Markets

Baron Small Cap Comments on Aspen Technology

Commentary on Aspen Technology ( AZPN ):

During the past quarter, the Fund built out its position in new holding Aspen Technology and added to nine others. The Fund sold out of 13 stocks, as referenced before and trimmed many others.

Aspen Technology, Inc. is the leading provider of engineering, design, operations and supply chain management software to the energy and process industries. Aspen's software helps customers increase productivity, reduce operating costs, enhance capital efficiency and decrease working capital requirements. We took advantage of the stock's sell-off as energy prices have come in, and we are continuing to build out our position as oil continues to decline.

Aspen was founded 30 years ago in a lab at MIT, gained scale through a series of acquisitions in the early 2000s, and recently completed a complete re-architecting of its software and business model. Today, Aspen is a market leading vertical software business that offers customers a growing portfolio of 70 unique applications. Its customers include the world's largest energy, chemical, and engineering and construction companies that depend on Aspen to run their businesses every day. As such, Aspen's tools became deeply embedded in customer workflows, leading to near-perfect retention rates, five to six year contracts and annual price increases.

Aspen will generate just over $400 million of recurring revenue this year, which we think represents less than 20% penetration of its existing opportunity. We think that recurring revenue can compound at close to a double-digit rate organically, though this will likely tick down in the shortterm. Much of that growth comes from deeper engagement from existing customers. The company recently introduced the concept of "tokens" as a means to encourage wider adoption of its software. We think this was a savvy move. Aspen's customers increase their token consumption when they use additional modules or allow more users to adopt the suite. Given the high ROI of the modules, the inevitable result is that customers need to keep coming back to Aspen to purchase more tokens as their use of Aspen technology expands. Growth should also be driven by an upgrade cycle to its newest platform, better integration of modules which should drive more token usage, and the consistent release of new modules. We think the company's investments in analytics and asset maintenance will meaningfully expand Aspen's opportunity over time

Like many vertical software companies, Aspen's business is highly profitable and extremely cash generative. Margins are already in the mid-40% range, and we think those will work higher over time given the company's high incremental margins and strong cost control. The company converts around 75% of its EBITDA to free cash flow, which it uses to repurchase stock and make acquisitions. The company just made an accretive acquisition of a publicly traded UK provider of strategic consulting and software that serves the same customer base. We believe the deal is accretive and strategic and on plan to enable deeper penetration of its clientele and to build out its capabilities.

We believe Aspen's business is super high

Warning! GuruFocus has detected 1 Warning Sign with BKS. Click here to check it out.

BKS 15-Year Financial Data

The intrinsic value of BKS

Peter Lynch Chart of BKS

Warning! GuruFocus has detected 3 Warning Sign with UDF. Click here to check it out.

UDF 15-Year Financial Data

The intrinsic value of UDF

Peter Lynch Chart of UDF

Warning! GuruFocus has detected 3 Warning Signs with QCOM. Click here to check it out.

QCOM 15-Year Financial Data

The intrinsic value of QCOM

Peter Lynch Chart of QCOM

Warning! GuruFocus has detected 1 Warning Sign with AZPN. Click here to check it out.

AZPN 15-Year Financial Data

The intrinsic value of AZPN

Peter Lynch Chart of AZPN

Read More:

About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

AZPN

Other Topics

Stocks