Aspen Technology Inc

NASDAQ:AZPN

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Aspen Technology First Quarter Fiscal 2022 Earnings Conference Call.

At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. I'd now like to hand the conference over to your speakers today, Brian dummy, please go ahead.

Good day, and thank you for standing by. And welcome to the Q4 2021 Aspen Technology Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

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

[Brian Denyeau, IR]

Thank you. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the first quarter of fiscal 2022 ending September 30, 2021. With me on the call today are Antonio Pietri, Aspen Tech's President and CEO and Chantelle Breithaupt, CFO of Aspen Tech.

Before we begin, I will make the Safe Harbor statement that during the course of this call, we may make projections or other forward-looking statements about the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from such projections or statements. Factors that might cause such differences include, but are not limited to, those discussed in today's call and contained in our most recently filed Form 10-Q.

Also, please note that the following information relates to our current business conditions and our outlook as of today, October 27, 2021. Consistent with our prior practice, we expressly disclaim any obligation to update this information. The structure of today's call will be as follows; Antonio will discuss business highlights from the first quarter and their pending agreement with Emerson and then I will review our financial results and discuss our guidance for fiscal year 2022. Chantelle will review our financial results and discuss our guidance for fiscal year 2022.

With that, let me turn the call over to Antonio. Antonio?

[Antonio Pietri, President and CEO]

Thanks, Brian. And thanks to all of you for joining us today. We had a strong start to the year with annual spend coming in above our expectations. We saw a notable improvement in the spending environment during the quarter as a continuing economic recovery has improved end market conditions for many of our customers.

As we have discussed over the past 12 months, we have seen consistently strong demand indications from our customers about expanding adoption of Aspen Tech solutions to increase operational efficiency and sustainability. While the market is not yet back to pre-COVID levels we believe that first quarter was an important indicator that a spending by our customers is improving.

More importantly, the recent announcement of our transaction with Emerson is a transformational moment for Aspen Tech. I'll discuss it in more detail later, but we cannot be more excited at the opportunity for the new Aspen Tech to deliver faster and greater value in sustainability, innovation and profitability to a broader set of customers.

Looking quickly at our financial results in the first quarter, revenue was $136 million, GAAP EPS was $0.58 and non-GAAP EPS was $0.77. Annual spend was $630 million up 1.4% in the quarter and 5.6% year-over-year and free cash flow was $33 million.

Looking at our first quarter performance in more detail, we saw clear signs of normalization in spending across our owner operator markets. In particular while the extra steps and scrutiny around the transaction approval process have remained in place, customer executives are noticeably more comfortable giving the final approval to transactions. We believe customers remain mindful of the fluidity with which market conditions can change, but the improved environment is enabling them to focus on the future, including how to deliver on their long-term and strategic objectives. We're optimistic this will be reflected in the CapEx and OpEx budgets for calendar 2022, that customers are now developing.

Looking at the business by vertical, we saw the most notable improvement amongst our owner operator customers, but especially with refining customers spending by this customers grew our MSC business by 3.2% sequentially and 9% in the last 12 months just shy of its historical double-digit growth rate, which is a strong performance, especially when compared to the growth of the MSC business in fiscal year 2021 at 5.8%.

As we mentioned on our last earnings call, we have seen a marked increase in the level of engagement with this customers in recent months about their future investment priorities. Our results in the quarter are an indication that improved conversations were signalling an improving sentiment from higher refining margins resulting in increased spending.

Our chemicals business also performed better and continue to improve sequentially contributing to the acceleration of the MSC business. While overall trends are encouraging, there are still sectors of the chemical supply chains that are recovering from the linker and economic effects of COVID. We're confident chemicals will continue to be an important growth contributor going forward. Aspen Tech Solutions are essential to chemical customers' ability to achieve their operational and supply chain efficiencies and sustainability targets.

Our E&C business performed as expected during the quarter. Conditions remained challenging and we have seen only modest improvements in CapEx and backlog trends. We expect this will be the part of the business that takes the longest to return to normal and we anticipate modest levels of growth from this customers for the foreseeable future. Attrition in the quarter was in line with our expectations, which if you recall, from our last earnings call was expected to be higher in the first quarter, given the timing of renewals this fiscal year.

While we're optimistic about the improve spending environment and higher budgets in calendar 2022, we believe it is appropriate for now to maintain our guidance for growth in annual spend in the range of 5% to 7%. We're also maintaining our guidance for attrition in the year, which as we previously stated is mainly a reflection of the reduction in CapEx in the E&C space and elevated levels of renewables in our fiscal year 2022.

Following are some notable wins from the quarter; first, a global energy company in the Middle East and a long time user of Aspen Tech's engineering and MSC suite signed an agreement to standardize on the use of Aspen Tech's PM [ph] solution for refining. After a rigorous process to evaluate the capabilities and incremental value creation opportunities of PM, the customer committed to standardize on the technology and executed on a global rollout of this technology. The deployment of PM is always expected to generate tens of millions of dollars of benefits for this customer.

Second our US based multinational food processing and commodities trading company, user of our engineer and MSC suites has committed to roll out our recently released batch APC capabilities across their bioproducts manufacturing business. Bioproducts manufacturer, amino acids from core through fermentation. After a rigorous trial of the technology, the customer recognized sufficient value from improving production yields in their bioproducts manufacturing to commit to the technology.

A new batch APC technology is expected to open up new use cases in batch production processes, as opposed to the continuous processes found in refining on bulk chemicals. We expect our batch PC technology to extend our reach further into specialty chemicals, bioprocesses pharma and other industries that use batch processing.

Third and final customer reference, a US energy company and a subsidiary of a global Middle East energy company expanded the use of the engineer and MSC suites to execute on our comprehensive deployment of production planning and production operations optimization solutions to realize benefits in excess of $50 million per year in their manufacturing complex. The products involved are planning, scheduling dynamic optimization technology or GDOT, multi-variable process control and engineering suite.

One of the key themes you've heard from Aspen Tech in recent years is our commitment to a sustainable future. To that end, in just a few days, Aspen Tech will join companies from around the world at COP26 to discuss and share solutions to address the global climate challenge.

Next Thursday, November 4, I will be speaking on our COP26 panel with executives from Microsoft and Wood discussing the digitization of the energy sector. This panel discussion will address how digital technologies are increasingly highlighted as key enablers to grow efficiencies across systems and to accelerate the technology development that is required to address demanding climate goals.

Similarly, as we have mentioned before, Aspen Tech is an active member of the alliance to end plastic waste, supporting innovation to build a more sustainable global plastic value chain to create circularity. I'm actively involved on the Board of the Alliance and several Aspen Tech delegates participate in Alliance work groups and committees that are focused on regional plastic waste issues and technology development. Our contributions to the Alliance will continue by providing expertise in advanced recycling and modeling with our engineering suite and we expect to play an even greater role here as the Alliance advances towards achieving its mission of plastic circularity.

I'd now like to talk about the pending transaction with Emerson. We believe this agreement offers compelling value for our customers and shareholders and positions new Aspen Tech as the leading industrial software company. There are several compelling benefits of this combination. First new Aspen Tech will have the most comprehensive portfolio of mission-critical software products that span the entire capital asset life cycle. Aspen Tech's rich heritage in asset optimization will be extended and is strengthened with Emerson's grid energy management and advanced distribution management systems technology, and the geological simulation software. The software portfolios are highly complimentary and provide exciting upsell and cross-sell opportunities into our respective installed basis.

Second, we will significantly diversify Aspen Tech's business and increase our total addressable market. New Aspen Tech will have an immediate leadership position in the power and utility transmission and distribution vertical and an enhanced portfolio to model the entire oil and gas supply chain and reservoir modeling capabilities for resource extraction and carbon capture and sequestration.

Third, this combination will enhance our capabilities to support our customer sustainability initiatives. We have long had a critical role to play in our customer's efforts to operate assets safer, greener, faster and longer. The combined company will now be able to more fully support a broader array of sustainability initiatives, including electrification and carbon capture among others.

Four, new Aspen Tech will have greater scale and a compelling financial profile with more than a $1 dollars in revenue and more than 3,000 global customers. We believe new Aspen Tech can be a consistent double digit grower with high recurrent revenue, best-in-class margins and substantial free cash flow. This increased scale and broader footprint will also make new Aspen Tech vehicle to pursue additional M&A in the future.

Fifth, we will deepen our existing commercial relationship with Emerson, which will provide exciting new go-to-market opportunities for resell, co-sell and OEM of the entire suite of Aspen Tech products and solutions into all the industries where Emerson is installed, including those that Aspen Tech is targeting today through organic investments. The commercial relationship will also lead to joint package solutions and the development of next generation software capabilities.

Finally, this transaction provides significant near and long-term value for our shareholders. Aspen Tech shareholders will receive $6 billion in cash and will own 45% of new Aspen Tech. This attractive structure will give our shareholders upfront liquidity and the opportunity to benefit from new Aspen Tech's increased scale, expanded growth opportunities and future margin expansion. A key aspect of this transaction will be converting the OSI and geological simulation software businesses to our token-based term license model.

For those of you that were around when Aspen Tech first introduced our new commercial model in fiscal year 2010, you recall the significant improvements in growth, sales productivity, and user adoption that we experienced. We're confident we can deliver similar results this time as well.

During our executive advisory board meeting that we hosted in Houston, following the announcement of the transaction with Emerson, we received a strong endorsement from those customer executives in attendance. They understood the synergies from the stump, a stronger relationship between the two companies, the possibilities for joint package solutions, and they even stronger ability. New Aspen tech will have to deliver sustainability solutions that can help transform their businesses.

Let me finish by reinforcing how excited we are by the recent developments for Aspen tech and the future potential for new Aspen tech. Our core business is beginning to show signs of improvement and we're executing well on the growth investments we're making in product development and our go to market capabilities.

When you put that together with a great software businesses that are being contributed to new Aspen tech and the deeper partnership with Emerson, we believe we have all the pieces in place to generate meeting's growth and reach $1.5 billion in annual spend in fiscal year 2026. My sentiment has only been reinforced and the most excited I've ever been about the future of Aspen Technology.

Now, let me turn the call over to Chantelle. Chantelle.

[Chantelle Breithaupt, CFO]

Thank you, Antonio. I will now review our financial results for the first quarter of fiscal 2022. As a reminder, these results are being reported under topic 6 0 6, which has a material impact on both the timing and method of revenue recognition for our term license contracts. Our license revenue is heavily impacted by the timing of bookings and more specifically renewal 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.

Our 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 result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods and our view annual spend will continue to be the most important metric in assessing the growth of our business and annual free cash flow.

The most important metric for assessing the overall value, our business generates annual spend, which represents the accumulated value of all the current invoices for our term license agreements. At the end of each period, the $630 million at the end of the first quarter, that's represented an increase of approximately 5.6% on a year-over-year basis. And 1.4% sequentially, total bookings, which are defined as the total value of customer term license contracts, where the associated term licenses were deemed delivered in the quarter under topic 606 was $128.2 million, a 30% increase year over year.

Total revenue was $130 million for the first quarter, an 18% increase from the prior year period, turning to profitability beginning on a cap basis. Operating expenses for the quarter were $81.3 million compared to $65.3 million in the year ago, period, this year over year increase in gap operating expenses was primarily driven by the ramp of new investments in our go to market organization and product development.

In addition to the timing of equity grants and a related expenses, total expenses, including cost of revenue were $96.1 million, which was up from $80.8 million in the year ago, period operating income was 1330 $9.9 million in income for the quarter was $39.4 million or 58 cents per share.

Now turning to non-gap results, excluding the impact of stock based compensation, expense, amortization of intangibles associated with acquisitions and acquisition related fees. We reported non-GAAP operating income for the first quarter of $55.4 million representing a 40.7% non-GAAP operating margin compared to non-GAAP operating income margin at $42.7 million and 37.2% respectively in a year ago, period, as a reminder, margins will fluctuate period to period due to the timing of customer renewals and therefore license revenue recognized during the quarter non-GAAP net income was $51.6 million or $0.77 per share based on 67.4 million shares outstanding turning to the balance sheet and cash flow. We ended the quarter with approximately $248 million of cash and cash equivalents and 208 to $9 million outstanding under our credit facility.

In the first quarter, we generated $32.7 million of cash from operations and $33 million of free cash flow. After taking to consideration the net impact of capital expenditures, capitalized software and acquisition related payments from a capital allocation perspective, we successfully completed our $150 million accelerated share repurchase agreement.

During the quarter buying back 1.1 million shares, it is our intention to continue buying back up to 50 million of stock per quarter, subject to market conditions until the transaction Emerson, which is currently expected to occur by the end of the second quarter of calendar 2022, I would now like to close with respect to annual spent, we are maintaining our target of five to 7% annual spend growth. We are also maintaining our bookings guidance range of $766 million to $819 million. Our expected revenue range is also unchanged at $702 million to $737 million.

As a reminder, we expect license revenue in the range of hundred and $81 million to $515 million and maintenance revenue and service and other revenue of approximately $192 million and $30 million respectively from incense perspective, we now expect total gap expenses of 389 to $394 million taken together.

We expect GAAP operating income in a range of $313 million to $343 million for fiscal 2022 with GAAP net income of approximately 285 to $311 million. We expect gap then income per share to be in the range of $4.19 to $4.67. From non-GAAP perspective, we continue to expect non-gap operating income of 361 to $391 million and not expect non-gap income per share in the range of $4.75 to $5.

From a free cash flow perspective, we continue to expect free cash flow $275 million to $285 million. Our fiscal 2022 free cash flow guidance. It seems cash tax payments in the range of 60 to $66 million to wrap up Aspen tech delivered a strong first quarter performance. We are seeing positive signs of improvement in our business, and we are focused on building upon our success.

In the first quarter, we are also incredibly excited at the future value creation opportunities that we believe will be possible with new Aspen Tech, which will have a broader product portfolio, greater end market diversification, and a deeper partnership with Emerson. We are confident that the strategic initiatives we are executing on will generate significant value for shareholders.

And with that operator, let's begin the Q&A please.

[Operator]

[Operator instructions] Now, first question, coming from the line of Andrew Obin with Bank of America. Your line is open.

[Andrew Obin, Bank of America]

Good morning. Good afternoon. It's been a long day for me. Sorry about that. Hey, how are you guys? So you highlighted the spend in the quarter was about expectations. What would make you guys comfortable in terms of what kind of benchmarks or for you to raise guidance? Is it just seeing it for a couple more quarters? Are you looking at any specific industry events? You sound better, but I appreciate it the first quarter, but you haven't raised guidance. So if you could expand on that. Thank you.

[Antonio Pietri, President and CEO]

Yeah, I, Andrew and Michelle can supplement what I say as well. Look as I like to say one data point doesn't make a trend, but certainly if you look at the macro KPIs, we track, they're all open to the right price of oil, refining margins, chemicals production and chemicals margin, chemicals demand, and chemicals margins and even with EPC as well, while certainly there's been a significant reduction in CapEx, it's already been almost a year and we believe that the situation there is stabilizing but we have to work to the contract. So, we're being cautious, as I said. We're maintaining our guidance for now and as we see the year progress, we'll make the appropriate decisions at the time.

[Andrew Obin, Bank of America]

And just a follow up question, it seems that really are a lot of opportunities to integrate the channel with Emerson. How long do you think it will take to start seeing the impact in your numbers from this better integration?

[Antonio Pietri, President and CEO]

Look as we said, when we announced the transaction we expect to close a transaction in the second calendar quarter of 2022. And then we will start working on executing our integration plans and with what's agreed on the commercial agreement between the two companies. So, certainly hope, if you think about timing, you're looking out Q4 fiscal '22 for Aspen Tech July 1, next year is fiscal '23. So we would expect that perhaps we start to see some of those benefits later in fiscal '23, then into '24, '25. So…

[Andrew Obin, Bank of America]

Well, good to see the things improving. Congratulations on the deal.

[Antonio Pietri, President and CEO]

Thank you, Andrew.

[Operator]

Now, next question coming from the line of Rob Oliver [ph] with Barrick. Your line is open.

[Unidentified Analyst]

Hey Antonio. Hi, Chantelle, thanks for taking my questions. My first one is on, Antonio, your comments around some of the pockets of improvement that you're seeing within your end markets. So I wanted to dig in a little bit deeper on that. It sounds, based on what you said that, core on owner operators are seeing the most movement, but there are pockets within cams. I'm just curious, if you can elaborate a little bit more on some of that and maybe within cams, what some of the puts and takes are there.

And then just as a corollary what, you've certainly -- commodity prices up into the right at the same time we're experiencing some major global supply chain issues. So just curious how we balance those factors relative to your core customers and how we think about annual spend for the remainder of the year and then I had a follow-up.

[Antonio Pietri, President and CEO]

Yeah, sure. Well, if you look at refining and the opening up of economies around the world there's definitely been a material change and, and automobile traffic which is driven higher consumption of fuels. Refining margins in the last few months have tripled and really does put him at the, at the low end of their historical margin range there, these are not record margins, but now they're within the historical range, which is, which is very good on, on talking to our refining customers. They are very optimistic about that. So that's been a marked change from, from three months ago, let's say and that's why I think we've seen the performance in, in refining that we saw in our Q1 quarter on, came on the chemical side.

Look, if you only have to look at the announcements from chemical companies record margins and cash flow generation and certainly, there's cautiousness within that customer sector around supply chain issues dampening demand for their products and that's something to keep an eye on and they're still sectors small sectors, but they're still sectors within the chemicals industry that are not doing as well as they were doing before the pandemic but on the whole ball chemicals which is ethylene and polymers has done very well in this calendar year. So, if you look at those two, global economic growth continuing to drive demand and so on, I think the outlook is positive and then EPC is, and even with EPC is look, UPC is, are going through their own transformation.

They're focusing a lot more on sustainability areas such as hydrogen and biofuels and others, which I think over time will, will make that industry a healthier industry. And I would say that now you're starting to see the debate develop over the last week or two around whether the oil industry is spending enough topics to supply global demand over the next few years. And that's a real issue. That's that?

That was a concern frankly, back in '18, '19, he got exacerbated over the last 12 to 18 months with a Kohl's for reduced investments in oil and gas. And, the real question here will be whether the, you know the, the sustained level of cap expand we'll, we'll, we'll facilitate balance demand supply scenario going forward. So, look overall good, but, you know I think we need to be cautious, and it's still a very fluid environment.

[Unidentified Analyst]

Yeah, that's helpful.

[Chantelle Breithaupt, CFO]

And if I could add, I'm sorry, Rob. I was going add yeah, no worries. I think that so very much agree with Antonio's thought around, you know, operating our customers operating in their day to day environments will the pressure of supply chain. The other thing back to the question on annual spend, how we see it going forward is we're also waiting for this calendar or flip on sustainability. This is a topic with new funding and new importance for our customers. So that's another signal we're waiting to see outside our regular, you know, kind of metrics of we look at. And so that's another thing going into our Q2. We're looking for, just to give you some additional.

[Unidentified Analyst]

Got it. That's really helpful for both of you guys and I'll just make my follow up a quick one, even though I, I wanted to ask a bunch about Jefferson, but it's probably a broader discussion, but just, I, know Chantelle, Antonio referred to the attrition number, but I just want to make sure we got the exact number because I know it wasn't in the press release. And what was the attrition this quarter and, and you, what do you expect it to be for the remainder of the year?

[Antonio Pietri, President and CEO]

What I can share with you Rob, is that we're sticking to the guide we have in Q4 of 6% attrition for the year.

[Operator]

Our next question coming from the line of Matthew Pfau with William Blair. Your line is open.

[Matthew Pfau, William Blair]

I guess. Thanks for taking my questions wanted of to first follow up on, on the sustainability comments and how is there any way to, to guess how many of your deals today are driven by sustainability initiatives and then Chantelle your comments was that related to maybe the anticipation of some of your customers carving out budgets specifically related to investing in technologies that that help achieve their sustainability initiatives.

[Chantelle Breithaupt, CFO]

Yeah. Maybe I can start with the second and Antonio we can work on the first one together. Yes, absolutely, when Antonio referred to the executive advisory customer meeting that we had in Houston a few weeks back you can hear customers speak of kind of two budgets that they're working in as they go forward. One is their operating Catholic office and the other is either guided from their board or their shareholders, their own is to spend more on sustainability and how that rearranges in the company is yet to be seen. But we definitely two conversations emerging in the sense of what the customers will be focused spending their funds on.

[Antonio Pietri, President and CEO]

Yeah. Matt, in a way for a lot of customers, as, as they've said, they're net zero carbon emission goals that, that overarching initiative and ambition is, driving the thought process and prioritization of investments in inside these companies and, and the expectation through some of our own research survey, surveying customers, where corporate sustainability will probably be a top influencer on software spend over the next few years especially in the areas of analytics and, and, and benchmarking.

So, we're pretty optimistic about this and, and, and, and, and what we do every day is, is about creating efficiencies that reduce and missions or plastic waste or reduce the consumption of, you know, water and so on. So, so we, these coupled with the assets that we're getting from Amazon around global electrification and, and the ability to model for carbon capture and sequestration we'll open, we just opened up tremendous opportunities for Aspen Technology. And by the way that reserve for modeling capability that we're also getting from in the geological simulation software business we'll also be able to take into mining for, or for modeling of rock formations and, and, and resources. So very exciting stuff.

[Matthew Pfau, William Blair]

Got it. And then just wanted to ask on ETM and how that performed in, in the quarter and, and, and related maybe you know, an update on what you saw in pharma and metals and mine in as well.

[Antonio Pietri, President and CEO]

Yeah, look so we give you an update on APM every six months and, and, and we, we continue to sign APM customers. I'll say that we were seeing also better progress in, in Asia with our APM solutions. And at the same time look we've learned a lot over the last 18 to 24 months as the market adjusted, as a solution has been implementing our customers environments and what they're looking for and, and how we need to add capabilities to a solution. So, so there's we're also while excited about what we're seeing in the market, we're also working to, to continue to deliver innovation in the solution that, that we believe will, will strengthen the, not only strengthen the suite, but also Aspen, which is, I know where the question is or is focused on. So but we'll give you an update when we report the Q2 results in, in January.

[Matthew Pfau, William Blair]

Okay. Thanks guys. Appreciate it. Thank you.

[Operator]

Our next question, coming from Jackson Ader with JPMorgan. Your line is open.

[Jackson Ader, JPMorgan]

My questions guys, and Antonio. So the bookings and number if you net out the, the bookings up for renewal, if you want to call that kind of gross bookings or, or gross bookings or something was, was up a bunch year over year, and I'm just curious, you know, how much that had to do with maybe some easy comparisons. I remember a year ago, you mentioned that customers in the first quarter just didn't really want to have conversations with you in July and August versus maybe some upside in execution or, or net new demand or net new interest, just what drove that growth, booking speed,

[Antonio Pietri, President and CEO]

Chantel, you want to take that or do you like me to take it?

[Chantelle Breithaupt, CFO]

Well, I can start, certainly. I think that I would actually, one of the things I think that we're proud of is the fact that we are seeing that gross growth to your point Jackson. So I think it's a great point to highlight, I think that if you look at some of the areas, we see the growth, you know, we talked about the MSC growth and maybe Antonio, you wanted to give some more, more color on from the customer viewpoint or end market viewpoint.

[Antonio Pietri, President and CEO]

Yeah, yeah, no about Jackson in a way. It is very simple, we over-performed in Q1. We in August, we told you meaning investors in general and the market that that we felt we were going to have a quarter that was going to grow where growth was going to be dampen by the amount of attrition that, that we saw coming in the quarter as a result of, of a number of a larger number of engineering renewals, EMC renewals that all happened. And, and there was a larger accumulation of that, but we also saw tremendous growth on the MSC. I gross growth and, and that accounts for a lot of that over performance in, in bookings as well. So, so it's, it's a combination of multiple factors, but certainly the, the, the MSC over performance helped in, in that regard. Yeah.

And I think, to that point, Jackson, it's what we're, what we're triangulating is that the pen up demand, but now it's flowing through that me to get back to their steady states. And, you know, some of that, some of that pressure is being released through this gross growth is how I would articulate it.

[Jackson Ader, JPMorgan]

Yeah and then just a quick follow up on the MSC. Well, I guess it's really chemicals. Is there any way to quantify what type of a headwind the, the chemicals piece is at the moment so that we can get a sense for, you know, the, what we would expect that, that normalized MSC growth might look like without the, the supply chain headwind?

[Antonio Pietri, President and CEO]

Well, look, so at the moment we're not seeing if, if you talk to chemical customers, they are not yet seeing a headwind and at least anecdotally talking to them they will be announcing you know, very on results for the September quarter. There is a certain level of concern with regards to, you know, the supply chain issues, getting worse and, and having an impact on demand for their products, but it's not something that they have seen and they're not able to quantify themselves and that is what they, it would even show up. So, look I think in the overall I'm looking, I'm focusing a lot more on economic growth across the bull and how that will continue to drive demand for all sorts of products you know regardless of the supply chain. So,

[Operator]

[Operator instructions] Our next question, coming from the line of [indiscernible] with Berenberg. You line is open?

[Unidentified Analyst]

Hey, thank you for taking my questions. The first one is just in terms of the MST parts of the business clearly performing. Well, the question for me is what has changed is the confidence. This is the main reason here. And then you guys mentioned kind of pan up demand. It's starting to kick in. Do you have an idea of how much of that pant up demand is last for the year? In other words, this isn't kind of a one quarter phenomenon that you're right.

[Antonio Pietri, President and CEO]

Well, look, I'll look again, you can only in a way that that's a, that's a hard question to answer. Okay. what, how much pen up the money is left, but I can point you to the last time we troughed in '17, when we troughed at 4.1, the following year was 6.4. And when we had two consecutive years of normal budgets we went from 6.4% to 10.6% growth. And, in my opinion, a, a lot of that is initially driven by pen top demand, and then it, it normalizes a, a double digit growth.

That's, my point of view. So I think what we're if history is an indication of, of the future, I think what we're seeing is again, back to a release of, of a spending to do a catch up on technology implementation that will eventually normalize at, at a higher level. Once we have two years of consecutive, oh, two consecutive years of good budgets. And to me that will be calendar '22 and calendar '23.

[Unidentified Analyst]

Perfect. And then just on the flip side on the ENC, obviously that have a lot of renewals this this year, so you is still kind of guiding for this high churn. But would you expect that to kind of work through and, and, and the, and the budgets are also recovered based on the, based on what you're seeing in the end market right now? Or is it more like a two year process that if the oil prices remains stable and we might see more cut budgets being untied into the next year, and we'll probably need to wait for that in order to kind of get the confidence

[Antonio Pietri, President and CEO]

Look at this is a very good question and the thing about the demand and supply and macro trends is that you have to give time, time, meaning you have to let time pass to for things to prove themselves out and this narrative that, that cap expand in the oil and gas industry was at a level that wasn't sustainable for future demand has been a narrative. Now that narrative has been overwhelmed by certainly climate change and sustainability. They focus on renewables, which is all important and, and, and necessary. But look at energy transitions happen over a long period of time and in this context there's a sense that you know, that we could be facing a very tight supply demand balance, which could accelerate or continue to drive all prices up which by the way, I don't, I don't think is necessarily healthy because it may impact economic at some point.

So, so on a personal basis, a rather, or sea oil somewhere between, around $70 a barrel, but, but what having settled that, what this could all mean is that some companies or countries do see an incentive to start spending, putting more CapEx to work because they see an opportunity to, to supply more to the market than the road. So, so we'll see we'll see. But at the same time, look out of the last recall from 1617, what we saw was low single digit CapEx growth to meet single digit, really 5% at the, at the high end.

And, that was enough for, for, for our growth to accelerate back to double digit with the contribution from our APM suite. Today we have a lot more things in play, not only APM, but I T pharma mining, but also the Emerson relationship the contribution of this assets, the OSI assets and the GSS assets and the, and the, and this commercial relationship with Emerson, the, that will be so comprehensive and global, that that will, will, will support an acceleration of our growth rate.

So, look I'm all the KPIs are look good. We've signed transformation transaction that will support our growth and, and diversify our, our business going forward as well. So I said it, look, my closing statement was I I'm the most excited about our future than I've ever been and, and, and remain so.

[Unidentified Analyst]

Perfect. Thank you so much for your answers.

[Antonio Pietri, President and CEO]

Yeah. I just want to, before the next I want to highlight to Jackson's comment or question around supply chains and chemicals look one of the things that's happened as well over the last 18 months with COVID is of supply chains around the world, not only the ones ensuring of production and sites, but also the reconfiguration of the supply chains and really building resiliency into supply chains in preparation for future disruptions.

So we are seeing in much greater interest from chemical companies on supply chain management capability, supply chain logistics the concept of the control tower. And this is certainly opening up a whole and an increased area of investments by chemical companies around other supply chain but also other companies by the way, pharmaceuticals and including oil and oil companies. So, I think this whole the whole discussion around supply chains is one that actually will be a tailwind for Aspen technology as well.

[Operator]

The next question coming from the line of Jason Celino with KeyBanc. Your line is open.

[Jason Celino, KeyBanc]

Hi, just a couple questions for me. So Q1 has seasonally been the weakest growth quarter? This Q1 biggest influential increase that we've seen in two years, actually, maybe, can you talk about the linearity of the strength how it might have stuck started before you started seeing it kind of any that would be great. Thank you.

[Antonio Pietri, President and CEO]

Yeah. Look again, no doubt. Q1 by nature have, are the sort of lowest growth quarters the lowest growth quarter that we normally have. And well, we just had a very strong Q1, especially considering the attrition that we experienced, the amount of cross growth that was generated this quarter in Q1 was look there, there was also I'll say an easy comp versus Q1 FY '21 as well.

Look Q2 tend to be stronger quarters historically than Q1 and then it into Q3 and Q4, normally being our strongest quarters, just because it's the end of a fiscal year. Normally, our sales cycle is nine to 12 months. And the sales organization is gearing for, to exceed their quarters and getting to accelerators for commission. So that's let that's how I would view it. But, I also want to be cautious here. But yes, we're happy about Q1. I'll take this Q1 versus last.

[Jason Celino, KeyBanc]

Well, what I was really trying to understand is how the quarter improved throughout, throughout the quarter. Oh, sorry.

[Chantelle Breithaupt, CFO]

Yeah. I think that's a, yeah. So, sorry. I was going to just add to Antonio's comment. I think that you were, you know, the attrition, most of the renewals activity to your point is in the same hockey stick as every other company. So that's a third quarter, but I would say, from the beginning pipeline to the conversion through the quarter, I would say that probably mid to later, we started to really solidify those conversations with our customers. But we were definitely out of the gate Q4 having the gross growth conversations. But you know, it takes time and it still has the top approvals that Antonio referred to. So you don't really see that momentum Jason until the second, third month.

[Antonio Pietri, President and CEO]

Yeah. Perfect. No, sorry, Jason. MIS I misunderstood your question. Look, no worries. The one new ones, the one new ones about Q1 are Q1 quarter, September is July and August are heavy vacation months. And, and really is, is the first few days of September when a business activity begins to accelerate. So, so tends to be a quarter where that is very concentrated into four weeks in September. And, it was a great four weeks.

[Jason Celino, KeyBanc]

Perfect. That is very helpful. Thank you.

[Operator]

I'm showing no further questions at this time. I would not like to send a call back over to Ms. Antonio Pietri for any closing remarks.

[Antonio Pietri, President and CEO]

All right. Well thank you everyone for joining today's call and we look forward to again participating in event and hopefully starting to meet some of you in person, which we've started to do with customers and, and is a very different experience to be meeting customers in person than over video. So hopefully we'll start seeing some of you in person in the future. Thank you everyone.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.