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Aspen Technology, inc (NASDAQ:AZPN)
Q4 2021 Earnings Call
Aug 11, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 speakers' 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, your CFO, Chantelle Breithaupt. Thank you. Please go ahead, madam.

Chantelle Breithaupt -- Chief Financial Officer

Thank you. Good afternoon, everyone and thank you for joining us to discuss our financial results for the fourth quarter of fiscal 2021, ending June 30, 2021. I'm Chantelle Breithaupt, CFO of AspenTech and with me on the call is Antonio Pietri, President and CEO.

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, August 11, 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 fourth quarter and then I 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 Chief Executive Officer

Great. Thanks, Chantelle and thanks to all of you for joining us today. Before turning to the quarter, I would like to acknowledge that tomorrow is the 40th anniversary of AspenTech's founding. Some of the original team from MIT that our at AspenTech to this day. And I would like to congratulate them and all of our employees on this milestone. I would also like to thank our customers and investors for their continued support over the years.

Now turning to the fourth quarter. Overall, our performance was in line with our expectations. While the macro environment has recovered considerably since our last earnings call, the spending environment by our customers remains constrained. However, we continue to have exciting and strategic conversations with customers. There is clear interest in expanding adoption of AspenTech solutions to meet the objectives of increasing operational efficiency and sustainability. These conversations gives us continued confidence that we will return to double-digit annual spend growth over time as the macro environment continues to improve and spending budgets normalize.

Looking quickly at our financial results, starting with the fourth quarter. Revenue was $198 million, GAAP EPS was $1.49 and non-GAAP EPS was $1.53. Annual spend was $621 million, up 1.9% in the quarter and 4.8% year-over-year and free cash flow was $103.7 million. For the full year, total revenue was $709.4 million, an increase of 18%. GAAP EPS was $4.67 and non-GAAP EPS was $5.20 and free cash flow was $277.5 million.

Looking at our fourth quarter results in more detail. We had a seasonally stronger performance as you would expect, but the spending environment remained constrained with -- consistent with recent quarters. There continue to be a great deal of a spending restraint in our core markets from the impact the pandemic had on the operating environment of our customers. As we have seen throughout fiscal year 2021, overall demand activity remain healthy with pipeline growth across all areas of the business. Conversely, the more difficult dynamic around transaction approval processes that we discussed last quarter were still prevalent, but we did start to see signs of normalization as the quarter went on.

Overall Asia-Pacific, North America and our SMB business were strong in the fourth quarter from a new business standpoint. At a high level, the overall economic backdrop improved during the quarter as many markets began to reopen and end market demand for fuel and chemicals approached or exceeded pre-COVID levels. However, this was not uniform across the world, as the very recent shutdowns in Australia, India, Singapore and Japan illustrate. A positive outlook for consistent and sustained recovery from the pandemic coupled with overall improvement in economic conditions should translate into greater confidence and readiness to deploy larger capex and opex budgets, supporting faster growth for AspenTech.

As a reminder, our customers are operating with budgets that were set late last year in a far more challenging and uncertain environment. We're cautiously optimistic that budgets for calendar year 2022 will reflect the improved conditions we see today, but as we all know, the evolution of the pandemic and COVID infections is highly fluid. From a vertical perspective, refining margins improved to pre-pandemic levels in the U.S. in the fourth quarter and moved higher in Europe, but remains under pressure in other parts of the world still dealing with COVID waves.

Overall, end market demand and therefore utilization rate and refining margins have been trending in the right direction in recent months. Financial results for refining customers or the refining businesses of integrated oil companies in the most recent quarter have improved to varying degrees, reflecting their symmetrical recovery in evolving end market environment for these customers. We were encouraged in the fourth quarter by the increase in the number and quality of conversations we're having with customers, focused on more strategic discussions about their future investment priorities. We believe this is a positive sign for future demand for AspenTech.

Chemical customers saw a record demand in some sectors in their most recent quarter with strong margins supporting solid financial results overall. Spending trends by customers in this sector are not back to pre-COVID levels, but remain healthy and were modestly better than the third quarter. AspenTech solutions are very well aligned to the chemicals customer's need for greater operational efficiency and sustainability. We expect chemicals will continue to be a source of a strength for us going forward.

Looking at our E&C business. Our performance was better than expected. Even as the E&C industry continues through a process of adjustment as a result of the reduced capex spending by their customers. Capex budgets remain tight and this has led to reductions in backlog on projects on which to utilize our solutions over the last 12 months, but we did see a slight pickup in project awards going into the quarter and expect a slight upward trend in project awards going forward. We do not anticipate an accelerated improvement in this part of the market, but continue to believe there's a longer-term opportunity in this industry, especially as these customers continue to shift their focus to operations and maintenance activities and sustainability related capex.

Finally in APM, we saw some improvement during the quarter in our core markets, but the trend is largely the same as we saw throughout fiscal 2021, high and growing customer interest. In the GEI markets we continue to see more concrete purchasing decisions around Aspen Mtell. As we have discussed previously, APM has been an area where core customers have deferred buying decisions to preserve capital given lower asset utilization rates and less need for maintenance. We're confident, this is a temporary phenomenon and that as the operating conditions require it, customers will begin to budget for operations and maintenance spending that will support increased growth in the future.

A good example of the opportunity in APM was a low seven figure expansion transaction we signed with a global mining customer, an existing APM user. This customer continues to expand its deployment of APM to other sites around the world. Overall, this customer is now spending more than $3 million annually on APM, which we believe is great validation of the opportunity in this market. Some other notable wins from the fourth quarter include: first a global chemical company based in Asia signed an expanded renewal for Aspen Mtell that extended its initial one-year license for three more years after signing an initial contract for two of its clients based on the ease of use and its capability of solution. This customer will now be expanding its deployment to four sites due to Mtells AI capabilities that enhance the safety and sustainability of their operations.

Second, a global chemical company based in Asia and one of AspenTech's first customers has embarked in a transition of its business from bulk to specialty chemical production. At the same time, this customer is also undertaking a digital transformation to leverage more technology in its operations. As part of the most recent renewal, the customer expanded its commitment to AspenTech with added usage of Aspen AI Model Builder or some of the non-linear specialty chemicals processes, which are difficult to model using first principles. The customer is also increasing usage of Aspen DMC3 and will continue deploying Aspen Mtell. All of these resulted in a renewal with material growth with plans for expansion of usage in these and other technology areas.

And lastly, a North American integrated oil company and long-term customer of AspenTech decided to embark on the digital transformation of its petroleum supply chain from production to retail to capture the full potential of their value chain. More than 15 vendors were invited to a rigorous evaluation of their technology and capabilities. AspenTech was ultimately selected as a leading technology partner for the comprehensive program that is expected to generate incremental free cash flow in the hundreds of millions of dollars for this customer.

I would now like to provide you with some additional details about our performance for the full year 2021, all of which are quoted on an annual spend basis. From a product perspective, the engineering business grew annual spend 3.3% for the year, generating 40% of our overall annual spend growth. This performance exceeded our expectations, supported by stronger performance than expected in the E&C vertical.

Our manufacturing and supply chain or MSC business delivered annual spend growth of 5.8%, representing 40% of our total annual spend growth. MSC was the area most heavily impacted by COVID related disruptions and the related macro environment as customers pulled back on their opex budgets due to the significant deterioration in the operating environment. This was the first time in many years the MSC business did not grow more than 10%. Additionally, MSC has not been a cyclical business and we don't expect it to be in the future, but the historic COVID related downturn impacted our owner, operator, customers in ways not experienced before.

The Asset Performance Management or APM business generated total annual spend growth of 16% or 13% [Phonetic] of our total annual spend growth for the year, contributing 0.6 points of annual spend growth. As we discussed throughout the year, APM's performance reflected an increase in no decisions by customers looking to defer investment decisions until they had more visibility into their business outlook. At the end of the year, our installed base of business was split 57% engineering, 39% MSC and 4% APM. Our three core verticals of energy, chemicals and engineering and construction contributed 46%, 24% and 24% of our growth in annual spend during the year respectively. Global economy industries or GEIs contributed 6% of our annual spend growth for the year and grew 4.7% in the year.

We are in the early days of our investment in pharmaceuticals. We grew our business 8.6% in the year. We expect this industry to be a more meaningful contributor to growth in this fiscal year and going forward. In addition to standing up on organization focused on this industry, an increase in our R&D and marketing investments, we have been building our pharma sales channel in Europe and North America over the last six months, with incremental investment plans in Asia this fiscal year. We believe pharmaceuticals represent an important opportunity for AspenTech as this industry drives the digitalization of their business operations and increases the use of technology in manufacturing and for their sustainability ambitions.

We're also optimistic for the opportunity in the metals and mining industry, particularly with the APM suite. We grew our business in this industry 4.6% in the year. There's an increase in number of APM customers in this industry and they have expanded the use of our technology because preventive failure alerts create significant value. We will plan for increasing our investments as the opportunity evolves and our strategy is executed.

At the end of fiscal year 2021, the energy vertical represented 41% of our business, chemicals 28%, engineering and construction 25% and GEIs including pharma 6%. For the full year, our attrition rate was 6.7%. This is above the high end of the 5% to 6% range that we provided at the beginning of the year and guidance given in our most recent earnings call. Most of the additional attrition was attributable to a divestiture of certain assets by a few customers. This impacts attrition since these assets rolled up those customer's contracts, but it is offset by a corresponding increase in spend by the customer acquiring the assets.

Despite the challenges this year, it is important to note that we generated gross growth or growth prior to attrition of 11.4% in fiscal 2021. This is tremendous validation of how valuable our solutions are to customers. During the fourth quarter, we held our Bi-annual Optimize conference, our first virtual customer conference. This year's Optimize was five times larger than our most recent in-person event with more than 5,400 participants, representing over 2000 companies and 84 countries. This year's Optimize was entitled the future starts with industrial AI and the recurrent topic was how customers can generate new levels of operational excellence, while simultaneously addressing their sustainability targets.

This dual challenge broadly means meeting the increase in demand for resources and higher standards of living from a growing population, while also addressing sustainability goals, reductions in emissions and reductions in plastic waste in the environment. Many of our existing customer share their progress in meeting the dual challenge using our products and solutions. One notable example was a customer in Japan, which is a producer of packaging materials derived from propylene and other resins. This customer implemented our supply chain management solution in their distribution network and we're able to achieve reductions in CO2 emissions of over 160,000 metric tons per year.

Also as part of its supply chain distribution, optimization and logistics, the customer collected some of the waste being produced as a result of the use of their products and returned over 443,000 metric tons per year to warehouses for recycling. All simply through the use of supply chain management capabilities. This customer received a 2020 Green Supply Chain Award from the Demand & Supply Executive Publication in Japan. Taking this to a higher level, AspenTech has estimated collectively among our customers the use of our products and solutions to generate $59 billion in profits per year through greater efficiencies and productivity. At the same time, we have calculated that among our European refinery customers alone, they have in total realized CO2 emission reductions of 2.3 million metric tons per year associated with $4.2 billion in efficiencies and productivity gains per year.

Our unmatched domain expertise and growing data science capabilities have resulted in a methodology and capabilities that we now refer to as hybrid products or hybrid modeling. This approach announced last year as part of aspenONE version 12 enhance its first principles through the models with artificial intelligence capabilities. Our latest product introduction in May has aspenONE V12.1 builds on the hybrid model approach and represents the next step in fulfilling our vision of the self optimizing plan. With our version 12.1 enhancements we have extended industrial AI across our solutions to drive higher levels of profitability and sustainability in customers' operations. One of the most important features to come out of these new release is first principles driven hybrid models, embedded within our products, which brings AI directly into our simulators. With version 12.1, we now have a library of sustainability application examples that customers can leverage that range from carbon capture and sequestration modeling to optimizing the reduction of carbon emissions in production operations. Also including biomass processing and hydrogen production modeling.

Over the next few quarters and years, you will see us release more and more sustainability applications that will allow customers to not only model hydrogen production for hydrogen transportation distribution and capture. We will also introduce more capabilities around chemicals or advanced recycling and other processes that are of keen interest to customers. As I have said many times, there is no trade-off between safety, sustainability, reliability and profitability. It is all intertwined and it is what we have been doing for our customers throughout our 40 years of existence.

As we look ahead to fiscal '22, we're optimistic, we will deliver increased growth while there continues to be heightened levels of uncertainty. We currently expect the year to be a tale of two halves. The first half we expect to look broadly similar to what we have experienced in the second half of fiscal year 2021 due to current customer budgets and the second half to start showing an acceleration of growth as we expect customers' budgets for calendar 2022 to increase given their improved business outlook. It is important to know that there is caution in our expectations. As we have seen repeatedly in the last 18 months, the impact of COVID-19 is highly unpredictable and has led to an asymmetric recovery. The global recovery has been uneven, countries have come in and out of lockdown and the emergence of the delta variant has added more uncertainty.

Our current expectation is for annual spend growth to be 5% to 7%. There are several assumptions underpinning our guidance. We expect the bulk of growth to come in the second half of the year. As mentioned earlier, our baseline assumption is that spending conditions improve in the second half of the fiscal year as customers set their calendar 2022 budgets in the context of greater certainty and a better operating and macro environment than they did last year. An environment with greater certainty due to COVID and the delta variant could influence budgetary decisions and result in an outcome toward the low end of the range.

From a suite perspective, we expect the engineering and MSC suites will contribute 4 to 6 points of growth and APM is expected to contribute approximately 1 point of growth. And third, attrition is expected to be approximately 6% for the year. Specifically, we expect attrition in the first quarter to be elevated due to the concentration of renewals in more challenged verticals like engineering and construction and upstream, which will lead to higher than normal attrition. This will dampen annual spend growth in the first quarter and is factored into our outlook for the year.

I would like to finish by reiterating our optimism for the business. In the midst of the most difficult environment, we have seen in decades, we generated almost 5% annual spend growth and $277 million in free cash flow, while helping our customers solve the two primary long-term challenges faced in their businesses, operating efficiency and sustainability.

Fiscal year 2022 will represent the largest yearly increase in investment in 20 years in AspenTech, demonstrating our belief on the opportunity available in our core markets and our conviction on the opportunity ahead of us in pharmaceuticals and in metals and mining. The investment plan to accelerate our product roadmaps, add new talent to the company and continues to enhance our go-to-market capabilities as we position AspenTech for the next three to five years. We have demonstrated time and again the resiliency and cash flow generating capacity of this business through a major downturns and our ability to generate double-digit annual spend growth during normal spending environments. We're confident the same will be true this time as budgets return to normal over time. We're excited for the future and the opportunities ahead for AspenTech.

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

Chantelle Breithaupt -- Chief Financial Officer

Thank you, Antonio. I will now review our financial results for the fourth quarter of fiscal 2021. As a reminder, these results are being reported under Topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts. Our license revenue is heavily impacted by the timing of bookings and more specifically renewal bookings. A decrease or increase in bookings between fiscal periods, resulting from a change in the amount of term licenses, contracts up for renewal, is not an indicator of the health or growth of our business. The timing of renewals is not linear between quarters or fiscal years and this non-linearity will have a significant impact on the timing of our revenue.

As a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods. In 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 was $621 million at the end of the fourth quarter. This represented an increase of approximately 4.8% on a year-over-year basis and 1.9% sequentially. Total bookings, which we define as the total value of customer term license contracts signed in the current period, less the value of our term license contracts signed in the current period, but where the initial licenses were not yet deemed delivered under Topic 606 plus term license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period was $225.6 million, a 4.5% decrease year-over-year. Total revenue was $198 million for the fourth quarter, a 2% decrease from the prior year period.

Turning to profitability, beginning on a GAAP basis. Operating expenses for the quarter were $77.8 million compared to $70.5 million in the year ago period. Total expenses, including cost of revenue, were $92.1 million, which was up from $85.6 million in the year ago period. Operating income was $105.9 million and net income for the quarter was $95.4 million or $1.39 per share.

Turning to non-GAAP 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 fourth quarter of $118.4 million, representing a 59.8% non-GAAP operating margin compared to non-GAAP operating income and margin of $125.5 million and 62.2% respectively in the 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 $105.3 million or $1.53 per share based on 68.6 million shares outstanding.

Turning to the balance sheet and cash flow. We ended the quarter with approximately $380 million of cash and cash equivalents and $293 million outstanding under our credit facility. In the fourth quarter, we generated $103.2 million of cash from operations and $103.7 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software and acquisition-related payments. In the full year 2021, we generated $276.1 million of cash from operations and $277.5 million of free cash flow. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.

From a capital allocation perspective, we resumed our share repurchase activity in the fourth quarter, buying 361,000 shares for $50 million. In addition, we recently announced a new share repurchase program for fiscal year 2022 to repurchase up to $300 million of stock. As part of the program, we entered into an accelerated share repurchase agreement for $150 million that we expect to complete later this quarter. The remaining $150 million are expected to occur over the balance of the year. Utilizing our balance sheet, whether through share repurchases or M&A to generate shareholder value is an important part of our strategy.

I would now like to close with guidance. Consistent with fiscal years 2021 and 2020, we will continue to provide guidance on an annual basis. With respect to annual spend growth as Antonio mentioned, we are forecasting 5% to 7% annual spend growth. We expect bookings in the range of $766 million to $819 million, which includes $486 million of contracts that are up for renewal in fiscal 2022. This includes approximately $58 million of contracts up for renewal in the first quarter. We expect revenue in the range of $702 million to $737 million. We expect license revenue in the range of $481 million to $515 million and maintenance revenue and service and other revenue of approximately $192 million and $30 million respectively. From an expense perspective, we expect total GAAP expenses of $386 million to $391 million. Taken together, we expect GAAP operating income in a range of $316 million the $346 million for fiscal 2022 with GAAP net income of approximately $288 million to $314 million. We expect GAAP net income per share to be in the range of $4.27 to $4.65.

From a non-GAAP perspective, we expect non-GAAP operating income of $361 million to $391 million and non-GAAP income per share in the range of $4.80 to $5.17. From a free cash flow perspective, we expect free cash flow of $275 million to $285 million. Our fiscal 2022 free cash flow guidance assumes cash tax payments in the range of $60 million to $66 million.

To summarize, we continue to produce growth in significant cash generation in a challenging environment. We are investing in our solutions to increase the value we deliver for our customers and ensure we are in the best position to accelerate growth as our customers' ability to spend with us improves. We have been through these cycles before and are confident we will return to double-digit annual spend growth over time.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of David Robinson from William Blair. Your line is now open.

Antonio Pietri -- President and Chief Executive Officer

Hi David.

David Robinson -- William Blair -- Analyst

Hi guys. Hi, thanks for taking my questions. The first question I had was about kind of the budget improvements that you're expecting for the next upcoming fiscal year. Can you quantify kind of how much you expect the budgets to improve relative to 2021 and your end customers' market?

Antonio Pietri -- President and Chief Executive Officer

Well, let me frame it in the following manner and of course, it will be up to customers to decide how much they're going to increase their budgets. But if you look at the sort of the key metrics that we track for the performance of our customers, certainly oil prices have been in a healthy range for the last few months. If you look at chemicals demand is back to pre-COVID or above pre-COVID levels. If you look both now at refining margins, they're back to pre-COVID levels. Chemicals margins have exceeded pre-COVID levels and in a way are in some cases setting records. There's an expectation that capex investment will begin to grow, perhaps in the low single digits, but nonetheless as well. So, if you take all those metrics as a group, you think that, we will have a better budgets and spending environment next year.

Now, at the same time look the COVID pandemic and the delta variant certainly introduce question mark around where the outlook will be in the fall season. And that's something that may or may not have an impact on budget, but overall, we feel that our customers will be increasing their budgets for calendar 2022.

David Robinson -- William Blair -- Analyst

That's helpful. And then one other question I had around the attrition. So, you said you kind of came in within your expectations for the year. Was that kind of last customer that you referenced that disposed or disinvested in from assets, was that kind of built into your original attrition expectations? I'm just trying to get a sense of kind of how that affected the overall rate for the rest of the year?

Antonio Pietri -- President and Chief Executive Officer

Yes, so, I just want to clarify, we came in somewhat above the range that we had given investors at the beginning of the year 6.7% versus a range of 5% to 6%. What we saw in the last 12 months was an increase in M&A activity by customers, especially in the oil sector, where they were actually divesting assets, refining assets and certainly led to greater attrition as a result of these divestitures. This is not something that we had expected or planned for, but it is a result of the sort of reassessment of our old customers of their businesses going forward. The sell off of stand-alone refineries as they reposition their portfolios -- for their refining portfolios to be more integrated petrochemical sites. But to answer your question specifically, no, no, it was not something that we had expected.

David Robinson -- William Blair -- Analyst

Okay. I appreciate the additional detail and that's all the questions I had. Thanks for taking my questions.

Antonio Pietri -- President and Chief Executive Officer

Yes, thank you, David.

Operator

Your next question comes from the line of Jackson Ader from J.P. Morgan. Your line is now open.

Antonio Pietri -- President and Chief Executive Officer

Hi Jacky.

Jackson Ader -- J.P. Morgan -- Analyst

Thanks for taking my questions. Hi, Antonio. So Antonio referred to a long time -- when customers are under pressure, is that long times that would drive some efficiencies purchases or efficiency demand? I'm just curious why you think that didn't materialize this year for your chemicals or refinery customers that were particularly under pressure?

Antonio Pietri -- President and Chief Executive Officer

I'm sorry. And your question is why it will or did it materialize?

Jackson Ader -- J.P. Morgan -- Analyst

Yes, why did not materialize this past year in fiscal '21.

Antonio Pietri -- President and Chief Executive Officer

Okay. Yes, well, look, we've now been engaged with customers both virtually and in the last few months. I finally had some in-person meetings with customers, which was great. Look as we said in the prepared remarks, the disruption that took place in the last 12 months was like nothing before, especially operating rates dropping into the low 60s for refineries and the impact that had in operational stability and their margins overall. When you're operating at those rates, your ability to create value from driving greater efficiencies in your operations isn't there. Okay. Because you are just not processing as much crude oil or feedstock for your naphtha crackers to produce ethylene.

So, the need for technology to drive operational efficiencies is just isn't there anymore in such an environment. And frankly in my entire career and I'm now getting toward the end of it, I had not experienced a moment like this, where you have refiners operating at such low rates that their decision is whether to keep these assets operating at the edge of operational stability or shutting them down, which some of them had to do. So that incentive to drive more technology implementation just wasn't there.

Equally with chemical companies and our expectation going forward though is that as operating rates are now coming back to that 85%, 90% range, if you listen to Marathon Petroleum's earnings call, the CEO talked about their operating rates being at 94%. So, that's all very healthy for them to start thinking about how do squeeze more efficiencies out of their operations including chemical, so -- included in the chemical sector. So, I do think that we're now back to range of operations where the incentive for technology adoption is back in play and we'll see what happens going forward.

Jackson Ader -- J.P. Morgan -- Analyst

Okay. And then another kind of maybe strategic follow-up as well for you, Antonio. I mean, is it fair to wonder whether the planned investments in pharma or the other GEI industries are warranted or worth it? I mean, if they're not necessarily growing that much faster, if at all than the core, on a much smaller base, I mean, I guess, I just would have expected that the pharma revenue would have grown a little bit faster than 8%. And so, if it's not growing that much faster, at the moment, do you think it's worth creating all this kind of sales and go-to-market investments around it?

Antonio Pietri -- President and Chief Executive Officer

Yes. look at Jackson. That's a fair question from you, but look let me say the following. Fiscal '21 certainly was a very difficult year from a standpoint of our end markets, but at the same time, there was a lot happening inside the company as we put our foot to the pedal on investments. Well, fiscal '22 will be the largest investment year in 20 years. Fiscal '21 was the second largest. We launched our AIoT business unit on October 1st of last year. We launched our pharmaceuticals business unit on April 1. We hired metals and mining executive that is now formulating a strategy and we're beginning to execute, put the pieces in place for that strategy. We've been growing our GEI sales organization that is actually the one that's going to market in metals and mining. We've been standing up our pharmaceutical sales organization as well.

So, in the context of -- from an operational standpoint, everything that we were working on was really to set up for faster growth in fiscal '22 and going forward, I'm not disappointed on our results in pharma or metals and mining, as a matter of fact, I'm glad we had it. But we do expect better results in fiscal '22 and going forward. And absolutely those investments will be merited.

Jackson Ader -- J.P. Morgan -- Analyst

Okay, all right, great. Thank you, Antonio.

Operator

Your next question comes from the line of Andrew Obin from Bank of America. Your line is now open.

Andrew Obin -- Bank of America Securities -- Analyst

Hi. Yes, good afternoon. Can you hear me?

Antonio Pietri -- President and Chief Executive Officer

Yes, hi. right.

Andrew Obin -- Bank of America Securities -- Analyst

Hey guys, how are you? So, I completely appreciate having to guide on oil and gas budgets as your customers have not even really started the planning process for calendar '22. Having said that, I think a couple of your competitors are definitely talking about the fact that having good visibility into '22 and even '23 and I think our channel checks indicate some of that as well. Can you just talk about this longer-term visibility and what kind of conversations you are having with your customers that are giving you confidence into '22 and '23?

Antonio Pietri -- President and Chief Executive Officer

Okay. Well, I mean look, we -- in AspenTech, it's been our philosophy to only guide one year at a time. So, I will not talk about 2023.

Andrew Obin -- Bank of America Securities -- Analyst

Yes, I know, sure.

Antonio Pietri -- President and Chief Executive Officer

Okay. Look, I think you're also implying that we're claiming not full visibility into our customers' budgets for '22, but some of our competitors are. I won't talk about our competitors, but what I can tell you is that where we sit today and what we have experienced in the first half of this calendar year, gives us a certain sense for what the second half of the calendar year, the first half of our fiscal year will be. We believe the budgets will be the same. These customers will maintain their -- sort of their fiscal discipline and continue to expand through the budget that they said last fall and then come '22, look, we do think that budgets will improve and we're having good conversations with customers. But we'd rather be more cautious with our guidance at this point in the fiscal year and the calendar year and then wait until what customer still has the plan to do for calendar '22.

Andrew Obin -- Bank of America Securities -- Analyst

Oh, no, no, what I meant to imply that I think it's easier for your competitors to make more vague statements about '22 without having to formally guide. I was not implying that they have more visibility.

Antonio Pietri -- President and Chief Executive Officer

Okay.

Andrew Obin -- Bank of America Securities -- Analyst

No, no, no. Yes, another question. Yes. And then -- yes, just it's tough to guide in the middle of the year. That's all. Thanks. Another thing, I just want to understand as we think about annual spend and where we are for fiscal '21 and where you're guiding for fiscal '22. As you think about longer-term plan, do you think that the curve has permanently shifted down or do you think there is going to be a catch up down the line to sort of to get back to you on this track of I think 12% CAGR that you were talking about at your Analyst Day? Thank you.

Antonio Pietri -- President and Chief Executive Officer

Yes, but -- I mean look, first of all, we are very optimistic about our end markets going forward. If anything, an expectation that capex investments in upstream will increase over the next two, three to five years. Certainly, the refining industry will probably be going through sort of a slow readjustment and that integrated refining and chemical side will be more profitable going forward and you'll see some refinery rationalization. At the same time, refining capacity in Asia and the Middle East will continue to grow and on a net-net basis refining capacity will continue to increase around the world. Now, what happens in 15, 20 years from now, we can have that debate in a separate call. But, no, we're very optimistic about the next five to 10 years.

Look, our job in Aspen Technology is to help our customers be the best stewards of those resources in order to drive more sustainable businesses by reducing CO2 emissions and plastic waste in the environment. That's what we've always done in AspenTech. It wasn't how we position ourselves, but it is absolutely what our customers are now looking to do with this company and therefore we see a lot of positive going forward.

Andrew Obin -- Bank of America Securities -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Jason Celino from KeyBanc. Your line is now open.

Antonio Pietri -- President and Chief Executive Officer

Hi Jason.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Hi, Antonio. Thanks for taking my questions here. It sounds like the approval processes with your customers are still elongated, but it was interesting when you said that and the quarter kind of went on probably to improve a little bit, but can you help us understand the magnitude of that improvement, the end of the quarter versus maybe the beginning?

Antonio Pietri -- President and Chief Executive Officer

Yes, I think it's a tale of two sides, Jason. One, the larger the deal, certainly scrutiny is still there. Look, we worked on some seven figure deals in the quarter and certainly there were still a lot of scrutiny on the level of spend. But as you got to smaller deals, we saw a lot less friction in getting those deals approved. So, I think there's a greater degree of comfort on the environment, all these, our oil and chemical companies have reported an incredible cash flow generation in the last quarter and I think that's also been leading to a loosening of some of the approval processes for smaller spend. A larger spend, yes, it's still there, the approval processes. So, I think that we'll continue to evolve over the next few months.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Okay. And then when I look at the free cash flow guidance, it's basically flat year-over-year and it's lower growth and annual spend that we saw that you're forecasting, maybe why is that? Yes, I'll let Chantelle step in here. All right, Chantelle.

Chantelle Breithaupt -- Chief Financial Officer

Yes, hi. I think that there are two things and this is a -- we always have a prudent free cash flow guidance, I would say, but the two things I would take into consideration are the investments that we're making is quite a big. The largest investment that Antonio referred to is 20 years and two of those diverse kind of industries in our core. And two, we have a position on cash taxes that we're still working through to see. So, I'd say cash tax assumptions and the investments are the two main factors we're working through in that guidance.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Okay, excellent. That is quite helpful. And then maybe one quick follow-up on the big investments here. And how much is it headcount related versus other development or product type investment?

Chantelle Breithaupt -- Chief Financial Officer

Yes, I would say we -- I would say there's three main categories. We have talent, which you call head count, I'd call it talent investment. We have R&D investments and then the third one would be our go-to-market, especially in some of the geographies that Antonio mentioned. So there's three -- two main areas that we're focusing on.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Okay. Thank you.

Antonio Pietri -- President and Chief Executive Officer

Yeah, Jason, I mean, look, as we go into these new industry -- I mean you industries, we've been in pharmaceuticals for a while, but certainly we need to raise the visibility of AspenTech in pharmaceuticals, our visibility in pharma and our brand recognition. So, some of those investments are one time investments, but there's a lot of talent investment in there as well.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Okay, thanks.

Operator

Your next question comes from the line of Mark Schappel from Benchmark. Your line is now open.

Antonio Pietri -- President and Chief Executive Officer

Hi Mark.

Mark Schappel -- Benchmark -- Analyst

Hi. How are you doing guys? Thanks for taking my question. Antonio, last quarter you called out a competitor that was giving away software for free, I think for like a three-year period, did you continue to see that type of intense pricing discount from competitors this quarter?

Antonio Pietri -- President and Chief Executive Officer

Look, not that I'm aware. It wasn't raised or I heard about something like that in our forecast call during the quarter. So, maybe that competitor heard me talk about it in the last earnings call and was a little embarrassed and stopped the practice.

Mark Schappel -- Benchmark -- Analyst

Okay. And then with respect to your ESG products, right, you expect to launch in the coming year or so. You did mentioned in detail the work you're doing in area of hydrogen production. I was wondering if you could give another example to some of the other ESG areas that you're developing?

Antonio Pietri -- President and Chief Executive Officer

Yes. Great and thank you for that question, Mark. Because the fact of the matter is that there's so much functionality in our products today that is ESG or sustainability related. In a way, a lot of our customers are not familiar with it because they've really never had a need for it, but now, of course, this is front and center. But, look, carbon capture and sequestration model, and some of the early pilot sites for carbon capture and sequestration were modeled using our Aspen Plus technology, biomass processing modeling. You can talk about, while looking at hydrogen production, but also advanced chemicals or chemicals recycling. So, there's a lot in our products.

Look, you can optimize a refinery from the standpoint of reducing the amount of CO2 emissions. And we have customers that are now inquiring about that functionality in our product that they've been using for 25 years, but at the same time. Look, we are going to enhance the capabilities of our products around all of this. Just that, look, when I was in Asia, based in Asia, one of the biggest users of our Aspen custom modeling technology, which is a layer product in Aspen Plus were Japanese automobile makers because they were modeling electrical batteries for some of their hybrid automobiles back in the mid 2000. So, we've had pockets of usage of these capabilities and now it's all at the forefront and probably will drive certainly some of our growth in over the next five, 10 years and beyond for sure.

Mark Schappel -- Benchmark -- Analyst

Great, thank you.

Operator

There are no further question at this time. I will turn the call over to your CEO, Antonio Pietri.

Antonio Pietri -- President and Chief Executive Officer

All right, well thank you everyone for participating in today's call. Look forward to hopefully have some in-person meetings here in the future, but nonetheless, thank you all.

Operator

[Operator Instructions]

Duration: 53 minutes

Call participants:

Chantelle Breithaupt -- Chief Financial Officer

Antonio Pietri -- President and Chief Executive Officer

David Robinson -- William Blair -- Analyst

Jackson Ader -- J.P. Morgan -- Analyst

Andrew Obin -- Bank of America Securities -- Analyst

Jason Celino -- KeyBanc Capital Markets -- Analyst

Mark Schappel -- Benchmark -- Analyst

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