AspenTech Earnings: Ugly Results as Merger Integration and Macro Headwinds Weigh on Stock

Wide-moat Aspen Technology AZPN reported fiscal third-quarter results that were below our revenue and profitability expectations. Macro headwinds are hurting renewals, the chemicals industry is slowing spending, subsurface science and engineering, or SSE, contracts are not elongating as expected, and digital grid management, or DGM, sales cycles have not contracted as planned. These factors affected results as well the outlook, which management lowered for the year. We see these factors continuing throughout this year and even bleeding into calendar 2024, so we are lowering our near-term estimates and reducing our fair value estimate to $195 per share from $215. We believe AspenTech is well positioned to capitalize on secular trends and will uniquely benefit from capital-intensive industries facing the challenge of meeting increasing resource demand in a sustainable way. That said, we would wait for signs of improvement in demand and more progress on DGM integration efforts before investing in the stock.

Given the merger with Emerson, results are not comparable with the prior-year period. Third-quarter revenue declined 5% sequentially to $230 million, well below our estimate. Management attributes this decline to the timing of customer renewals affecting the licensing business and to deterioration in the chemical industry, as customers pull back on software spending amid supply chain challenges and elevated energy costs. We view annual contract value as a more meaningful indicator of the underlying health of the business; this came in at $855 million for the quarter, up 11% year over year, which is better than the reported revenue results. Management was positive on the health of the business and optimistic about the pipeline, just more cautious on the near term. While DGM remains more sluggish relative to management’s initial plan, SSE has made up for it with strong performance since the merger finalization.