Aspen Technology - Q3 2024

Executive Summary

• Q3 FY2024 revenue was $278.1M (+21% YoY) and non-GAAP EPS was $1.70, with non-GAAP operating margin at 41.8% versus 29% a year ago; ACV reached $936.1M (+9.5% YoY, +2.4% QoQ).
• Management lowered FY2024 guidance across ACV growth (≥9.0% vs prior ≥11.5%), revenue (≥$1.10B vs ≥$1.12B), non-GAAP operating income (≥$425M vs ≥$445M), and FCF (≥$340M vs ≥$360M), citing cautious customer spending and maturing sales execution.
• DGM maintained strong demand and is expected to contribute ~2.5 points to FY2024 ACV growth; Heritage AspenTech suites saw deal pushouts late in the quarter; APM underperformed and strategy will be sharpened for lower attrition.
• Catalyst: Broad guidance reset and commentary on budget vs spending intent likely drive estimate cuts and sentiment shifts; CFO transition announced (David Baker appointed effective June 3, 2024).

What Went Well and What Went Wrong

• What Went Well

  • Non-GAAP operating leverage improved materially: non-GAAP operating income $116.3M (margin 41.8%), driven by mix shift to license/solutions and efficiency actions.
  • DGM momentum: term license wins, wallet share expansion, and pipeline strength across U.S. and international markets; expected ~2.5 points of FY2024 growth contribution. CEO: “Demand for our grid innovation remains strong... unprecedented investment cycle to update and modernize the grid”.
  • Cash generation: CFO from operations $138.1M and FCF $137.0M in Q3, both up vs prior year.

• What Went Wrong

  • Guidance cut: ACV growth, revenue, bookings, non-GAAP operating income, and FCF all revised lower for FY2024 due to cautious customer spending and sales execution challenges.
  • Heritage AspenTech softness: engineering, MSC, and APM deals pushed out late in March; chemicals downturn remains a headwind; APM expected not to contribute to ACV growth in FY2024.
  • Sales organization maturation: onboarding and institutionalizing best practices flagged as near-term execution priority to restore predictability.

Transcript

Operator (participant)

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. To ask a question during the session, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. 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 (Partner)

Great. 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 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 two, 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 (President and CEO)

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 the theme of Partnering for the Future. This was the first time that the new AspenTech organization has held an Optimize 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 their organizations through a transformation that will require a heavy investment in digitalization and new technologies to meet performance, resiliency, and sustainability objectives.

We believe that 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 as customers exercised 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 the 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 continued to onboard our expanded sales team and institutionalize best practices. Over the past 12-18 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 actually actively address those things that we can control. To that end, in the near term, we're working to drive full alignment across our sales organization 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're 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 the 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 suites' 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 other 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're 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 and 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 this into consideration, we now expect approximately one point of growth from SSE in our Fiscal year 2024.

Turning to slide five on our Heritage AspenTech suites. This is the part of the business where the 2 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 continued 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 Manufacturing and 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 interest in our multivariable process control DMC3 product, multi-unit 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 this 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 suites to contribute at least 5.5 points of ACV growth to our Fiscal year 2024 results. On to slide six, 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 and Scheduling.

We have previously released Aspen Virtual Advisor for our DMC3 multi-variable 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, the Strategic Planning for Sustainability Pathways helps sustainability planners to solve the blank page problem, combining different inputs to generate initial plans for asset carbon reduction. Turning to slide seven, 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, accelerate our path to best-in-class profitability and free cash flow going forward. We're focused on controlling what we can control and believe there are several opportunities to rationalize expenses and drive multi-year improvements in productivity. Third, we will continue to make targeted investments into strategically important areas of the business. This includes a special focus on our DGM business, given the multiple tailwinds in that space, and our continuing 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 mega trends, including global decarbonization and electrification, as well as the transition to a new energy system. At the same time, they 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're taking the necessary steps to drive improvement in areas that are both within our control and able to better position us to achieve our objectives in Q4 and beyond. We're confident that the 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 four 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 the 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 (Interim CFO)

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 one-time 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 licensed 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 2024. Year to date, we have repurchased approximately 1.2 million shares for $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 (President and CEO)

Thanks, Chris. As I mentioned earlier, we have adjusted our guidance for Fiscal year 2024 in response to the dynamics we faced in Q3 and our measured expectations for this quarter. We're actively monitoring and engaging 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?

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Jason Celino with KeyBanc Capital Markets. You may proceed.

Antonio Pietri (President and CEO)

Hi, Jason.

Jason Celino (Managing Director and Equity Research Analyst)

Hey, Antonio. Thanks for, you know, taking my questions. You know, I think the question on everyone's minds is, you know, relative to maybe last quarter, especially for the heritage business, like, what specifically, you know, changed?

... I mean, where kind of particularly was the downtick? And then, at what point in the quarter did you start to kind of feel it?

Antonio Pietri (President and CEO)

Well, I mean, look, we maintained very good conversations and engagement with our customers, basically through the beginning of March. We started to see things start to turn into the second week of March, and especially the last two weeks of March, as our teams started to drive the closing process with these customers on the different deals. And what we expected to be final approval didn't happen, or reasons to extend beyond the quarter. So I would say it came down to the last three weeks of the quarter, mainly the last two weeks.

As you well know, most of our business comes down to the last two weeks of the quarter, and this is where we saw the push-out materialize. What I will say about that, as I said in my remarks, it was broad-based across all of our regions and impacted most of our product suites, to a lesser extent DGM, because it's driven by different dynamics. But it was very consistent and in a way, also surprising.

Jason Celino (Managing Director and Equity Research Analyst)

Okay. And then just when I think about the Q4 guidance, you know, usually when we look at the sequential change between Q3 and Q4 for ACV, it looks like the implied kind of increase is kind of consistent with what we saw last year on, like, on a growth basis. So I guess what I'm asking is, you know, what's baked in from, like, a conservatism standpoint? Like, is there anything that we should be aware of on deals that maybe didn't close this quarter, but you feel good about closing next quarter? Anything you can kind of say there?

Antonio Pietri (President and CEO)

Yeah, yeah. Well, I mean, look, we've had a strong conviction about the fiscal year. We've said as much in the Q2 earnings call in January, early February. We have a very strong pipeline of business. We have some very interesting deals in that pipeline. Q4 and our guide is based on very specific conversations we're having with customers around a very specific set of deals across all of our regions. Is where we are confirming, and we have confirmed with customers, not only that they have a budget, because we believe budgets are in place, but their intent to spend. And I think we need to differentiate between budget and intent to spend.

I think what we saw in Q3 was budgets in place, but the intent to spend got pushed out. And so our Q4 outlook and guidance is based on engagement with customers. There were many conversations had at Optimize last week. And what we're guiding to is it reflects those conversations and an analysis of our pipeline. I have personally done a top to bottom review of our sales activity with every one of our frontline sales leaders, area sales managers, area sales directors. That's something that already happened the week before Optimize, and that will happen again here. And as such, the guidance that we have provided.

Jason Celino (Managing Director and Equity Research Analyst)

Great, thank you.

Antonio Pietri (President and CEO)

Mm-hmm.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Andrew Obin with Bank of America. You may proceed.

Antonio Pietri (President and CEO)

Hi, Andrew.

David Ridley-Lane (Equity Research Analyst)

Hi, this is David Ridley-Lane filling in for Andrew Obin.

Antonio Pietri (President and CEO)

Hi, David.

David Ridley-Lane (Equity Research Analyst)

Could you add a little more color around DGM's pipeline, those comments you had? Just, you know, relative size, how that's developing, your confidence in kind of the, you know, knowing that those have elongated sales cycle, but your confidence in those closing in this fiscal year.

Antonio Pietri (President and CEO)

Yeah, sure. Look, first and foremost, we just told you that we believe that DGM will grow approximately 2.5 points of or will contribute 2.5 points of growth to our guide of 9. 2.5 points of growth for DGM puts DGM at somewhere around the range of 40% growth for the year, the suite. Last year, that suite grew 30%. So we do believe we have different dynamics around DGM. These are utilities, government-owned, whether it's a state or multiple across multiple states. So they're driven by the need to upgrade and expand the grid, cybersecurity. So their spend has different drivers and motivations.

You know, our pipeline continues to grow on DGM. We've expanded our sales organization into Europe. We have started an expansion into Asia Pacific now, and in the Middle East. But that pipeline, when we go into a customer and we replace an existing system, that's a 12-24 month sales cycle, because it's a very rigorous procurement process that happens tied to government regulations. Now, once we are in there, there's upgrades and new applications that get deployed, and the sales cycle then tends to be shorter, 6-12 months. So our pipeline is a combination of these longer sales cycle deals and the shorter sales cycle upgrades and add-ons, if you will.

We like what we see, we like the progress that we're making, we like the investment thesis behind the utilities industry and the continued commitment of funds to upgrade the grid. We believe we'll continue to benefit from all of that. Of course, you know, we did a reset of the OSI sales team, even in North America. We've put in a new sales team into Europe. We're gonna put a new sales team into Asia Pacific. There's a lot of learning that has to happen in these sales teams, onboarding, and institutionalization, if you will, around how we do business in AspenTech to deliver the quality of growth and profitability that we're accustomed to.

So it takes time to, to onboard these people and make sure they're producing at the level of productivity that we expect. Nonetheless, you know, the Q3 quarter for DGM was a good quarter. There were a couple of deals that slipped, slipped into, into Q4, but that's more timing than anything due to the procurement processes that those customers, follow. But overall, you know, we, we remain, you know, very excited about, our DGM business.

David Ridley-Lane (Equity Research Analyst)

Got it. And as a follow-up, a lot of the kind of commentary you have here is that if you will, you know, most calendar year budgets for your clients are flat to up. But given your fiscal year-end in June, more of that spend is likely to happen in Fiscal 2025 versus Fiscal 2024. Would you say there's sort of a, if you look at it on a 12-month view, there's been a significant change in your outlook for ACV additions?

Antonio Pietri (President and CEO)

Yeah, I mean, look at and I appreciate your question, sort of, comment, all wrapped into one. Look, I think it is important that... I don't mean to, you know, split hairs here, but there's budgets, and then there's intent to spend. If you look at the macro indicators that we track, oil prices, refining margins, CapEx spend in oil and gas, CapEx spend around sustainability, all those indicators are flashing green. I mean, oil prices have fluctuated between $70 and $95. Refining margins came down a little bit in the March quarter, but they're still solid. We're now going into the driving season in the summer here in the United States, so margins should improve for refiners.

You know, the CapEx spending in electrification continues to... So all those indicators are green. And we believe that our customers have put in place budgets that are in line with what they deployed in 2023, perhaps even a little bit better in some cases around oil and gas CapEx. Now, the intent to spend, I think, has to do more with uncertainty around the macro environment, whether that is interest rates or anything else.

And if you look at the results that our customers are in that our customers in Heritage AspenTech have posted, the oil and gas companies, chemical companies, you can understand why perhaps there was a slowdown in spending in the quarter, in order to support better results, in light of lower revenue, lower profitability, driven by lower oil prices and margins in refining, and the challenges around chemicals. So the question then is, okay, is it a temporary slowdown in spending? Does it go into Q4 or the remainder of the year? We don't know that.

What we're working on and doing is now very rigorously engaged with our customers to make sure that if our champion or sponsor says, "Yes, we're gonna do a deal," that when it goes up to the CFO and CEO for approval, that it is approved, because we saw some of that in the Q3 quarter. A strong willingness to do business by our champions and sponsors with approvals, and then some deals that got rejected at the CFO, CEO level, to the surprise of everyone, including our champions and sponsors. So I think this is a different dynamic. I think budgets are in there. Frankly, oil prices at $80, $90, or $70 are equally healthy.

But the results reported by our customers for the March quarter certainly lead me to think as well that what we saw was just a premeditated pullback on spending.

David Ridley-Lane (Equity Research Analyst)

Understood. Thank you very much.

Antonio Pietri (President and CEO)

You're welcome.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Rob Oliver with Baird. You may proceed.

Antonio Pietri (President and CEO)

Hi, Rob.

Rob Oliver (Senior Research Analyst)

Great. Hi, Antonio. Thanks, nice to see everybody in Houston. Appreciate you guys hosting, the panel as well. Two questions. I guess the first one for me is, around the sales-related issues. You know, I know you just enumerated some of those issues on the previous question, but it just seems like a lot, you know, coming on here in the back half of the year. So, you know, as you're approaching your FY 25, you look at the sales challenges, what's been done and what's fixed and what still remains to be done? And are you confident that you'll have that straightened out, you know, ahead of FY 25 kind of sales kickoff and everything? And then I had a follow-up question.

Antonio Pietri (President and CEO)

Yeah, no, I appreciate the question. I mean, first of all, Rob, I already conducted a couple of reviews, one with the regional sales leaders, and area and group leaders, right after the quarter ended, and then one a couple of weeks ago with the first-line leaders for sales. Part of my objective was also to understand what are the challenges and opportunities that they see. We've come up with a very specific set of opportunities that we've put actions around them.

Of course, first and foremost, you know, when you have a lot of new salespeople in the organization, it starts with their affinity for what customers are telling them, their ability to read the signals that customers are giving them or not, including their own body language when they're meeting with them. So we're certainly deploying a lot of our more experienced people on the deals that we believe we need to close in Q4, because one, it will help them accelerate their own understanding and learning, but also it will give us greater assurance of what's coming back as a deal that have the opportunity to close is real.

And look, this isn't something that I think it's the regular process of salespeople when they join a company and are learning. But we also have a lot of experienced people in the company that have been here selling for 15, 20, 25 years. So we're taking a much more rigorous approach around partnering and reviewing of the deals. We're also then looking at accelerating the onboarding, making sure that all the training that needs to happen happens as quickly as possible, and more specifically this quarter, before we go into the new fiscal year and our new sales kickoff meeting in mid-July.

For Fiscal 25, we don't wanna wait until the sales kickoff meeting to bring to closure all the onboarding that has to happen, including, you know, what are our crown jewels when we're negotiating deals, including, you know, what are those terms and conditions in our agreements that are most important to us? Again, to maintain the high quality of business that we generate that supports the profitability that we drive, in order to avoid the elongation of negotiations, and then many other activities. I think the action plan is very clear. I think also there's some alignment that needs to happen when you have new people that are still learning their way around the organization. So we're also working to facilitate some of that.

But I think the look, we've been onboarding people here for the last 12 months, 12-18 months. The European DGM team was put in place pretty much in the middle of last year. There's newer people that got onboarded in Q1, Q2, and even some in Q3. So we're just working to make sure that we get everyone on the same page, going forward. But I'm optimistic. This is what we're supposed to do, and we'll get it done.

Rob Oliver (Senior Research Analyst)

Great, thanks. And then just a quick follow-up, and I think we're all going at this question in ways, so it's a bit repetitive, but you know, when I look at the breakdown of your business, you guys actually did a nice job forecasting, you know, the DGM and SSE businesses, although you know, a little weakness in SSE, which you called out. But DGM essentially came in line. So the bulk of the reduction, you know, in a pretty significant reduction at ACV, is actually coming from ... And if I had isolated just that portion of the slide deck that said, "Hey, you know, that MSC deal that was, you know, hadn't closed," I would have thought, Okay, you know, we're out of it here. We're in a good spot.

So but even with that deal closing, things got much, you know, worse. So, you know, I think we're focused for here, but was it more kind of at the midpoint of the year, just sort of, you know, hoping that these deals would get through amid some troubling signs? Or, or was it something that, like, changed dramatically in the macro? Because it seems a pretty, a pretty significant amount in your core, which is clearly the business that you guys know best. Thanks very much.

Antonio Pietri (President and CEO)

Yeah. I appreciate the question. I mean, Rob, I think we've always emphasized that one of the challenges that we have with our fiscal year is that it starts on July first, in the middle of a fiscal budget for our customers. And then, and then comes, you know, January first, it's a new fiscal year for our customers, while we're still in the middle of our fiscal year. You know, we normally just finish the second quarter. I think, you know, we saw good activity in Q1 and Q2. We always said that our fiscal year was gonna be back-end loaded, meaning to the second half of the year.

And then, you know, we come into the new calendar year, new fiscal year for our customers, our Q3 quarter and customer deploy, new budgets, but also, their intent to spend or not, clearly, wasn't targeted at the March quarter. This is why, I wanna be very clear that we need to differentiate between budgets and spending. So I think what's happening here is, we always said, this was gonna be back and loaded. We came into Q3 with great expectations, a great pipeline, a great visibility into deals. I said as much in the early February earnings call. And we got caught by surprise, by the spending decisions of our customers.

This is a challenge that we have with how our fiscal year lays out. In some cases, some years it's been positive, some years it's been neutral, and other years it's been a surprise, and I think that's what happened this time around, the latter.

Rob Oliver (Senior Research Analyst)

Thank you.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Dylan Becker with William Blair, you may proceed.

Antonio Pietri (President and CEO)

Hi, Dylan.

Dylan Becker (Equity Research Analyst)

Hey, Antonio. Maybe kind of double-clicking on the pipeline strength and being more kind of calendar year versus fiscal year. Any kind of incremental takeaways from the conference last week and your customer conversations that helped kind of validate that conference? I think it was the first time you guys were able to kind of show the full strength of the combined Aspen and Emerson approach. So maybe some customer takeaways that help kind of support that intent to spend initiative.

Antonio Pietri (President and CEO)

Yeah. Well, let me look, first of all, incredible feedback from customers about the conference. The value proposition, our strategy, the opportunity that they see, and the challenges that they have, and how AspenTech is incredibly well lined up across all of that. So, you know, it was really a moment of a high, and that was great to see. Look, we also had great customer meetings around just new relationships developed, extending existing relationships and also specific deals. If you look at what happened, you know, we had close to 1,200-1,300 customers. Our DGM plenary, which happened on Monday, was a standing room only plenary. We had seats for 550 people.

We believe we got in there about 650. Part of that was due to customers from other industries interested in the DGM solutions to understand their applicability into their industries, whether it's refining, chemicals, mining. It was a sight to see, to have a standing room only plenary. We got great feedback. We got great feedback from customers in DGM about the opportunity to take some of our artificial intelligence capabilities, our optimization capabilities, our control capabilities from our Heritage AspenTech industries, refining chemicals into our utility solutions, to enhance the value creation for them and resiliency of the grid.

If you look at also the sessions that we had, one of the main points of feedback that we received is that some of our customers were frustrated because there were so many sessions that they wanted to attend that were happening at the same time. So they were asking us to find a way to extend the conference next time so that they can attend more sessions. And this just speaks to the wealth of technology that now exists inside AspenTech that are so relevant to the challenges and opportunities that these customers are facing. So look, I said it in my plenary presentation. I've never been as excited about the future of this company as I am today.

I came out of the conference even more convinced about that feeling and statement, and I think we have to work our way through this moment that we encounter in Q3. We have to certainly finish up some of the transformation initiatives that we're working on. And now that we have in place a sales team, because we now have it in place, we're only expanding sales in DGM to move into Asia and the Middle East. We're gonna focus on solidifying the execution of the sales team, making sure that it's performing at the excellent level that we have traditionally performed in AspenTech. And I can only see positive going forward, but certainly this has been a more challenging year than I expected, than we expected in the company.

But I just see this as a bump on the road, and absolutely doesn't change our future trajectory whatsoever.

Dylan Becker (Equity Research Analyst)

Got it. That's super helpful. Maybe sticking internally as you guys kind of think about the expense management side of the equation as well, too. I know you called out the opportunity to rationalize and realize productivity gains. You're now two years into that Emerson integration. I guess I wonder where, or how you're seeing kind of the most readily apparent opportunities there that haven't been realized already, and maybe what's more kind of the long-term structural shift? I know sales will be a component of that, and sales efficiency, but thinking about kind of the broader cost structure as well. Thanks.

Antonio Pietri (President and CEO)

Well, I mean, look, certainly, and we said it in the prepared remarks. I think one of the big opportunities that we'll now, and we're already working on and will continue to work on here, is efficiencies and productivity. When you have three companies coming together, and really three and a small one Inmation, there will always be opportunities to drive efficiencies, to as you simplify, as you streamline the organization. So, we're very much focused on that.

Including a one-time expenses, sort of non-compensation expenses, which, because there's always- if you wanna be a best-in-class profitability company, you have to do more with less, and that's the culture that we're building here, and that's part of the focus on efficiencies that we're driving and will continue to drive. From a productivity standpoint, it's always been my north star. You get to that profitability level by really doing more with less on headcount and driving to maximum productivity. It's a multi-year journey because you cannot just-- it's not a binary zero to one. As you drive improvements and exercise your muscles, you get fitter and fitter.

So this is why I said it was a multi-year journey to the productivity that we wanna get to. But as you drive that productivity, you can grow, you can grow and spending less, which then starts expanding profitability and free cash flow going forward. I know one of the things that we are getting credit for was in the early phases of my tenure in AspenTech, when we maintained flat expenses for four years in this company, and we drove incredible increases in profitability. And I believe that's possible. So here as well in the new AspenTech. So we're gonna be focusing on all that much more rigorously.

And in the meantime, we'll build our sales muscle, and I'm sure we'll find ourselves in the right place here pretty soon.

Dylan Becker (Equity Research Analyst)

Great. Thank you, Antonio.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Clarke Jeffries with Piper Sandler. You may proceed.

Clarke Jeffries (Vice President and Senior Research Analyst)

Hello. Thank you for taking the question. Antonio, I think you've, you've really shaped a lot of the description around budget versus spending intent. But I really wanted to, I think, put in that final piece of the, you know, the discussion around, are these deals primarily lost to no decision or later decision, more than anything else? And I think the final part of that is, been seen in the presentation, but I wanna be explicit, is attrition trending as you expected? Is the rough 5% number still the applicable number when you think about this commentary around expansion versus retention of ACV? I have one follow-up.

Antonio Pietri (President and CEO)

No, great, great point. Now, look, our attrition is in line with what we guided for the year, about 5 points of attrition. Of course, we've had this large deal that didn't renew in Q2, is now in Q3, that produced a big bump of attrition. Excluding that deal, our attrition is in line because we've now closed that deal, so that was a net neutral deal, if you will. But no, attrition is fine, and we believe we have very good sight into that attrition in Q4 as well. Look, it's an interesting dynamic because while a lot of engineering business got pushed out of the quarter, our E&C customers are expanding spending with AspenTech.

We signed a number of transactions in the quarter, especially one of our largest E&Cs, where they expanded their spend with AspenTech by an incremental percentage, which is a sizable number in the context of their deal, of the spend they already have with AspenTech. We're seeing this same behavior across more and more E&C. So, I don't think it's a CapEx related issue, because CapEx is a long-term investment by these customers. I think this is a temporary pullback on OpEx spending that impacts short-term deals in engineering and MSC and APM.

The dynamic that we saw in APM is very typical of, of the dynamic that we saw, during the pandemic, in that a pullback on OpEx, maintenance being a very discretionary area of spending, and, and even if you have deals that have already been signed, if they come up for renewal, we've also seen those customers give up on those, on those agreements in order to save that, that spend. So, so overall, you know, it's a combination of, of behavior that, you know, support the, the, the, the macro, the positive flashing green indicators that we have, but also, you know, what was clearly, a, a pullback on spending in the quarter.

Clarke Jeffries (Vice President and Senior Research Analyst)

Perfect. I think, I think that's very helpful. And I think just the last point on this about March being the timeframe where you started to see some of these impacts to, sort of, closing times. You know, just as you sort of frame up across all the segments, April and where we are into May, have you seen any definable improvement, especially maybe in the wake of Optimize? And if there's any amount of reminder you can give us around how much of the business in the ACV terms closes in the last months, that'd be incredibly helpful. Thank you.

... Well, I mean, we're a typical software company in that regarding that most of our business closes in the last month, okay? And you can ask any software company, and they'll probably give you numbers somewhere around, you know, 50, 75% of the business closing in the last month of the quarter. That's just how, you know, sales cycles work. And now, I'll say, and this is just a commentary, we've already closed a good business in the April month, a lot of it tied to the Q4, to the Q3 deals that we were pursuing. But there's also some business that, you know, in Q3 that has moved into Q1.

But what I'll also say is that hardly ever those deals disappear from our pipeline, like, a customer didn't wanna do business and the deal falls off of the pipeline. It gets pushed out into the future. And most of the business that pushed out of Q3 is in Q4 or some of it in Q1.

Thank you very much.

Antonio Pietri (President and CEO)

Thanks.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Mark Schappel with Loop Capital Markets. You may proceed.

Antonio Pietri (President and CEO)

Hi, Mark.

Mark Schappel (Managing Director)

Hey, Antonio, thanks for taking my question. In your prepared remarks, you noted that you were reviewing your APM segment as a result of the segment's underperformance in the quarter. And you may have touched on this a little bit in a prior question, but I was wondering if you could just provide some additional details around your APM segment and what you're doing there?

Antonio Pietri (President and CEO)

Yeah. Yeah, yeah. Look, Mark, the fact is that our APM business, or especially our Mtell product, is a great product. I think Mtell has been given five or six awards as best technology of AI, IoT, whatever, since the very beginning. I mean, in almost every region of the world, Mtell has gotten a best technology award by Hydrocarbon Processing, by conferences. Frankly, it's a little bit incredible, the recognition that our products receive. So, okay, a lot has happened with Mtell and APM. What we're clearly seeing is that the value proposition for Mtell is incredibly clear, quantifiable and material to, in some customer segments, to the extent that we see very little attrition in those customer segments.

So these customers, by the technology, deployed and expanded, so we have some customers already with the technology across 20-25 sites, generating incredible value. And I'm not gonna mention what customer segments, because I'm sure the competition is probably listening. So but at the same time, we have some customer segments where customers love the technology. They buy, they implement it, and for whatever reason, a year or two later, either their teams move on, get promoted, leave the company, and the value hasn't really been proven and quantified, and therefore, there isn't a commitment to sustaining the use of the technology. That is what generates attrition. So the product, and Mtell and APM, they've never stopped generating growth.

The fact is that every quarter there's an important amount of gross growth, new growth that gets generated, but is negated then by some attrition. So in this review that we've done, you know, it's part of the outcome of the reviews that I've been involved in, is clearly that if we sharpen our focus with Mtell and APM, we can go into some customer segments where we'll be very successful with the product, where we will see very little attrition. Therefore, the net growth will be more material and a contributor to our overall growth as a company. So that's what we're doing.

We're gonna, for Fiscal 25, we're gonna, we're gonna sharpen our strategy, we're gonna be very focused, and we're gonna pursue not business for the sake of business, but high quality business that doesn't generate attrition later on. And we believe we have a number of customer segments. I can tell you, we believe we're becoming the leader with Mtell in some of those customer segments by far. And those customers that are already using it just love the technology, so.

Mark Schappel (Managing Director)

Thank you. That's helpful. That's all for me.

Antonio Pietri (President and CEO)

Yeah, yeah.

Operator (participant)

Thank you. I would now like to turn the call back over to Antonio Pietri for any closing remarks.

Antonio Pietri (President and CEO)

All right. Thank you, Josh, and, and thank you to everyone for joining the call today. We will be attending the Baird Technology Conference and the William Blair Growth Conference in the first week of June, so please, reach out to our investor relations team for more information on this event. We look forward to catching up with, many of you soon. So thank you, everyone, for joining, and, we will see you on the road. Thanks.

Operator (participant)

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.