Aspen Technology (AZPN) released its second quarter financial results, and unfortunately for AspenTech's owners, the market did not like what it saw. When we last looked at the company, its stock price was around $120 per share. And now the price is again hovering around $120 after dropping more than 15% in the days following the release. Here are a couple of things that I saw from the last quarter's results.
Nothing seems to indicate a permanent issue.
The market had quite a negative reaction from AspenTech's earnings release, but none of the news appeared to indicate any permanent issues for the company. What the company did report was licensing revenue down about 25% and net income down about 35% compared to the second quarter last year. The company primarily attributed the drop in revenues versus last year to some deals that were expected to close in the second quarter but are now expected to close in the third quarter as well as a decrease in the number of licenses up for renewal compared to the previous year.
Related to the decrease in licenses up for renewal, management stated that "the timing of renewals is not linear between quarters or fiscal years." This means that license revenue is subject to swings and should not be considered a reliable measure of the company's performance. Instead, the company believes a figure that they call "annual spend" and free cash flow are better references. Annual spend "represents the accumulated value of all the current invoices for our term license agreements at the end of each period" and is management's preferred measure of company growth. For the second quarter, this was $564.4 million which was up 10% from the previous year and 3% from the previous quarter.
Management believes free cash flow is the best metric measuring the company's value generation. To calculate free cash flow the company takes operating cash flow against purchases of property and equipment, payments for capitalized software, and other nonrecurring items. Using this measure, the company's free cash flow was about flat for the first half of the year relative to last year.
Currently, I do not believe that owners have anything to fear right now. Management reaffirmed an expectation that business would pick up in the second half of the fiscal year and generally maintained its 2020 guidance. The main exception being related to two different tax effects increasing free cash flow and decreasing net income per share.
There is a new credit agreement.
When we last looked at AspenTech, we noted that a risk to the company was the substantial utilization of a credit agreement which was set to mature in February 2021. As expected, the company rolled the debt from this agreement forward with a new "Amended and Restated Credit Agreement" which was executed in December. You can see the details of the new agreement in the company's 8-K that was submitted on December 23rd, 2019.
Included in the new agreement is "a $200.0 million secured revolving credit facility and a $320.0 million secured term loan facility" which fully matures on December 23rd, 2024. While the bulk of the loan is due on that date, the term loan facility has parts that mature each quarter until then. The first payment is a $4 million payment due at the end of the third quarter of 2020. The agreement also contains a series of covenants including a requirement to maintain "a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverage ratio of 2.5 to 1.00."
While the current macroeconomic and global environment (including the coronavirus) may present some near-term challenges to companies including AspenTech, the company's overall health appears to be fine. If we start to see a trend forming in the company's results, then we can rethink things. But at the moment, I believe that there is no cause for concern for long-term owners, and any correction should be seen as a chance to buy a little more until you get to your portfolio's maximum allocation.