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. 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. 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 and combined 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 onJune 30 , and references in this Quarterly Report to a specific fiscal year are the twelve months endedJune 30 of such year with the exception of fiscal 2022 being the nine months endedJune 30 (for example, "fiscal 2023" refers to the year endingJune 30, 2023 ).
Business Overview
We are a global leader in asset optimization software that enables industrial manufacturers to design, operate, and maintain their operations for maximum performance. We combine decades of modeling, simulation, and optimization capabilities with industrial operations expertise and apply advanced analytics to improve the profitability and sustainability of production assets. Our purpose-built software is proven to drive value creation levers for our customers; improving operational efficiency and maximizing productivity, reducing unplanned downtime and safety risks, and minimizing energy consumption and emissions. Our technology is at the center of their sustainability and decarbonization programs, enabling circularity through improved industrial technologies and more degradable and recyclable plastics, and supporting the broader energy transition with advanced solutions for power transmission and distribution, carbon capture, storage and utilization, batteries and energy storage. Cybersecurity is foundational in the design of our software. OnMay 16, 2022 ,Heritage AspenTech and Emerson Electric Co. ("Emerson") and certain of its subsidiaries, entered into a definitive agreement pursuant to, among other matters Emerson and its subsidiaries contributed to Heritage AspenTech Shareholders$6,014,000,000 in cash and itsOpen Systems International, Inc. business (the "OSI business" or "OSI Inc. ") andGeological Simulation Software business, which we have renamed as Subsurface Science & Engineering (the "SSE business" or "SSE") in exchange for 55% of our outstanding common stock (on a fully diluted basis). By combining the software capabilities, deep domain expertise and leadership of Heritage AspenTech with the OSI and SSE businesses, we have created a company that we believe will deliver superior value to customers across diverse end markets including energy, chemicals, power transmission and distribution, engineering, procurement, and construction, pharmaceuticals, and metals and mining, among others. 20 -------------------------------------------------------------------------------- Table of Contents For the quarter endedSeptember 30, 2022 , the consolidated and combined financial statements comprised the results ofOSI Inc. , SSE and HeritageAspenTech , while for the same period in the prior fiscal year, these financial statements comprised the results of onlyOSI Inc. and SSE. Certain financial information for the periods endedSeptember 30, 2021 have been reclassed to conform to the consolidated and combined financial statements for the three-month period endedSeptember 30, 2022 .
Recent Events
OnJuly 27, 2022 , we announced that we entered into a definitive agreement to acquireMicromine , a global leader in design and operational management solutions for the metals and mining industry, from private equity firmPotentia Capital and other sellers for AU$900 million in cash (approximately$623 million USD based on foreign currency exchange rate at the time of announcement). We currently intend to finance the transaction through a combination of cash on hand and additional debt financing. The acquisition currently is expected to close in the fiscal second quarter of 2023, subject to receipt of regulatory approvals. In connection with the agreement to purchaseMicromine , we also entered into foreign currency forward contracts onAugust 2, 2022 for a six-month period ending onFebruary 6, 2023 to mitigate the impact of foreign currency exchange associated with the forecasted payment of purchase price. Key Business Metrics Background
We utilize key business metrics 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 Contract Value •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.
Annual Contract Value
Annual contract value (ACV) is an estimate of the annual value of our portfolio
of term license and software maintenance and support (SMS) contracts, the annual
value of SMS agreements purchased with perpetual licenses, and the annual value
of standalone SMS agreements purchased with certain legacy term license
agreements, which have become an immaterial part of our business.
Comparing ACV for different dates can provide insight into the growth and
retention rates of our recurring software business because ACV represents the
estimated annual billings associated with our recurring license and maintenance
agreements at any point in time. Management uses the ACV business metric to
evaluate the growth and performance of our business as well as for planning and
forecasting purposes. We believe that ACV is a useful business metric to
investors as it provides insight into the growth component of our software
business.
ACV generally increases as a result of new term license and SMS 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, or an increase in the value of licenses delivered.
ACV is adversely affected by term license and SMS agreements that are renewed at
a lower entitlement level or not renewed, a decrease in the value of licenses
delivered, and, to a lesser extent, by customer agreements that become inactive
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during the agreement's term because, in our determination, amounts due (or which
will become due) under the agreement are not collectible. As ACV is an estimate
of annual billings, it will generally not include contracts with a term of less
than one year. Because ACV represents all other active term software and SMS
agreements, it may include amounts under agreements with customers that are
delinquent in paying invoices, that are in bankruptcy proceedings, are subject
to termination by the customer or where payment is otherwise in doubt.
As of September 30, 2022 , customer agreements representing approximately 84% of
our ACV (by value) were denominated in U.S. dollars. For agreements denominated
in other currencies, we use a fixed historical exchange rate to calculate ACV in
dollars rather than using current exchange rates, so that our calculation of
growth in ACV is not affected by fluctuations in foreign currencies. We have not
applied this methodology retroactively for OSI software amounts delivered prior
to October 2020 , but do not believe this to have a material impact on our
reported ACV metric due to the high USD-denominated concentration of the OSI
business. As of September 30, 2022 , approximately 94% of OSI ACV was denominated
in USD.
For term license agreements that contain professional services or other products
and services, we have included in ACV 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 estimate that the pro forma ACV of AspenTech grew by approximately 7.7%, from
$751.9 million as of September 30, 2021 to $809.6 million as of September 30,
2022 . This includes approximately $2.7 million from Inmation.
Total Contract Value
Total Contract Value ("TCV") is the aggregate value of all payments received or
to be received under all active term license and perpetual SMS agreements,
including maintenance and escalation. TCV of Heritage AspenTech, the OSI
business and the SSE business was $3.3 billion and $3.1 billion as of September
30, 2022 and 2021, respectively.
Bookings
Bookings is the total value of customer term license and perpetual SMS contracts signed in the current period, less the value of such contracts signed in the current period where the initial licenses and SMS agreements are not yet deemed delivered, plus term license contracts and SMS agreements signed in a previous period for which the initial licenses are deemed delivered in the current period. The bookings of Heritage AspenTech, the OSI business and the SSE business was$224.0 million during the three months endedSeptember 30, 2022 , compared to$156.2 million during the three months endedSeptember 30, 2021 . The change in bookings is related to the timing of renewals. 22
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Non-GAAP Business Metrics
The following table provides a reconciliation of GAAP net cash provided by (used
in) operating activities to free cash flow for the indicated periods (in
thousands):
Three Months Ended
September 30,
2022 2021
Net cash provided by (used in) operating activities (GAAP)
$ (9,186) Purchase of property, equipment, and leasehold improvements (1,321)
(2,607)
Payments for capitalized computer software development costs (99)
-
Acquisition related payments 7,059 54
Free cash flow $ 10,716 $ (11,739)
The following table presents our (loss) 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
September 30,
2022 2021
GAAP (loss) from operations $ (51,182) $ (13,884)
Plus:
Stock-based compensation 17,736 368
Amortization of intangibles 121,160 28,809
Acquisition and integration planning related fees 4,858 54
Non-GAAP income from operations$ 92,572 $
15,347
Critical Accounting Estimates and Judgments
Note 2, "Significant Accounting Policies," to the audited consolidated and combined financial statements in our Transition Reports on Form 10-KT for the fiscal year endedJune 30, 2022 describes the significant accounting policies and methods used in the preparation of the consolidated and combined financial statements appearing in this report. The accounting policies that reflect our critical estimates, judgments and assumptions in the preparation of our consolidated and combined financial statements are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of our Transition Reports on Form 10-KT for the fiscal year endedJune 30, 2022 , and include the subsection captioned "Revenue Recognition." 23 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Comparison of the Three 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
months ended
Three Months Ended Increase / (Decrease)
September 30, Change
2022 2021 $ %
(Dollars in Thousands)
Revenue:
License and solutions $ 160,224 $ 44,215 $ 116,009 262.4 %
Maintenance 78,366 24,535 53,831 219.4 %
Services and other 12,229 8,265 3,964 48.0 %
Total revenue 250,819 77,015 173,804 225.7 %
Cost of revenue:
License and solutions 69,513 34,388 35,125 102.1 %
Maintenance 9,217 4,234 4,983 117.7 %
Services and other 12,400 4,898 7,502 153.2 %
Total cost of revenue 91,130 43,520 47,610 109.4 %
Gross profit 159,689 33,495 126,194 376.8 %
Operating expenses:
Selling and marketing 118,274 25,000 93,274 373.1 %
Research and development 49,740 15,555 34,185 219.8 %
General and administrative 42,848 6,617 36,231 547.5 %
Restructuring 9 207 (198) (95.7) %
Total operating expenses 210,871 47,379 163,492 345.1 %
(Loss) from Operations (51,182) (13,884) (37,298) 268.6 %
Other (expense), net (58,632) (1,359) (57,273) 4,214.3 %
Interest income (expense), net 5,023 (272) 5,295 (1,946.7) %
(Loss) before provision for income
taxes (104,791) (15,515) (89,276) 575.4 %
(Benefit) for income taxes (93,547) (4,313) (89,234) 2,069.0 %
Net (loss) $ (11,244) $ (11,202) $ (42) 0.4 %
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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 months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, 2022 2021 (% of Revenue) Revenue: License and solutions 63.9 % 57.4 % Maintenance 31.2 31.9 Services and other 4.9 10.7 Total revenue 100.0 100.0 Cost of revenue: License and solutions 27.7 44.7 Maintenance 3.7 5.5 Services and other 4.9 6.4 Total cost of revenue 36.3 56.5 Gross profit 63.7 43.5 Operating expenses: Selling and marketing 47.2 32.5 Research and development 19.8 20.2 General and administrative 17.1 8.6 Restructuring costs - 0.3 Total operating expenses 84.1 61.5 (Loss) from operations (20.4) (18.0) Other (expense), net (23.4) (1.8) Interest income (expense), net 2.0 (0.4) (Loss) before provision for income taxes (41.8) (20.1) (Benefit) for income taxes (37.3) (5.6) Net (loss) (4.5) % (14.5) % Revenue Total revenue increased by$173.8 million during the three months endedSeptember 30, 2022 as compared to the same period in prior fiscal year. Overall revenue growth is primarily due to$176.4 million in revenue from HeritageAspenTech as a result of the Transaction, an increase of$3.9 million in new and renewal contracts from SSE, offset by a decrease in revenue of$6.5 million from OSI due to the mix of open customer projects and the stage of completion compared to the prior period.
License and solutions revenue increased by
Maintenance revenue increased by$53.8 million during the three months endedSeptember 30, 2022 as compared to the same period in prior fiscal year. This increase was primarily due to$53.0 million from Heritage AspenTech as a result of the Transaction. Services and other revenue increased by$4.0 million during the three months endedSeptember 30, 2022 , as compared to the same period in prior fiscal year primarily due to$7.1 million from Heritage AspenTech as a result of the Transaction, offset by a decrease of$3.1 million in services and other revenue from OSI and SSE professional services arrangements.
Cost of Revenue
Cost of revenue increased by
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Cost of license and solutions revenue increased$35.1 million during the three months endedSeptember 30, 2022 , as compared to the same period in prior fiscal year. This increase was driven by$35.2 million from Heritage AspenTech as a result of the Transaction,$32.9 million of which is associated with additional amortization of intangible assets. Cost of maintenance revenue increased by$5.0 million during the three months endedSeptember 30, 2022 , as compared to the same period in prior fiscal year. This increase was primarily due to$6.0 million from Heritage AspenTech as a result of the Transaction. Cost of services and other revenue increased by$7.5 million for the three months endedSeptember 30, 2022 , as compared to the same period in prior fiscal year primarily due to$8.2 million from Heritage AspenTech as a result of the Transaction. Gross profit margin on services and other revenue was (1.4)% and 40.7% for the three months endedSeptember 30, 2022 and 2021, respectively. Overall gross profit increased by$126.2 million for the three months endedSeptember 30, 2022 , as compared to the same period in prior fiscal year primarily due to$127.0 million from the Transaction. Gross profit margin increased significantly to 63.7% for the three months endedSeptember 30, 2022 from 43.5% for the same period in prior fiscal year. The increase was mainly driven by larger gross profit on license revenue from Heritage AspenTech in the current period. Operating Expenses Selling and marketing expense increased by$93.3 million during the three months endedSeptember 30, 2022 , as compared to the same period in prior fiscal year primarily due to$100.9 million from Heritage AspenTech as a result of the Transaction, of which$64.2 million was additional amortization of intangible assets, offset by a decrease of$7.6 million in management fees, severance and restructuring. Research and development expense increased by$34.2 million during the three months endedSeptember 30, 2022 , as compared to the same period in prior fiscal year primarily due to$32.8 million from Heritage AspenTech as a result of the Transaction, and$1.5 million from SSE compensation related costs. General and administrative expense increased by$36.2 million during the three months endedSeptember 30, 2022 , as compared to the same period in prior fiscal year primarily due to$37.2 million from Heritage AspenTech as a result of the Transaction, and increased stock-based compensation expense of$2.0 million from SSE and OSI.
Non-Operating Income (Expense)
Interest income (expense) increased by$5.3 million for the three months endedSeptember 30, 2022 as compared to the same period in prior fiscal year. The increase was largely attributable to the Transaction, which contributed$9.2 million resulting from interest income earned on Heritage AspenTech's long-term revenue contracts, partially offset by a$3.7 million increase in interest expense due to a higher interest rate on our term loan and amortization of debt issuance costs associated with the Bridge Facility. Other (expense), net is comprised primarily of unrealized losses on foreign currency forward contracts and 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.
Other expense increased by
Benefit for Income Taxes
Three Months Ended Increase / (Decrease)
September 30, Change
2022 2021 $ %
(Dollars in Thousands)
(Benefit) for income taxes $ (93,547) $ (4,313) $ (89,234) 2,069.0 %
Effective tax rate 89.3 % 27.8 %
26-------------------------------------------------------------------------------- Table of Contents Benefit for income taxes was$93.5 million and$4.3 million for the three months endedSeptember 30, 2022 and 2021, respectively, resulting in effective tax rates of 89.3% and 27.8%, respectively. Income tax benefit increased due to the higher Foreign-Derived Intangible Income ("FDII") deduction recorded in the current period as a result of non-deductible amortization of intangibles, capitalized R&D costs, and a change in the accounting methodology related to historical revenue recognition for tax purposes on multi-year software license agreements. The change resulted in the recognition of taxable income over a 4 tax year period with fiscal year 2024 as the last year of the adjustment.
Liquidity and Capital Resources
Resources
As ofSeptember 30, 2022 andJune 30, 2022 , our principal sources of liquidity consisted of$382.5 million and$449.7 million , respectively, in cash and cash equivalents. We believe our existing cash on hand and cash flows generated by operations are sufficient for at least the next 12 months to meet our operating requirements, including those related to salaries and wages, working capital, capital expenditures, and other liquidity requirements associated with operations. 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.
Bridge Facility
OnJuly 27, 2022 , the Company entered into a$475.0 million senior unsecured bridge facility (the "Bridge Facility") withJPMorgan Chase Bank, N.A . ("JPMorgan"), as Administrative Agent, to finance the acquisition of all of the equity interests ofMining Software Holdings Pty Ltd ("Micromine acquisition"). The Bridge Facility was entered into under the existing Amended and Restated Credit Agreement dated as ofDecember 23, 2019 , with JPMorgan ("Credit Agreement"). The Company may elect that each incremental borrowing under the Bridge Facility bear interest at a rate per annum equal to (a) the Alternate Base Rate ("ABR"), plus the applicable margin or (b) the Adjusted Term Secured Overnight Financing Rate ("SOFR"), plus the applicable margin. There are no amounts outstanding under the Bridge Facility as ofSeptember 30, 2022 . Future borrowings under the Bridge Facility are payable 364 days after the closing date ofJuly 27, 2022 . Credit Agreement
The Credit Agreement provides for a
The interest rate as of
As of
For a more detailed description of the Credit Agreement, see Note 8, "Credit Agreement", to our Unaudited Consolidated and Combined Financial Statements in Part 1, Item 1 of this Form 10-Q.
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