Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with our consolidated and combined financial statements and related notes beginning on page 58 . In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” for a discussion of important factors that could cause our actual results to differ materially from our expectations.
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On May 16, 2022 (the “Closing Date”), the transaction contemplated by the Transaction Agreement and Plan of Merger, dated as of October 10, 2021, as amended by Amendment No. 1, dated as of March 23, 2022, and Amendment No. 2, dated as of May 3, 2022 (as it may be further amended from time to time, the “Transaction Agreement”), was consummated between Heritage AspenTech and Emerson and certain of its subsidiaries, pursuant to which, among other matters, Emerson and its subsidiaries contributed to Heritage AspenTech shareholders $6,014,000,000 in cash and its industrial software business (the “Industrial Software Business”), consisting of, our DGM business and our SSE business in exchange for 55% of our outstanding common stock (on a fully diluted basis). Emerson owns 56% of AspenTech on a fully diluted basis as of June 30, 2024.
In connection with the Transaction, we approved a change to our fiscal year end from September 30 to June 30. References to our fiscal years 2024 and 2023 are to the twelve-month periods ended June 30, 2024 and June 30, 2023, respectively, and to our fiscal year 2022 are to the nine-month period ended June 30, 2022, unless otherwise noted. Refer to Note 1, “Operations” to our consolidated and combined financial statements for additional information.
The Transaction has been accounted for as a business combination in accordance with United States GAAP, with the DGM business and the SSE business treated as the “acquirer” and Heritage AspenTech treated as the “acquired” company for financial reporting purposes. Accordingly, the historical financial statements of the DGM business and the SSE business are our historical financial statements following the completion of the Transaction. Our historical financial results are not necessarily indicative of future financial results because Heritage AspenTech has only been included since the Closing Date.
Business Overview
We are a global leader in industrial software focused on helping customers in asset-intensive industries address the Dual Challenge. Our solutions address complex environments where it is critical to optimize across the full asset lifecycle - asset design, operation, and maintenance - enabling customers to run their assets safer, greener, longer, and faster. Thousands of companies, ranging from multi-national corporations to start-ups, rely on our software to help them run their assets more profitably, resiliently, and sustainably to meet their operational excellence and sustainability goals.
We help customers solve some of their most critical challenges via our purpose-built software that combines engineering first principles, deep industry domain knowledge, and advanced technologies, such as Industrial AI. We drive significant value creation through our decades of experience in modeling, simulation, and optimization technologies. The operational challenges we help our customers solve include how to maintain maximum efficiency in process operations, manage electrical grids amid the growth in renewable energy sources, ensure supply chain resiliency, reduce carbon emissions, and more.
Our software also enables companies to develop new processes that can be scaled to support the energy transition and a net zero future, such as green hydrogen, biofuels, carbon capture, utilization and storage, and circularity of plastics.
By combining the software capabilities, deep domain expertise and leadership of Heritage AspenTech with the DGM and SSE businesses, we expanded our served markets, augmented our expertise and sales channels, and broadened our portfolio to include five product suites: ENG, MSC, APM, DGM, and SSE. These suites are supported by Inmation, our data platform with advanced capabilities in data contextualization, structuring and cleansing, and enables our customers to better manage their industrial data at scale.
Relationship with Emerson
At the closing of the Transaction, we entered into a Stockholders Agreement (the “Stockholders Agreement”) with Emerson. In addition to that agreement, we also entered into a Commercial Agreement (the “Commercial Agreement”), a Transition Services Agreement (the “Transition Services Agreement”), a Registration Rights Agreement (the “Registration Rights Agreement”) and a Tax Matters Agreement (the “Tax Matters Agreement”) related to certain operations going forward.
Pursuant to the Commercial Agreement, AspenTech granted a subsidiary of Emerson the right to distribute, on a non-exclusive basis, certain (i) existing Heritage AspenTech products, (ii) existing Emerson products transferred to AspenTech pursuant to the Transaction and (iii) future AspenTech products as mutually agreed upon by the parties during the term of the Commercial Agreement, in each case, to end-users through such subsidiary of Emerson acting as an agent, reseller or original equipment manufacturer.
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Business Segments
Prior to the Transaction, the Industrial Software Business had two operating and reportable segments: the DGM and the SSE business. The Transaction resulted in the creation of a third operating and reportable segment: Heritage AspenTech. During the three months ended September 30, 2022, we completed certain integration activities and changes to our organizational structure that triggered a change in the composition of our operating and reportable segments. As a result, beginning with the interim period ended September 30, 2022, AspenTech is comprised of a single operating and reportable segment. Accordingly, we have restated our operating and reportable segment information for fiscal 20 22. Ou r chief operating decision maker is our President and Chief Executive Officer.
Heritage AspenTech
Heritage AspenTech was founded over 40 years ago with a focus on industrial process efficiency and optimization. As a global leader in asset optimization software, Heritage AspenTech combines decades of modeling and operations expertise with big data, AI, and advanced analytics. Heritage AspenTech’s unique asset lifecycle approach and market-leading solutions help customers achieve new levels of efficiency, accelerate innovation and reduce emissions and waste, without compromising safety.
Heritage AspenTech has developed its applications to design and optimize industrial operations across three principal business areas: engineering, manufacturing and supply chain, and asset performance management. Heritage AspenTech is a recognized technology leader in providing process optimization and asset performance management software for each of these business areas. With its mission to digitally transform the industries we serve by optimizing their assets to run safer, greener, longer and faster, Heritage AspenTech is also a global leader in helping companies achieve their sustainability goals while achieving operational excellence.
Customers use our solutions to help advance sustainability technology pathways in improving resource efficiencies, such as energy, water or feedstock; supporting energy transition and decarbonization initiatives, including integrating renewable and alternative energy sources, such as biofuels; innovating new approaches for the hydrogen economy and carbon capture; and, enabling recycling efficiencies for waste reduction throughout operations with advanced simulation and scale-up solutions.
Digital Grid Management Business
Our DGM business offers operational technology (“OT”) solutions that enable electric, gas, and water utilities and asset operators to manage and optimize the digital grid, incorporating all types of generation, industrial cogeneration, transmission, distribution, and microgrids. Utilities, industry, and institutions use DGM solutions to transform and digitize the grid to seamlessly incorporate renewable energy and storage, to achieve reliability, maximize cybersecurity, and minimize peak loading.
Our DGM business’ energy management solution (“EMS”) monitors, controls, and optimizes the increasingly interconnected transmission networks and generation fleets to help manage grid stability and ensure security and regulatory compliance. Our advanced distribution management solution (“ADMS”), distributed energy resource management solution (“DERMS”) and Outage Management offerings provide system resiliency, efficiency, and safety by monitoring, controlling and modeling the distribution network as utilities seek to increase reliability, predict and react to increasingly dynamics supply and demand patterns, resolve outages faster and in a more automated manner, and manage field service digitally.
Subsurface Science & Engineering Business
Our SSE business is a leading provider of geoscience and modeling software for optimization across subsurface engineering and operations. With over 30 years of technology experience in geophysics, petrophysics, geological and reservoir modeling, SSE software empowers decision makers to reduce uncertainty, improve confidence, minimize risk, and support responsible asset management. Used extensively by the global energy industry, SSE solutions also have applications that extend into geothermal energy, and CCUS.
Our SSE business provides end-to-end workflows from seismic analysis and interpretation to reservoir and production simulation and from asset appraisal to operational planning and execution, to optimize production and utilization and minimize energy use, water use, and fugitive emissions. SSE software is also employed to screen and assess oil and saline aquifer reservoirs for CO 2 sequestration and to monitor CO 2 storage.
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Recent Events
On August 1, 2023, we announced that our Board of Directors approved a share repurchase program (the “Fiscal 2024 Share Repurchase Authorization”), pursuant to which an aggregate $300.0 million of our common stock was authorized to be repurchased. As of June 30, 2024, we have repurchased a total of 1,520,993 shares and have completed the Fiscal 2024 Share Repurchase Authorization.
On August 6, 2024, we announced that our Board of Directors approved a new share repurchase authorization, pursuant to which we may repurchase up to $100.0 million in the aggregate of our outstanding shares of common stock, by means of open market transactions, block transactions, privately negotiated transactions or any other purchase techniques, including 10b5-1 trading plans.
In June 2024, the United States government announced new expanded sanctions that will prohibit certain commercial activities with customers in Russia. These expanded restrictions impact the sale, service, maintenance, and support (such as bug fixes and updates) of enterprise management software and design and manufacturing software in the Russian market. As a result, we recently have suspended all commercial activities in Russia. This includes the discontinuation of the following activities: all commercial discussions with customers, initiating or processing renewals, providing proposals to customers or selling products or services, and we have written-off certain assets that are related to the operations in Russia. The impact of the additional sanctions was treated as a modification to existing contracts with customers in Russia in accordance with ASC Topic 606, Revenue from Contracts with Customers . The aggregate impact of the contract modifications resulted in the reversal of $5.5 million of revenue in the fourth quarter of fiscal 2024. The remaining net accounts receivable balance associated with customers in Russia as of June 30, 2024 is not material. We also now classify cash balances that are both held in Russia and in excess of what we estimate will be required to wind down our operations in Russia in fiscal 2025 as restricted cash due to current restrictions impacting our ability to transfer funds from bank accounts located in Russia to other countries. As of June 30, 2024, the restricted cash held in Russia was $11.5 million, which is included within our other non-current assets on the consolidated balance sheets.
Key Components of Operati ons
Revenue
We generate revenue primarily from the following sources:
License and Solutions Revenue.
We sell our software products to end users primarily under fixed term licenses. We also sell integrated solutions for our DGM software suite to our end users under perpetual software licenses along with professional services and hardware. For customer contracts entered into by the DGM business on or after January 1, 2023 we account for the DGM software license, hardware, maintenance, and professional services as separate and distinct performance obligations. See Note 2, “Significant Accounting Policies” to our consolidated and combined financial statements for more information.
Maintenance Revenue.
We provide customers with technical support, software assurance patch management services and the right to receive any when-and-if available updates to software. Our technical support services are provided from our customer support centers throughout the world, as well as via email and through our support website.
Services and Other Revenue.
We provide training and professional services to our customers. Our professional services are focused on implementing our technology in order to improve customers’ plant performance and gain better operational data. Customers who use our professional services typically engage us to provide those services over periods of up to 24 months. We charge customers for professional services on a time-and-materials or fixed-price basis. We provide training services to our customers, including on-site, internet-based, and customized training.
Cost of Revenue
Cost of License and Solutions.
Our cost of license revenue consists of (i) royalties, (ii) amortization of capitalized software and intangible assets associated with developed technology, and (iii) distribution fees.
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Cost of Maintenance.
Our cost of maintenance revenue consists primarily of personnel-related costs of providing our customers technical support, software assurance patch management services and the right to receive any when-and-if available updates to software.
Cost of Services and Other.
Our cost of services and other revenue consists primarily of personnel-related and external consultant costs associated with providing our customers with professional services and training.
Operating Expense
Selling and Marketing Expenses.
Selling and marketing expenses consist primarily of the personnel and travel expenses related to the effort expended to license our products and services to current and potential customers, as well as for overall management of customer relationships. Marketing expenses include expenses needed to promote our company and our products and to conduct market research to help us better understand our customers and their business needs, in addition to expenses resulting from amortization of intangible assets associated with customer relationships and backlog.
Research and Development Expenses.
Research and development expenses consist primarily of amortization of developed technology, personnel expenses related to the creation of new software products, enhancements, and engineering changes to existing products.
General and Administrative Expenses.
General and administrative expenses include the personnel expenses of corporate and support functions, such as executive leadership and administration groups, finance, legal, human resources, and corporate communications, and other costs, such as outside professional and consultant fees, amortization of intangible assets associated with certain purchased software, and the provision for bad debt on accounts receivable.
Restructuring Costs .
We record liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. Employee severance costs are accrued when the restructuring actions have been determined and communicated to the employee. Costs for one-time termination benefits, in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. Restructuring costs in prior years were related to the undertaking of certain restructuring transactions in accordance with the restructuring plan attached to the Transaction Agreement to separate the DGM business and the SSE business from Emerson’s other business activities and to consolidate such separated business under a holding company, which was contributed to AspenTech as part of the Transaction.
Other Income and Expenses
Interest Income (Expense), Net.
Interest income is recorded for financing components under Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). When a contract includes a significant financing component, we generally receive the majority of the customer consideration after the recognition of a substantial portion of the arrangement fee as license revenue. As a result, we decrease the amount of revenue recognized and increase interest income by a corresponding amount. Interest income also includes interest earned on our receivable balances under the cash pooling arrangements and debt agreements with Emerson and on the interest-bearing cash balances held at our designated financial institutions worldwide. Interest expense is primarily related to outstanding borrowings under our Second Amended and Restated Credit Agreement prior to the outstanding balance being paid off and payable balances under the cash pooling arrangements and debt agreements with Emerson.
Other (Expense) Income, Net.
Other (expense) income, net is comprised primarily of unrealized gains and losses on foreign currency forward contracts and unrealized and realized foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our entities.
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Benefit for Income Taxes.
Benefit for income taxes is comprised of domestic and foreign taxes. We record interest and penalties related to income tax matters as a component of income tax expense. Our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events, such as tax benefits from the disposition of employee equity awards, settlements of tax audits, and assessments and tax law changes. Our effective income tax rate is also impacted by, and may fluctuate in any given period because of, the composition of income in foreign jurisdictions where tax rates differ.
Change in Fiscal Year
On the Closing Date, we changed our fiscal year end from September 30 to June 30. As a result, our fiscal year 2024 and 2023 results of operations, cash flows, and all transactions impacting stockholders’ equity presented in this Annual Report on Form 10-K are for the twelve-month periods ended June 30, 2024 and 2023, respectively, whereas those same items for our fiscal year 2022 are for the nine-month period ended June 30, 2022, unless otherwise noted.
This Annual Report on Form 10-K also includes unaudited consolidated and combined statements of operations and cash flows for the twelve months ended June 30, 202 2; see Note 23, “Transition Period Comparative Data” to our Consolidated and Combined Financial Statements f or further information.
The discussion below in the Results of Operations section provides a comparison for the twelve months ended June 30, 2024 and 2023, and for the twelve-months ended June 30, 2023 compared to the twelve-months ended June 30, 2022.
Key Business Metrics
Background
We utilize key business metrics to track and assess the performance of our business. We have identified the following set of appropriate business metrics in the context of our evolving business:
• Annual Contract Value
• Total Contract Value
• Bookings
We also use the following non-GAAP metrics in addition to GAAP measures to track our business performance:
• Free cash flow
• Non-GAAP operating income
We make these measures available to investors and none of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with GAAP.
Annual Contract Value
ACV is an estimate of the annual value of our portfolio of term license and SMS contracts, the annual value of SMS agreements purchased with perpetual licenses, and the annual value of standalone SMS agreements purchased with certain legacy term license agreements, which have become an immaterial part of our business.
Comparing ACV for different dates can provide insight into the growth and retention rates of our recurring software business because ACV represents the estimated annual billings associated with our recurring license and SMS agreements at any point in time. Management uses the ACV business metric to evaluate the growth and performance of our business as well as for planning and forecasting purposes. We believe that ACV is a useful business metric to investors as it provides insight into the growth component of our software business.
ACV generally increases as a result of new term license and SMS agreements with new or existing customers, renewals or modifications of existing term license agreements that result in higher license fees due to contractually-agreed price escalation or an increase in the number of tokens (units of software usage) or products licensed, or an increase in the value of licenses delivered.
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ACV is adversely affected by term license and SMS agreements that are renewed at a lower entitlement level or not renewed, a decrease in the value of licenses delivered, and, to a lesser extent, by customer agreements that become inactive during the agreement’s term because, in our determination, amounts due (or which will become due) under the agreement are not collectible. As ACV is an estimate of annual billings, it will generally not include contracts with a term of less than one year. Because ACV represents all other active term software and SMS agreements, it may include amounts under agreements with customers that are delinquent in paying invoices, that are in bankruptcy proceedings, and agreements that are subject to termination by the customer or where payment is otherwise in doubt.
As of June 30, 2024, customer agreements representing approximately 84.4% of our ACV (by value) were denominated in U.S. dollars, and excluding the impact of the Russia exit, approximately 85.3% of our ACV (by value) were denominated in U.S. dollars. For agreements denominated in other currencies, we use a fixed historical exchange rate to calculate ACV in U.S. dollars rather than using current exchange rates, so that our calculation of growth in ACV is not affected by fluctuations in foreign currencies.
For term license agreements that contain professional services or other products and services, we have included the portion of those agreements that are reflective of the relative fair value of the term license, rather than the portion of the actual invoice attributed to the term license, as outlined in the agreement within ACV. We believe that this methodology more accurately allocates any discounts or premiums to the different elements of the agreement.
We have suspended all commercial activities in Russia following the recent announcement of expanded commercial sanctions in the country and, as a result, reduced the Russia-based ACV balance by $35.5 million in the fourth quarter of fiscal 2024. ACV grew by approximately 5.4% during fiscal 2024 to $932.9 million as of June 30, 2024, from $884.9 million as of June 30, 2023. Excluding the impact of the Russia exit, ACV grew by approximately 9.4% during fiscal 2024 to $968.4 million as of June 30, 2024.
Total Contract Value
TCV is the aggregate value of all payments received or to be received under all active term license and perpetual SMS agreements, including maintenance and escalation. Our TCV was $3.940 billion as of June 30, 2024, excluding the impact of the Russia exit. Including the impact of the Russia exit, TCV was $3.819 billion as of June 30, 2024. As of June 30, 2023, our TCV was $3.626 billion.
Bookings
Bookings is the total value of customer term license and SMS contracts signed and delivered in the current period, less the value of such contracts signed in the current period where the initial licenses and SMS agreements are not yet deemed delivered, plus the value of term license contracts and SMS contracts signed in a previous period for which the initial licenses are deemed delivered in the current period.
The bookings of AspenTech was $1.162 billion and $1.078 billion during the twelve-month period ended June 30, 2024 and 2023, respectively, compared to $937.9 million during the nine-month period ended June 30, 2022, respectively. The change in bookings is primarily related to the timing of renewals.
Non-GAAP Business Metrics
Free cash flow (non-GAAP) excludes certain non-cash and non-recurring expenses and is used as a supplement to net cash provided by operating activities presented on a GAAP basis. We believe that free cash flow (non-GAAP) is a useful financial measure because it permits investors to view our performance using tools that our management uses to gauge progress in achieving goals and as an indication of cash flow that may be available to fund future investments and other capital uses, such as to repay borrowings under our credit facilities or to fund acquisitions or share repurchase authorizations.
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The following table provides a reconciliation of GAAP net cash provided by operating activities to free cash flow for the indicated periods:
Year Ended
June 30, 2024
Year Ended
June 30, 2023
Nine Months Ended June 30, 2022
(Dollars in Thousands)
Net cash provided by operating activities (GAAP)
Purchase of property, equipment, and leasehold improvements
Payments for capitalized computer software development costs
Free cash flow (non-GAAP) (1)
(1) For the interim and annual periods beginning on or after January 1, 2023, we no longer exclude acquisition and integration planning related payments from our computation of free cash flow. Free cash flow for all prior periods presented has been revised to the current period computation methodology.
Non-GAAP income from operations excludes certain non-cash and non-recurring expenses and is used as a supplement to loss from operations presented on a GAAP basis. We believe that non-GAAP income from operations is a useful financial measure because removing certain non-cash and other items provides additional insight into recurring profitability.
The following table presents our (loss) income from operations, as adjusted for stock-based compensation expense, amortization of intangible assets, and other items, such as the impact of acquisition and integration planning related fees, for the indicated periods:
Twelve-Months Ended June 30,
Nine-Months Ended June 30,
Twelve-Months Ended 2024 Compared to 2023
Twelve-Months Ended 2023 Compared to Nine-Months Ended 2022
(Dollars in Thousands)
GAAP (loss) income from operations
Plus:
Stock-based compensation
Amortization of intangible assets (1)
Acquisition and integration planning related fees
Non-GAAP income from operations
(1) The Company has increased amortization of intangible assets following the close of the Transaction with Emerson. As a result, the Company expects its amortization of intangibles assets to remain at higher levels for the next several years as the related asset balance is amortized over the respective expected useful lives of the intangible assets.
Results of Operations
A discussion regarding our financial condition and results of operations for the twelve-months ended June 30, 2024 compared to the twelve-months ended June 30, 2023, and for the twelve-months ended June 30, 2023 compared to the twelve-months ended June 30, 2022 is presented below. The following table sets forth the results of operations and the period-over-period percentage change for the twelve-months ended June 30, 2024, 2023, and 2022:
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Twelve-Months Ended June 30,
Twelve-Months Ended 2024 Compared to 2023
Twelve-Months Ended 2023 Compared to 2022
(unaudited)
(Dollars in Thousands)
Revenue:
License and solutions
Maintenance
Services and other
Total revenue
Cost of revenue:
License and solutions
Maintenance
Services and other
Total cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring costs
Total operating expenses
(Loss) income from operations
Other expense, net
Interest income, net
(Loss) income before benefit for income taxes
Benefit for income taxes
Net (loss) income
The following table sets forth the results of operations as a percentage of total revenue for certain financial data for the twelve-months ended June 30, 2024, 2023, and 2022:
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Twelve Months Ended June 30,
(% of Revenue)
Revenue:
License and solutions
Maintenance
Services and other
Total revenue
Cost of revenue:
License and solutions
Maintenance
Services and other
Total cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring costs
Total operating expenses
(Loss) income from operations
Other expense, net
Interest income, net
(Loss) income before benefit for income taxes
Benefit for income taxes
Net (loss) income
Revenue
Total revenue for the twelve-month period ended June 30, 2024 increased by $83.3 million, or 8.0%, compared to the twelve-month period ended June 30, 2023. This was primarily due to an increase of $32.4 million in license and solutions revenue, an increase of $28.5 million in maintenance revenue, and an increase of $22.4 million in services and other revenue.
Total revenue for the twelve-month period ended June 30, 2023 increased by $561.9 million, or 116.5%, compared to the twelve-month period ended June 30, 2022. The increase reflected the Heritage AspenTech acquisition pursuant to the Transaction which contributed $760.8 million of revenue during the twelve-month period ended June 30, 2023.
License and Solutions Revenue
License and solutions revenue is primarily derived from the sale of term software licenses by Heritage AspenTech and SSE. License and solutions revenue also included DGM integrated solutions consisting of perpetual or term software licenses sold with professional services and treated as a single performance obligation. License and solutions revenue changes are due to sales to new customers or the loss of existing customers, the timing of multi-year term license renewals, new offerings to existing customers, and the timing of progress on integrated solutions.
The increase in license and solutions revenue of $32.4 million, or 4.8%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, was primarily attributable to new term license orders, offset in part by the reversal of $5.5 million in revenue from customers in Russia due to the recent suspension of commercial activities in Russia.
The increase in license and solutions revenue of $346.4 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022, was primarily due to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in license and solutions revenue of $366.2 million. License and solutions revenue from SSE increased by $12.9 million, which was primarily driven by an increase in license sales during the twelve-month period ended June 30, 2023. License and solutions revenue from DGM decreased $32.8 million due to customer contracts sold during the twelve-month period ended June 30, 2023 where the related professional services revenue is recognized as a distinct performance obligation, as well as changes in estimates and contract modifications, associated with certain integrated solution projects, which resulted in a reduction of revenue.
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Maintenance Revenue
Maintenance revenue includes technical support, software assurance patch management services and the right to receive any when-and-if available updates to software. Maintenance revenue changes as a result of adding new term or perpetual software license customers, the timing of maintenance renewals for existing perpetual software license customers, the scope of maintenance offerings customers subscribe to, and the escalation of annual payments.
The increase in maintenance revenue of $28.5 million, or 9.0%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, was primarily due to growth of our base of customer arrangements.
The increase in maintenance revenue of $188.6 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022, was primarily due to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in maintenance revenue of $193.8 million. Maintenance revenue from DGM increased by $6.8 million due to the completion and timing of certain integrated solution projects, while maintenance revenue from SSE decreased by $12.0 million, primarily attributable to the expiration of certain customers’ maintenance renewals.
Services and Other Revenue
Services and other revenue includes professional services that are not considered part of an integrated software solution, in addition to training services. Time-and-materials contracts are based upon hours worked and contractually agreed-upon hourly rates. Fixed-price engagements recognize revenue using the proportional performance method by comparing the costs incurred to the total estimated project cost.
The increase in services and other revenue by $22.4 million, or 38.5%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, was primarily due to the timing and volume of professional services engagements, and increased activities from certain customer contracts where the related professional services revenue is recognized as a distinct performance obligation.
The increase in services and other revenue by $26.9 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022, was primarily due to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in services and other revenue of $26.9 million.
Cost of Revenue
Cost of License and Solutions Revenue
Cost of license and solutions revenue decreased by $9.3 million, or 3.3%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, primarily due to the business transformation activities in which we began recognizing distinct performance obligations for certain customer contracts effective beginning in the third quarter of fiscal 2023. License gross profit margin was 61.5% for the twelve-month period ended June 30, 2024, compared to 58.2% for the twelve-month period ended June 30, 2023. The improvement in gross profit margin in fiscal 2024 was due to license and solutions revenue increasing at a greater rate than the related costs.
Cost of license and solutions revenue increased by $119.9 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022, primarily due to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in cost of license and solutions revenue of $124.0 million. License gross profit margin was 58.2% for the twelve-month period ended June 30, 2023, compared to 50.5% for the twelve-month period ended June 30, 2022. The improvement on gross profit margin in fiscal 2023 was attributable to the Heritage AspenTech acquisition pursuant to the Transaction, which contributed a higher gross profit margin on a weighted average basis as compared to the prior fiscal year.
Cost of Maintenance Revenue
Cost of maintenance revenue increased by $3.5 million, or 9.7%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, primarily due to higher compensation costs of $5.4 million related to salaries and benefits. Maintenance gross profit margin was 88.4% during both of the twelve-month periods ended June 30, 2024 and 2023.
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Cost of maintenance revenue increased by $17.4 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022, primarily due to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in cost of maintenance revenue of $21.1 million. This was offset by a $3.8 million decrease in cost of maintenance revenue due to reduced compensation expenses resulting from a prior restructuring. Maintenance gross profit margin was 88.4% during the twelve-month period ended June 30, 2023, compared to 85.0% for the twelve-month period ended June 30, 2022.
Cost of Services and Other Revenue
The timing of revenue and expense recognition on professional service arrangements can impact the comparability of cost and gross profit margin of professional services revenue from year to year. For example, revenue from fixed-price engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs.
Cost of services and other revenue increased by $14.7 million, or 25.6%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, primarily due to the increased activities from customer contracts where the related professional services revenue is recognized as a distinct performance obligation. Service and other revenue gross profit margin was 10.4% for the twelve-month period ended June 30, 2024, compared to 1.2% for the twelve-month period ended June 30, 2023. The improvement in gross profit margin in fiscal 2024 was due to services and other revenue increasing at a greater rate than the related costs.
Cost of services and other revenue increased by $36.4 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022, primarily due to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in cost of services and other revenue of $36.4 million. Service and other revenue gross profit margin was 1.2% for the twelve-month period ended June 30, 2023 and 32.6% for the twelve-month period ended June 30, 2022.
Gross Profit
Gross profit increased by $74.3 million, or 11.1%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023. Gross profit margin increased to 66.1% during the twelve-month period ended June 30, 2024 compared to 64.2% during the twelve-month period ended June 30, 2023, primarily due to licensing and solutions, maintenance, and services and other revenue all increasing at greater rates than their related costs. These revenue increases were primarily due to increases in bookings driven by the timing of renewals.
Gross profit increased by $388.2 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022. Gross profit margin increased to 64.2% during the twelve-month period ended June 30, 2023 compared to 58.6% in the twelve-month period ended June 30, 2022 primarily due to the acquisition of Heritage AspenTech pursuant to the Transaction.
Operating Expenses
Selling and Marketing Expense
Selling and marketing expense increased by $8.1 million, or 1.7%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023. The increase was primarily due to higher compensation costs of $13.3 million related to salaries and benefits expenses due to the expansion of our sales capacity in new and existing markets. This was partially offset by a decrease in stock-based compensation of $5.8 million.
Selling and marketing expense increased by $349.2 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022. The increase was primarily due to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in selling and marketing expense of $355.7 million, primarily related to amortization of intangible assets of $257.8 million. This was partially offset by a decrease of $6.5 million in selling and marketing expenses due to fewer headcount and compensation expenses.
Research and Development Expense
Research and development expense decreased by $3.2 million, or 1.5%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023. The decrease was primarily due to a $9.3 million decrease in stock-based compensation and bonus expenses, partially offset by an increase in salaries expense of $7.0 million.
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Research and development expense increased by $129.5 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022. The increase was primarily due to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in research and development expense of $120.9 million, and an increase of $8.7 million in research and development expenses as a result of greater headcount and compensation expenses.
General and Administrative Expense
General and administrative expense decreased by $24.1 million, or 14.9%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023. The decrease was primarily due to lower compensation costs of $13.7 million related to stock-based compensation expense, and a $5.6 million decrease in acquisition and integration expenses.
General and administrative expense increased by $115.2 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022. The increase was primarily related to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase in general and administrative expense of $117.6 million, an increase of $2.8 million as a result of greater compensation and consulting expenses, partially offset by a $5.2 million decrease due to reduced personnel and facilities expenses as a result of the Heritage AspenTech acquisition pursuant to the Transaction.
Non-Operating (Expense) Income
Other Expense, Net
Other expense, net decreased by $20.9 million, or 71.2%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023. This decrease in expense was primarily due to $26.2 million in net realized losses on foreign currency forward contracts in the prior year that were terminated in June 2023. See Note 16, “Derivatives”, to the consolidated and combined financial statements for further discussion of the foreign current forward contracts.
Other expense, net increased by $28.4 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022. This increase was primarily related to net realized losses on foreign currency forward contracts.
Interest Income, Net
Interest income, net increased by $22.3 million, or 69.8%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023. The increase was primarily due to an increase in interest income earned on long-term revenue contracts of $9.4 million, an increase in interest income earned on cash and cash equivalent balances of $1.4 million, and a decrease in interest expense of $10.6 million due to the repayment of our term loan facility under the Amended and Restated Credit Agreement in the third quarter of fiscal 2023.
Interest income, net increased by $28.7 million during the twelve-month period ended June 30, 2023 as compared to the twelve-month period ended June 30, 2022. The increase was primarily attributable to the Heritage AspenTech acquisition pursuant to the Transaction, which represented an increase of $26.9 million resulting from interest income earned on our long-term revenue contracts.
Benefit for Income Taxes
The effective tax rate for the periods presented is primarily the result of income earned in the United States taxed at United States federal and state statutory income tax rates, income earned in foreign tax jurisdictions taxed at the applicable rates, as well as the impact of permanent differences between book and tax income.
Our effective tax rate was 77.7% and 40.3% for the twelve-month periods ended June 30, 2024 and 2023, respectively.
We recognized income tax benefits of $34.1 million for the twelve-month period ended June 30, 2024 compared to $72.8 million for the twelve-month period ended June 30, 2023. Our tax benefit for the twelve-month period ended June 30, 2024 was favorably impacted primarily by the Foreign-Derived Intangible Income (“FDII”) deduction and tax credits, offset by return to provision adjustments and stock-based compensation.
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As of June 30, 2024, we maintained a valuation allowance in the United States primarily for deferred tax assets related to state R&D credits. We also maintained a valuation allowance on certain foreign subsidiary tax attributes, primarily net operating loss carryforwards and other deferred tax assets because it is more likely than not that a benefit will not be realized. As of June 30, 2024 our total valuation allowance was $16.3 million.
Our effective tax rate was 40.3% and (71.6)% for the twelve-month periods ended June 30, 2023 and 2022, respectively.
We recognized income tax benefits of $72.8 million for the twelve-month period ended June 30, 2023 compared to $17.5 million for the twelve-month period ended June 30, 2022. Our tax benefits for the twelve-month period ended June 30, 2023 was favorably impacted primarily by the FDII deduction, the benefit from the deduction of state taxes, the difference in foreign tax rates, and the change in valuation allowance on certain jurisdictions, offset by Global Intangible Low-Taxed Income (“GILTI”), stock-based compensation, and return to provision adjustment. The tax benefits for the twelve-month period ended June 30, 2022 was favorably impacted primarily by the FDII deduction and the benefit from the remeasurement of state deferred taxes related to the Transaction.
As of June 30, 2023, we maintained a valuation allowance in the United States primarily for certain deferred tax assets related to the investment in a joint venture and on state R&D credits. We also maintained a valuation allowance on certain foreign subsidiary tax attributes, primarily net operating loss carryforwards and other deferred tax assets because it is more likely than not that a benefit will not be realized. As of June 30, 2023 our total valuation allowance was $16.0 million.
Liquidity and Capital Resources
Resources
As of June 30, 2024 and 2023, our principal sources of liquidity consisted of $237.0 million and $241.2 million in cash and cash equivalents, respectively.
We believe our existing cash on hand and cash flows generated by operations are sufficient for at least the next 12 months to meet our operating requirements, including those related to salaries and wages, working capital, capital expenditures, and other liquidity requirements associated with operations. We may need to raise additional funds if we decide to make one or more acquisitions of businesses, technologies or products. If additional funding for such purposes is required beyond existing resources and our Second Amended and Restated Credit Agreement described below, we may not be able to affect a receivable, equity or debt financing on terms acceptable to us or at all.
Amended and Restated Credit Agreement
We had entered into an Amended and Restated Credit Agreement with JP Morgan on December 23, 2019 that provided for a $200.0 million secured revolving credit facility and a $320.0 million secured term loan facility . On June 27, 2024, we terminated the Amended and Restated Credit Agreement and entered into a new Second Amended and Restated Credit Agreement with an expiration date of June 27, 2029. At the time of termination, there were no amounts outstanding under the Amended and Restated Credit Agreement.
The Second Amended and Restated Credit Agreement provides for aggregate borrowing commitments of $200.0 million under a new revolving credit facility, including issuances of letters of credit. The loans made under the Second Amended and Restated Credit Agreement will bear interest at a rate per annum equal to the applicable benchmark rate plus a margin that varies according to a leverage-based grid. The interest rate margin for term benchmark, daily simple SOFR, and SONIA loans ranges from 1.25% to 2.00% per annum, and such margin for ABR and CBR loans ranges from 0.25% to 1.00% per annum. We must also pay a commitment fee quarterly in arrears on the undrawn portion of the Credit Facility, which commitment fee ranges from 0.15% to 0.30% per annum based on our leverage ratio. The Second Amended and Restated Credit Agreement is secured by substantially all of our assets.
As of June 30, 2024, after considering eligible outstanding letters of credit allowable per the Second Amended and Restated Credit Agreement in the aggregate amount of $4.9 million, we had $195.1 million available for borrowing under the Second Amended and Restated Credit Agreement.
For a more detailed description of the Second Amended and Restated Credit Agreement, see Note 12, “Debt” to our consolidated and combined financial statements.
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Cash Flows
Operating Cash Flows
Net cash provided by operating activities increased by $40.7 million, or 13.6%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, primarily driven by an increase of $78.2 million in cash provided due to higher income before non-cash charges, partially offset by a decrease of $37.5 million in cash due to unfavorable changes in working capital, primarily due to the timing of contract cycle renewals, billings and the timing of settlement on the foreign currency forward contract in the prior year.
Net cash provided by operating activities increased by $270.2 million during the twelve-month period ended June 30, 2023 as compared to the nine-month period ended June 30, 2022, primarily driven by an increase of $210.9 million in cash provided due to higher income before non-cash charges related to increased amortization as a result of the Transaction, and an increase of $59.4 million in cash due to favorable changes in working capital, primarily due to the timing of contract cycle renewals, and billings.
Investing Cash Flows
Net cash used in investing activities decreased by $81.6 million, or 76.0%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, primarily driven by a decrease of $64.2 million in cash used for business acquisitions related to the Inmation acquisition, and a decrease of $26.2 million in cash used to settle the foreign currency forward contract, partially offset by an increase of $12.5 million in cash used for the asset acquisition of Plantweb Optics Analytics software. For a more detailed description of the asset acquisition of Plantweb Optics Analytics software, see Note 18, “Related-Party Transactions” to our consolidated and combined financial statements.
Net cash used in investing activities decreased by $5.468 billion during the twelve-month period ended June 30, 2023 as compared to the nine-month period ended June 30, 2022, primarily driven by a decrease of $5.499 billion in cash used for business acquisitions related to the Emerson Transaction, partially offset by an increase of $26.2 million in cash used to settle the foreign currency forward contract.
Financing Cash Flows
Net cash used in financing activities decreased by $89.5 million, or 23.3%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, primarily driven by a decrease in funds used for the repayment of the term loan of $276.0 million, and an increase of $21.9 million in cash provided from our cash pooling arrangements with related parties, offset in part by an increase of $200.0 million in cash used for common stock repurchases.
Net cash used in financing activities increased by $6.353 billion during the twelve-month period ended June 30, 2023 as compared to the nine-month period ended June 30, 2022, primarily driven by a decrease of $5.992 billion in cash received related to the Heritage AspenTech acquisition pursuant to the Transaction, and an increase in funds used for the repayment of the term loan of $270.0 million, offset in part by a decrease of $100.0 million in cash used for common stock repurchases.
Free Cash Flows
Free cash flow (non-GAAP) increased by $43.0 million, or 14.7%, during the twelve-month period ended June 30, 2024 as compared to the twelve-month period ended June 30, 2023, primarily driven by an increase in cash flows provided by operating activities.
Free cash flow (non-GAAP) increased by $266.1 million during the twelve-month period ended June 30, 2023 as compared to the nine-month period ended June 30, 2022, primarily driven by an increase in cash flows provided by operating activities.
The following table provides a reconciliation of net cash provided by operating activities (GAAP) to free cash flow (non-GAAP) for the indicated periods:
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Year Ended
June 30, 2024
Year ended June 30, 2023
Nine Months Ended June 30, 2022
(Dollars in Thousands)
Net cash provided by operating activities (GAAP)
Purchase of property, equipment, and leasehold improvements
Payments for capitalized computer software development costs
Free cash flow (non-GAAP) (2)
(1) For the interim and annual periods beginning on or after January 1, 2023, we no longer exclude acquisition and integration planning related payments from our computation of free cash flow. Free cash flow for all prior periods presented has been revised to the current period computation methodology.
Contractual Obligations and Requirements
Our contractual obligations, which consist of operating lease commitments for our headquarters and other facilities, royalty obligations, equity method investments, and standby letters of credit and other obligations, were as follows as of June 30, 2024:
Payments due by Period
Total
Less than 1 Year
1 to 3 Years
3 to 5 Years
More than 5 Years
(Dollars in Thousands)
Contractual Cash Obligations:
Operating leases (1)
Royalty obligations
Equity method investments
Other purchase obligations
Total contractual cash obligations
Other Commercial Commitments:
Standby letters of credit
Total commercial commitments
(1) The $156.9 million of contractual obligations includes rent and fixed fees for all of our operating leases, including those not recognized on the consolidated balance sheets.
We are not currently a party to any other material purchase contracts related to future capital expenditures.
The standby letters of credit secured our performance on professional services contracts, certain facility leases and potential liabilities as of June 30, 2024. The letters of credit expire at various dates through fiscal 2029.
The above table does not reflect a liability for uncertain tax positions of $8.3 million as of June 30, 2024. We estimate that none of this amount will be paid within the next year, and we are currently unable to reasonably estimate the timing of payments for the remainder of the liability.
Effects of Inflation
We do not believe that inflation has had a material impact on our business or operating results during the periods presented. However, inflation may in the future have an impact on our ability to execute on our acquisition strategy. Inflationary costs could adversely affect our business, financial condition and results of operations. In addition, increased inflation has had, and may continue to have, an effect on interest rates. Increased interest rates may adversely affect our borrowing rate and our ability to obtain, or the terms under which we can obtain, any potential additional funding.
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Critical Accounting Estimates and Judgments
Our consolidated and combined financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. The most significant areas where management judgments and estimates impact the primary consolidated and combined financial statements are described below. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For further information on our significant accounting policies, refer to Note 2, “Significant Accounting Policies,” to our consolidated and combined financial statements.
Revenue Recognition
In accordance with ASC 606, Revenue from Contracts with Customers , we account for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable that we will collect substantially all of the consideration to which we are entitled. We evaluate our contracts with customers to identify the promised goods or services and recognize revenue for the identified performance obligations at the amount we expect to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Revenue is recognized when, or as, performance obligations are satisfied, and control has transferred to the customer.
We disaggregate our revenue into three categories: (i) license and solutions, (ii) maintenance and (iii) services and other.
License and solutions
License and solutions revenue is primarily derived from term software licenses. It also includes DGM perpetual and term software licenses sold along with professional services and recognized as revenue in one performance obligation. See Note 3, “Revenue from Contracts with Customers” and Note 21, “Segment and Geographic Information,” to our consolidated and combined financial statements for additional information about our revenue disaggregated by region, and type of performance obligation.
Term software license revenue is recognized at a point in time when control transfers to the customer, which generally aligns with the first day of the contractual term.
Prior to the third quarter of fiscal 2023, DGM software licenses were primarily sold with professional services and hardware to form an integrated solution for the customer. The professional services and hardware sold with the license significantly customized the underlying functionality and usability of the software. As such, none of the software license, hardware or professional services were considered distinct within the context of the contract and were therefore considered a single performance obligation. Because the integrated solution had no alternative use to us and we held an enforceable right to payment, revenue was recognized over time (typically one to two years) using an input measure of progress based on the ratio of actual costs incurred to date to the total estimated cost to complete. For integrated solution contracts executed prior to the third quarter of fiscal 2023, revenue continues to be recognized over time until the implementation is complete.
At the start of the third quarter of fiscal 2023, we completed a series of business transformation activities relating to DGM products and services in conjunction with its ongoing integration activities. As part of a change in the related go-to-market strategy, we have invested in tools and processes to simplify and streamline the implementation services to significantly reduce the complexity and interdependency associated with our software. In addition, we have identified and trained several third-party implementation service partners to operate autonomously and directly with DGM customers to implement its products.
Accordingly, effective January 1, 2023, following the completion of these business transformation activities, for all prospective DGM contracts entered into after January 1, 2023, we account for the DGM software license, hardware, maintenance, and professional services as separate and distinct performance obligations. Software license revenue is recognized at a point in time when control transfers to the customer, which generally aligns with the first day of the contractual term. Hardware revenue is recognized at the point in time when control transfers to the customer, which generally occurs upon delivery. The recognition of maintenance revenue at DGM is unchanged and continues to be recognized ratably over the maintenance term. Professional services revenue is recognized over time (typically one to two years) using the proportional performance method by comparing the costs incurred to the total estimated project costs.
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Maintenance
Software maintenance is recognized ratably over the maintenance term and includes technical support, software assurance patch management services and the right to receive any when-and-if available updates to the software. For term software licenses, maintenance is included with the license. For perpetual software licenses, maintenance is initially sold with the license and subsequently sold separately, both primarily on an annual basis. Software maintenance does not significantly modify or otherwise depend on other performance obligations within the contracts and therefore is accounted for as a separate performance obligation. For maintenance sold with the integrated solution, the maintenance term begins once implementation is complete.
Services and other
All of our businesses offer services which consist of professional services and training.
Professional service revenue is provided to customers on a time-and-materials (“T&M”) or fixed-price basis. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as we satisfy our performance obligation. Professional service revenue is recognized by measuring progress toward the completion of our obligations. We recognize professional services revenue for our T&M contracts based upon hours worked at contractually agreed-upon hourly rates. Fixed-price engagements recognize revenue using the proportional performance method by comparing the costs incurred to the total estimated project cost. The use of the proportional performance method depends on our ability to reliably estimate the costs to complete a project. Historical experience is used as a basis for future estimates to complete current projects. Additionally, we believe that costs are the best available measure of performance. Out-of-pocket expenses which are reimbursed by customers are recorded as revenue.
Training services provided to customers include on-site, internet-based, and customized training. These services are considered separate performance obligations as they do not significantly modify, integrate or otherwise depend on other performance obligations included in a contract. Revenue is recognized as the customer consumes the benefits of the services we provide.
Contracts with Multiple Performance Obligations
We allocate total contract consideration to each distinct performance obligation in an arrangement on a relative standalone selling price basis. The standalone selling price reflects the price that would be charged for a specific product or service if it was sold separately in similar circumstances and to similar customers.
When two or more contracts are entered into at or near the same time with the same customer, we evaluate the facts and circumstances associated with the negotiation of those contracts. Where the contracts are negotiated as a package, we will account for them as a single arrangement and allocate the consideration for the combined contracts among the performance obligations accordingly.
When available, we use directly observable transactions to determine the standalone selling prices for performance obligations. If directly observable data is not available when software licenses are sold together with software maintenance in a bundled arrangement, we estimate a standalone selling price for these distinct performance obligations using relevant information, including our overall pricing objectives and strategies, historical pricing data, market consideration and other factors.
Contract Modifications
We sometimes enter into agreements to modify previously executed contracts, which constitute contract modifications. We assess each of these contract modifications to determine (i) if the additional products and services are distinct from the products and services in the original arrangement; and (ii) if the amount of consideration expected for the added products and services reflects the standalone selling price of those products and services, as adjusted for contract-specific circumstances. A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both requirements is considered a change to the original contract and is accounted for on either (i) a prospective basis as a termination of the existing contract and the creation of a new contract or (ii) a cumulative catch-up basis.
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Contract Assets and Contract Liabilities
Payment terms and conditions vary by contract type. Terms generally include a requirement of payment annually over the term of the license arrangement. During the majority of each customer contract term, the amount invoiced is generally less than the amount of revenue recognized to date, primarily because we transfer control of the performance obligation related to the software license at the inception of the contract term, and the allocation of contract consideration to the license performance obligation is a significant portion of the total contract consideration. Therefore, our contracts often result in the recording of a contract asset throughout the majority of the contract term. We record a contract asset when revenue recognized on a contract exceeds the billings.
We record accounts receivable when we have the unconditional right to issue an invoice and receive payment regardless of whether revenue has been recognized. If revenue is not yet recognizable and we have a right to invoice or have received consideration, a contract liability is recorded to defer the revenue until recognition is appropriate. If revenue is recognizable in advance of the right to invoice, and the right to consideration is conditional on something other than the passage of time, a contract asset is recorded until invoicing occurs.
We defer unearned maintenance and service revenue when we have the right to invoice, with recognition of the revenue recognized over the support period. Contract assets and contract liabilities are presented net at the contract level for each reporting period.
Payment Terms
We generally receive payment from a customer after the performance obligation related to the term license has been satisfied, and therefore, our contracts with terms greater than one year generally contain a significant financing component. The significant financing component is calculated utilizing an interest rate that derives the net present value of the performance obligations delivered on an upfront basis based on the allocation of consideration. We have instituted a customer portfolio approach in assigning interest rates. The rates are determined at contract inception and are based on the credit characteristics of the customers within each portfolio.
Perpetual software licenses, sold along with professional services and hardware as an integrated solution, generally require payments from the customer aligned with progress milestones in the contract. Payment terms on invoiced amounts are typically net 30 days. We do not offer return rights for our products and services in the ordinary course of business, and contracts generally do not include customer acceptance clauses.
Goodwill and Other Intangibles Impairment Testing
Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded at their respective fair values. Goodwill represents the excess of consideration paid over the net assets acquired and is assigned to the reporting unit that acquires the business. We evaluate and test the recoverability of our goodwill for impairment at least annually on May 31 of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable. If an initial qualitative assessment indicates it is more likely than not goodwill may be impaired, it is evaluated by comparing the reporting unit’s estimated fair value to its carrying value. An impairment charge would be recorded for the amount by which the carrying value of the reporting unit exceeds the estimated fair value. As of the May 31, 2024 annual impairment testing date, the carrying value of our stockholders’ equity exceeded our market capitalization. No goodwill impairment was recorded for fiscal 2024, 2023, or 2022.
With the exception of certain trade names, all of our identifiable intangible assets are subject to amortization on a straight-line basis over their estimated useful lives. Identifiable intangibles consist of intellectual property, such as patented and unpatented technology and trademarks, customer relationships and capitalized software. Identifiable intangible assets are also subject to evaluation for potential impairment if events or circumstances indicate the carrying value may not be recoverable. No intangible assets impairment was recorded for fiscal 2024, 2023, or 2022.
Valuation of Assets and Liabilities Acquired in a Business Combination
Accounting for a business combination requires the excess of the purchase price for an acquisition over the net book value of assets acquired to be allocated to identifiable assets, including intangible assets. We engaged an independent third-party valuation specialist to assist in the determination of the fair value of intangible assets related to the acquisitions of Heritage AspenTech and DGM. This included the use of certain assumptions and estimates, including the projected revenue for the customer relationship and developed technology intangible asset and the obsolescence rate for the developed technology intangible asset. Although we believe the assumptions and estimates to be reasonable and appropriate, they require judgement and are based on experience and historical information obtained from Heritage AspenTech and DGM.
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Recent Accounting Pronouncements
Refer to Note 2, “Significant Accounting Policies” to our consolidated and combined financial statements for information about recently adopted and issued accounting pronouncements.
