Aspen Technology Inc

NASDAQ:AZPN

Earnings Call Analysis

Company Maintains Solid Growth Projections

In Q2 fiscal 2024, the company posted a solid performance with an annual contract value (ACV) of $914 million, marking a 9.6% year-over-year increase. Total revenue grew by 5.9% to $257 million. A delayed deal expected in Q2 is now anticipated in Q3. Despite a 3.9% drop in total bookings, the company maintains an 11.5% ACV growth target for fiscal 2024, with an outlook for mid- to high 3% sequential ACV growth in Q3. The outlook is underpinned by a robust pipeline and upcoming renewals of $580 million, with strong market demand and sales channel expansions fueling confidence. Profitability remains strong, boasting $89 million in non-GAAP operating income. The company has increased non-GAAP EPS guidance by $0.02 to reflect the impact of share repurchases. Executives conveyed optimism about delivering on fiscal 2024 financial targets, citing various suites' momentum and expanded sales channels as key drivers.

Solid Growth Amidst Economic Tailwinds

Navigating the dynamic market landscape, the company witnessed a robust 9.6% year-over-year increase in annual contract value (ACV), demonstrating its resilience and customer commitment. This achievement becomes even more notable when considering the broader positive momentum, marked by a staggering growth exceeding 30% in the firm's total pipeline. The evolution of the SSE suite into a token suite, expanding deal duration, showcases an innovative approach that's successfully drawing both customer intrigue and positive market attention.

Operational Efficiency and Financial Improvement

On the financial front, the company impressed with its non-GAAP operating margin and net income. The latest quarter's non-GAAP net income jumped to $88 million, or $1.37 per share, a remarkable leap from the prior year's $23 million, or $0.35 per share. Such a trajectory of profitability is a clear indicator of operational excellence and effective cost management, despite the increased expenses associated with headcount and sales expansion initiatives.

Outlook Confirms Growth and EPS Uplift

Looking ahead, the company remains bullish, sustaining its outlook with an anticipated ACV growth of at least 11.5% in fiscal '24, thanks to a strong pipeline and healthy demand ecosystem. Additionally, share repurchase activities have led to a slight uplift in the projected non-GAAP EPS range, up $0.02 from previous forecasts, reflecting prudent capital allocation and shareholder value creation.

Diversified Customer Base Emerges as a Strength

The company enjoys a longstanding partnership with key industry players such as Aramco, a testimony to its deep industry roots and enduring customer relationships. Responding to market changes, such as Aramco's recent announcement, the firm remains adaptable and optimistic about its position even amid fluctuating industry dynamics, underscoring the strategic value of its offerings.

Balancing Growth and Operational Capacity

With growth comes the challenge of scaling operations. The company's strategy includes developing a network of implementation services partners, a move that underpins confidence in fulfilling new and existing business demands across various regions globally. This initiative dovetails with a clear, customer-focused approach, prioritizing close collaboration and ultimately ensuring the successful execution of agreements.

A Minor Setback with a Clear Path Forward

Despite a slight hiccup in a renewal deal worth $5.4 million, which got postponed to Q3, the company exhibits confidence in a prompt closure, anchored in a detailed sequence of events that's already three-quarters underway. This illustrates both transparency and effective management of investor expectations.

Steady Capital Expenditure Across Industries

Capital expenditure (CapEx) rates remain promising, mirroring the previous year or showing slight increases within certain customer segments. More significantly, this consistency extends to refining customers and, to an extent, the chemical sector, although a major OpEx spend recovery in chemicals is not forecasted for the calendar year '24.

Strategic Inroads into the Utilities Sector

In a strategic move, the company has secured its position as the foundational technology for operating the electric grid in multiple European countries, advancing beyond the impressive 40% market penetration within U.S. utilities. This not only expands the firm's geographic footprint but also signifies the diversification of its customer base and the deepening of its technological impact across key infrastructural segments.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by fiscal Q2 2024 Aspen Technology Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Denes from ICR. Please go ahead.

[Brian Denyeau]

Thank you, Justin. Good afternoon, everyone, and thank you for joining us to discuss our financial results for the second quarter of fiscal 2024, ending December 31, 2023. With me on the call today are Antonio Pietri, AspenTech's President and CEO; and Chris Dagnon, AspenTech's Interim CFO. Please note, we have posted an earnings presentation on our IR website, and we ask that investors to refer to this presentation, in conjunction with today's call.

Starting on Slide 2, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-K and other subsequent filings made with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this presentation, we present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and investor presentation, both of which are available on our Investor Relations website.

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

[Antonio Pietri, executive]

Thanks, Brian, and welcome to everyone joining us today. Let me start by reiterating that I've never been as excited about the future of AspenTech as I am today. The AspenTech team has done an excellent job working through a dynamic macro environment to deliver solid results in the second quarter. With an expanded portfolio and team we are uniquely positioned to capture and benefit from the numerous opportunities available in the energy transition from efficiencies and sustainability use cases.

Now starting on Slide 3 with our quarterly results. In Q2, we saw solid demand for our products and solutions. Annual contract value, or ACV, was $914 million increasing 9.6% year-over-year, while free cash flow was $29 million. These results reflect a delay in renewing a large customer agreement that was scheduled to be renewed in Q2 and reduced ACV growth by approximately 0.6 points. We now expect to close this customer agreement in Q3 with a corresponding benefit to Q3 ACV growth. In addition to this, I would like to highlight [Audio Gap] over the past several quarters and the contribution from the DTM and SSE suites resulting from the transformation of those 2 businesses. We will start converting more of this pipeline to sales in the second half of fiscal year '24.

Second, the macro environment and demand for our products and solutions has remained strong in most end markets consistent with our commentary from the last couple of quarters. Third, we made significant advances in upgrading our product portfolio and advancing new sustainability-related use cases in Q2. With the successful launch of our V14 software update, we have introduced enhancements to our products that we believe will drive incremental growth in the second half of fiscal year '24 and longer term. Fourth and final, taking all these factors into consideration, we remain confident in our ability to deliver on our ACV growth target of at least 11.5% for the full fiscal year. We recognize that we need to have 2 strong quarters of growth in the second half to achieve this target, and we continue to believe that we're in a good position to deliver on this outlook.

Turning to Slide 4. I will now provide an update on our end markets and suites, starting with digital grid management, our Utility Solutions business. DGM has enjoyed an excellent first half of the year as it continues to benefit from the mission-critical nature of its products and solutions alongside a robust demand environment. Importantly, today's utilities are in the early stages of an unprecedented investment cycle to expand the electrical grid, introduce renewable energy and enhanced cybersecurity capabilities to meet the growth in electricity demand driven by the energy transition and the energy security requirements of countries around the world. Our transformation initiative to align the DGM business with the heritage AspenTech model over the past 18 months are also producing their expected results. These initiatives have included launching and growing DGMs term software licensing model, expanding its sales channel and global footprint to capitalize on the growth opportunities we're seeing and ramping up its ISP network. For example, in Q2, we won several large term license deals including one with a leading North American power utility, where we displaced the competition as part of their holding company's vendor standardization program.

Our energy management solutions proven track record of delivering value as well as our long-standing relationships with other utilities in this holding company's portfolio were key catalysts for us in this win. Both in the U.S. and internationally, GM's product strength, hardware-agnostic stands and ability to form a strategic long-term partnership with customers are driving growth. We expect to see continued strength from this suite in the second half of fiscal '24 and believe this will be a high-growth business for AspenTech going forward.

Now turning to our Subsurface Science and Engineering suite. SSE performed to expectations in the first half of the fiscal year. benefiting from a strong CapEx spending environment and new use cases driven by sustainability, especially in carbon capture and sequestration. SSE has long been the upstream industry's most comprehensive offering, and the AspenTech go-to-market model is serving as the catalyst to help fully unleash its potential. In Q2, for example, SSE gained further momentum as we closed a large deal with a national oil company in Asia. While many vendors competed for this opportunity, the strength of our subsurface formation evaluation and geological modeling capabilities combined with the strength of our relationships across the organization, allowed us to ultimately win this deal. We continue to work closely with this customer and see clear pathways to expand this strategic relationship and additional signs with more solutions.

SSE is also benefiting from synergies with our engineering suite and the positive momentum from its tokenization rollout as with our other suites we continue to see that the combination of a term license model and tokenize suite is a true win-win situation, allowing our customers to benefit from our latest innovation and supporting faster product uptake. Overall, we expect CapEx budgets in calendar '24 to remain consistent with last year's, supporting the demand for SSE products in the second half of fiscal '24, in line with our expectations.

Now moving to Slide 5. Let's review our heritage AspenTech business, starting with our engineering suite. Strong CapEx trends in traditional upstream markets and newer sustainability-related use cases are driving greater usage by EPCs and our owner operator. On the back of this favorable spending environment, our engineering suite modeling, simulation and analysis capabilities have remained in high demand supporting the strongest growth this Suite has seen in many years in the first half of fiscal '24. In Q2, for example, we won a large-scale deal with a new EPC logo that is executing several projects for a large energy company in the Middle East. Prior to working with AspenTech, this customer was using a variety of tools from different vendors to manage its process engineering workflows. The customer was interested in standardizing their engineering software solutions tool set and conducted a competitive evaluation process resulting in the selection of AspenTech due to the breadth of capabilities. By engaging with AspenTech, they are now able to leverage our full portfolio of innovation and product synergies to execute on their project backlog.

Separately, our engineering suite has continued to see solid traction with the small to medium business segment of the market through our high-velocity sales organization.

During the quarter, this business continued to win engineering deals with customers in nontraditional industries for AspenTech that are looking to decarbonize their operations or see a business opportunity in sustainability, including such areas as the aviation biofuels, hydrogen, ammonia, LNG, Director Carbon Capture or DAC and more.

Now turning to our manufacturing and supply chain suite. The MSC results in the first half of 2024 reflected the ongoing weakness in the chemicals market as well as the delayed renewal that I referenced earlier. Nevertheless, given this business's typical seasonality, strong pipeline and expected closing of the delayed renewal agreement as well as the continuation of solid refining demand and our ongoing innovation efforts we expect a stronger performance in the second half of this year. As part of our recent V14 software update, we have made substantial improvement to our new Aspen Unified platform environment for asset planning and scheduling in MSC. Specifically, we have introduced tighter and better model integration, improved data management capabilities, deeper AI capabilities and a more scalable architecture. This represents the most significant update to our unified platform planning and scheduling solutions in over a decade.

While we're still in the early phase of this rollout Customers are already responding positively to this improvement. For example, in Q2, we received a green light from one of the world's largest integrated energy companies to implement our updated Aspen Unified planning and scheduling solution across their asset base. This customer highly values the strength of our latest innovations and ultimately, our ability to support better operational decision-making across their global teams. We're excited to work with them on this project over the next several months and see additional opportunities to support their digitalization initiatives going forward. Finally, our asset performance management suite continues to gain industry recognition and grow its customer base. For example, in Q2, our APM team closed an exciting win with a large global pharmaceutical company to implement our [ Mtell ] product at one of its European manufacturing plants. This deal was supported by our commercial agreement with Emerson who also has a strong relationship with the customer via their offerings, including the DeltaV control system. While this deal was for one initial site, the customer has shown strong interest in rolling out the solution across its entire manufacturing base to drive further operational and sustainability excellence.

Turning to Slide 6. We will discuss our sustainability initiatives. As I highlighted previously, sustainability-related CapEx contributed to accelerated engineering suite growth in Q2. We believe that the strong tailwind we're seeing in sustainability is being driven by the energy transition and the alignment of corporate strategies with government policy and funding. This was further validated to me at COP 28, the United Nations Climate Exchange Conference. As part of this event, public and private organizations alike made pleasures to reduce carbon emissions by increasing renewable energy production and usage and driving higher energy efficiency. To do this, companies must not only accelerate their digitalization journeys but also leverage the potential of new and existing asset optimization technologies. We remain focused on partnering and co-innovating with customers in these areas in Q2 to accelerate their use case development. For example, we advanced our collaboration with a large global player in renewable wind energy that aims to also secure leadership in the production of green hydrogen and ammonia. While this customer currently leverages our modern and DMC3 process capabilities to drive efficiency, we are now also partnering to improve their electrolyzer modeling capability. Additionally, we've built on our existing relationship with a refining company in Europe to implement our emissions management solution for better CO2 tracking, reporting and modeling.

This customer already relies on our solutions to run its assets more efficiently and sustainably and is excited about the potential to leverage our emissions management solution to better manage its carbon footprint going forward. As an organization, we also recognize that the challenges presented by the prevailing energy megatrends are considerable, and we remain committed to doing our part. To that end, I'm proud to announce that we made a formal commitment last week to achieve net-zero emissions as an organization by 2045. As part of this commitment, we will build a decarbonization plan over the next 12 to 24 months to achieve net-zero for Scope 1 and 2 emissions by 2030 and across Scope 1 to 3 by 2045 in line with the science-based target initiative.

Now turning to Slide 7 for our innovation initiatives. In November, we successfully launched enhancements to our version 14 and a new version of 14.2 AspenOne Software. This update included enhanced industrial AI further OT data integration and additional sustainability capabilities with more than 140 sustainability models now available to customers. As mentioned previously, this latest rollout is garnering positive customer response and helping us to win additional business. We look forward to showcasing the full range of our innovations at our optimized 2024 conference in Houston this May. I would also like to take a moment to speak about how our latest B14 update incorporate artificial intelligence. While we have been using industrial AI in our products for years, this latest update leverages the technology in ways that are new, innovative and represent exciting growth drivers for us. For example, with this latest release, we have integrated additional AI capabilities, including neural networks into Aspen Unified and Aspen [ HysiDynamics ] hybrid models. These AI enhancements extend and build upon our ability to employ a nonlinear hybrid modeling in both traditional and sustainability-related use cases to improve modeling accuracy.

We have also incorporated generative AI-based assistant into our strategic planning capabilities for sustainability pathways. This innovation helps to solve the cold start problem for users by using their queries or prompts to automatically create a new super structure workflow, saving them time and allowing them to focus on more creative and high value of tasks. These are just a few examples of the way AspenTech is leveraging AI across our portfolio today. As always, our ability to leverage these innovations alongside the [ best ] expertise and first principles know-how remains a competitive differentiator for us and highly valued by our customers.

In closing, on Slide 8, we remain confident in our ability to deliver ACV growth of at least 11.5% year-over-year in fiscal 2024. Our confidence in reaffirming this guidance is primarily based on the following factors: First, is the strength of our pipeline resulting from a positive macro environment, Brazilian demand and sales channel expansion. Second, the adoption of the DGM suite term licensing model is accelerating in the market and contributing to increasing growth. Third, the SSE suite and its tokenization continues to gain momentum in the market. Fourth is the continued demand strength for our engineering suite driven by upstream and sustainability CapEx. And Fifth and final, and expanded sales channel will have a greater impact on pipeline conversion in the second half of the fiscal year. Specifically, on Q3, we now expect sequential ACV growth in the mid- to high 3% range. This accounts for the closing of the delayed renewal agreement mentioned earlier as well as the factors just referenced in support of our fiscal year guidance. A stronger Q3 and Q4 quarters are in line with our historical cadence as AspenTech's results have traditionally been more weighted to the second half of our fiscal year.

With that, I would now like to turn the call over to Chris for a discussion of our Q2 financial results. Chris?

[Christopher Stagno, executive]

Thank you, Antonio, and hello, everyone. I'm excited to be with you here today and to help lead AspenTech through the CFO transition process. Turning to our Q2 performance. I will start out by highlighting that our earnings presentation includes explanations regarding the impact of ASC Topic 606 on our financial results. We have also included definitions of annual contract value or ACV bookings and free cash flow, among other metrics in our earnings presentation now available on our IR website. We ask that investors refer to these definitions together with today's call.

Starting on Slide 9, annual contract value was $914 million in the second quarter of fiscal 2024, up 9.6% year-over-year and 1.8% quarter-over-quarter. As Antonio mentioned, we had one large renewal of approximately $5.4 million or 0.6 points of growth that we expected to close in the second quarter but was delayed. We now expect to close this deal in Q3. Total bookings were $233.4 million in the second quarter, decreasing 3.9% year-over-year, consistent with our expectations. Total revenue was $257 million for the second quarter up 5.9% on a year-over-year basis. Please note that revenue in our model is heavily impacted by contract renewal timing and variability under ASC Topic 606. This includes the impact of the larger deal that was pushed out of Q2.

Now turning to profitability. On a non-GAAP basis, we reported operating income of $89 million in Q2, representing a 34% non-GAAP operating margin. This compares to non-GAAP operating income of $87 million for a non-GAAP operating margin of 36% a year ago. The year-over-year increase in expenses was driven by increased head count and compensation costs, consistent with our sales expansion efforts and other business initiatives. As a reminder, margins will fluctuate period-to-period due to the timing of customer renewals and the resulting impact on license revenue recognition in a given quarter. Non-GAAP net income was $88 million in the quarter or $1.37 per share compared to non-GAAP net income of $23 million or $0.35 per share a year ago. Please note that the difference in non-GAAP net income between periods was mainly due to the change in computing our tax provision, which initially incurred in the second quarter of fiscal 2023.

Turning to our balance sheet. We ended the quarter with approximately $131 million of cash and cash equivalents, reflecting the impact of share repurchases under a $300 million share repurchase authorization and $197 million available under our revolving credit facility. During the quarter, we repurchased approximately 375,000 shares for $72 million under our $300 million share repurchase authorization for fiscal year 2024. We Year-to-date, we have repurchased approximately 955,000 shares with $186 million under the same authorization. On cash flows, we generated $30 million of cash flow from operations and $29 million of free cash flow in Q2 compared to $50 million in cash flow from operations and $48 million of free cash flow a year ago, mainly due to higher cash tax and the variability of contract cycle renewals and billings between.

Turning to Slide 10. I would now like to close with guidance. For the full year of fiscal 2024, we are reiterating our outlook across all metrics. We continue to expect ACV growth of at least 11.5% in fiscal '24. As Antonio mentioned, we are seeing pipeline strength a healthy demand environment, several other notable tailwinds across our business that support our conviction as we move into the second half of our fiscal year. In addition, our non-GAAP EPS range has increased by $0.02 from our prior guide to reflect the impact of our share repurchase activity in the second quarter. There was no impact to GAAP EPS. Now turning to Slide 11 for linearity. As Antonio noted, we now expect to deliver sequential ACV growth in the mid- to high 3% range in the third quarter. On free cash flow, we expect Q4 to come in slightly above Q3. On revenue, we continue to expect our fiscal '24 revenue linearity to be similar to that of fiscal '23. This includes expectations for bookings up for renewal of $580 million in fiscal '24 with $173 million up for renewal in Q3 and $195 million of our renewal in Q4. For a complete overview of our fiscal year '24 guidance and linearity commentary, please refer to our earnings presentation slides now available on our IR website.

In closing, we delivered a solid Q2 performance to close out the first half of our fiscal 2024. With a strong foundation in place, we continue to make investments in those areas that can support growth while also remaining disciplined in our execution to return to our historical profitability levels over time. Looking ahead, we are excited about the opportunities we are seeing across our end markets and confident in our ability to deliver on our fiscal '24 financial targets.

With that, I will turn it back over to Antonio for closing comments.

[Antonio Pietri, executive]

Thanks, Chris. As I mentioned earlier, we recognized that we need 2 strong quarters of growth in the second half to achieve our fiscal '24 guidance targets. We believe that we're in a good position to deliver on this outcome. Our confidence is supported by the factors we laid out today. We're also excited by the growth potential of our innovation efforts. Across our portfolio, we continue to roll out new and enhanced capabilities to help our customers better meet their efficiency and sustainability objectives. As global leaders in industrial software AspenTech has a long track record of partnering closely with customers to understand their needs, support their digitalization efforts and drive positive business outcomes. We remain fully committed to this work going forward.

With that, we will open it up for Q&A. Operator?

[Operator]

[Operator Instructions]. And our first question comes from Rob Oliver from Baird.

[Robert Oliver, analyst]

I had two. My first one is -- just I know you've called out the sort of back half weighted nature of the ACV guide and you provided some details around that. I think even with the deal that slipped at least in our model, it shows up as something markedly more back-end loaded than historically you guys were. So just -- some of the things you mentioned, pipeline, channel expansions, I guess, maybe if you could just home in on kind of 1 or 2 things that gives you the most comfort here as we look at that sort of big ramp you guys need in the second half? And then typically, in the past, you guys provided a range. And this year, you guys said that, that would be sort of the minimum, is that now the goal? In other words, the chance of kind of beating that number and that being the minimum kind of off the table now? And then I just had a quick follow-up.

[Antonio Pietri, executive]

Well, I mean, first of all, we remain to our guidance, which it's always been at least 11.5%. And that is the goal. And time will tell what that means, but at least 11.5% over that number. Look, with regards to the -- how weighted this year is to the second half. First of all, of course, that delayed renewal, which is about 0.6 points of growth. And unfortunately, through complications and internal alignment and administrative issues with that customer, that deal didn't get renewed on time. This is the first time that something like this happens. This is certainly the largest deal that we had to experience that with normally is much smaller transactions. But it's not unusual and this is the first time that we probably have to disclose something like this.

With regards to our confidence on the second half look, it starts with the volume of the pipeline. Our pipeline over the last 12 months, January to January, our total pipeline for the company has grown over 30%, and this is certainly supported by the channel expansion, but also by the macro environment that we see, the demand from our customers and certainly, the market leadership position of our products. But more specifically, look, we're very excited about the fact that now after 18 months, some of the transformation initiatives that we started working at the beginning of fiscal '23 are starting to bear fruit. The outcome for DGM on term software licensing in the first half of the year was a great outcome. The pipe -- the term software pipeline for the DGM is expanding very rapidly. As a matter of fact, it's grown by almost 500% in the last 12 months. and the majority of our customers are now accepting term software. So we're very excited about that, and we have a positive outlook for the DGM suite for the full year.

Equally, the transformation of the SSE suite into a token suite. They used to do term deals mostly 1 year -- 1-year deals now is tokens and we're expanding the duration of those deals continues to gain momentum. This is gaining the attention of our customers. But look, I also believe is catching the attention of our competition because it is starting to eat into the market position of some of our competitors. So we're also very excited about SSE and we also have a positive outlook for that suite for the full year. Look, equally, the growth that we're seeing on the engineering suite that started last year, last fiscal year, but has continued this year, and we expect it to continue through the full fiscal year is very exciting. It is driven by both the CapEx spend but also sustainability CapEx spend. And we expect that suite to perform very well for the full fiscal year and most likely above plan. And then look, we now have an expanded sales team that's in place for the most part that is now familiar with our motion and cadences and we expect them to be very, very engaged converting that pipeline here in Q3, Q4.

But I also want to say the following because in a way, with Heritage AspenTech after years of taking those products to market, we relied on volume to deliver our results in the past. And once in a while, we had deals of significant size. What we are now seeing with DGM and SSE is that we have a larger number of more sizable deals in our pipeline that come through as a result of the spend at utilities have to put in place in order to upgrade their systems. These are very large systems that required a lot of software and technology. Therefore, the size of these deals is 7 figures and sometimes deep in the 7 figures. And with SSE, we're also seeing deals that are larger than historically had deal. So when we look at our pipeline, it's not only volume but also size, especially as we talk specifically Q3 and Q4. So there are many reasons for this. as I said, very excited about what I see going forward. And of course, we know that we need to hit on all cylinders to deliver Q3 and Q4. And my expectation is that we will.

[Robert Oliver, analyst]

I appreciate all the detail, Antonio. Just quickly as a follow-up, if you could just comment because the question we've been getting from investors is around your relationship with Aramco. And I know that you guys do have a co-innovation model with Aramco and they're an important customer. Could you just comment on what the recent production cut from Aramco could mean in terms of their CapEx and if that might have any impact at all on Aspen. I know you do a lot with them.

[Antonio Pietri, executive]

Yes. Aramco is one of our most important customers. We've had -- we've been doing business with Aramco for probably 30 years. Certainly, with SSE relationship has expanded with Aramco. But look, it's a relationship that existed and spend that existed before they announced that we're going to expand their production from $12 million to $30 million -- sorry, million barrels. And now that they've announced that they're going to not do it and stay at 12 million barrels, I don't think it changes our outlook for Aramco. As a matter of fact, Aramco has been a heavy user of our engineering suite. And in my prepared remarks, I talked about the opportunities or advantages that our customers are seeing from leveraging the synergies around the engineering suite and the SSE suite.

So we're engaged with Aramco. And furthermore, what I will say is that on a global basis, oil and gas companies have to replace 4 million to 5 million barrels of oil production every year because of depletion in their reservoirs. So there's a lot of CapEx that has to be put to work to just maintain production, let alone increase it. So we're still very optimistic about our outlook in the Middle East overall.

[Operator]

And our next question comes from Matthew Pfau from William and Blair.

[Matthew Pfau, analyst]

Just wanted to first ask a follow-up in terms of the back half ramp for ACV. So if we exclude the deal, the renewal that got delayed, is the back half ramp still in line with your expectations from the previous quarter? Or did it get more back-end loaded absent that -- the impact of that renewal?

[Antonio Pietri, executive]

Just slightly higher in the second half. If you were to put that deal back into Q2. It's just a few percentage points higher at the second half, but nothing that material.

[Matthew Pfau, analyst]

Okay. Great. And then on DGM, good to hear the commentary on that pipeline being up 500% over the past 12 months for term deals. What about in terms of implementation capacity there? I know that building out the ecosystem has been a focus, do you feel you have enough implementation capacity to implement those deals?

[Antonio Pietri, executive]

Yes. Look, I think this is something that we remain very focused on. This is the reason why we continue to progress building the implementation services partner network that we talked about already 12, 18 months ago. But also equally, part of that demand is new business that we're generating in other regions of the world. And we're setting up teams in those regions as well, including developing these partnerships. So we're confident in our ability to meet the demand, working closely and collaborating with these customers as these agreements get signed and the implementation plans get defined.

[Operator]

And our next question comes from Mark Schappel from Loop Capital Markets.

[Mark Schappel, analyst]

Antonio, I was wondering if you could just provide some additional details around that slipped renewal contract in terms of, say, industry or geography. And also, too, I mean, what's giving you confidence that, that slip renewal will close in Q3.

[Antonio Pietri, executive]

Yes. So Mark, just for reasons of confidentiality and considering that our friendly competitors may always be listening, we won't talk about geography, what technologies or products, this is about. As we said, it's about -- it's a renewal that got delayed, it's about $5.4 million in value. We expect that it will close in Q3. We have a very detailed sequence of events, and we are about 3 quarters through the sequence of event already. So we expect that transaction to close in Q3.

[Mark Schappel, analyst]

Okay. That's fair. And then regarding your joint commercial agreement with Emerson, is there an immediate or maybe a near-term industry focus around that agreement. So for example, you did a pulp and paper joint deal with them last quarter. It looks like a nice pharma deal this quarter. It appears that the commercial agreement is focused more on process manufacturing industries outside of the core oil and gas business. So I was wondering if you could just comment on that.

[Antonio Pietri, executive]

Yes. Look, I think in the first 12 months of the commercial agreement, mostly fiscal '23, as we learned about each other, it became clear that focus was going to be very important in succeeding initially in the partnership. So we have -- we are targeting very specific areas of engagement, both areas like pharma, but also areas where Emerson has a lot of strength in their businesses, whether it's geographies, whether it's types of projects that they pursue and other areas where Emerson has a very strong presence and also nontraditional industries for AspenTech. We've been very focused on that in this fiscal year. Our efforts are very targeted in that regard. And we believe that this is paying off and will pay off more handsomely in the future as we ramp up those go-to-market activities.

[Operator]

And our next question comes from Jason Celino from KeyBanc Capital Markets.

[Jason Celino, analyst]

Now that we've -- not we've -- now that most of your customers have kind of set their budgets for the year. How are global CapEx rates looking for this year? And maybe how does that maybe compare to last year?

[Antonio Pietri, executive]

Yes. No. Look, actually, we're very excited about what we're hearing and seeing oil and gas CapEx more or less in line to last year or up depending on the customer segment or geography. And by that, I mean, probably 5% to 10%, but mostly in line with last year, which was healthy and good for our business. refining customers equally, CapEx spending in line with what they've traditionally done and what they did last year. Chemicals is more of the same. So we don't expect a recovery in the spend -- OpEx spend by chemical customers in calendar '24. The fact is that their sort of soft patch that they are going through will probably extend through the full calendar year.

And then utilities. Look, utilities more and more CapEx is being targeted at global electrification and in that utilities. But part of that CapEx in global electrification is going into renewables, whether it's solar and wind. But that renewable -- that electricity produced from renewables have to be put into or connected into the grid. And therefore, utilities then have to spend to upgrade their systems, deal with the complexity of more and more renewable energy electricity into their networks. And this is one of the main drivers for them to have to spend to upgrade their systems. We're very excited about what we were hearing from utilities. And look, it used to be a very sort of a steady-state industry 30, 40 years ago. Today is an incredibly exciting industry. It's an industry that absolutely will have to rely on technology to deal with the complexity of the grid to maintain the grid in balance and in operation but also to cybersecurity. And our conversations not only about delivering our software to these customers, but also co-innovating and accelerating co-innovation because part of one of the challenges that if you talk to utilities customers is they feel that there needs to be an acceleration of innovation for them to keep up with the complexity that they're having to manage.

So we're very excited about this over the last 12, 18 months and especially the last 6 months of last calendar year, I travel to meet utility customers around the world. Not only am I excited about what I just mentioned, but also about the role that now new AspenTech with the DGM suite plays around global electrification and global infrastructure. AspenTech and the Monarch [indiscernible] system in the DGM suite is responsible not only for managing, but keeping the electrical grid imbalance for the entire country of India, for example, but also the entire country of Vietnam that also -- Southern California, the lights in Southern California are kept on through the use of our also technology and systems, 40% of utilities in the United States are using now the DGM products and solutions and AspenTech is [indiscernible] to them, but also we've made great progress moving into Europe. And now we're going to be basically the foundation technology for multiple countries in Europe and certainly in the Netherlands tenant has a well-known installation that's been going on for 2, 3 years now. but we've also won business in 2 or 3 other countries where our technology is going to be the base technology to run the grid in those countries. And I will mention them because just recently signed agreements but equally, our expansion into Latin America, we run the largest transmission network in Latin America using our technology, the entire gas distribution network in Spain is [ run ] using the Monarch skid system in the DGM suite. So -- and look, every time we win a deal we're displacing the competition. we're displacing industrial that have been in the market for many years. but now their solutions having kept up with the needs of the industry. And this is then [indiscernible] and now AspenTech are stepping into the bridge and being very successful. So we're very excited about what we're seeing with DGM. I think this is a game-changing suite for us. And as I said, it's not only the volume but also the size of deals. And I think that's part of what gives us confidence about the success we're going to have in Q3 and Q4.

[Jason Celino, analyst]

Okay. Awesome. Good stuff on DGM. Maybe to follow up on Matt's earlier question. So apologies, but if we strip out that chemicals deal slipping and you think about the pipeline moving a little bit more back half weighted what area moved back, if it was a specific vertical? Or was it chemicals? Curious on how you would kind of characterize it.

[Antonio Pietri, executive]

Well, look, I don't want to confirm or deny that [indiscernible] is a chemical deal. We haven't said anything about what vertical it is in. But putting that aside, Look, as we said, certainly, the MSC suite, what we'll say is that deal certainly is a transaction that is all MSC software. So that impacted the performance of the MSC suite in the first half of the year. Chemicals was a little flat. So we do expect a stronger performance for MSC in the second half of the year. APM has continued to behave in the same manner that it has now for a couple of years. But we're also excited about the over performance in engineering because we do think that we'll be able to make up if necessary, for any shortfall that we may see around MSC or APM. But our goal is to get certainly the MSC suite to plan and, if possible, also APM. And look, what we're seeing with BGM and SSE is also exciting. So overall, we were confident there's work to do here. We're going to execute and we have 2 quarters to do at least 11.5%.

[Operator]

[Operator Instructions]. And our next question comes from Nay Soe Naing from Berenberg.

[Nay Soe Naing, analyst]

I actually have a few [indiscernible] development.

[Antonio Pietri, executive]

[ Nathan ] you are breaking up. You are not coming through. Operator, I think we lost Nathan.

[Operator]

And our next question comes from Arsenije Matovic from Wolfe Research.

[Arsenije Matovic, analyst]

This is Arsenije on for Josh. So seeing that this delayed renewal impacted about $5.4 million of ACV in the quarter, what gives you more confidence in the visibility to ramp in the second half? Was this idiosyncratic to the company up for renewal? Or could this maybe show more weakness in their respective end market then was initially expected for the second half of '24. And then I have a brief follow-up on DGM. Thanks.

[Antonio Pietri, executive]

No. Look Arsenije, the specifics around these deals that didn't renew have nothing to do with the macro environment or demand. is just some internal issues and administrative issues with this customer. we thought the deal was going to get renewed and it didn't. So it will happen now in Q3. So nothing to do with demand at all. Look, what gives us confidence, we've set a pipeline the strength that we're seeing in DGM, SSC, engineering, a bigger sales organization, that is now in place to convert that pipeline. So overall, those are the factors that we think will get us there.

[Arsenije Matovic, analyst]

Got it. And then given the traction you're seeing in DGM, is the 2.5 percentage point for the contribution of ACV that you expected for growth conservative? Can that be a stronger contribution to growth? And then just very briefly on the renewal impact, what was the specific impact to free cash flow in the quarter from the renewal.

[Antonio Pietri, executive]

Yes. Let me first address the question on DGM and then I'll have Chris talk about that impact. but if any. Look, the 2.5 points is the gold. 2.5 points of growth contribution is the goal for DGM. Hopefully, we'll exceed it. But we'll keep that as a goal for the moment. The pipeline looks solid, but let's see where we get to at the end of Q4.

[Christopher Stagno, executive]

Yes. And then as it relates to free cash flow, there was an impact as it related to that renewal being pushed out. It was the ACV amount that we quoted of about $5.4 million. We do expect that, like Antonio said, the deal will close in the third quarter and then we'd collect that in the second half of the year.

[Operator]

And our next question comes from Clarke Jeffries from Piper Sandler.

[Clarke Jeffries, analyst]

Antonio, it sounds like the growth in the pipeline is broad-based but I wanted to specifically ask around the sales capacity expansion and the sales capacity that seems to be coming online in the second half. Can you remind us, is that broad-based across the business? Is that weighted to DGM, is that really the primary driver even in first half in terms of the pipeline growth. And any assumptions around close rates based off of that expansion of capacity coming on in the second half, trying to understand if this is a particular product category or all rounds of business getting a capacity increase?

[Antonio Pietri, executive]

Yes. Look, as you would expect, certainly a significant portion of the sales investment went into DGM expansion of the sales organization in DGM into other regions but also in North America. Expansion of the high velocity sales [ organization ], are small to medium sales team because we're seeing accelerated growth in that team. So the team also benefited from an important expansion in the head count. That team is pursuing mostly engineering business. that comes through consulting, engineering consulting companies or companies that are first customers of Aspen -- first-time customers of AspenTech. This is a team that as far has obtained companies like Tesla, Meta, Google to be customers of AspenTech. So is a very active team and I think that it's grown materially for us over the last 2, 3 years.

But also, we added especially solution consultants in our Heritage AspenTech team as we focus also on driving more enterprise-type deals with our customers in that area, considering the critical mass of business that we already have with some of these customers we believe there's an opportunity there for us to do more with those customers. And a little bit of, as we reorganized into our hat sales organization, we've also made a little bit of investment in to the SSE team as well.

[Clarke Jeffries, analyst]

Perfect. And just one follow-up on that. I mean, at this point, I mean imagine there's a lag between the hiring and the actual capacity, the reps being ready. But are you at the point where you're still on the upswing in terms of hiring ambitions or growing headcount? Or is this all about maturity of kind of previously hired individuals trying to understand if there's further ramps coming even beyond fiscal '24.

[Antonio Pietri, executive]

Yes. I mean, look -- we're pretty much done with expansion in fiscal '24 that this investment cycle started in Q4 of fiscal '23. So last April, 9 months ago, were done. Most of the sales head count is in place. It's been in place for a number of months. So this is why we expect to see -- we're seeing the benefit on the pipeline, and we expect to see the benefit on the conversion. Now having said that, now for fiscal '25 coming up, we look at what investments we need to make around expanding the DGM sales organization into other parts of the world. And what other sort of [ 2 ] investments we have to make in other parts of the sales organization. But this was an important ramp-up in head count. And now we also want to see that additional head count increase their productivity. So good investment, a little bit more investment in fiscal '25 around DGM and a few other areas. And look now that I talked about pipeline and conversion, there was a question just before about the conversion rate for our pipeline. Look, the -- we track certainly the conversion rate for our pipeline quarter-to-quarter and year-to-year, and we expect that the historical range of conversion that we've seen in order to deliver our goals is what we need to have in Q3, Q4 to achieve at least 11.5%. So we do -- the team does a good job of tracking their performance against historical and as a forbearer of what's going to come.

[Operator]

And I'm showing no further questions. I would now like to turn the call back over to CEO, Antonio Pietri.

[Antonio Pietri, executive]

Thank you, operator, and thank you, everyone, for joining the call today. Over the coming months, we will attend 2 investor conferences. In February, we're going to attend the Wolfe Investor Conference. And in March, we will attend a key bank Emerging Technology Summit. So please reach out to our Investor Relations team for more information on these 2 events and we look forward to catching up with many of you soon. Thank you, everyone, for joining, and we will see you on the [ road ]. Thank you.

[Operator]

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