ASPEN TECHNOLOGY Caution Concerning Forward-Looking Statements
This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, prospective products, size of market, plans, objectives of management, expected market growth and the anticipated effects of the coronavirus (COVID-19) pandemic (and any COVID-19 variants, the "COVID-19 pandemic") on our business, operating results and financial condition are forward-looking statements. In addition, this Quarterly Report contains forward-looking statements regarding the pending Transactions with Emerson (each as defined below under "Transaction Agreement with Emerson Electric Co."), including: statements regarding the expected timing and structure of the Transactions; the ability of the parties to complete the Transactions considering the various closing conditions; the expected benefits of the Transactions, such as improved operations, enhanced revenues and cash flow, synergies, growth potential, market profile, business plans, expanded portfolio and financial strength; the competitive ability and position of New AspenTech (as defined below) following completion of the Transactions; legal, economic and regulatory conditions; and any assumptions underlying any of the foregoing. Forward-looking statements concern future circumstances and results and other statements that are not historical facts and are sometimes identified by the words "may," "will," "should," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "plan," "could," "would," "project," "predict," "continue," "target" or other similar words or expressions or negatives of these words, but not all forward-looking statements include such identifying words. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. We can give no assurance that such plans, estimates or expectations will be achieved and therefore, actual results may differ materially from any plans, estimates or expectations in such forward-looking statements. Important factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others: (1) that one or more closing conditions to the Transactions, including certain regulatory approvals, may not be satisfied or waived, on a timely basis or otherwise, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the Transactions, may require conditions, limitations or restrictions in connection with such approvals or that the required approval by our stockholders may not be obtained; (2) the risk that the Transactions may not be completed in the time frame expected by us or Emerson, or at all; (3) unexpected costs, charges or expenses resulting from the Transactions; (4) uncertainty of the expected financial performance of New AspenTech following completion of the Transactions; (5) failure to realize the anticipated benefits of the Transactions, including as a result of delay in completing the Transactions or integrating the industrial software business of Emerson with our business; (6) the ability of New AspenTech to implement its business strategy; (7) difficulties and delays in achieving revenue and cost synergies of NewAspenTech ; (8) inability to retain and hire key personnel; (9) the occurrence of any event that could give rise to termination of the Transactions; (10) potential litigation in connection with the Transactions or other settlements or investigations that may affect the timing or occurrence of the Transactions or result in significant costs of defense, indemnification and liability; (11) evolving legal, regulatory and tax regimes; (12) changes in economic, financial, political and regulatory conditions, inthe United States and elsewhere, and other factors that contribute to uncertainty and volatility, natural and man-made disasters, civil unrest, pandemics (e.g., the COVID-19 pandemic), geopolitical uncertainty, and conditions that may result from legislative, regulatory, trade and policy changes associated with the current or subsequentU.S. administration; (13) our ability and the ability of Emerson and NewAspenTech to successfully recover from a disaster or other business continuity problem due to a hurricane, flood, earthquake, terrorist attack, war, pandemic, security breach, cyber-attack, power loss, telecommunications failure or other natural or man-made event, including the ability to function remotely during long-term disruptions such as the COVID-19 pandemic; (14) the impact of public health crises, such as pandemics (including the COVID-19 pandemic) and epidemics and any related company or governmental policies and actions to protect the health and safety of individuals or governmental policies or actions to maintain the functioning of national or global economies and markets, including any quarantine, " shelter in place," " stay at home," workforce reduction, social distancing, shut down or similar actions and policies; (15) actions by third parties, including government agencies; (16) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the Transactions; (17) the risk that disruptions from the Transactions will harm Emerson's and our business, including current plans and operations; (18) certain restrictions during the pendency of the Transactions that may impact Emerson's or our ability to pursue certain business opportunities or strategic transactions; (19) our, Emerson's and New AspenTech's ability to meet expectations regarding the accounting and tax treatments of the Transactions; and (20) other risk factors as detailed from time to time in Emerson's and our reports filed with theSEC , 28 -------------------------------------------------------------------------------- Table of Contents including Emerson's and our annual report on Form 10-K, periodic quarterly reports on Form 10-Q, periodic current reports on Form 8-K and other documents filed with theSEC . While the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Any forward-looking statements speak only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statements, whether as a result of new information or development, future events or otherwise, except as required by law. You should read the following discussion in conjunction with our unaudited consolidated financial statements and related notes thereto contained in this report. You should also read "Item 1A. Risk Factors" of Part II for a discussion of important factors that could cause our actual results to differ materially from our expectations.
Our fiscal year ends on
Business Overview
We are a global leader in asset optimization software that optimizes asset design, operations and maintenance in complex, industrial environments to enable organizations to meet their business goals for sustainability and profitability. We combine decades of process modeling and operations expertise with big data, artificial intelligence, and advanced analytics. Our purpose-built software helps organizations meet their sustainability goals to reduce emissions and drive innovation which enables competitiveness and profitability of our customers. Our software enhances capital efficiency and decreases working capital requirements over the entire asset lifecycle driving a higher level of operational excellence. In addition, we help our customers increase throughput, drive resource efficiencies, increase production levels, reduce unplanned downtime, manage emissions to reach their net-zero footprint goals, and improve overall safety. Our software combines our proprietary mathematical and empirical models of manufacturing and planning processes which reflects the deep domain expertise we have amassed from focusing on solutions for the process and other capital-intensive industries for over 40 years. Our products have embedded artificial intelligence, or AI, capabilities that create insights, provide guidance, and automate and democratize knowledge, known as Industrial AI, to create more value for the industries we serve. For customers beginning to consider how AI can be applied to their domain-specific challenges, we recently introduced our hybrid model methodology. This capability enhances first principles-driven models with AI to improve accuracy, safety and predictability without requiring customers to have additional data science expertise. We have developed our applications to design and optimize processes across three principal business areas: engineering, manufacturing and supply chain, and asset performance management, or APM. Each business area leverages our Artificial Intelligence of Things, or AIoT, products as the foundation of applying Industrial AI at scale. We are the recognized market and technology leader in providing process optimization and asset performance management software for each of these business areas.
We have established sustainable competitive advantages based on the following strengths:
•Innovative products that help our customer' meet their sustainability and profitability goals;
•Long-term customer relationships;
•Large installed base of users of our software; and
•Long-term license contracts.
We have approximately 2,500 customers globally. Our customers consist of
companies engaged in the process industries including energy, chemicals,
engineering and construction, as well as pharmaceuticals, food and beverage,
transportation, power, metals and mining, pulp and paper, and consumer packaged
goods.
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Business Segments
We have two operating and reportable segments, which are consistent with our
reporting units: (i) subscription and software; and (ii) services and other. The
subscription and software segment is engaged in the licensing of process
optimization and asset performance management software solutions and associated
support services, and includes our license and maintenance revenue. The services
and other segment includes professional services and training, and includes our
services and other revenue.
Recent Events
Due to the COVID-19 pandemic, beginning in March 2020 , there was a sudden
decrease in demand for oil, compounded by the excess supply arising from
producers' failure to agree on production cuts, which resulted in a drop in oil
prices. Our business was negatively impacted by these factors. Specifically, we
saw a slowdown in closing customer contracts, a higher than pre-COVID customer
attrition rate due to non-renewals and renewals at lower entitlement level and,
to a lesser extent, a slowdown in customer payments. During fiscal year 2022,
there has been a normalization of transaction closing cycles and customer
payment timing. As of March 31, 2022 , oil prices have fully recovered and
surpassed pre-pandemic levels and our customers' operations are now more
normalized although some effects remain. We are continuing to assess the impact
of these items on global markets and the various industries of our customers.
The extent of the impact on our operational and financial performance going
forward will depend on capital expenditure and operational expenditure budgetary
cycles that are inherent in our customers' procurement strategies, which are
informed by oil prices and environmental factors such as COVID-19, all of which
are uncertain and cannot be predicted. We are continuing to monitor the
potential impacts related to the COVID-19 and uncertainty in the global markets
on the various industries of our customers. These factors could potentially
impact the signing of new agreements, as well as the recoverability of assets,
including accounts receivable and contract costs.
Russia's invasion of Ukraine on February 24, 2022 and the ongoing military
conflict between Ukraine and Russia , exacerbated by sanctions and other
regulatory measures imposed by the global community, have resulted in
significant volatility in financial markets and depreciation of the Russian
ruble and Ukrainian hryvnia, as well as in an increase in energy and commodity
prices globally. We maintain operations in Russia and license software and
provide related services to customers in Russia and Ukraine . While the conflict
has not had a material impact on our financial results, we continue to evaluate
the impact, if any, of the various sanctions and export control measures imposed
by the United States and other governments on our ability to do business in
Russia , maintain contracts with vendors and pay employees in Russia , receive
payment from customers in Russia and Ukraine , and assess our operations for
potential asset impairment. The outcome of these assessments will depend on how
the conflict evolves and any further actions that may be taken by the United
States , Russia , and other governments around the world. As a software company,
there is no material impact to supply chain operations expected due to the
conflict in Ukraine .
Transaction Agreement with Emerson Electric Co.
OnOctober 11, 2021 , we announced that we had entered into the Transaction Agreement with Emerson, pursuant to which Emerson will combine itsOpen Systems International, Inc. andGeological Simulation Software businesses, with us to form New AspenTech. Upon closing of the Transactions, which is subject to the satisfaction of certain customary conditions, including the approval of our stockholders, each issued and outstanding share of our common stock (subject to certain exceptions) will be converted into the right to receive 0.42 shares of New AspenTech common stock and a per share cash consideration amount, calculated by dividing$6,014,000,000 by the number of outstanding shares of our common stock as of the closing of the Transactions on a fully diluted basis. Immediately following the closing of the Transactions, Emerson and its affiliates will collectively own 55% of the outstanding New AspenTech common stock (on a fully diluted basis) and our stockholders will own the remaining outstanding New AspenTech common stock. Following the closing, New AspenTech and its subsidiaries will operate under the name "Aspen Technology, Inc. " The Transaction Agreement was negotiated and signed subsequent to a process that our Board of Directors originally undertook beginning in late 2020 to explore options to increase our value to our shareholders. As part of that process, we retained financial advisors, including JPMorgan Chase & Co., which assisted in facilitating contact with third parties, including Emerson, to assess the level of interest on the part of such third parties in a potential strategic corporate transaction involving us. Potential transactions included a range of structures, from a minority stake to finance targeted acquisitions, to a majority stake and up to a potential whole company acquisition. After discussions with such third parties, it became apparent that there were no such transactions that were of interest among the parties or that we wished to pursue, and inMay 2021 our Board of Directors determined to close the process. Subsequently, an arrangement was proposed by Emerson that our Board of Directors 30 -------------------------------------------------------------------------------- Table of Contents found to be an attractive pathway to increasing shareholder value and creating a global leader in our industry; accordingly, our Board of Directors advanced those discussions, which ultimately resulted in the Transaction Agreement with Emerson. We filed a definitive proxy statement on Schedule 14A onApril 18, 2022 , with respect to the special stockholder meeting to be held onMay 16, 2022 for the approval of the Transactions, which contains detailed information relating to the Transaction Agreement and the Transactions as well as additional details of the process.
For more detail about the transaction with Emerson, please see our Current
Report on Form 8-K filed with the
Key Components of Operations
Revenue
We generate revenue primarily from the following sources:
License Revenue. We sell our software products to end users, primarily under fixed-term licenses, through a subscription offering which we refer to as our aspenONE licensing model. The aspenONE licensing model includes software maintenance and support, known as our Premier Plus SMS offering, for the entire term. Our aspenONE products are organized into three suites: 1) engineering; 2) manufacturing and supply chain; and 3) asset performance management. Each product suite leverages our AIoT products as a foundation for applying Industrial AI at scale. Our APM product suite is licensed by customer sites, user seats or cloud connections. The engineering and manufacturing and supply chain product suites are licensed by tokens, which are interchangeable measures of usage based on the various units of measure such as users, servers, applications, manipulated variables, etc. Customers may use tokens flexibly to access one or more products in the suite in any combination. This licensing system enables customers to use products as needed, and to experiment with different products to best solve whatever critical business challenges the customer faces, and to license additional tokens as business needs evolve.
We also license our software through point product arrangements with our Premier Plus SMS offering included for the contract term.
Maintenance Revenue. We provide customers technical support, access to software fixes and updates and the right to any new unspecified future software products and updates that may be introduced into the licensed aspenONE software suite. Our technical support services are provided from our customer support centers throughout the world, as well as via email and through our support website. Services and Other Revenue. We provide training and professional services to our customers. Our professional services are focused on implementing our technology in order to improve customers' plant performance and gain better operational data. Customers who use our professional services typically engage us to provide those services over periods of up to 24 months. We charge customers for professional services on a time-and-materials or fixed-price basis. We provide training services to our customers, including on-site, Internet-based and customized training.
Cost of Revenue
Cost of License. Our cost of license revenue consists of (i) royalties, (ii) amortization of capitalized software and intangible assets, and (iii) distribution fees.
Cost of Maintenance. Our cost of maintenance revenue consists primarily of personnel-related costs of providing Premier Plus SMS bundled with our aspenONE licensing and point product arrangements.
Cost of Services and Other. Our cost of services and other revenue consists primarily of personnel-related and external consultant costs associated with providing our customers professional services and training.
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Operating Expenses
Selling and Marketing Expenses. Selling expenses consist primarily of the
personnel and travel expenses related to the effort expended to license our
products and services to current and potential customers, as well as for overall
management of customer relationships. Marketing expenses include expenses needed
to promote our company and our products and to conduct market research to help
us better understand our customers and their business needs.
Research and Development Expenses. Research and development expenses consist primarily of personnel expenses related to the creation of new software products, enhancements and engineering changes to existing products.
General and Administrative Expenses. General and administrative expenses include the personnel expenses of corporate and support functions, such as executive leadership and administration groups, finance, legal, human resources and corporate communications, and other costs, such as outside professional and consultant fees, amortization of intangible assets, and the provision for receivables.
Other Income and Expenses
Interest Income. Interest income is recorded for financing components under Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) or Topic 606. When a contract includes a significant financing component, we generally receive the majority of the customer consideration after the recognition of a substantial portion of the arrangement fee as license revenue. As a result, we decrease the amount of revenue recognized and increase interest income by a corresponding amount.
Interest Expense. Interest expense is primarily related to outstanding borrowings under our Amended and Restated Credit Agreement.
Other (Expense) Income, Net. Other (expense) income, net is comprised primarily of foreign currency exchange gains (losses) generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our entities. Provision for Income Taxes. Provision for income taxes is comprised of domestic and foreign taxes. We record interest and penalties related to income tax matters as a component of income tax expense. Our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events, such as tax benefits from the disposition of employee equity awards, settlements of tax audits and assessments and tax law changes. Our effective income tax rate is also impacted by, and may fluctuate in any given period because of, the composition of income in foreign jurisdictions where tax rates differ. Key Business Metrics Background
We utilize key business measures to track and assess the performance of our business. We have identified the following set of appropriate business metrics in the context of our evolving business:
•Annual spend •Total contract value •Bookings
We also use the following non-GAAP business metrics in addition to GAAP measures to track our business performance:
•Free cash flow
•Non-GAAP operating income
We make these measures available to investors and none of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with GAAP.
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Annual Spend
Annual spend is an estimate of the annualized value of our portfolio of term
license agreements, as of a specific date. Annual spend is calculated by summing
the most recent annual invoice value of each of our active term license
agreements. Annual spend also includes the annualized value of standalone SMS
agreements purchased with certain legacy term license agreements, which have
become an immaterial part of our business.
Comparing annual spend for different dates can provide insight into the growth
and retention rates of our business, because annual spend represents the
estimated annualized billings associated with our active term license
agreements. Management utilizes the annual spend business metric to evaluate the
growth and performance of our business as well as for planning and forecasting.
In addition, our corporate and executive bonus programs are based in part on our
success in meeting targets for growth in annual spend that are approved by our
Board of Directors. We believe that annual spend is a useful business metric to
investors as it provides insight into the growth component of our term licenses
and to how management evaluates and forecasts the results of the business.
Annual spend increases as a result of new term license agreements with new or
existing customers, renewals or modifications of existing term license
agreements that result in higher license fees due to contractually-agreed price
escalation or an increase in the number of tokens (units of software usage) or
products licensed, and escalation of annual payments in our active term license
agreements.
Annual spend is adversely affected by term license and standalone SMS agreements
that are renewed at a lower entitlement level or not renewed and, to a lesser
extent, by customer agreements that become inactive during the agreement's term
because, in our determination, amounts due (or which will become due) under the
agreement are not collectible. Because the annual spend calculation includes all
of our active term license agreements, the reported balance may include
agreements with customers that are delinquent in paying invoices, that are in
bankruptcy proceedings, or where payment is otherwise in doubt.
As of March 31, 2022 , approximately 85% of our term license agreements (by
value) were denominated in U.S. dollars. For agreements denominated in other
currencies, we use a fixed historical exchange rate to calculate annual spend in
dollars rather than using current exchange rates, so that our calculation of
growth in annual spend is not affected by fluctuations in foreign currencies.
Beginning in fiscal 2019 and for all future periods, for term license agreements
that contain professional services or other products and services, we have
included in the annual spend calculation the portion of the invoice allocable to
the term license under Topic 606 rather than the portion of the invoice
attributed to the license in the agreement. We believe that methodology more
accurately allocates any discounts or premiums to the different elements of the
agreement. We have not applied this methodology retroactively for agreements
entered into in prior fiscal years.
We estimate that annual spend grew by approximately 2.4% during the third
quarter of fiscal 2022, from
Total Contract Value
Total Contract Value, TCV, is the aggregate value of all payments received or to be received under all active term license agreements, including maintenance and escalation. TCV was$2.9 billion as ofJune 30, 2021 . TCV is an annual metric.
Bookings
Bookings is the total value of customer term license contracts signed in the current period, less the value of such contracts signed in the current period where the initial licenses are not yet deemed delivered, plus term license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period. Bookings increased from$175.6 million during the three months endedMarch 31, 2021 to$207.0 million during the three months endedMarch 31, 2022 . Bookings decreased from$548.8 million during the nine months endedMarch 31, 2021 to$516.7 million during the nine months endedMarch 31, 2022 . The change in bookings is due to the timing of renewals. 33
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Free Cash Flow
We use a non-GAAP measure of free cash flow to analyze cash flows generated from our operations. Management believes that this financial measure is useful to investors because it permits investors to view our performance using the same tools that management uses to gauge progress in achieving our goals. We believe this measure is also useful to investors because it is an indication of cash flow that may be available to fund investments in future growth initiatives or to repay borrowings under the Amended and Restated Credit Agreement, and it is a basis for comparing our performance with that of our competitors. The presentation of free cash flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity. Free cash flow is calculated as net cash provided by operating activities adjusted for the net impact of (a) purchases of property, equipment and leasehold improvements, (b) payments for capitalized computer software costs, and (c) other nonrecurring items, such as acquisition and integration planning related payments. Acquisition and integration planning related payments are costs we paid to effect a business combination. Those costs include: finders fees; advisory, legal, accounting and due diligence, valuation, and other professional or consulting fees; and costs of registering and issuing equity securities.
The following table provides a reconciliation of GAAP net cash provided by operating activities to free cash flow for the indicated periods:
Nine Months Ended
March 31,
2022 2021
(Dollars in Thousands)
Net cash provided by operating activities (GAAP) $ 155,086 $ 172,949
Purchase of property, equipment, and leasehold improvements (1,138) (733)
Payments for capitalized computer software development costs (361) (895)
Acquisition and integration planning related payments 20,592 2,433
Free cash flow (non-GAAP) $ 174,179 $ 173,754
Total free cash flow on a non-GAAP basis increased by $0.4 million during the
nine months ended March 31, 2022 as compared to the same period of the prior
fiscal year. The increase was primarily due to higher customer receipts and a
decrease in tax payments, offset by an increase in supplier and
compensation-related payments resulting from an increase in headcount. See
additional commentary in the "Liquidity and Capital Resources" section below.
Non-GAAP Income from Operations
Non-GAAP income from operations excludes certain non-cash and non-recurring
expenses, and is used as a supplement to income from operations presented on a
GAAP basis. We believe that non-GAAP income from operations is a useful
financial measure because removing certain non-cash and other items provides
additional insight into recurring profitability and cash flow from operations.
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The following table presents our income from operations, as adjusted for
stock-based compensation expense, amortization of intangible assets, and other
items, such as the impact of acquisition and integration planning related fees,
for the indicated periods:
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
GAAP income from operations
17.2 % $ 189,123 $ 252,522 $ (63,399) (25.1) %
Plus:
Stock-based compensation 7,757 9,225 (1,468) (15.9) % 25,713 24,589 1,124 4.6 % Amortization of intangibles 2,025 2,047 (22) (1.1) % 6,102 5,657 445 7.9 % Acquisition and integration planning related fees 11,923 749 11,174 1,491.9 % 29,066 3,133 25,933 827.7 % Non-GAAP income from operations$ 102,461 $ 80,920 $ 21,541 26.6 %$ 250,004 $ 285,901 $ (35,897) (12.6) %
Critical Accounting Estimates and Judgments
Note 2, "Significant Accounting Policies," to the audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements appearing in this report. The accounting policies that reflect our critical estimates, judgments and assumptions in the preparation of our consolidated financial statements are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 , and include the subsection captioned "Revenue Recognition."
See Note 3, "Revenue from Contracts with Customers," to our Unaudited Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q for more information on our accounting policies related to revenue recognition.
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Results of Operations
Comparison of the Three and Nine Months Ended
The following table sets forth the results of operations and the
period-over-period percentage change in certain financial data for the three and
nine months ended
Increase / Increase /
Three Months Ended (Decrease) Nine Months Ended (Decrease)
March 31, Change March 31, Change
2022 2021 % 2022 2021 %
(Dollars in Thousands)Revenue: License$ 130,032 $ 110,104 18.1 %$ 327,247 $ 352,133 (7.1) % Maintenance 50,017 45,885 9.0 % 146,615 139,561 5.1 % Services and other 7,704 6,737 14.4 % 21,267 19,721 7.8 % Total revenue 187,753 162,726 15.4 % 495,129 511,415 (3.2) % Cost of revenue: License 489 2,485 (80.3) % 5,291 6,859 (22.9) % Maintenance 4,760 5,174 (8.0) % 13,674 14,066 (2.8) % Services and other 8,373 8,396 (0.3) % 24,436 24,911 (1.9) % Total cost of revenue 13,622 16,055 (15.2) % 43,401 45,836 (5.3) % Gross profit 174,131 146,671 18.7 % 451,728 465,579 (3.0) % Operating expenses: Selling and marketing 33,977 30,345 12.0 % 94,088 82,092 14.6 % Research and development 28,704 25,874 10.9 % 80,975 70,576 14.7 % General and administrative 30,694 21,553 42.4 % 87,542 60,389 45.0 % Total operating expenses 93,375 77,772 20.1 % 262,605 213,057 23.3 % Income from operations 80,756 68,899 17.2 % 189,123 252,522 (25.1) % Interest income 8,287 8,410 (1.5) % 25,646 26,383 (2.8) % Interest (expense) (1,572) (1,495) 5.2 % (4,626) (5,639) (18.0) % Other income (expense), net 522 (5) (10,540.0) % (2,107) (1,807) 16.6 % Income before income taxes 87,993 75,809 16.1 % 208,036 271,459 (23.4) % Provision for income taxes 12,870 13,314 (3.3) % 31,650 47,101 (32.8) % Net income$ 75,123 $ 62,495 20.2 %$ 176,386 $ 224,358 (21.4) % 36
-------------------------------------------------------------------------------- Table of Contents The following table sets forth the results of operations as a percentage of total revenue for certain financial data for the three and nine months endedMarch 31, 2022 and 2021: Three Months Ended Nine Months Ended March 31, March 31, 2022 2021 2022 2021 (% of Revenue) Revenue: License 69.3 % 67.7 % 66.1 % 68.9 % Maintenance 26.6 28.2 29.6 27.3 Services and other 4.1 4.1 4.3 3.9 Total revenue 100.0 100.0 100.0 100.1 Cost of revenue: License 0.3 1.5 1.1 1.3 Maintenance 2.5 3.2 2.8 2.8 Services and other 4.5 5.2 4.9 4.9 Total cost of revenue 7.3 9.9 8.8 9.0 Gross profit 92.7 90.1 91.2 91.0 Operating expenses: Selling and marketing 18.1 18.6 19.0 16.1 Research and development 15.3 15.9 16.4 13.8 General and administrative 16.3 13.2 17.7 11.8 Total operating expenses 49.7 47.8 53.0 41.7 Income from operations 43.0 42.3 38.2 49.4 Interest income 4.4 5.2 5.2 5.2 Interest (expense) (0.8) (0.9) (0.9) (1.1) Other income (expense), net 0.3 - (0.4) (0.4) Income before income taxes 46.9 46.6 42.0 53.1 Provision for income taxes 6.9 8.2 6.4 9.2 Net income 40.0 % 38.4 % 35.6 % 43.9 % Revenue Total revenue increased by$25.0 million during the three months endedMarch 31, 2022 as compared to the corresponding period of the prior fiscal year. The increase of$25.0 million during the three months endedMarch 31, 2022 was comprised of an increase in license revenue of$19.9 million , an increase in maintenance revenue of$4.1 million , and an increase in services and other revenue of$1.0 million , as compared to the corresponding period of the prior fiscal year. Total revenue decreased by$16.3 million during the nine months endedMarch 31, 2022 as compared to the corresponding period of the prior fiscal year. The decrease of$16.3 million during the nine months endedMarch 31, 2022 was comprised of a decrease in license revenue of$24.9 million , offset in part by an increase in maintenance revenue of$7.1 million , and an increase in services and other revenue of$1.5 million , as compared to the corresponding period of the prior fiscal year. License Revenue Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease) March 31, Change March 31, Change 2022 2021 $ % 2022 2021 $ % (Dollars in Thousands) License revenue$ 130,032 $ 110,104 $ 19,928 18.1 %$ 327,247 $ 352,133 $ (24,886) (7.1) % As a percent of total revenue 69.3 % 67.7 % 66.1 % 68.9 % 37
-------------------------------------------------------------------------------- Table of Contents The period-over-period increase of$19.9 million in license revenue during the three months endedMarch 31, 2022 was primarily attributable to increases in bookings driven by the timing of renewals. The period-over-period decrease of$24.9 million in license revenue during the nine months endedMarch 31, 2022 was primarily attributable to decreases in bookings driven by the timing of renewals. Maintenance Revenue Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease) March 31, Change March 31, Change 2022 2021 $ % 2022 2021 $ % (Dollars in Thousands) Maintenance revenue$ 50,017 $ 45,885 $ 4,132 9.0 %$ 146,615 $ 139,561 $ 7,054 5.1 % As a percent of total revenue 26.6 % 28.2 % 29.6 % 27.3 % We expect maintenance revenue to increase as a result of: (i) having a larger base of arrangements recognized on a ratable basis; (ii) increased customer usage of our software; (iii) adding new customers; and (iv) escalating annual payments. The period-over-period increases of$4.1 million and$7.1 million in maintenance revenue during the three and nine months endedMarch 31, 2022 , respectively, were primarily due to growth of our base of arrangements, which include maintenance, being recognized on a ratable basis. Services and Other Revenue Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease) March 31, Change March 31, Change 2022 2021 $ % 2022 2021 $ % (Dollars in Thousands) Services and other revenue$ 7,704 $ 6,737 $ 967 14.4 %$ 21,267 $ 19,721 $ 1,546 7.8 % As a percent of total revenue 4.1 % 4.1 % 4.3 % 3.9 % We recognize professional services revenue for our time-and-materials, or T&M, contracts based upon hours worked and contractually agreed-upon hourly rates. Revenue from fixed-price engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs. Services and other revenue increased$1.0 million and$1.5 million during the three and nine months endedMarch 31, 2022 , respectively, as compared to the corresponding period of the prior fiscal year primarily due to the timing and volume of professional services engagements. Cost of Revenue Cost of License Revenue Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease) March 31, Change March 31, Change 2022 2021 $ % 2022 2021 $ % (Dollars in Thousands) Cost of license revenue$ 489 $ 2,485 $ (1,996) (80.3) %$ 5,291 $ 6,859 $ (1,568) (22.9) % As a percent of license revenue 0.4 % 2.3 % 1.6 % 1.9 % Cost of license revenue decreased$2.0 million and$1.6 million for the three and nine months endedMarch 31, 2022 , respectively, as compared to the corresponding period of the prior fiscal year, primarily due to a decrease in royalty expenses. License gross profit margin increased to 99.6% from 97.7% for the three months endedMarch 31, 2022 and 2021, respectively, and to 98.4% from 98.1% for the nine months endedMarch 31, 2022 and 2021, respectively due to lower cost of license revenue. 38
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Cost of Maintenance Revenue
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Cost of maintenance revenue $ 4,760 $ 5,174 $ (414) (8.0) % $ 13,674 $ 14,066 $ (392) (2.8) %
As a percent of maintenance
revenue 9.5 % 11.3 % 9.3 % 10.1 %
Cost of maintenance revenue remained consistent for the three and nine months
ended March 31, 2022 , respectively, as compared to the corresponding period of
the prior fiscal year. Maintenance gross profit margin increased for the three
and nine months ended March 31, 2022 and 2021, respectively, due to higher
maintenance revenue.
Cost of Services and Other Revenue
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Cost of services and other
revenue $ 8,373 $ 8,396 $ (23) (0.3) % $ 24,436 $ 24,911 $ (475) (1.9) %
As a percent of services and
other revenue 108.7 % 124.6 % 114.9 % 126.3 %
The timing of revenue and expense recognition on professional service
arrangements can impact the comparability of cost and gross profit margin of
professional services revenue from year to year. For example, revenue from
fixed-price engagements is recognized using the proportional performance method
based on the ratio of costs incurred to the total estimated project costs.
Cost of services and other revenue remained consistent for the three and nine
months ended March 31, 2022 , respectively, as compared to the corresponding
period of the prior fiscal year. Gross profit margin on services and other
revenue was (8.7)% and (24.6)% for the three months ended March 31, 2022 and
2021, respectively, and (14.9)% and (26.3)% for the nine months ended March 31,
2022 and 2021, respectively. The improved gross profit margin on services and
other for the three and nine months ended March 31, 2022 , as compared to the
same periods of the prior fiscal year, was a function of an increase in services
and other revenues attributable to increased training services and a decrease in
cost of services and other expenses.
Gross Profit
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Gross profit $ 174,131 $ 146,671 $ 27,460 18.7 %
(3.0) % As a percent of revenue 92.7 % 90.1 % 91.2 % 91.0 % For further discussion of subscription and software gross profit and services and other gross profit, please refer to the "Cost of License Revenue," "Cost of Maintenance Revenue," and "Cost of Services and Other Revenue" sections above. Gross profit increased by$27.5 million and decreased by$13.9 million for the three and nine months endedMarch 31, 2022 , respectively, as compared to the corresponding period of the prior fiscal year. Gross profit margin increased to 92.7% from 90.1% for the three months endedMarch 31, 2022 and 2021, respectively, and increased to 91.2% from 91.0% for the nine months endedMarch 31, 2022 and 2021, respectively. The increase for the three months endedMarch 31, 2022 was primarily attributable to an increase in license revenue due to an increase in bookings driven by the timing of renewals during the three months endedMarch 31, 2022 , as compared to the same periods last year, while costs decreased. The decrease for the nine months endedMarch 31, 2022 was primarily attributable to a decrease in license revenue, partially offset by increases in maintenance and service and other revenues and decreases in cost of license revenue. 39
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Operating Expenses
Selling and Marketing Expense
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Selling and marketing
expense $ 33,977 $ 30,345 $ 3,632 12.0 % $ 94,088 $ 82,092 $ 11,996 14.6 %
As a percent of total
revenue 18.1 % 18.6 % 19.0 % 16.1 %
The period-over-period increase of $3.6 million in selling and marketing expense
during the three months ended March 31, 2022 was attributable to higher
compensation costs of $1.7 million related to salaries, benefits, and bonuses as
a result of increased headcount, and greater acquisition and integration
planning related expenses of $1.5 million .
The period-over-period increase of $12.0 million in selling and marketing
expense during the nine month ended March 31, 2022 was attributable to higher
compensation costs of $4.9 million related to salaries, benefits, and bonuses
due to an increase in headcount, greater acquisition and integration planning
related expenses of $2.8 million , greater commission expense of $1.2 million ,
increased travel expenses of $1.0 million , increased stock-based compensation
expense of $0.7 million , and greater marketing costs of $0.4 million .
Research and Development Expense
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Research and development
expense $ 28,704 $ 25,874 $ 2,830 10.9 % $ 80,975 $ 70,576 $ 10,399 14.7 %
As a percent of total revenue 15.3 % 15.9 % 16.4 % 13.8 %
The period-over-period increase of $2.8 million in research and development
expense during the three months ended March 31, 2022 was primarily attributable
to higher compensation costs of $2.3 million related to salaries, benefits, and
bonuses as a result of increased headcount, and higher capitalized software
development costs of $0.4 million in the prior fiscal year period, offset in
part by a reduction on stock-based compensation expense of $0.6 million .
The period-over-period increase of $10.4 million in research and development
expense during the nine months ended March 31, 2022 was primarily attributable
to higher compensation costs of $7.1 million related to salaries, benefits, and
bonuses as a result of increased headcount, greater information services
allocated expenses of $1.8 million , and higher capitalized software development
costs of $0.7 million in the prior fiscal year period.
General and Administrative Expense
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
General and administrative
expense $ 30,694 $ 21,553 $ 9,141 42.4 % $ 87,542 $ 60,389 $ 27,153 45.0 %
As a percent of total revenue 16.3 % 13.2 % 17.7 % 11.8 %
The period-over-period increase of $9.1 million in general and administrative
expense during the three months ended March 31, 2022 was attributable to an
increase in acquisition and integration planning related expenses of $9.7
million , higher compensation costs of $1.3 million related to salaries,
benefits, and bonuses as a result of increased headcount, offset in part by a
reduction in information services allocation costs of $1.5 million .
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The period over period increase of $27.2 million in general and administrative
expense during the nine months ended March 31, 2022 was attributable to
acquisition and integration planning related expenses of $23.0 million , higher
stock-based costs expenses of $2.2 million , and higher hardware, software, and
maintenance expenses of $2.2 million .
Non-Operating Income (Expense)
Interest Income
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Interest income $ 8,287 $ 8,410 $ (123) (1.5) % $ 25,646 $ 26,383 $ (737) (2.8) %
As a percent of total
revenue 4.4 % 5.2 % 5.2 % 5.2 %
Interest income remained consistent for the three and nine months ended
March 31, 2022 .
Interest (Expense)
Three Months Ended (Increase) / Decrease Nine Months Ended (Increase) / Decrease
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Interest (expense)
5.2 % $ (4,626) $ (5,639) $ 1,013 (18.0) %
As a percent of total
revenue (0.8) % (0.9) % (0.9) % (1.1) %
Interest (expense) remained consistent for the three months ended
Other Income (Expense), Net
Three Months Ended (Increase) / Decrease Nine Months Ended (Increase) / Decrease
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Other income (expense), net $ 522 $ (5) $ 527 (10,540.0) % $ (2,107) $ (1,807) $ (300) 16.6 %
As a percent of total
revenue 0.3 % - % (0.4) % (0.4) %
Other income (expense), net is comprised primarily of unrealized and realized
foreign currency exchange gains and losses generated from the settlement and
remeasurement of transactions denominated in currencies other than the
functional currency of our entities.
During the three months ended March 31, 2022 and 2021, other income (expense),
net was primarily comprised of $0.4 million of equity income from equity method
investments and $(0.1) million of foreign currency exchange (losses),
respectively.
During the nine months ended March 31, 2022 and 2021 other income (expense), net
was primarily comprised of $(2.2) million and $(2.0) million of foreign currency
exchange (losses), respectively.
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Provision for Income Taxes
Three Months Ended Increase / (Decrease) Nine Months Ended Increase / (Decrease)
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
(Dollars in Thousands)
Provision for income taxes
(3.3) % $ 31,650 $ 47,101 $ (15,451) (32.8) %
Effective tax rate 14.6 % 17.6 % 15.2 % 17.3 %
The effective tax rate for the periods presented is primarily the result of
income earned in the U.S. taxed at U.S. federal and state statutory income tax
rates, income earned in foreign tax jurisdictions taxed at the applicable rates,
as well as the impact of permanent differences between book and tax income,
primarily the Foreign Derived Intangible Income, or FDII, deduction. Assuming
certain requirements are met, the FDII deduction is a benefit for U.S. companies
that sell their products or services to customers outside the U.S.
Our effective tax rate was 14.6% and 17.6% during the three months ended
March 31, 2022 and 2021, respectively, and 15.2% and 17.3% during the nine
months ended March 31, 2022 and 2021, respectively. Our effective tax rate was
lower in the three and nine months ended March 31, 2022 due to the higher FDII
deduction taken this year compared to last year due to the timing of revenue
recognition for tax purposes on multi-year software license agreements as the
result of the change in income tax regulations.
We recognized income tax expense of $12.9 million and $13.3 million during the
three months ended March 31, 2022 and 2021, respectively, and $31.7 million and
$47.1 million during the nine months ended March 31, 2022 and 2021,
respectively. Our income tax expense was driven primarily by pre-tax
profitability in our domestic and foreign operations and the impact of permanent
items and discrete tax items. The permanent items are predominantly the FDII
deduction, stock-based compensation expense and tax credits for research
expenditures.
Liquidity and Capital Resources
Resources
In recent years, we have financed our operations with cash generated from
operating activities. As of
We believe our existing cash and cash equivalents, together with our cash flows from operating activities, will be sufficient to meet our anticipated cash needs for at least the next twelve months. We may need to raise additional funds if we decide to make one or more acquisitions of businesses, technologies or products. If additional funding for such purposes is required beyond existing resources and our Amended and Restated Credit Agreement described below, we may not be able to effect a receivable, equity or debt financing on terms acceptable to us or at all. Credit Agreement InDecember 2019 , we entered into an Amended and Restated Credit Agreement withJPMorgan Chase Bank, N.A ., as administrative agent, joint lead arranger and joint bookrunner,Silicon Valley Bank , as joint lead arranger, joint bookrunner and syndication agent, and the lenders and co-documentation agents named therein, which we refer to as the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement, which amends and restates the Credit Agreement we entered into as ofFebruary 26, 2016 with the same lenders, provides for a$200.0 million secured revolving credit facility and a$320.0 million secured term loan facility. The indebtedness under the revolving credit facility matures onDecember 23, 2024 . Prior to the maturity of the Amended and Restated Credit Agreement, any amounts borrowed under the revolving credit facility may be repaid and, subject to the terms and conditions of the Amended and Restated Credit Agreement, borrowed again in whole or in part without penalty. OnDecember 14, 2021 , we andJPMorgan Chase Bank, N.A ., as administrative agent, entered into the Waiver and Second Amendment to the Amended and Restated Credit Agreement dated as ofDecember 23, 2019 , which we refers to as the Waiver and Amendment. The Waiver and Amendment amends the Amended and Restated Credit Agreement to (i) permanently waive the specified event of default resulting from the consummation of the Transactions under the Transaction Agreement with Emerson, Emerson Sub, New AspenTech, and Merger Subsidiary; (ii) permanently waive a possible change of fiscal year event 42 -------------------------------------------------------------------------------- Table of Contents of default in the future if we change the end of our fiscal year; (iii) establish a benchmark replacement for each affected currency due to the 2021 LIBOR cessation; (iv) make New AspenTech a loan party and guarantor of the Amended and Restated Credit Agreement, if and when the Transactions are consummated. The waivers and New AspenTech accession would become effective upon the consummation of the Transactions. The benchmark amendments became effective as of the effective date of the Waiver and Amendment. As ofMarch 31, 2022 , our current borrowings of$26.0 million consisted of the term loan facility. Our non-current borrowings of$253.4 million consisted of$256.0 million of our term loan facility, net of$2.6 million in debt issuance costs. As ofJune 30, 2021 , our current borrowings of$20.0 million consisted of the term loan facility. As ofJune 30, 2021 , our non-current borrowings of$273.2 million consisted of$276.0 million of our term facility, net of$2.8 million in debt issuance costs.
For a more detailed description of the Amended and Restated Credit Agreement, see Note 11, "Credit Agreement", to our Unaudited Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q.
Cash Equivalents and Cash Flows
Our cash equivalents remained consistent at$1.0 million as ofMarch 31, 2022 andJune 30, 2021 , consisted of money market funds. The objective of our investment policy is to manage our cash and investments to preserve principal and maintain liquidity. The following table summarizes our cash flow activities for the periods indicated: Nine Months Ended March 31, 2022 2021 (Dollars in Thousands) Cash flow provided by (used in): Operating activities$ 155,086 $ 172,949 Investing activities (2,116) (18,826) Financing activities (246,398) (125,393)
Effect of exchange rate changes on cash and cash equivalents (1,208)
573
(Decrease) increase in cash and cash equivalents $ (94,636) $ 29,303
Operating Activities
Our primary source of cash is from the annual installments associated with our
software license arrangements and related software support services, and to a
lesser extent from professional services and training. We believe that cash
inflows from our term license business will grow as we benefit from the
continued growth of our portfolio of term license contracts.
Cash from operating activities provided $155.1 million during the nine months
ended March 31, 2022 . This amount resulted from net income of $176.4 million ,
adjusted for net uses of cash of $(15.3) million and non-cash items of $(6.0)
million related to changes in working capital.
Non-cash items during the nine months ended March 31, 2022 consisted primarily
of a reduction in deferred income taxes of $53.5 million , partially offset by
stock-based compensation expense of $25.7 million , depreciation and amortization
expense of $8.2 million , a reduction in the carrying amount of right-of-use
assets of $7.6 million , a provision for receivables of $2.3 million , and net
foreign currency losses of $2.2 million . A $53.5 million decrease in deferred
income taxes was mainly because of the adjustment resulting from tax accounting
method changes related to revenue recognition associated with our multi-year
software licenses as a result of the change in income tax regulations.
Cash used by working capital of $15.3 million during the nine months ended
March 31, 2022 was primarily attributable to an increase in cash used in
contract assets of $49.7 million and a decrease in lease liabilities of $7.9
million , partially offset by an increase in accounts payable, accrued expenses
and other current liabilities of $36.0 million , an increase in prepaid expenses,
taxes and other assets of $12.1 million , an increase in deferred revenue of $5.4
million , and an increase in accounts receivable of $0.8 million . A $36.0 million
increase in accounts payable, accrued expenses and other current liabilities was
mainly comprised of a $30.2 million increase in income taxes payable.
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Investing Activities
During the nine months endedMarch 31, 2022 , we used$2.1 million of cash for investing activities. We used$1.1 million for capital expenditures,$0.6 million for equity method investments, and$0.4 million for capitalized computer software costs. Financing Activities During the nine months endedMarch 31, 2022 , we used$246.4 million of cash for financing activities. This amount resulted from$234.0 million of cash used for the repurchase of common stock,$14.0 million of cash used for maturities of amounts borrowed under our term loan facility, and$12.7 million of cash used for withholding taxes on vested and settled restricted stock units, offset in part by$15.9 million for cash provided by the exercise of employee stock options.
Contractual Obligations
Standby letters of credit for
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