AspenTech Enjoys Wide Moat in Niche Industries

Senior Equity Analyst

Dan Romanoff

Aspen Technology is an industry leader in asset optimization software, providing solutions that enable industrial users to design, operate, and maintain their manufacturing processes for maximum performance. In our view, AspenTech is poised to capitalize on secular trends, acquisition opportunities, and its sticky existing customer base to pave a long runway for growth, as evidenced in our wide moat rating.

In May 2022, AspenTech and Emerson Electric joined forces. The new AspenTech is a combination of heritage Aspen and two of Emerson’s software segments: digital grid management, or DGM, and subsurface science and engineering, or SSE. Emerson and AspenTech also entered into a mutually beneficial commercial agreement, enabling parties to leverage distribution networks, intellectual property, and internal functions. We believe the transaction strategically makes sense and will lead to a stronger AspenTech in the long run.

Heritage Aspen’s software optimizes asset design, operations, and maintenance in complex industrial environments. Its flagship product, the AspenOne platform, can be deployed across the entire product lifecycle to help improve process-oriented plant efficiency, providing simulation, visualization, predictive maintenance, and modeling software. Aspen serves industries that are capital-intensive, with large-scale operators continuously searching for modest improvements to drive uptime and cost reduction. For example, asset failure and unplanned shutdowns can cost large refineries tens of millions of dollars a year. 

We think the total addressable market for industrial automation is above $200 billion, but AspenTech’s addresses a niche with a TAM of $6 billion (pretransaction). We expect AspenTech’s TAM to double for utilities and upstream as the firm integrates DGM and SSE. We also expect the new AspenTech to grow as the firm expands into vertical areas outside its core markets. Currently, most of Aspen’s customers are in energy and petrochemicals, with around 10% of annual spending from pharmaceuticals, paper and pulp, mining, and consumer packaging. We expect these other areas to grow within the mix over the next decade.

Business Strategy & Outlook

We assign a wide moat rating to AspenTech, driven by strong customer switching costs and intangible assets. We believe high switching costs have historically been a key driver of heritage Aspen’s ability to generate returns on invested capital in excess of its cost of capital, supported by the firm’s excellent customer retention and nature of its customer base. Further, we view the combination of heritage Aspen’s decades of experience and domain expertise with DGM and SSE businesses as a deepening of intangible assets that will propel the company toward achieving excess returns for the next 20 years.

At its core, the firm provides a broad suite of software solutions geared toward improving process-oriented plant efficiency and asset optimization across the design, operations, and maintenance phases of the product lifecycle. Heritage Aspen’s core segments are energy, chemicals and engineering, and construction, which contributed 54%, 32%, and 7%, respectively, of growth in annual spending over 2022. These industries are typically capital-intensive, have long lifecycles, and deliver narrow margins, so squeezing every possible drop of efficiency out of the assets is critical. For instance, a refinery might have a functional capacity of 400,000 barrels per day. However, the marginal cost of processing one extra barrel is minimal, and therefore a 1% increase in capacity through more efficient plant usage results in a 404,000-barrel capacity, or over 1,400 barrels annually, delivering meaningful value over time. AspenTech has achieved stickiness in its solutions, through customers deploying a range of products throughout their asset lifecycle, then enjoying improvements in their throughput, margins, and efficiency.

Aspen’s embedded software is critical for customer success in more ways than one, allowing the firm to enjoy consistently high renewal rates in excess of 95%. We believe high retention is intuitive for industries AspenTech serves, as the high capital investment required, and long construction times and useful lives indicate that switching costs are a major impediment. There is also great risk and little potential upside to rip and replace software that is vital to operating a multi-billion-dollar facility and generates a fast return on investment.

From a market lens, Aspen is viewed as the industry gold standard for asset optimization software. The company has earned its place in higher education, where university students are trained on the technical software prior to joining the workforce. We view this presence in education as hard to replicate and inherently sticky, given that present and future engineers essentially grow up on Aspen software.

AspenTech serves virtually all the largest refineries, chemical processors, and engineering and construction companies, who face increasing pressure to deliver resources for a growing population while also reducing waste, emissions, and energy consumption. The increased use of highly advanced technical software is critical for customers to meet their environmental, social, and governance requirements, as digitized workflows and predictive modeling enable a reduction in errors and downtime, leading to efficient energy usage and improved safety. AspenTech has uniquely positioned itself at the center of customers’ sustainability and decarbonization programs, offering over 60 sustainability modules. Here, it enjoys an increased level of stickiness as its offerings become a strategic imperative for expanding the bottom line and achieving sustainability goals.

We view intangible assets as a secondary moat source. We first see value in heritage Aspen’s superior modeling, simulation, and asset performance management capabilities and relationships built over decades, enabling the firm to support the largest refineries and industrial manufacturers’ digitization efforts. We view AspenTech as the gold standard software solution for process efficiency, with its offerings being shortlisted for consideration in all new projects or upgrades at customer facilities. The key driver behind its deep domain expertise is the firm’s targeted research and development toward process engineering, where research and development expenses normally account for 14%-16% of revenue annually, and the firm further invests in capabilities through small tuck-in acquisitions. By comparison, industrial competitors such as Rockwell Automation, Siemens, PTC, Schneider Electric, and Yokogawa invest around 5%-7% of revenue toward research and development.

We also believe the most recent Emerson transaction strengthens the firm’s intangible assets. The DGM portfolio enables optimal digital grid management for electric, gas and water utilities, while SSE adds geoscience and modeling for optimization across subsurface engineering and operations. The DGM and SSE businesses further diversify revenue into expanding end markets, where demand for software solutions is increasing. For instance, the world’s power demand is expected to double by 2050 under U.S. Energy Information Administration scenarios, and digital grid management solutions provided by the DGM business will be vital for successfully expanding networks. We believe the combination of the three businesses, as well as additional commercial agreements formed with Emerson to leverage capabilities and IP will both broaden and deepen technical know-how and research and development capability. We also view that the transaction creates a solid foundation for future acquisitions, so that AspenTech can continue to diversify into different end markets and remain an innovation leader within its served markets.

Wide

Economic Moat

Aspen Technology Inc

Aspen Technology, Inc. develops software for asset performance, monitoring management and optimization solutions. It helps organizations to streamline engineering and maintenance processes to reduce downtime and increase operational efficiency. The company was founded on August 12, 1981 and is headquartered in Bedford, MA.

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