E&C customers and expect they will continue.
The environment for chemicals remains consistent with the first half of this calendar year as industry players manage operating costs to support margins in response to weaker demand. While this is impacting our growth in the chemicals market, chemicals customers remain interested in AspenTech solutions to help drive efficiencies, reduce emissions and plastic waste and accelerate the development of the circular economy. This gives us confidence that we will deliver faster growth from this vertical as market conditions improve. Finally, demand in the power T&D industry remains robust as the industry benefits from an immense and ongoing investment cycle to expand, modernize and strengthen the grid. This is being driven by increasing consumer and industrial demand for electricity, rapid adoption of renewables and significant government funding.
For example, the International Energy Agencies or IEA's most recent update to its net zero road map for 2050 predict that $680 billion in global annual grid investment is needed by 2030 to meet the expected increase in electricity demand. The IEA also predicted that nearly 70% of this investment will be used for distribution grids with the aim of expanding and strengthening and digitalizing networks, all of which were well prepared to help support through our DGM suite. We're bullish on the long-term growth potential of this market and it remains a key strategic area for investment going forward. Turning to Slide 5, I'd like to provide an update on our sales efforts as we kicked off the year. As I highlighted on Slide 3, we're making investments to increase sales capacity in both new and existing markets.
We believe this investment combined with our Emerson commercial relationship will enable us to capitalize on the numerous growth opportunities we see across our business in the years ahead. We began this process in the fourth quarter of fiscal 2023 and have made significant progress in these efforts since then. We expect to start benefiting from this additional capacity towards the end of fiscal 2024 and realize its full impact in fiscal 2025 and beyond. I'd now like to provide some additional color around software transactions closed in the quarter. Our customers continue to recognize the exceptional value and breadth of our innovation for their businesses, both to meet their needs today and their long-term development objectives. As a result, we have continued to win new business while also deepening our relationships with existing customers.
The first customer reference is a world leader in industrial gases that is in the process of expanding from its traditional role in the production of industrial gases to become a leader in the production of green hydrogen. As part of this journey, this customer is using our software to design next generation process technology and estimate investment cost for green hydrogen, green ammonia and renewables. This customer doubled their engineering suite token entitlement as foundational technology for their ambitious growth objectives with plans to explore further standardization on our offerings going forward. The second customer is a leading refiner that decided to more than double their business with us citing its condition and the capabilities of our engineering suite and intention to explore additional use cases in alternative fuel development.
This latest transaction built on our long-standing relationship with the customer and we're excited to continue partnering with them going forward. Third, for DGM we secured a large scale perpetual license transaction with a U.S. power utility. The utility was in search of a better way to manage its transmission network and recognizing the strength of our monarch platform chose us over the incumbent following a competitive process. This customer is interested in additional DGM Suite products and we plan to continue working with them to expand the relationship going forward. The fourth and final reference is from our collaboration with Emerson where we displaced an incumbent in the pulp and paper business of a leading global manufacturer. Emerson's existing relationship with this customer through its DeltaV install base provided valuable insights into its evaluation process and helped us identify that the value of our adaptive process control technology for more efficient and sustainable plant operations would be a key differentiator.
We see room for expansion across this customer's asset base and remain confident in our ability to continue partnering with Emerson in pursuits going forward. Moving to Slide 6, I would like to provide an update on the sustainability opportunities we're seeing. The global mega trends of the energy transition and net zero targets continue to drive significant investment into the development of existing and novel technologies that can scale to achieve customers net zero ambitions. As a result, customers interest in our solution to support this type of sustainability projects is growing. This is manifested through ongoing CapEx spend, which drives increased interest and use in our engineering suite and represents most of our growth in this market today.
These assets are still in their initial design phase. However, overtime we expect to see a benefit from sustainability related projects in our manufacture and supply chain and asset performance management suites as well, since we provide customer value across the entire asset life cycle from the basic design phase to asset operation and maintenance. The customer reference mentioned a moment ago around green hydrogen is an excellent example of these land-and-expand opportunities and we continue to see many other compelling projects in different areas of sustainability. We also won in the quarter several sustainability related opportunities through our high velocity sales team. These wins included companies still in their initial startup journeys and later stage companies that have advanced into the testing and development stages of a specific sustainability use cases.
By leveraging our technology, these companies are developing solutions in areas such as carbon capture, plastics recycling, green hydrogen, renewable fuels and batteries. We're excited about the potential to help them scale up their digitalization initiatives going forward. Turning to Slide 7, I will now provide an update on our innovation initiatives. In Q1, we continued to drive innovation across our portfolio to help customers run their assets safer, greener, longer and faster, resulting in the planned release of enhancements to our current V14 software and a new V14.2 update later this month. These upgrades will include new machine learning and newer net capabilities across many of our products to enhance their hybrid modeling functionality.
Expansion of our sustainability application library and product integration for Emerson Ovation power generation control system among other areas. We also remain focused on helping our partners reach their sustainability goals through co-innovation in the quarter. For example, we have completed the productization of the technology license from Aramco, Architect 3 to be released as Aspen's strategic planning for sustainability pathways. This product holds significant potential to help our customers make more informed decisions in their carbon management strategies and over time, it should also incorporate capabilities to help customers better navigate multiple other sustainability pathways. In its initial release the product will simultaneously consider economics, process design and operating constraints to help customers optimize their carbon management strategies.
Additionally, as announced this afternoon, we're expanding our relationship with OMV Group, a multinational, integrated energy company based in Austria to accelerate the company's energy transition initiatives. As a first step in this partnership, we will focus on the renewable fuel optimization strategy by helping them better leverage their industrial data and develop a simplified integrated supply chain model across OMV's fuels and chemical supply chain. Now turning to Slide 8, I will discuss our outlook for the remainder of fiscal 2024. We remain confident in our ability to deliver ACV growth of at least 11.5% and free cash flow of at least $360 million. Industry demand for greater operational efficiency coupled with higher investment levels to support sustainability goals and energy transition initiatives is driving strong demand for our innovation.
Macro trends remain consistent with our expectations at the beginning of the year and we're closely monitoring the ongoing conflict in the Middle East for any potential impact on market dynamics which so far has been minimal. I would also like to give an update on the AspenTech team in Israel. Our priority has been the physical and mental safety of our team members there. We remain focused on these and we will continue to make sure we're doing all that we can to support our affected employees. We also want to extend our heartfelt condolences to all those directly and indirectly impacted by this event in Israel and throughout the region. Lastly, as announced a few weeks ago, Chantelle will be stepping down from her role here as CFO at the end of December.
Chantelle has been a great partner to me and a leader for the organization. On behalf of the entire team here at AspenTech, I'd like to thank her for her many contributions and wish here all the best in the next chapter of her career. We have full confidence in Chris Stagno, SVP and Chief Accounting Officer to step into the interim CFO role after Chantelle's departure should we need additional time to complete our search for a permanent CFO. With that, I would now like to turn the call over to Chantelle for a discussion of our Q1 financial results. Chantelle?
Chantelle Breithaupt: Thank you for the kind words, Antonio. It has been a privilege to serve as CFO for the past two and a half years at AspenTech. I am highly appreciative of your leadership, vision and commitment to the company. I am proud of what we have accomplished and I'm very confident in AspenTech's ability to continue delivering strong top and bottom line growth going forward. I remain committed to working with Antonio, Chris and the entire team to ensure a successful transition. Turning to our Q1 performance, I'd like to start out by highlighting that our earnings presentation includes explanations regarding the impact of ASC Topic 606 on our financial results. We have also included definitions of Annual Contract Value or ACV, bookings and free cash flow among other metrics in our earnings presentation now available on our IR website.
We ask that investors refer to these definitions together with today's call. Starting on Slide 9, annual contract value was $898 million in the first quarter of fiscal 2024, up 10.9% year-over-year and 1.4% quarter-over-quarter. As a reminder, Q1 typically sees the lowest number of transactions closed given our historical sales cadence. In addition, ACV performance in the first quarter of fiscal 2023 included one-time transformation and integration benefits from SSE and our acquisition of Inmation, which together represented approximately $10 million of net new ACV or 1.3 points of sequential growth in Q1 of fiscal 2023. Total bookings were $212 million in the first quarter, decreasing 5.4% year-over-year. As a reminder, bookings are impacted by the timing of renewals, which were down year-over-year, consistent with expectations.
We expect $131 million in bookings up for renewal in the second quarter of fiscal 2024. Total revenue was $249 million for the first quarter, which was approximately flat on a year-over-year basis. Please note that revenue in our model is heavily impacted by contract renewal timing and variability under ASC topic 606. Now turning to profitability, on a non-GAAP basis, which excludes the impact of stock based compensation expense, amortization of intangibles and acquisition and integration planning related fees, we reported operating income of $78 million in Q1 representing a 31% non-GAAP operating margin compared to a non-GAAP operating income of $93 million for a 37% non-GAAP operating margin a year ago. As a reminder, margins will fluctuate period-to-period due to the timing of customer renewals and the resulting impact on license revenue recognition in a given quarter.
Additionally, on expenses, please note that the increase was driven by increased headcount and compensation costs in line with Antonio's commentary around our expansion initiatives in fiscal 2024. This increase in expenses was expected and is consistent with our fiscal year 2024 guidance. Non-GAAP net income was $75 million in the quarter or $1.16 per share compared to non-GAAP net income of $142 million or $2.20 per share a year ago. Please note that the difference in non-GAAP net income between periods was mainly due to a lower benefit from income taxes in the first quarter compared to a year ago, driven by the change in our approach to computing our tax provision which originally occurred in the second quarter of fiscal 2023. Turning to our balance sheet, we ended the quarter with approximately $121 million of cash and cash equivalents, reflecting the impact of share repurchase under our $300 million share repurchase program.
In addition, we had $198 million available on our revolving credit facility. During the quarter, we purchased approximately 580,000 shares for $114 million under our $300 million share repurchase authorization announced in fiscal year 2024. We also settled our $100 million accelerated share repurchase program in the quarter to receive an additional 107,000 shares. Please note that the $100 million ASR program was paid for in full in fiscal 2023. For cash flow, we generated $17 million of cash from operations and $16 million of free cash flow in the quarter compared to $5 million in cash from operations and $4 million in free cash flow a year ago. As Antonio noted, this was in line with our expectations as Q1 has historically been our lowest cash flow quarter due to the amount of cash available for collection in the period.
Turning to Slide 10, I would now like to close with guidance. For the full year of fiscal 2024 we are reiterating our outlook across all metrics. This includes at least 11.5% of ACV growth and a free cash flow target of at least $360 million for the period. We continue to expect total bookings of at least $1.04 billion with $580 million of bookings up for renewal in fiscal 2024. Our non-GAAP EPS range has increased by $0.06 [ph] from our prior guide to reflect the impact of our share repurchase activity in the first quarter on shares outstanding. There is no impact to GAAP EPS. For a complete overview of our fiscal 2024 guidance, please refer to our earnings press release and presentation available on our IR website. As investors think about linearity for the remainder of the year, we continue to expect a cadence consistent with our historical performance.
This includes fiscal 2023 when adjusting for the one-time contributions from SSE Inmation in Q1 that I discussed earlier. We expect to generate net new ACV in the low 60% range in the second half of fiscal 2024. In addition, we expect that we will begin to see the impact from our sales investments in the second half of fiscal 2024 consistent with the assumptions we provided around our fiscal year 2024 guidance on our last quarterly earnings call. Please refer to Slide 13 of our earnings presentation for a detailed overview of our linearity expectations. To wrap up, we delivered a solid start to fiscal year 2024. We remain on track to meet our full year targets while also strategically investing in different areas that are supportive of our long-term growth objectives.
We believe AspenTech is in a great position to benefit from many of the largest and most important investment trends impacting asset intensive industries today, which should support our ability to generate attractive levels of growth and profitability for the foreseeable future. With that, I will turn it back over to Antonio for closing comments.
Antonio Pietri: Thank you, Chantelle. Q1 was a solid quarter where we once again delivered double digit ACV growth. Following our initial foundation building year, we have shifted focus to execution and expansion in fiscal year 2024. We're investing in areas that can drive our growth while also managing our expenses for a return to best-in-class profitability overtime. We're pleased to report that demand remains resilient for our mission critical solutions across most end markets. We also continue to see encouraging signs of growth in different areas of sustainability as I have touched on today. Our team is clearly energized to continue helping our customers with their sustainability initiatives going forward and we remain confident in our fiscal year 2024 guidance targets. With that, we will open it up for Q&A. Operator?
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