Aspen Technology, Inc. (AZPN) Q2 2022 Earnings Call Transcript

Aspen Technology, Inc. (AZPN)
Q2 2022 Earnings Call
Jan 26, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Aspen Technologies second quarter 2022 earnings conference call.  At this time, all participants are in a listen only mode. After the presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to Brian Denyeau from ICR.

Please go ahead.

Brian Denyeau -- Investor Relations Contact Officer

Thank you. Good afternoon, everyone and thank you for joining us to discuss our financial results for the second quarter of fiscal 2022 ending December 31, 2021. With me on the call today are Antonio Pietri, AspenTech's president and CEO; and Chantelle Breithaupt, CFO of AspenTech. 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, January 26, 2022. 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 second quarter and our pending transaction with Emerson and then Chantelle will review our financial results and discuss our guidance for fiscal year 2022. With that, let me turn the call over to Antonio. Antonio?

Antonio Pietri -- President and Chief Executive Officer

Thanks, Brian and thanks to all of you for joining us today. We delivered strong second quarter results that reflect continued improvement in the spending environment and good execution by our team. Our second quarter performance reinforces our belief in the strategic importance to customers of enhancing the operational efficiency and sustainability of their assets. We're now seeing this customer trend materialize in better growth as market conditions have normalized.

While not all the way back to pre-COVID levels, market conditions are moving concretely in the right direction for AspenTech. We are confident this will continue to support improved annual spend growth across our business over time. We've also made significant progress toward completing the proposed transaction with Emerson, which remains on track to close during our fourth fiscal quarter. As we've gotten to know the Emerson businesses better, we are continually impressed by the team and their culture.

Since the announcement, we've also received more and more positive feedback from customers in a number of industries about their enthusiasm for the transaction. Given all of this, we're even more excited about the transformational opportunity the new AspenTech has in current and new verticals as well as in sustainability, allowing for increased value creation opportunities for both our customers and shareholders. Looking quickly at our financial results in the second quarter, revenue was $171.4 million, GAAP EPS was $0.92 and non-GAAP EPS was $1.20. Annual spend was $640 million, up 1.7% in the quarter and 6% year over year.

And free cash flow was $51.9 million. Looking at the second quarter in more detail, one of the key areas of improvement was the normalization of transaction closing cycles, which are now back to pre-pandemic cycle times. I'm pleased at how our sales organization has navigated these changes in recent quarters. In terms of vertical performance, spending by our refining customers saw notable improvement for the second consecutive quarter.

As we have discussed in the past, refining has been a consistent source of strength for AspenTech as our solutions are critical to delivering on the short-term and long-term operational and sustainability priorities of our customers. During the second half of calendar 2021, refining margins improved meaningfully and trended back to their historical range, ending up on a strong note in December. We're also encouraged by the fact that the Omicron variant has not reduced fuel demand for transportation despite causing record numbers of COVID cases, with low inventories for diesel and jet fuel now being reported. The performance of our refining customers in the first half of the fiscal year gives us confidence that this vertical will support the MSC business returning to consistent double-digit annual spend growth, assuming stronger budgets and spending in calendar 2022.

Chemicals once again had a solid quarter and has been the most consistent vertical over the past two years. Within chemicals, there continue to be some areas that face supply chain constraints. But overall, we've had consistently good conversations with customers on their future investment priorities. We believe there are exciting opportunities for growth in this market and that AspenTech will continue to be an important partner to our customers as they drive operational excellence and transition to a more sustainable future, which for them means lower emissions as well as plastics circularity.

The positive results from our refining and chemicals customers drove better-than-expected performance for our engineering and MSC suites, which are ahead of plan for the first half of the fiscal year. The E&C industry performed better than expected, delivering a slightly positive growth quarter. The market dynamics affecting this industry have largely stabilized and backlog trends have shown modest positive improvement in the first half of the year. Importantly, attrition among these customers has been tracking marginally better than expectations and we're optimistic about our ability to forecast this metric.

This is a critical first step toward improved demand and a return to stronger positive annual spend growth. While we do not expect the E&C sector to be a primary growth driver for our business short term, we're encouraged by the acceleration in final investment decisions, FIDs, for LNG projects and in the oil and gas sector in the Middle East region as well as the expected increase in global oil and gas capex in calendar 2022. In addition, the shift in their focus toward sustainability investments will help accelerate their recovery as increasingly capex spend will be driven by hydrogen projects, carbon capture and sequestration, biofuels, wind, solar and other projects. We believe this will drive E&C customers to be greater contributors to our long-term growth targets than they are today.

Finally, I would like to provide an update on our APM suite. We're beginning to see some improvement in demand conversion in this area of the business as customers increase opex spend on maintenance and reliability in facilities where a lot of this work was postponed throughout the pandemic. As we have discussed during the same period of the pandemic, interest and demand for our APM solutions have been strong with consistent growth in customer engagement pipeline and pilots. Through the first half of the year, APM contributed 0.28 points of annual spend growth, just under our first half year plan.

We believe the suite is well positioned to benefit from increased spending and contribute approximately 1 point of annual spend growth in fiscal 2022. We're also confident that a pandemic-tested APM business will be better positioned for growth longer term. The following are references to a few of the customer transactions closed in the quarter. First, a U.S.-headquartered engineering firm, a customer for close to 15 years, increased its spend with AspenTech now that its business outlook is improving after having reduced its software license entitlement at renewal at the beginning of the pandemic.

After conducting a thorough analysis of the market, including competitive offerings, the customer increased its commitment to the suite. The availability in the suite of AspenTech's ACCE product for capital cost estimation was fundamental in the decision because the customer is in the process of reconstituting its capital cost estimation team that had been dismantled at the beginning of the pandemic and its functionality is not available in the market from other competitors. Second, a European energy and petrochemical company and long-term user of our multivariable control technology in refining and chemicals decided to standardize all operating assets on our Aspen DMC3 multivariable control technology through an enterprise license agreement. Two main reasons supported their decision.

The operational improvements and value created by the technology and the customer's focus on energy efficiency and emissions reduction as part of a commitment to net zero carbon emissions by 2050. Third, a refining customer in Asia conducted an extensive evaluation of asset predictive maintenance solutions, including Aspen Mtell. The customer selected Aspen Mtell on the basis of its technical capabilities and ease of implementation. The acquisition of an APM solution supports the planned digitalization of the customer's maintenance functional area.

It is expected that Aspen Mtell will be rolled out to multiple units and equipment in the refinery and in time, expanded to other refineries. Operator are you able to hear -- listen to us? OK. Operator, are we back?

Questions & Answers:

Operator

Yes. You are live, sir.

Antonio Pietri -- President and Chief Executive Officer

OK, thank you. We lost our network connection here in the office. So let me get back to -- is the audience able to hear me?

Operator

Yes, sir.

Antonio Pietri -- President and Chief Executive Officer

OK, great. Let me get back to our customer references. Third, a refining customer in Asia conducted an extensive evaluation of asset predictive maintenance solutions, including Aspen Mtell. The customer selected Aspen Mtell on the basis of its technical capabilities and ease of implementation.

The acquisition of an APM solution supports the planned digitalization of the customer's maintenance functional area. It is expected that Aspen Mtell will be rolled out to multiple units and equipment in the refinery and in time, expanded to other refineries. Fourth and final, a Northern Europe independent refiner recently formed from the acquisition of assets divested by one of the major oil companies sought to upgrade the optimization technologies in their refinery to increase profitability and reduce emissions as part of the customer's and host country's commitment to net zero carbon emissions. After a detailed analysis of the value capture opportunity, which was determined to be greater than $75 million per year and the estimation of the expected reduction in emissions, the customer committed to a site license for the Aspen DMC3 multivariable control technology and the Aspen GDOT multi-unit optimization technology in the MSC suite.

This agreement was signed in a three-month sales cycle. I point out that in two of the highlighted transactions, the customers requested enterprise license agreements to deploy certain solutions across their entire asset base. We're encouraged by these examples of customers preferring comprehensive agreements to deploy solutions that are critical to their sustainability initiatives. It's important to note that these agreements are still structured as part of our token-based licensing model.

As we look to the second half of the fiscal year and calendar 2022, we're encouraged by the recent trends in key macro indicators for our business. Oil demand, while not yet at pre-pandemic levels, has exceeded growth expectations. Oil prices in the range of $75 to $85 per barrel and an equally strong or stronger outlook for calendar 2022. Refining margins back in their historical range with industry expectations for acceleration in fuel consumption and strengthening margins in 2022.

Chemical demand and margins expected to remain strong in calendar 2022. Capex spending in oil and gas and chemicals expected to increase by double digits, with capex spend in hydrogen, carbon capture and sequestration and biofuels projects experiencing significant increases as sustainability investments accelerate. And software spend in our customer base projected to increase 10% to 15% based on customer surveys we conducted late last year. All of this leads to our expectation of solid increases in customer budgets and spending in calendar 2022, while we also remain vigilant about the evolution of the COVID pandemic and geopolitical events.

Together with our year-to-date performance, we're adjusting our annual spend guidance for the fiscal year to 7% to 8%, up from 5% to 7% previously. In addition, in support of our growth guidance, we're adjusting our fiscal year guidance for attrition to 5% to 5.5% compared to approximately 6% previously. While we are pleased with our performance in the first half of the year and the market trends we're seeing, we'll remind you of the potential uncertainties that still exist in the market that could change the outlook for our business. Our other primary focus in the second half of the fiscal year is completing our transaction with Emerson.

Detailed information concerning the transaction can be found in the registration statement on Form S-4 recently filed with the SEC and available on the investor relations page of our website. Based on current information, we continue to expect we will close the transaction during our fourth fiscal quarter. As I previewed earlier, we have been incredibly impressed with the OSI and geological simulation software businesses and their employees. Like AspenTech, the teams at these two businesses are passionate about their customers and creating value for them.

They are also passionate about the industries they serve. It is clear that both businesses have very talented workforces, lead with product innovation in modeling, simulation and optimization and have developed impressive product portfolios that are truly best-in-class. The more we learn, the more excited we are for the long-term opportunities we will have as the new AspenTech and our unique position to drive profitability and sustainability for customers. We continue to be confident in the new AspenTech's ability to be a consistent mid-teens grower with high recurring revenue, best-in-class margins and substantial free cash flow.

Underpinning our confidence in the growth opportunity for new AspenTech is the increasing importance of sustainability among operators in capital-intensive industries. While sustainability has long been part of the value proposition of AspenTech, in recent years, we have seen it become a critical lens through which many customers make purchasing decisions. With this goal in mind, we focused our November software release on introducing over 15 new sustainability models that accelerate digitalization efforts for customers in support of their initiatives. Our customers are taking a truly comprehensive view of how their businesses need to adapt both in the near and the long term to meet the sustainability targets they have set for themselves.

The combined product portfolio of the new AspenTech, which will include new electrification and carbon capture capabilities as well as increasingly leverage AI to enhance the sustainability benefits of many existing AspenTech solutions, will make us a key strategic partner for all asset-intensive businesses. We're confident sustainability will support significant investment cycles in these industries over the coming decades. Before I turn the call over to Chantelle, I would like to reiterate the key takeaways from the second quarter. Demand trends and growth continued to improve throughout the first half of fiscal 2022, which, coupled with greater confidence that calendar 2022 budgets will lead to increased spending, support our decision to raise the guidance for the full year.

While spending is not all the way back to pre-COVID levels, we're increasingly confident that it will continue to trend positively and support our long-term growth targets. The improvement among owner-operators, particularly refiners, is an important trend that is now firmly in place. These customers have been the primary growth drivers for the business for a number of years and we feel good that they will once again deliver consistent double-digit growth for our MSC suite. Our strong year-to-date free cash flow performance demonstrates the scalability and efficiency of our business and our ability to generate high margins while investing in our growth initiatives.

Finally, we're on track to close with Emerson and create the new AspenTech in the coming months. Taken together, we have made great progress on each of our key priorities for fiscal 2022. We believe that the combination of the transaction with Emerson and the factors discussed on this call will provide increased confidence in our ability to generate mid-teens growth and exceed $1.5 billion in annual spend in fiscal year 2026. We believe that the steps we have taken this year will create compelling opportunities to generate significant value for our customers and shareholders over the long term.

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 second quarter fiscal 2022. As a reminder, these results are being reported under Topic 606, which have a material impact on both the timing and method of revenue recognition for our term license contracts. Our license revenue is heavily impacted by the timing of bookings and more specifically, renewal bookings.

A decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license contracts up for renewal is not an indicator of the health or growth of our business. The timing of renewals is not linear between quarters or fiscal years and this nonlinearity 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 $640 million at the end of the second quarter. This represented an increase of approximately 6% on a year-over-year basis and 1.7% sequentially. Total bookings, which are defined as the total value of customer term license contracts where the associated term licenses were deemed delivered in the quarter under Topic 606, was $182 million, a 34% decrease year over year. The year-over-year decline reflects the particularly strong bookings quarter in the year ago period, which included our largest-ever renewal.

Total revenue was $171.4 million for the second quarter. Turning to profitability beginning on a GAAP basis. Operating expenses for the quarter were $88 million compared to $70 million in the year ago period. The year-over-year increase in GAAP operating expenses was primarily driven by acquisition and integration planning-related expenses associated with our pending transaction with Emerson.

Total expenses, including cost of revenue, were $102.9 million, which was up from $84.3 million in the year ago period. Operating income was $68.5 million and net income for the quarter was $61.9 million or $0.92 per share. Turning to non-GAAP results. Excluding the impact of stock-based compensation expense, amortization of intangibles associated with acquisitions and integration planning-related fees, we reported non-GAAP operating income for the second quarter of $92.2 million, representing a 53.8% non-GAAP operating margin compared to a non-GAAP operating income margin of $162.2 million and 69.4%, 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. In particular, the second quarter of fiscal 2021 was an exceptionally strong license quarter due to the timing of some very large renewals. Non-GAAP net income was $80.6 million or $1.20 per share based on 67.2 million shares outstanding. Turning now to the balance sheet and cash flow.

We ended the quarter with approximately $211 million of cash and cash equivalents and $285 million outstanding under our credit facility. In the second quarter, we generated $41.3 million of cash from operations and $51.9 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software, acquisition and integration planning-related payments. From a capital allocation perspective, we repurchased approximately 439,000 shares for $65 million during the second quarter. The final settlement of shares associated with the ASR executed in Q2 will occur in Q3.

We do not currently anticipate repurchasing additional shares in fiscal 2022. I would now like to close with guidance. Our updated outlook reflects the strong performance in the first half of the year and the improving demand trends we see in many areas of our business. We believe the importance of asset optimization and sustainability are durable growth drivers that give us confidence to raise our guidance for the year.

With respect to annual spend, as Antonio mentioned, we are increasing our outlook for the year to 7% to 8% growth. We are increasing our bookings guidance range from $814 million to $840 million, which includes $486 million of contracts that are up for renewal in fiscal '22. This includes approximately $136 million of contracts up for renewal in the third quarter. Our expected revenue range is now $737 million to $754 million.

We now expect license revenue in the range of $513 million to $530 million and maintenance revenue and service and other revenue of approximately $196 million and $28 million, respectively. From an expense perspective, we now expect total GAAP expenses of $413 million to $418 million. This outlook continues to incorporate our ongoing investments in our go-to-market organization, product development and business units, including APM, AIoT and pharmaceuticals. We expect GAAP operating income in the range of $324 million to $336 million for fiscal 2022, with GAAP net income of approximately $295 million to $306 million.

We expect GAAP net income per share to be in the range of $4.37 to $4.53. From a non-GAAP perspective, we now expect non-GAAP operating income of $397 million to $409 million and now expect non-GAAP income per share in the range of $5.23 to $5.39. From a free cash flow perspective, we are now targeting free cash flow of $280 million to $290 million. Our updated fiscal 2022 free cash flow guidance still assumes cash tax payments in the range of $60 million to $66 million.

Our free cash flow outlook is equivalent to between 42% and 43% of annual spend and highlights our predictable and sustained cash generation. To wrap up, AspenTech delivered strong second quarter results. We are pleased with the improvements we have seen across the business and the strong execution from our team. Our updated outlook for the year reflects our increased confidence that we are now firmly on the path of faster growth and toward our long-term targets.

We are looking forward to the completion of our transaction with Emerson and the significant opportunities that new AspenTech will have to create value for our shareholders. And with that, operator, we would now like to begin the Q&A.

Operator

[Operator instructions] The first question is from Andrew Obin with Bank of America. Your line is open.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Yes, guys. Good afternoon. 

Antonio Pietri -- President and Chief Executive Officer

Yeah. Hi, Good afternoon, Andrew.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Congratulations. Seems like we're at the bottom or past the bottom. So the question is, annual spend guidance raised by one and a half points in the midpoint to seven and a half from six. So can you just unpack a little bit how much is upside versus your plan in the first half of FY '22? How much is around better market conditions? And how much is more sort of execution-specific like lower E&C attrition and APM wins? Thank you.

Antonio Pietri -- President and Chief Executive Officer

OK. Well, Andrew, it's a combination of a number of factors. I'd like to think that our execution in the last few quarters has improved significantly and that's a contributor. Two, no doubt that our customers are now spending more money.

Clearly, the sales cycles are back to pre-pandemic levels. Deals are now being escalated to the C-suite for final approval and that gives us also then better predictability. And then there's a sort of improvement in the macro, which is driving gross growth and supported by the spending. But also, I think as the macro has improved, attrition, we're getting better insights into how we can reduce attrition.

And the raise in the guidance is a combination of expectation that will drive some increase in new growth, gross growth, but also that reduction of half a point to a point of attrition and that supports sort of the, from the midpoint the one and a half points of increase in the guidance.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Thank you.

Antonio Pietri -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Rob Oliver with Baird. Your line is open.

Rob Oliver -- Baird -- Analyst

Great. Thank you very much. 

Antonio Pietri -- President and Chief Executive Officer

Hi, Rob.

Rob Oliver -- Baird -- Analyst

Good evening, guys. I appreicate you taking my questions. I had two. One, Antonio, just to start, some nice commentary about the core refining customers really coming back strong.

You cited in particular that nice Aspen Mtell win. And I think you mentioned that the sales cycles are shortening. I'm just curious, it seems like there might be a bit of pent-up demand there for some of those APM-related projects and general projects. So just wanted to kind of maybe get a sense for how much of this you think is pent-up demand from stuff that was shelved during the pandemic and how much of it represents sort of ongoing opportunity and then I had a quick follow-up.

Antonio Pietri -- President and Chief Executive Officer

Yeah, yeah. Well, look, specifically around APM, the fact is the majority of the growth that we delivered in the first half of the year for APM came in Q2. Q1 was a challenging quarter for APM. So the real pickup in demand for APM in the first half of the year was in the Q2 quarter.

And I do think like we saw in Q1 with our engineering and MSC suite and then also in Q2, there's somewhat of that pent-up demand. I mean, our Q3 and Q4 quarters fiscal '21 were quite constrained from a spending standpoint by customers. Customers have remained very interested in our technologies. The demand has been there, the engagement, the conversations.

And then in Q1, we saw that sort of release as the macro improved, especially oil prices, in engineering and MSC. We saw some of that now with APM. And look, all the key indicators that we track are up into the right. They are green.

We believe that through commentary from our customers, through analysis of analysts in the market budgets will be better. Our own research through the survey that we conducted last year, which in a way gives us the confidence to raise the guidance and believing that both APM and our engineering and MSC suites will have stronger demand. We're a month into our Q3 quarter. We have good visibility in the quarter and Q4 normally is our strongest quarter of the fiscal year.

So we raised our guidance with a lot of insight and visibility into our pipeline.

That's great.

Chantelle Breithaupt -- Chief Financial Officer

Yeah. The other thing I was going to -- sorry, Rob. The other thing I was just going to add to that point is, yes, the one hypothesis, which I assume is in your question, but as a team we were considering is to make sure the great growth in the first half wasn't a pull-in, like it's not. We just got the quarter kind of profile or portfolio overall.

But given to Antonio's point, we don't see it as pull-in. We see it as actually the pent-up demand and quality and hygiene in our second half pipeline. So that was one of the signs we were looking for to your question.

Rob Oliver -- Baird -- Analyst

That's great. And then I just had one follow-up and it could be for either of you guys. Just on, Antonio, you called out in the deals that you guys are always generous with the color around the deals in the quarter and a bunch of them that you referenced were ELAs. And I think you guys had done a little bit of that with your APM business in the past.

But I can't say I recall you stressing ELA so much having followed you guys for so many years. I just was curious, if you could talk a little bit about what the ELA structure means and how, if at all, it differs and are durations in these contracts similar to what we're used to with Aspen, any color there would be helpful.

Antonio Pietri -- President and Chief Executive Officer

Yeah, thank you. So let me start. So certainly, with APM, we've seen multisite agreements and even a couple of enterprise agreements that cover a lot of sites. And especially in MSC, when it comes to technologies like APC and optimization, we are now seeing and this is the third of those agreements in about a year, a year's time actually going back to Q4 of last year, where customers with very clear intentions to capture emissions are focusing on a total rollout of our APC advanced control technologies to capture the emissions and the value.

Normally, we would see one of those not very often, but now within a year, we've seen 3. My sense is that it will be a more common occurrence as our customers focus on accelerating the capture of emission commitments, reduction in emission commitments that they've made and therefore are willing to negotiate these agreements. Look, the agreements are still based on the token licensing model. We just give them enough tokens to do a complete rollout of the technology, but it's all part of the MSC suite and the token licensing system. 

Rob Oliver -- Baird -- Analyst

Thanks again.

Antonio Pietri -- President and Chief Executive Officer

Hope that answers your question, Rob.

Rob Oliver -- Baird -- Analyst

It did. Thanks again, Antonio.

Antonio Pietri -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Matt Pfau with William Blair. Your line is open.

Antonio Pietri -- President and Chief Executive Officer

Hi, Matt.

Matt Pfau -- William Blair -- Analyst

Hey, guys. Thanks for taking my questions. First, just wanted to ask on the Russia Ukraine situation. Does that have any impact on your business at all?

Antonio Pietri -- President and Chief Executive Officer

Well, I mean, look, we do, do business in Russia. And we've talked about the performance of our Russian business in the past, but it is not that material to our overall business. Having said that, we have a great team in Russia that is working all the time to close business. But should something were to happen, we're confident that our guidance will hold.

And then we'll have to determine what it means fiscal year '23 and going forward. But it is not that material to our overall business.

Matt Pfau -- William Blair -- Analyst

Got it. And then just wanted to ask about your acquisition strategy. And if you look at the document that was filed related to the transaction and the time line of how that went down last year. There were a few acquisition possibilities mentioned in there, not by name, but obviously that you were looking to acquire some businesses and it seemed like they could potentially be larger ones than maybe you've done historically.

So any sort of update you can provide in terms of how you're thinking about your acquisition strategy would be helpful.

Antonio Pietri -- President and Chief Executive Officer

Yeah. Well, let -- look, when we announced the transaction back on October 11, we did say that part of the reasons for the transaction that we're announcing with Emerson was to create a platform for AspenTech to become more acquisitive in the future. That's what we will say for now. We're working on closing the transaction.

Once we close it, well, then we lift our head and see what's ahead. But the goal, it's always been and we said so in October that we want to be more acquisitive going forward once the transaction closes.

Chantelle Breithaupt -- Chief Financial Officer

Yeah, and the other thing too that has not changed, but just to reinforce for the question is our framework of potential acquisitions of any size to support our double-digit growth strategy for annual spend and our annual spend operating margin framework of 47% to 50%. So all of those things will be incorporated into any future considerations.

Matt Pfau -- William Blair -- Analyst

Got it. Thanks a lot guys. Appreciate it.

Antonio Pietri -- President and Chief Executive Officer

Thank you, Matt.

Operator

Our next question comes from Gal Munda with Berenberg. Your line is open.

Antonio Pietri -- President and Chief Executive Officer

Hi, Gal.

Gal Munda -- Berenberg -- Analyst

Hey. Thank you for taking -- Hi, Antonio. Hi, Chantelle.

Chantelle Breithaupt -- Chief Financial Officer

Hi, Gal.

Gal Munda -- Berenberg -- Analyst

So the first question I had was just expanding a little bit on the ELAs that you mentioned. So you said that's the third one in about a year that you talked about, which is interesting. Is there a way to think about your, especially the MSC customers and thinking about those priorities that they have and how many of those ELA deals could come? And I don't know if you can give us just some sort of a idea of what's the uplift that those ELAs come compared to the previous contracts that they had signed in terms of the ACV or annual spend or the way we look at it?

Antonio Pietri -- President and Chief Executive Officer

Yeah. Well, I mean, look, Gal, my sense is that -- well we all know that sustainability is an imperative. But achieving net zero carbon emissions by 2050 is a tall order. And therefore, my sense is that customers see themselves in a lot of urgency to start reducing their emissions.

The low-hanging fruit is through efficiencies, through energy optimization, reductions in energy consumption in their operations and so on. And this is what we do. We've been doing this for 40 years. And now the spotlight is on it.

The focus, while still on profitability, has become equal or stronger on sustainability, which is what also excites us very much because you can deliver both profitability and sustainability using our technology. So what we are seeing is these customers that already have a significant penetration in the use of our technology, multivariable control and optimization in their assets. And normally in the past, they've been increasing the use or the deployment one unit at a time, one drink at a time. And this imperative around sustainability is now driving them to say, no, we need to blanket all of our process units and refineries or chemical plants as quickly as possible with this technology so that we can account for those reduction in emissions.

So they are coming to the table and saying, look, we know we already have this entitlement, what would it take to do an enterprise agreement? And then that's a negotiation. And depending on how much penetration that customer has of the technology, well, the uplift can be from a sx-figure number to a seven-figure number. So my sense is that we'll see some of those with greater occurrence or frequency in the future.

Gal Munda -- Berenberg -- Analyst

That's really helpful. Thank you. And then the other comment you made which was interesting was how the customers have responded to your pending transaction with Emerson software side. Can you talk, when you said there's a positive feedback coming, does that imply some sort of revenue synergies that you think you can then extract because of the tie-up? Is it either in go-to-market or just joint products together? Maybe if you can just note the excitement from the customers, what were they saying that they like in the tie-up itself.

Antonio Pietri -- President and Chief Executive Officer

Yeah, I think from a customer standpoint, it's not necessarily about revenue synergies. From our standpoint, it's certainly about revenue synergies. Look, I think customers are seeing two great engineering, technology companies coming together that both companies are key strategic suppliers to them. They rely on both companies for different technologies in different areas, but they also see the opportunity to bring together our solutions and create packaged solutions around sustainability, emissions tracking, for example, greater productivity improvements and so on.

So what they say is, a lot of logic around the transaction, the culture of the companies, the focus on innovation and technology, the common customer base and so on. And then, OK, they believe that there's significant technical synergies between the two companies and they're looking forward to seeing those. Of course, from our side, it's something that I felt and we felt was part of the thesis for doing this with Emerson and it's part of the revenue synergies that we talked about when we announced the transaction.

Chantelle Breithaupt -- Chief Financial Officer

Yeah. And I think just in addition, the one thing I would add, Antonio, is the other thing that I've heard that they're excited about is just the joint go-to-market capabilities between the sales teams, the partner channels, etc. So I think that's also a very powerful thing that they're looking at. Just one more thing to add.

Gal Munda -- Berenberg -- Analyst

Thank you so much for answering the questions and I'll go back in queue.

Antonio Pietri -- President and Chief Executive Officer

Thank you, Gal.

Operator

[Operator instructions] Our next question is from Jackson Ader with J.P. Morgan. Your line is open.

Antonio Pietri -- President and Chief Executive Officer

Hey, Jack.

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

Hey. Thanks for taking my question, guys. You mentioned the budget's improving in refining for, I think, the outlook for 2022. I'm just curious how they compare to like the budget levels of say 2019? Are we back to those levels yet?

Antonio Pietri -- President and Chief Executive Officer

Well, I mean, Jackson, time will tell. I don't necessarily think that we're there yet. Look, if you read the analysis of the refining market in the calendar fourth quarter, meaning the December quarter, refining margins even exceeded some of the most recent margins and were somewhere back to 2010 levels, sort of the golden years of refining margins. That's sort of December.

But we said in the October call that refining margins were back into the historical range but at the low end of the range. My sense is that refiners certainly see and we've also heard CEOs from some of the refining companies talk about a much better outlook for 2022. So my sense is that their budgets for 2022 will be much better. When they were setting them, they were still somewhere in the, toward the low end of the range.

But nonetheless, they'll be much better than they were in '21 and 2020. So are they going to be back to 2019? Time will tell. But I do see, based on what we saw in Q4, sorry, our Q2 quarter, the December quarter, that these customers are now ready to spend and that's what our guidance reflects.

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

OK. All right. Great. And then a follow-up on the APM suite.

It seems like the business broadly is seeing a lot of tailwinds. And I'm just curious, is there anything about specific to APM that is easily explainable as to why that was kind of the only portion of the business that came in below what you were expecting in the first half?

Antonio Pietri -- President and Chief Executive Officer

Yes. I mean just below our plan. The fact is that our plan was conservative, very conservative for APM in the first half of the year. We always felt that we needed new budgets in this calendar year for APM to really start seeing a liftoff.

We started to see that in Q2. Q1, I would call the trough for APM being Q1. Look, I think it's all about priorities in our customers' organizations. If you read about the industry in that October, November period, there was a lot of material written about these companies starting to focus back on maintenance and reliability, which I think is what we saw in the quarter and I'm sure it will be reflected in their budgets for this calendar year.

So we're optimistic about it but also cautious. So.

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

OK. All right. Great. Thank you.

Antonio Pietri -- President and Chief Executive Officer

Thank you, Jackson.

Operator

Our next question is from Mark Schappel with Loop Capital. Your line is open.

Mark Schappel -- Loop Capital Markets -- Analyst

Hi. Thank you for taking my question. Antonio, pharma and metals and mining were two areas of your business that were receiving increased investment this year. I was wondering if you'd just give us an update on the progress you're making on those fronts.

And also, how did those businesses fare this quarter?

Antonio Pietri -- President and Chief Executive Officer

Yeah. Well, look, we're not going to give guidance on pharma or metals and mining because the fact of the matter is that, that business flows through our engineering, MSC and APM suite. So a lot of what you hear about our engineering, MSC and APM suite is also a reflection of the contribution from those two industries. But what I'll give you sort of at a high level around pharma is, look, we now have a sales team that has been engaged with our customers in those industries, is starting to gain traction and build pipeline and we expect the contribution from the business to really start showing up here in the second half.

And the metals and mining has been an ongoing activity through our focus with APM on that sector. We saw business out of customers in the Q2 quarter and a little bit in the Q1 quarter as well. And really, the step-up in investments in metals and mining will come in the second half of this year and then certainly for fiscal year '23. But look, part of the excitement around the Emerson transaction is also Emerson's market position in pharmaceuticals, in the space that they are in pharmaceutical software.

They have an important market share. So certainly, Emerson will be an important channel to market for us in pharmaceuticals. And then they have some capabilities in metals and mining, nothing like they have in pharma and we'll also try to leverage those. But pharmaceuticals, we hope to benefit from their presence in that -- in their industry.

Mark Schappel -- Loop Capital Markets -- Analyst

Great. That's helpful. Thank you.

Antonio Pietri -- President and Chief Executive Officer

Yeah. Thank you, Mark.

Operator

Thank you. And this ends our Q&A session. I will turn the call back to Antonio Pietri for his final remarks.

Antonio Pietri -- President and Chief Executive Officer

Thank you, Carmen. And thank you, everyone, for joining us today for this call. I look forward to participating in the different investor conferences and calls with you and investors over the coming months. Thank you, everyone.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Brian Denyeau -- Investor Relations Contact Officer

Antonio Pietri -- President and Chief Executive Officer

Chantelle Breithaupt -- Chief Financial Officer

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Rob Oliver -- Baird -- Analyst

Matt Pfau -- William Blair -- Analyst

Gal Munda -- Berenberg -- Analyst

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

Mark Schappel -- Loop Capital Markets -- Analyst

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