Company Overview: Aspen Technology, Inc. (NASDAQ: AZPN) is a worldwide leader in asset optimization software to address complex and critical industrial environments to enhance the asset design, operation, and maintenance lifecycle. The company has ~2,300 customer base across the world, with around 1,600 employees. Further, AZPN has offices in 32 countries that includes the United States, Europe, Asia-Pacific, and other locations.

AZPN Details

Higher Product Adoption & Deal Wins Are Key Positives: Aspen Technology, Inc. (NASDAQ: AZPN) is engaged in providing asset optimization software solutions for various industries, consequently, facilitating the clientele to improve the efficiency of assets. The company offers aspenONE Asset Performance Management (APM) suite of solutions which consist of Aspen Mtell, Aspen ProMV, Aspen Fidelis Reliability, Aspen Root Cause Analytics, and Aspen Column Analytics. In 2016, the company bought Mtelligence Corporation (also known as Mtell) with a long-term view to bolster its asset performance optimization software suite.

In FY19, the company generated revenues of $598.3 million, as compared to $518.9 million reported in the year-ago period. The company has two reportable segments, namely subscription and software, and services. The subscription and software segment accounts for fixed-term licenses and other related support services and represented 95.2% of total FY19 revenues. Whereas, the services segment represented 4.8% of total FY19 revenues and comprises training and professional services.

Recently, Aspen Technology and Hargrove announced a partnership deal to provide engineering services for a “Digital Twin” to better handle the processes and maintenance phase of a plant’s lifecycle. Hargrove will deliver digital twin services that will depend on the main technology and domain capability from Aspen Technology. AZPN remains committed for more than 35 years to aid owner-operators to boost their operations. The company is also focusing to embed AI across its portfolio, which will aid customers who are already using digital twins to get an upgraded version of embedded AI.

In another update, the company stated that its Mtell and ProMV APM solutions have been chosen by a chemical company China National BlueStar, also known as BlueStar, for its digital transformation objectives. By using predictive analytics on all critical assets, BlueStar will be equipped with better product quality by forecasting process variations and avoiding unplanned delays.

The company witnessed a CAGR of 8% and 22% in revenue and net income, respectively, over the period of FY15-FY19. Dividends also increased from $1.33 per share in FY15 to $3.71 per share in FY19, instilling investors’ confidence.

Snapshot of Past Performance (Source: Company Reports)

The company’s results are likely to benefit from a robust product portfolio, which, in turn, will boost the top-line and support the overall growth of the company. The company’s capability to enhance the customer base along with the recent deals wins are expected to be a tailwind in the near-term. Aspen Technology, Inc. has been seeing strong impetus for its asset optimizations solutions in recent times. Particularly, Messer Group GmbH has selected its DMC3 software to improve operating efficiency and margins, and curbing energy consumptions and emissions. Further, Aspen’s HYSYS Dynamics software was adopted by China HuanQiu Contracting and Engineering Corp. to strengthen its foothold in the digital transformation across the business and boost safety. We believe that these deal wins are likely to enhance AZPN’s revenues in the days ahead.

Sneak Peek at Q3FY20 Key Highlights: During the quarter, the company reported non-GAAP earnings of 74 cents per share, down 22.9% on a year-over-year basis. The company’s revenues also declined 10.8% year over year and came in at $132 million. The decline was on the back of lower year-over-year bookings. Notably, during the quarter, total bookings went down ~20.8% and stood at $126.7 million, owing to the adverse timing of renewals compared with year-ago quarter.

In 3QFY20, license revenues stood at $78.6 million, down 20.2% year over year and represented 59.5% of third-quarter revenues. However, revenues from maintenance went up 7.9% and stood at $45.2 million. maintenance segment accounted for 34.2% of total revenues during the quarter. The increase was on the back of the growth of its base of arrangements, which include maintenance, being established on a ratable basis. Services and other revenues accounted for the remaining 6.3% of total revenues and went up 7.9% year over year due to the rising volume of professional service engagements. Annual spend increased by 9.3% on pcp and stood at $575 million.

3QFY20 Key Highlights (Source: Company Reports)

Operating Details: During the quarter, the company reported gross margin of 88.1%, which contracted 220 basis points from the period corresponding period. Total operating expenses during the quarter came in at $70.1 million, up 11.7% year over year, primarily due to an increase in research & development and general & administrative expenses. As a result, non-GAAP operating income declined ~29.3% year over year and stood at $55.3 million. Non-GAAP operating margin came in at 41.9% in 3QFY20, down from 52.9% reported in the year-ago quarter. Net income for the quarter stood at $43.5 million.

Balance Sheet & Cash Flow Highlights: The company exited the quarter with a total cash balance of $192.2 million, and total debt amounted to $431.3 million. Cash flow operations for the quarter came in at $81.4 million and free cash flow amounted to $81.2 million. In 3QFY20, AZPN repurchased ~452,000 shares for $50 million.

Balance Sheet Highlight (Source: Company Reports)

Recent News: Recently, the company announced that Amar Hanspal joined the Board of Directors of the company, effective from July 22, 2020. The company also informed the market that Adriana Karabout has joined the board on the same date.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 50.15% of the total shareholding. The Vanguard Group, Inc. and Kayne Anderson Rudnick Investment Management, LLC holds the maximum interests in the company at 9.43% and 8.81%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The Company reported Mar’ FY20 gross margin at 88.1%, higher than the industry median of 76.6%. EBITDA margin for Mar’20 came in at 36.9%, higher than the industry median of 10.2%. ROE, in the same time span, stood at 11.2%, as compared to the industry median of -0.4%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: Aspen Technology, Inc. is facing stiff competition in the APM space from peers like SAP, IBM, and Oracle. This is expected to create pricing pressure to maintain market share, which could impact the company’s margins. Additionally, COVID-19 led uncertainties and dampened customers’ demand prevailing in the market are likely to have an impact company’s performance. Further, a leveraged balance sheet adds to the woes.

Outlook: For FY20, the company expects revenues in the range of $550-$582 million. Non-GAAP net income is expected to be in the ambit of $3.16-$3.48 per share, whereas, non-GAAP operating income is forecasted in the range of $249-$277 million. The company expects free cash flow to be in the range of $230-$260 million for FY20. The company is set to report its 4QFY20 results on August 12, 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of AZPN closed at $98.42 with a market capitalization of ~$6.65 billion. The stock made a 52-week low and high of $73.07 and $142.89, respectively, and is currently trading below the average of its 52-week trading range. The stock corrected ~4.88% in the last three months. Although, the company is expected to face near-term headwinds due to uncertainty in the market, we opine that the company is well-placed in the long run to steer current conditions based on its flagship products and solutions, durable business model, enhancing shareholder’s value. Considering the above factors, we have valued the stock using an EV/Sales multiples based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like ANSYS Inc (NASDAQ: ANSS), Autodesk Inc (NASDAQ: ADSK), and ACI Worldwide Inc (NASDAQ: ACIW). Hence, we recommend a “Buy” rating on the stock at the current market price of $98.42, up 1.19% on 3 August 2020.

AZPN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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