雅虎香港財經 Aspen Technology, Inc. (NASDAQ:AZPN) Q3 2024 Earnings Call Transcript
Aspen Technology, Inc. (NASDAQ:AZPN) Q3 2024 Earnings Call Transcript May 7, 2024
Aspen Technology, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Brian Denyeau - ICR:
Antonio Pietri - President and Chief Executive Officer:
Chris Stagno - Interim Chief Financial Officer:
Jason Celino - KeyBanc Capital Markets:
David Ridley-Lane - Bank of America:
Rob Oliver - Baird:
Dylan Becker - William Blair:
Clark Jefferies - Piper Sandler:
Mark Schappel - Loop Capital Markets:
Operator: Good day, and thank you for standing by. Welcome to the Q3 Fiscal 2024 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. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Denyeau from ICR.
Brian Denyeau: Thank you, Josh. Good afternoon everyone and thank you for joining us to discuss our financial results for the third quarter of fiscal 2024 ending March 31, 2024. With me on the call today are Antonio Pietri, AspenTech's President and CEO; and Chris Stagno, AspenTech's Interim CFO. Please note we have posted earnings presentation on our IR website, and we ask that investors refer to this presentation in conjunction with today's call. Starting on Slide 2, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. 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 will 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?
Antonio Pietri: Thanks, Brian, and welcome to everyone joining us today. Before I get into our results, I would like to highlight our flagship optimize user conference, which we held last week in Houston, Texas with a theme of Partnering for the Future. This was the first time that the new AspenTech organization has held an optimized event, and we were pleased to see many new and familiar faces in attendance. More than ever, our customers are focused on addressing the dual challenge of meeting the increasing demand for resources from a growing population with an increasing standard of living, while also addressing the sustainability imperative. At its core, this requires leading the organizations through a transformation that will require a heavy investment in digitalization and new technologies to meet performance, resiliency and sustainability objectives.
We believe the strong customer attendance and discussions held at the conference are representative of the opportunity available to AspenTech in the future. Now turning to Slide 3 for our Q3 results. We remain incredibly excited about the market opportunity we're seeing as reflected in the ongoing and healthy growth of our pipeline. That said, the volume of business closed in the quarter did not meet our expectations or reflect the opportunity available to us. Annual contract value or ACV was $936 million in Q3, increasing 2.4% quarter-over-quarter and 9.5% year-over-year and included the closing of the delayed renewal agreement that I had referenced on our prior Q2 earnings call. Free cash flow was $137 million in Q3. The lower than expected ACV growth in the quarter was driven by what we believe was a slow start to budget deployments by customers in their new fiscal year, and secondarily and to a much lesser degree, our maturing sales organization.
On the customer side, while customers remained engaged throughout the quarter on exciting value creation opportunities and discussions, ultimately their conviction to close business in the quarter waned in the last month. We saw closing timelines extend beyond the quarter exercise more caution in final purchasing decisions. These dynamics were prevalent across most regions and end markets in the quarter. We believe this reflected customers' need for additional time to evaluate their own end markets and budgetary allocations in the context of uncertainty created by a dynamic macro environment. That said, customers continue to communicate that their budgets are generally consistent with those of calendar 2023 and we're also seeing that strength exhibited in our pipeline.
We continue to monitor this dynamic closely and are doing everything within our control to drive faster decision making to meet our sales goals. On the sales side, we saw some instances where our sales execution was below our expectations as we continue to onboard our expanded sales team and institutionalize best practices. Over the past 12 to 18 months, we have put in place new sales leadership, expanded our overall sales team and adjusted sales coverage for a significant portion of our customer base. We believe the combination of a still maturing sales team and a more cautious spending environment created some missed opportunities in Q3. We remain confident the investments and changes made to our sales organization will best position us to fully capitalize on our long-term growth opportunity.
While we cannot control spending caution among global customers, we can actively address those things that we can control. To that end, in the near-term, we are working to drive full alignment across and return our sales execution and predictability to the level that we expect of ourselves as a high performance organization. Considering our Q3 performance, we are lowering our ACV growth outlook to at least 9.9% in fiscal year 2024. We believe this target is prudent when considering the dynamic we saw in Q3. We're also updating our fiscal year 2024 free cash flow guide to at least $340 million, which is mainly a function of softer net new ACV in Q3. Chris will provide more color on our financials in his remarks. With that said, I will now turn to Slide 4 to provide an update on our suite's performances in Q3 as well as our updated expectations for fiscal year 2024.
Starting with Digital Grid Management or DGM, this suite saw continued strength in demand and signed several term license wins in Q3, as we continue to expand wallet share with existing customers and win new loads. During the quarter, for example, we won a large distribution management and optimization deal in North America, beating the competition across nearly all evaluation categories including compliance, technology, security and performance. Overall, we continue to be excited about the outlook and prospects for this suite. Demand for our grid innovation remains strong as the acceleration of global electrification and prioritization of energy security drives an unprecedented investment cycle to update and modernize the grid. The combination of these funding tailwinds and the strength of our grid technology is helping to drive a strong term pipeline growth for DGM both in the United States and international markets.
Separately, as we've mentioned in the past, utility customers have a materially different and longer procurement process than our older customer segments. We continue to make progress in refining and strengthening our sales forecasting in this area considering the purchasing process characteristics associated with these deals. Overall, we are pleased with DGM's year-to-date performance and it remains on track to deliver approximately 2.5 points of growth for our fiscal year 2024. Subsurface Science & Engineering or SSE had a softer quarter. In Q3, SSE had its largest block of contracts up for renewal. This backdrop combined with the two factors I laid out at the top of the call resulted in deals that pushed out of the quarter and more muted growth.
We now expect to close many of these deals this quarter. With that said, the backdrop for SSE customers remains strong with solid CapEx and operating budgets in place for the remainder of the calendar year. In Q3, for example, we further expanded our existing SSE business with a national oil company in Latin America. This customer values the strength of our seismic technology and has shown significant interest in converting to tokenization down the road to access our entire portfolio of subsurface innovation more easily. Taking all these into consideration, we now expect approximately one point of growth from SSE in our fiscal year 2024. Turning to Slide 5 and our Heritage AspenTech Suites. This is the part of the business where the two drivers I laid out regarding our Q3 performance were most notable.
Engineering saw a significant number of deals pushed out of the quarter across all regions, marking a slowdown from the Suite's prior accelerated levels in the first half. This was more prevalent in our High Velocity Sales or HVS organization, which is one of the areas where we have increased our sales headcount significantly over the past several quarters. HVS is focused on generating new business through the SMB segment of the market as well as with larger enterprise accounts new to AspenTech. With that said, we continue to believe that our engineering suite will remain a prime beneficiary of the positive CapEx outlook for both traditional energy markets and sustainability over the long-term. In Q3, for example, we continue to win deals with owner operators and E&C companies, expanding our business with a long-standing customer, who is one of the world's top EPC firms in response to their increasing backlog in the energy sector and sustainability projects.
Turning to our Manufacture & Supply Chain Suite or MSC. In Q3, MSC benefited from the closing of the delayed Q2 transaction and a pickup in sales activity. However, we still saw some deals move out of the quarter. The prolonged downturn in the chemicals industry remains a headwind for MSC, while refining was also an area where we did see some more cautious buying activity in Q3. Nevertheless, we were encouraged by the early uptake of our recently released Aspen Unified Planning product with several customers committing to it in the quarter. Looking ahead, we remain cautious on when a chemicals recovery will return while refiners continue to have a favorable outlook. Our pipeline of business in this area continues to grow with the interest in our multivariable process control DMC3 product, multiunit dynamic optimization GDOT product and comprehensive supply chain optimization solution.
Finally, Asset Performance Management or APM performed below expectations in Q3 as several deals moved out of the quarter. The combination of these with higher expected attrition for the full fiscal year means that we do not expect APM to contribute to ACV growth in fiscal 2024. We're in the process of simplifying its go to market strategy since it is now clear to us that there are certain market segments where we're taking a leadership position and APM's return on investment is real, material and quantifiable. We believe this should provide better, more targeted selling opportunities and minimize the risk of future attrition over time. Taking all these factors into account, we now expect our Heritage AspenTech Suite to contribute at least 5.5 points of ACV growth to our fiscal year 2024 results.
On Slide 6, I would now like to provide an update on our product and R&D initiatives. R&D and product teams have remained laser focused on the launch of our V14.3 software update, which we plan to release this quarter. Version 14.3 will include updates to our recently launched Aspen Unified Platform, deeper industrial AI integration across our portfolio and more. As an example, this release will include Aspen Virtual Advisor or AVA for Aspen Unified Planning & Scheduling. We have previously released Aspen Virtual Advisor for our DMC3 multivariable process control technology. In Version 14.3, we're introducing AVA to the planning and scheduling area. AVA leverages AI algorithms at its core to help guide users in analyzing and optimizing production plans.
We also launched the beta version of our new Aspen Workflow product in Q3 as a shared component for Unified and other solutions. Aspen Workflow allows users to orchestrate workflows and actions across AspenTech and third-party applications for more efficient operational outcomes. This is just one of the many ways we're working to enhance the ability of our users to achieve greater workflow automation in their highly complex operating environments. Finally, we're excited to announce the recent limited availability launch of our Strategic Planning for Sustainability Pathways product, a new and unique integrated modeling and optimization solution that aims to guide companies in carbon capture, use and sequestration decision-making and sustainability strategy investments.
By leveraging generative AI capabilities, strategic planning for sustainability pathways help sustainability planners to solve the blank page problem, combining different inputs to generate initial plans for asset carbon reduction. Turning to Slide 7, I would now like to provide some color on our key focus areas for the coming quarters. First, we have several initiatives underway to drive better alignment and complete the onboarding across our sales teams. We're already making progress in these areas to date. Second, we're working to further drive efficiencies and productivity across the entire company to accelerate our path to best-in-class profitability and free cash flow going forward. We are focused on controlling what we can control and believe there are several opportunities rationalize expenses and drive multiyear improvements in productivity.
Third, we will continue to make targeted investments into strategically important areas of the business. This includes a special focus in our DGM business given the multiple tailwinds in that space and our continued belief in its significant long-term growth opportunity. Finally, I want to be clear that we feel strongly that our performance in Q3 does not reflect the full potential of the opportunities we're seeing today nor does it reflect any material changes in the long-term underlying strength of our end markets. Our customers remain at the center of several important megatrends, including global decarbonization and electrification, as well as the transition to a new energy system. At the same time, we are dealing with demands to do more with less, while working to address a growing skills gap across their labor forces.
As leaders in industrial software, our portfolio remains perfectly situated to help customers navigate these challenges, providing a compelling outlook for future spend with AspenTech. In conclusion, we are taking the necessary steps to drive improvements in areas that are both within our control and able to better position us to achieve our objectives in Q4 and beyond. We are confident that increased focus we now have in place for our expanded sales force combined with the multiple tailwinds we see across most end markets will yield improved ACV growth over time. Before I turn the call over to Chris, I would like to welcome two new members to the AspenTech team. First is our new Chief Financial Officer, David Baker. With a long and successful tenure in senior financial roles at Emerson, Dave comes to the company armed with deep financial acumen and operational expertise in support of our long-term growth objectives.
I'm looking forward to my partnership with Dave. I would also like to thank Chris for serving in the interim role over the last 4 months and for everything he has done to maintain our forward trajectory. Thank you, Chris. Secondly, I would like to welcome David Henshall to AspenTech's Board of Directors. Over a long and highly successful career in software, David has accumulated a wealth of knowledge and leadership experience that will prove invaluable to us as we advance organization going forward. Welcome, David. With that, I will turn it over to Chris for a review of our financial results before we open it up for Q&A. Chris?
Chris Stagno: Thank you, Antonio, and hello, everyone. Turning to our Q3 performance, I will 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 8, annual contract value was $936 million in the third quarter of fiscal 2024, up 9.5% year-over-year and 2.4% quarter-over-quarter. As Antonio mentioned, this included the closing of the large delayed renewal that pushed out from our prior Q2.
Total bookings were $301 million in the third quarter, increasing 30% year-over-year, while total revenue was $278 million for the third quarter, increasing 21% year-over-year. Please note that bookings and revenue are heavily impacted by contract renewal timing, while the majority of our revenue is recognized under ASC Topic 606. Now turning to profitability. On a non-GAAP basis, we reported operating income of $116 million in Q3, representing a 41.8% non-GAAP operating margin. This compares to non-GAAP operating income of $67 million for a non-GAAP operating margin of 29% a year ago. The year-over-year improvement in our margin profile was mainly driven by a higher mix of license and solutions revenue, in addition to onetime expense savings and a continuing focus on driving efficiencies.
As a reminder, margins will fluctuate period-to-period due to the timing of customer renewals and the resulting impact on license revenue recognition in a given quarter. Non-GAAP net income was $109 million in the quarter or $1.70 per share, compared to non-GAAP net income of $69 million or $1.06 per share a year ago. The year-over-year increase in non-GAAP net income between periods was mainly due to the combination of solid revenue growth and strong operating leverage. Turning to our balance sheet, we ended the quarter with approximately $178 million of cash and cash equivalents, reflecting the impact of share repurchases under our $300 million share repurchase authorization and $198 million available under our revolving credit facility. During the quarter, we repurchased approximately 228,000 shares for $57 million under our $300 million share repurchase authorization for fiscal year '24.
Year-to-date, we have repurchased approximately 1.2 million shares or $243 million under the same authorization, with a total remaining value of $57 million. On cash flows, we generated $138 million of cash flow from operations and $137 million of free cash flow in Q3, compared to $131 million in cash flow from operations and $129 million in free cash flow a year ago. Turning to Slide 9, I would now like to close with guidance. As Antonio mentioned, we now expect to achieve ACV growth of at least 9% in fiscal 2024. We expect total bookings of at least $1.03 billion with $580 million up for renewal in fiscal 2024 and $195 million up for renewal in Q4. We expect total revenue of at least $1.1 billion GAAP net loss at or better than $29 million and non-GAAP net income of at least $403 million.
From a cash flow perspective, we expect operating cash flow of at least $349 million and free cash flow of at least $340 million. For a complete overview of our updated fiscal year 2024 guidance, please refer to our earnings presentation slides now available on our IR website. In closing, we recognize that our year-to-date performance has not met our expectations and we are committed to implementing the necessary actions to improve our performance going forward. As Antonio mentioned, we now have several different initiatives in place that we are confident will help us address these different areas. Additionally, we are making steady progress toward our return to best-in-class profitability and free cash flow generation. With that, I will turn the call back to Antonio for his closing remarks.
Antonio?
Antonio Pietri: Thanks, Chris. As I mentioned earlier, we have adjusted our guide for fiscal year 2024 in response to the dynamics we faced in Q3 and our measure expectations for this quarter. We're actively monitoring and engaged with our customers to confirm their spending plans and ensure a successful Q4 outcome. More broadly, we remain excited about the strength of our software portfolio and its ability to help our customers run their assets more efficiently and sustainably. We look forward to closing out this fiscal year on a positive note with a focus on execution following our recent expansion initiatives. With that, we'll open it up to questions. Josh?
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