Good day, and thank you for standing by. Welcome to the Q2 2023 Aspen Technology Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today to Brian Denyeau, ICR. Please go ahead..

Antonio will discuss business highlights from the second quarter, and Chantelle will review our financial results and discuss our guidance for fiscal year 2023. With that, let me turn the call over to Antonio.

Antonio?.

Thanks, Brian, and thanks to all of you for joining us today. AspenTech delivered solid second quarter results as we continue to benefit from a positive demand environment in many of our core end markets.

We're also seeing clear benefits from the combination of heritage AspenTech with the OSI and SSE businesses that were part of the Emerson Transaction in go-to-market activities, innovation and customer access.

As I mentioned last quarter, our primary focus in the first half of the year was executing on the integration, transformation and change management plans to create unified consistent operating principles and a single business model across the entire organization.

We have made substantial progress and believe our initial integration plans are largely complete. And the transformation phase of the OSI and SSE businesses is well underway.

Our primary focus is in the second quarter was instituting and standardizing on best practices across our go-to-market organization, including transaction terms and conditions and the change management required to support these best practices.

While we have already onboarded the OSI and SSE sales teams in the first quarter and implemented a standardized sales methodology, we're now focused on driving the execution required to deliver high-quality and long-term duration license agreements that support the financial predictability that investors are accustomed to from heritage AspenTech.

This was a key area of reinforcement at our recent company-wide sales meeting in Boston from which I came away very pleased with the progress we have made towards establishing a common set of transaction best practices across all businesses and the enthusiasm and buying demonstrated by the OSI and SSE sales teams.

There is still more work to do in this area, but I'm encouraged by the progress to date. In terms of synergies, we are confident on our ability to meet or exceed the synergies expected in fiscal year 2023 based on the increasing pipeline across the different growth synergy categories.

The actual cost synergies achieved today, the alignment and execution between the Emerson and AspenTech teams and the completion of the key transformation requirements that capture growth in ACV in the OSI business.

Overall, I'm pleased with our performance in the first half of the year and confident in our ability to execute to achieve our full year financial targets.

The success we expect this year in integrating and transforming the business sets up -- and transforming the business sets up the new AspenTech well to deliver significant top and bottom line growth in the coming years. I'm highly optimistic about the opportunity ahead for AspenTech and our ability to generate significant value for our shareholders.

Now looking at our financial results for the second quarter. Annual contract value or ACV was $833.7 million, up 8.7% year-over-year. Revenue was $242.8 million. GAAP loss per share was $1.02 and non-GAAP EPS was $0.35, and free cash flow was $53.1 million. I wish to provide further commentary on the quarter performance from OSI and SSE.

The OSI business closed significant transactions in the quarter, in line with our expectations but because of the bundled nature of the commercial arrangements in the quarter, they did not contribute to ACV growth.

In our last earnings call, we talked about the importance of achieving separability for the OSI services business as a key transformation milestone to the new agreements signed are able to be included in our ACV metric.

We're excited to announce that, as expected, we recently achieved this key milestone which will allow us to begin including from OSI agreements, the DGM product term license component and the SMS component of perpetual license agreements in our ACV metric beginning this quarter. This aligns OSI with how ACV is calculated for heritage AspenTech.

Chantelle will go into more detail in her prepared remarks. We also continue to be very encouraged by the prospects of the SSE business and its contribution to ACV growth as demonstrated through its contribution of the two largest ACV growth transactions in the quarter.

We equally expect that as our execution in the OSI and SSE sales organizations evolves to be in line with heritage AspenTech, we will experience greater and more predictable ACV growth. Looking at the quarter in more detail, the demand environment remained positive and was similar to trends we have seen in recent quarters.

We signed notable contracts in each of our key verticals and global markets and pipeline development continues to be robust. Our continued strong performance in the midst of uncertain and change in economic conditions is a testament to the relevance and resiliency of our customers' businesses and the mission criticality of new AspenTech solutions.

AspenTech has an essential role to play in helping our customers meet the demand for their products that support greater global prosperity while achieving their sustainability goals and ambitions.

Historically, these two areas have been viewed as being intentioned with one another and delivering on both goals is the core of our dual challenge mission. Our customers have validated its value proposition and recognize our unique position to help them meet the dual challenge.

Refiners and chemical producers will need to meet the increasing demand for their products and significantly reduce their environmental impact volatilities will need to transform how electricity is generated and distributed to meet an unprecedented increase in demand.

These are complicated challenges that will require elevated levels of investment for decades to come, and AspenTech is in a great position to benefit from these trends. I would now like to spend a moment providing details of what we're seeing in the market and our performance by vertical. Refining continues to perform well around the world.

Refining margins are expected to remain solid through 2023, albeit down from historical highs. And overall, end market demand for refined products will continue to grow, especially for diesel and middle distillate products.

The ongoing return of air travel, the upcoming import ban of refined products from Russia by the European Union and the increasing demand from the recent reopening in China are all expected to be ongoing catalyst for this market. We feel very good about the opportunity for AspenTech to drive consistently strong growth with refining customers.

We had a very strong quarter and have great momentum in the power transmission and distribution or T&D market with the DGM solutions from our OSI business. We're very pleased with the sales performance of DGM in the first half of the year.

The secular trends in this market are incredibly favorable given the expected vast increase in electricity demand and increasing number of energy sources that will power the grid in the future.

The greater complexity from renewable power sources like wind and solar is creating more complex transmission and distribution networks, including commercial and industrial micro grids, which will require a wholesale rethinking of how to manage them.

We expect this industry to have favorable investment trends for many years to come, considering the investment that will be required to transform the grid. CapEx spend in 2023 for power generation, transmission and distribution is expected to be about $1.2 trillion.

One of our key growth synergy opportunities with DGM is to leverage AspenTech's global footprint starting in Europe. We have already had some exciting early wins with DGM in that market and continue to actively build out our sales capacity in that region. In December, we held the OSI user forum in Las Vegas.

The event was highly successful, with 500 customer attendees, representing more than 150 utility companies from around the world. This was the first time since the pandemic started that OSI's customers gather in person.

We felt great enthusiasm from customers about the future plans for the OSI business under AspenTech, especially on the establishment of an ecosystem of third-party implementers for the DGM solutions. The oil and gas industry upstream and midstream had a banner year in 2022, supported by high oil prices and strong execution discipline.

Forecasts indicate oil prices will remain elevated through 2023 at an average of $80 to $90 per barrel for Brent crude for the year based on various current projections. The industry CapEx is expected to increase by 12% to $485 billion in calendar 2023, according to Energy Intelligence projections.

With a significant portion of that increase coming from national oil companies. In our business, we had another strong quarter as the combination of heritage AspenTech Solutions and SSE's products has created an unmatched technology portfolio that can deliver far greater value for customers.

We signed a number of quality wins with the upstream customers in the quarter, including a significant contract with one of the largest oil producers in South America, and we're also engaged with customers on the use of SSE capabilities for carbon capture and sequestration in various locations around the world.

The E&C vertical did well in the second quarter and has been an important source of strength in the first half of the year. Customers in this market are benefiting from two important trends. First, in the traditional business, investment in upstream oil and gas projects has increased notably in recent quarters.

The combination of strong oil prices and tight supply after several years of below average CapEx investment in the oil and gas market is supportive of E&C's backlog and headcount growth, which is positive for AspenTech.

And second, E&Cs are aggressively investing in establishing engineering capabilities for sustainability investments that represent a new growth opportunity that is likely to be less cyclical than their traditional business.

The CapEx investment required to meet sustainability targets in our core owner operator markets will be substantial, and we present E&Cs with sizable growth opportunities that haven't been present for several years. We're very optimistic on the outlook in this market in fiscal year 2023 and beyond.

Finally, the chemicals industry had a good quarter, but does face some challenges globally and regionally in Europe. The ongoing situation in Europe and its impact on local energy supplies and consumer demand continue to weigh on chemical customers in the region.

Globally, chemical customers are also experiencing a slowing demand and margin pressure as the global economy has slowed its growth. In conversations through the last quarter, many of our customers have told us they believe the current situation will recover in the second half of the calendar 2023 as economic activity picks up.

We remain optimistic on the opportunity in the chemicals market, but would flag it as one of the area of our business that we are cautious on in the near term. I would now like to share some customer wins from the quarter demonstrate our success.

First, an existing SSE in heritage AspenTech customer and one of the largest oil producers in South America is looking to shorten by 65%, the time it takes to get a new oilfield discovery to production.

As part of this initiative, the customer evaluated multiple vendors on their knowledge automation and AI capabilities and elected to increase the spend of SSE products due to the combination of capabilities in the SSE suite.

SSE has been and remains the largest incumbent in the exploration and production portfolio of software capabilities used by the customer. Second, an international utility company headquartered in the UK owns and maintains the high voltage electricity transmission network in England and Whale.

This customer is investing heavily in its network of thousands of kilometers of overhead lines and underground cables and more than 300 substations to connect more and more low carbon electricity sources since that is a crucial factor to meeting net zero carbon emissions in the region.

After a careful study to upgrade transmission management system and an extensive evaluation of multiple competitors, the customer selected the OSI solution because of its more mature, modern architecture and out of the box capabilities.

This win opens up the opportunity to expand the use of OSI products into other operating areas and across other companies in the customers' group. And third and final, Emerson and AspenTech are having success in the market.

Emerson recently announced its selection as the main automation contractor for the Ras Laffan Petrochemical Complex or RLP, a joint venture between QatarEnergy and Chevron Phillips Chemical. RLP will be the largest S&M plant in the region and one of the largest in the world.

The scope of work covers automation, software and analytics capabilities, including various products from AspenTech’s engineering and MSC suites. Emersons see at the table in the very early phases of the competitive process for this major construction project accelerated AspenTech's visibility into this opportunity.

While AspenTech's products and solutions contributed to Emersons overall bid quality to the customer. We expect this win will open many more opportunities for both companies in the future.

This win is also a good demonstration that the commercial relationship between Emerson and AspenTech is already benefiting both companies and the alignment between both commercial organizations will undoubtedly continue to grow the pipeline of business.

We expect the focus on targeted growth initiatives will result in increased long-term growth and profitability for both companies through a strengthened go-to-market presence and offering. Now turning to our innovation investments.

In November, we launched our new software release as aspenONE version 14, which provides augmented intelligence, guiding users to improve decision-making abilities and increased operational excellence.

Introducing over 100 sustainability models, this release will help customers accelerate progress in the areas of emission management, hydrogen economy, carbon capture, material, circularity, bio-based feedstocks and renewable energy.

V14 is a great example of how AspenTech will leverage our historical strength in modeling and simulation with new technologies like artificial intelligence to deliver greater value to customers through better profitability and improve sustainability.

A great example of collaborative innovation in product development is our recently announced strategic partnership and licensing agreement with Saudi Aramco. As part of this agreement, we partnered with Aramco to provide to the market a unique integrated modeling and optimization solution for the sourcing and utilization of CO2.

Through this solution, we expect to provide customers the ability to rapidly evaluate sources of CO2 generation and potential opportunities for use or sequestration of the CO2 and hence, design new innovative solutions that can reduce their carbon footprint while ensuring profitability.

M&A is another important part of our innovative strategy, and we continue to maintain a positive posture in this area. We got off to a strong start with Emerson, which has received fantastic early feedback from customers.

It greatly accelerates our AIoT industrial data and connectivity product road map and will enable greater visibility and understanding of an asset operating environment. We're also proceeding on our integration planning with MicroMine (ph) as we work towards the completion of the transaction.

We expect this acquisition to close as soon as we obtain the last remaining regulatory approval, which we are actively working to secure. We have become even more impressed with the MicroMine team and products as we have gotten to know them better as this process has played out and look forward to welcoming them to AspenTech.

Let me finish by providing our latest thoughts on fiscal year 2023 guidance and the second half of fiscal 2023. We remain confident in our ability to deliver on the full year ACV growth target and are maintaining the guidance range of 10.5% to 13.5%, while also maintaining our free cash flow guidance of $347 million to $362 million.

Our confidence is based on our pipeline of business, the momentum building from the integration and transformation activities undertaken, the 2023 CapEx spend projections and economic outlook in our core industries.

Our success in achieving these outcomes will still depend in part on continuing to successfully execute on our integration and transformation initiatives across the company.

As a reminder, we have always expected the second half of the year to be a stronger contributor to growth and free cash flow given the historical buying patterns of heritage AspenTech customers and the expected timing of DGM and SSE contributions, including for the anticipated synergies.

We are pleased with the performance of DGM and SSE so far, and believe the operational progress we have made in the first half of the year and our growing sales pipeline puts us on track to deliver 4 points of ACV growth from those businesses.

We also continue to be mindful of the macroeconomic environment, COVID developments in China and the challenges facing the chemicals market, which we have flagged as the key variables in how we performed within our ACV growth range for the year.

Before I turn it over to Chantelle, I want to reiterate how much progress we have made in the first half of the year in bringing heritage AspenTech, OSI and SSE together as one company.

We have created a world-class industrial software company that is poised to accelerate growth and generate significant profitability as we execute on our long-term strategy. The new AspenTech team has done an amazing job getting us to this point, and I want to recognize their efforts and commitment to our success.

So with that, let me turn the call over to Chantelle.

Chantelle?.

Thank you, Antonio. I will now review our financials for the second quarter of fiscal 2023. As a reminder, these results are being reported under Topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts.

Our license revenue is heavily impacted by the timing of bookings, and more specifically, renewal bookings. A decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license contracts up for renewal is not an indicator of the health or growth of our business.

The timing of renewals is not linear between quarters or fiscal years and this non-linearity will have a significant impact on the timing of our revenue. As a reminder, we have transitioned from annual strength ACV, annual contract value as our primary growth metric.

This define ACV as estimated of the annual value of our portfolio of term license and term and perpetual software maintenance and support or SMS agreements. ACV provides insight into the annual growth and retention of our recurring revenue base which is the majority of our overall revenue as well as recurring cash flow.

Annual contract value was $833.7 million in the second quarter of fiscal 2023, up 8.7% year-over-year. As Antonio mentioned, we are pleased to have recently achieved separability for DGM software, which will allow us to prospectively recognize the growth of DGM term license and SMS businesses into our ACV metric on a stand-alone basis.

Main contributors to this go-to-market change are the enablement of implementation service partners to operate autonomously and directly with our DGM customers. The change to OSI commercial contracts whereby the customers will be contracting for software licenses and professional services separately.

And the streamlining of tools and processes for implementation services to significantly reduce complexity and interdependency with our software. We will begin to see the impact of this change at DGM beginning in this third quarter which will have a meaningful benefit to ACV in the second half of this fiscal year.

It's important to note that achieving separability has multiple business benefits as well, including the general acceleration of revenue and free cash flow generation.

Annual spend for [Technical Difficulty] which the company defines as the annualized value of all term license and maintenance contracts at the end of the quarter for the businesses other than OSI and SSE was approximately $697.5 million at the end of the second quarter of fiscal 2023, which increased 9% compared to the second quarter of fiscal year 2022 and 2.2% sequentially.

As a reminder, we intend to provide this annual spend disclosure for Heritage AspenTech only for fiscal 2023 to provide investors comparability with our historical disclosures.

Total bookings, which we define as the total value of customer term license and perpetual SMS contracts signed in the current period, that's the value of term license and perpetual SMS contracts signed in the current period where the initial license have not yet being delivered under Topic 606, plus term license in perpetual SMS contracts signed in the previous period for which the initial licenses are deemed delivered in the current period with $242.8 million, a 16.3% increase year-over-year.

Total revenue was $242.8 million for the second quarter. As a reminder, as a result of the Emerson transaction, the subsidiary that included OSI and SSE businesses became the surviving entity.

As a result, the year ago comparisons you see in our financial statements include OSI and SSE in the second quarter of fiscal 2022, and year-over-year comparisons are not meaningful. Now turning to profitability, beginning on a GAAP basis. Operating expenses for the quarter were $209.1 million.

Total expenses, including cost of revenues were $302.2 million. Operating loss was $59.4 million and net loss for the quarter was $66.2 million or $1.02 per share.

Please note that the net loss in the quarter reflected approximately [Technical Difficulty] of a non-cash gain related to the mark-to-market adjustment for the Australian dollar foreign currency derivatives related to the pending MicroMine acquisition.

Since the inception of this foreign currency derivatives, the total net unrealized loss would we have incurred has been approximately $15.3 million. There will continue to be fluctuations until the closing of the Micromine transaction. Turning to non-GAAP results.

Excluding the impact of stock-based compensation expense, the amortization of intangibles associated with acquisitions and acquisition and integration planning related fees. And excluding the impact of the unrealized gain on the foreign currency derivatives.

We reported non-GAAP operating income for the second quarter of $86.6 million, representing a 35.7% non-GAAP operating margin. As a reminder, margins will fluctuate period to period due to the timing of customer renewals and for license revenue recognized during the quarter.

Non-GAAP net income was $22.8 million or $0.35 per share based on 64.6 million shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with approximately $446.1 million of cash and cash equivalents and $264 million outstanding under our term loan agreement.

On December 23, 2022, we entered into a credit agreement with Emerson for an aggregate term loan commitment of $630 million. We intend to use the proceeds from borrowings under the agreement to pay in part the cash consideration for funding the pending MicroMine acquisition. Also in January, we fully paid off our existing term loan balance.

In the second quarter, we generated $49.5 million of cash from operations and $53.1 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software and excluding acquisition and integration planning related payments. We had a solid cash generation quarter that was in line with our expectations.

Our free cash flow cadence will be more back end loaded than prior years due in part to business mix, upfront integration expenses and the timing of the expected impact of our synergy initiatives.

In terms of synergies, we've made additional progress in each of our four synergy buckets, growth, business transformation, cost and the commercial agreement with Emerson. The most notable milestone was the DGM separability that we discussed earlier.

We believe we are well positioned for the long term from both a growth and profitability perspective and on our ability to realize the $110 million of adjusted EBITDA synergies by 2026. I would now like to close with guidance.

We have performed well in the first half of 2023 and have delivered on the business integration and transformation initiatives needed to position the business for faster ACV growth in the second half of the year. We are encouraged by the overall demand trends across the business while also being mindful of an uncertain economic outlook.

To account for this uncertainty, we continue to believe maintaining a wider guidance range is prudent. With respect to ACV, we are maintaining our target of 10.5% to 13.5% growth for the year, including 4 points of growth contribution from the DGM and SSE product portfolios.

We are encouraged by the transformation and integration outcomes with DGM and SSE and the trends in heritage AspenTech. We are maintaining our bookings guidance in the range of $1.07 billion to $1.17 billion, which includes $547 million of contracts that are up for renewal in fiscal 2023.

This includes approximately $133 million of contracts up for renewal in the third quarter. We continue to expect revenue in the range of $1.14 billion to $1.2 billion.

We expect license and solutions revenue in the range of $765 million to $826 million and maintenance revenue and service and other revenue of approximately $312 million and $64 million, respectively. From an expense perspective, we expect total GAAP expenses of $1.207 billion to $1.217 billion.

Taken together, we expect GAAP operating income in a range of loss of $67 million to a loss of $15 million for fiscal 2023, with GAAP net income in the range of negative $7.5 million to a positive $32.5 million. We expect GAAP net loss per share to be in the range of a loss of $0.11 to positive $0.49.

A non-GAAP perspective, we expect operating income of $503 million to $555 million and non-GAAP income per share in the range of $6.83 to $7. From a free cash flow perspective, we continue to expect free cash flow of $347 million to $352 million.

Our fiscal 2023 free cash flow guidance assumes cash tax payments in the range of $94 million to $101 million, which is unchanged. We would expect the third quarter to be the largest free cash flow quarter of the year, driven parts of the timing and cash collections for SSE's renewal portfolio. To wrap up, AspenTech is performing at a high level.

We generated solid growth and profitability in the first half of the year and we believe we are well positioned to deliver on our full year financial targets. We are targeting a large and expanding market opportunity that we believe can support significant levels of growth and profitability over time.

With that, operator, we would now like to begin the Q&A..

Thank you. [Operator Instructions] And I show our first question comes from the line of Rob Oliver from Baird. Please go ahead..

Hi, Rob..

Hey. Good afternoon. Hi, Antonio.

Can you guys hear me okay?.

Yeah..

Yeah..

Okay. Great. Hi, Chantelle. Just a couple of questions from me. Just first, Antonio, you talked about the phases or maybe Chantelle as you, you talked about the phases of the integration of OSI and SSE and how you've gotten through the first phase.

Can you remind us of what the milestones are and what needs to be done as we enter Phase 2?.

Well, look, Rob, in a way a lot of the key transformation milestones have been achieved. Certainly, separability was a key one for the OSI business because now it allows us to account for the growth in ACV from these transactions that we signed with customers.

The release of the SSE suite and tokens for Microsoft was also a key milestone that we achieved in the Q1 quarter. We are about to release the version for Linux. And then later in the year, in the fiscal year, we will be releasing the suite and tokens for the OSI, DGM suite.

There are many other smaller milestones, if you will, that are accomplished almost on a weekly basis.

But fundamentally, is also about the transformation of the commercial agreements between customers and the new AspenTech for SSE is a significant set of steps to transform those agreements into what looks like a heritage AspenTech, commercial terms and conditions.

And for OSI, for the majority of it is and now introducing term licensing to these customers. We did a little bit of that in Q2. There will be a lot of that done in Q3 and Q4 and going forward. But then look at some of the things that we talked about, new self-methodology, standardizing on best practices, a lot of change management going on.

But I would say that the major milestones that we had hoped to achieve are in place now. And that's what we have talked about Q3 and Q4 being the quarter where we expect the results from all this work we've done in the first six months of the year to show up.

I don't know, if I've missed anything, Chantelle?.

Yeah. That's very helpful, Antonio. And I had one follow-up for you. Just around the ACV guide for the full year. Acknowledging that now having now reached severability you guys are going to be able to start to book some of the new Emerson properties into ACV, which is exciting.

I think under heritage Aspen, you had traditionally given a fairly tight range and then you kind of broaden that out a little bit prior to the Emerson transaction to kind of a 3 point range. You're at the 3 point range right now. And I know earlier you had been talking about being comfortable with the high end of that range.

And I didn't hear you say that on this call, so -- but at the same time, I heard you say you're really comfortable with back half of the year. So I just wanted to get a sense for as you look at the end markets that you gave a lot of detail about how you feel about where we are within that range? Thanks..

Yeah, Rob. I appreciate the question. And look, the fact is that we're very comfortable with where we are at this point in the year on our growth in ACV trajectory. We felt that it was prudent and cautious to maintain our guidance, but I also feel a lot of confidence on the outlook for the year.

And based on what I've seen so far and what we have accomplished and the outlook for our industries and customers, I feel comfortable thinking that we could come in, in the mid to upper part of our range. And the bottom part of the range is just a conservative cautious stance..

Great. Very helpful. Thank you guys very much. Appreciate it..

Thank you. And I show our next question comes from the line of Andrew Obin from Bank of America. Please go ahead..

Hi, Andrew..

Hey.

How are you? Can you hear me?.

Yeah..

Yeah. Just so looking at heritage AspenTech, I know expense (ph) showing as acceleration.

Is this more on the engineering side or manufacturing and supply chain?.

Yeah. But look, certainly, the first half of the year has been a good year for engineering. We've seen an acceleration, and we're performing ahead of our plan in engineering.

With MSC, I would say, we're tracking MSC deals tend to be -- to have a longer sales cycle, nine months to 12 months and really historically is in the Q3, Q4 quarters when we see that big wave of MSC deals. But overall, performing according to expectations..

Got you. And just a follow-up question. I think it's more of a big picture question. Right now is sort of December, January and when we're getting really good view at the budgets of your customers for capital planning for '23.

Now that you guys sort of have access to Emerson and their channels, et cetera, et cetera, how has the visibility for Aspen has changed through the relationship you have with Emerson? And what I'm referring to, like, do you guys get better visibility with the relationship now versus before? Thank you..

Well, look, certainly, as the two companies are engaging in the market, we're getting increased visibility. I do think it behooves us as separate entities to develop our own point of view, but we do share what we hear in the market.

Our point of view on the macro outlook and budgets is developed -- internally developed through multiple conversations and customers over a period of time, and that's what you have in our guidance..

I would say… [Multiple Speakers] Yeah, I think the only thing I would add, Andrew, if I can take that bigger picture down to more granular, so not macro, but I think where we do have more near-term visibility is probably more at an account segment level, working with Emerson.

So we have probably more granular visibility into the customer accounts, but at the macro level, as Antonio articulated..

Got you. This is very useful. Thank you..

Thank you. And I show our next question comes from the line of Matthew Pfau from William Blair. Please go ahead..

Hi, Matt..

[Operator Instructions].

Yeah. Hey, Antonio and Chantelle. Thanks for taking my question. Wanted to first follow-up on your chemicals commentary. And is this an area that, I believe, last quarter, you sort of also called out that performance was good, but you were maybe cautious on it and keeping a close eye and this quarter you had somewhat similar commentary.

But just wondering if anything has changed versus last quarter either in terms of pipeline or ability to close deals in the chemicals vertical?.

No. Perhaps what I would say is with some customers in chemicals, we did see a little bit of longer conversations on deals. There was perhaps one or two deals that moved from Q2 into Q3 that we're now working to close. But in general, it's just a lot of conversations, a lot of meetings with chemical customers.

I spent a lot of time meeting customers in the Q2 quarter. And they just express the reality of what they are facing, which is slowing demand and more pressure in margins.

I think I think we all see that in the announcements that they're making with the results and guidance, forward-looking guidance we're giving, so -- but look, at the same time, as we've said, when the economic environment becomes more difficult for these customers, they also look for ways to drive efficiencies in their businesses and they turned to AspenTech historically for that as well.

So just being cautious about it. I think especially this quarter as new budgets have to be executed, but we continue good engagement. We have good visibility into a pipeline of business in the quarter and into Q4 and we're just being cautious about it..

Okay. Great. And then on the revenue in the quarter, it was down sequentially from first quarter and we don't have a lot of history of the combined business, but in heritage Aspen, you typically would see a sequential increase from first Q to second Q.

Is that related to SSE and OSI? And is this sort of some sort of seasonality that we should think about modeling going forward? Thanks..

Yeah.

I definitely -- I would definitely take into account Matt, the portfolio business mix coming in, and happy to follow up with you on that, but it's definitely a seasonality based on the portfolio and actually take the business models coming of SSE historically having on your terms and their calendar year and you have the OSI milestone completion.

So you're going to see a different mix definitely. And it depends on the renewal cycle as well. So there's quite a few -- there are quite a few dynamics..

I think Matt, [indiscernible] just to emphasize the point -- that one of the points that Chantelle made, remember, the OSI revenue today is a percent of completion on projects and driven by dynamics of our projects. So it has nothing to do with software sales..

Okay. Understood. Very helpful. Thank you. Appreciate it..

Thank you..

Thank you. And I show our next question comes from the line of Jason Celino from KeyBanc Capital Markets. Please go ahead..

Hi, Jason..

Thanks. Hi, Antonio. Hi, Chantelle. One question on the unbundling or the separability for OSI.

The price that customers pay is it -- is there any difference between when it gets separated or is it net equal from the total perspective?.

Yeah. Well, I think probably more to come in the sense of what's possible. I would say just the apples-to-apples answer, Jason, it's a separation of the pieces. Once it goes to third-party services that will be their conversation to have.

But I would expect apples-to-apples to be fairly similar with opportunities there as we work through to demonstrate our value to see where we can take that to..

Okay. Excellent. And then maybe just building off of or following up with Rob's guidance question.

Can you just remind everyone what type of macro or business conditions were you kind of baking into the book ends of the range?.

Yeah. Well, I think at the high end, in a way is what we talked about, the good budget, solid budgets into 2023. Macroeconomic conditions that support the industries that we're in. Certainly, the continued investment in expansion and upgrade of grid into utilities and more CapEx spend in upstream and midstream.

That operate also supports solid chemicals spending. The low end, think about it, the opposite on the macro environment and budget, but also throwing avid, throwing regional conflicts in Europe, so those are the bookends for those two.

We see China reopening from COVID and while the conflict in Europe is created certainly difficult dynamics for chemical customers. We continue to see good business from customers in Europe in refining and EPCs.

The EPC industry in general around the world is on the up and up because it's a global business or what they might be headquartered in Europe, they are doing global projects. So -- but those are the factors. And 10.5 is worst case scenario, 13.5 is a great outlook..

Okay. Great. That was super helpful. Thank you..

Thank you. And I show our next question comes from the line of Mark Schappel from Loop Capital. Please go ahead..

Hi, Antonio. Hi, Chantelle. Antonio, starting with you, in your prepared remarks, you mentioned some of the Emerson Aspen integration sales efforts and milestones.

I was wondering if you could just speak to any early efforts with Emerson to sell your products into other markets that Aspen historically hasn't played in such as pulp and paper and in wastewater?.

Yes. Well, let me look at those efforts are ongoing. Of course, both Emerson and AspenTech had great familiarity with our core markets and there's big capital projects happening in oil and gas, chemicals, even in refining in the Middle East and Asia. So it's natural that some of the first wins you would see are in those four industries.

At the same time, as you said, Emerson has the presence in other industries. We're enabling the sales people and teams in those industries. We're also working to determine the value proposition for some of these industries and some of the applications. And I would argue that's a longer term tail to business generation.

But nonetheless, it's an ongoing effort, and it's part of our targeted initiatives especially with pharma, while AspenTech is been in pharma. Emerson has a first or second largest market share in that area and we see great opportunities for both companies with Emerson's leadership in that space..

Okay. Great. Thank you. That’s all from me..

Thank you. And I show our next question comes from the line of Dustin (ph) Moskovitz from Wolfe Research. Please go ahead..

Hi, Antonio. This is [indiscernible] on for Gal. Thanks for taking the question. So with [indiscernible] suite for Linux go on development.

I was wondering whether when that comes when it becomes complete, whether there will be any incremental benefit from this because Linux operating systems generally tend to be used with larger corporations because of better safety and greater security parameters.

Relative to Windows, which you guys released in fiscal Q1 and whether that could continue to drive large deals in SSE correspondingly strong contribution to ACV growth in the year. Thank you. And just one follow-up after that..

Yes. No, Arsenio (ph), no doubt. What we've learned is that the leanest version of the operating -- our operating system is more common with higher workload applications, more sophisticated applications in the SSE suite. Perhaps applications that consume a lot more tokens as well, that suite will be released soon.

And we do expect to sort of capture that incremental use. But the bulk of the SSE suite usage is with the Microsoft operating system. I do want to emphasize that..

Got it. And then just to follow up on the guidance question. What has to happen, I guess, to improve relative to today to get towards that top end range of guidance? Is there any call-outs in particular sectors that you would need to see perform better than what you currently seen in the first half of fiscal '23? Thank you..

Well, I mean, look, the reason we maintained 13.5% at the high end of our guidance is because we have visibility, we'll have a path into that number. And with that, the pipeline of business and supported by synergies and then benefits from the transformation of OSI and SSC. So what needs to happen.

Look, it's execution and not being impacted by some of the things that I've mentioned, COVID and conflict in Europe, so prices around transformation, the transformation of a business is not linear per se. There's always surprises in and you can always be tripped in your execution.

We found some things in the last six months that were not in our assumptions, but we've been able to overcome them and we don't know of anything that could trip us in the second half of the year, but we also want to be cautious because there's a lot of we're lifting a lot of rocks and assuming that we're going to find what we think we're going to find and in some cases, we may not.

So we're just being cautious about that. But if we continue to execute on the transformation that we did in the first half, then that path to 13.5% is there..

Great. Thank you very much..

Thank you. And I show our last question comes from the line of Clarke Jeffries from Piper Sandler. Please go ahead..

Perfect. Thank you for taking the question..

Hello..

Antonio, your Emerson held its Analyst Day in November and an quoted two metrics that stood out to me on the Aspen business, one being, 1,000 plus salespeople actively selling AspenTech and the second being 70% of Emerson control systems do not have AspenTech software.

The question is, how do you expect those metrics to change in the coming calendar year? And which metric would you expect us to see the most progress in soon and which is the most meaningful near-term AspenTech?.

Well, let me look, certainly, the -- look, I think it's a combination. The Emerson installed base is addressed by those thousands of sales people. Now they have to be trained, enabled, educated and so on.

So the goal here is not to try to boil the ocean in one year because when you try to do that, you dilute yourself and you end up not being successful. I think we want to be very focused on the initiatives that we want to pursue to deliver the synergies that we've outlined for ourselves every year going forward.

And that eventually will turn into many, many more salespeople selling an AspenTech into a much greater installed base. That installed base is a huge opportunity for Aspen. There are places where Emerson has tremendous market position, pharmaceuticals, China, oil and gas, midstream, LNG and some of these core industries where they're in.

So we'll start focusing and working with them in each of these areas. And the fruits of our labor will show up over time. Those thousands of salespeople or the installed base that you refer to think of that as the total addressable market and we'll start eating into that TAM as time passes on..

Perfect. Thank you very much. And just a follow-up, Chantelle.

Maybe I missed it, but could you clarify what the raise is to the high end of net income? Is that primarily the fluctuation of the currency derivative or could you clarify what the changes there to the full year guidance on EPS?.

Yeah. I think it would be the items that come in on that sets of their – there is some stock-based compensation in there. There's the derivative. I think those are the two moving pieces that you would see in that change, the two main drivers..

Thanks. Perfect. Thank you very much..

Thank you..

Thank you. That concludes our Q&A session for today. At this time, I would like to turn the conference back over to Antonio Pietri, CEO for closing remarks..

Well, thank you, everyone, and I know it's already -- is January 25, but Happy New Year to everyone. I look forward to meet in-person some of you as we engage in conferences and other activities. So thank you, and have a good evening..

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect..