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Aspen Technology and Atlassian have been highlighted as Zacks Bull and Bear of the Day

For Immediate Release

Chicago, IL – October 31, 2022 – Zacks Equity Research shares Aspen Technology AZPN as the Bull of the Day and Atlassian TEAM as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Alphabet GOOGL, Microsoft MSFT and Amazon AMZN.

Here is a synopsis of all five stocks:

Bull of the Day:

Aspen Technology, aka AspenTech, is a $15 billion provider of industrial software that helps manufacturers and engineering firms monitor and optimize their operations in a process commonly referred to as asset performance management (APM).

Their most recent quarterly report on October 26 blew away all expectations with a 75%+ beat on the bottom line EPS. But the stock fell from all-time highs above $260 to $235 on Thursday as lots of technology got slammed after weak reports from Amazon and META Platforms shook the sector.

AZPN was already a Zacks #1 Rank headed into the quarter as analysts were raising estimates on new deals, partnerships, and customers.

And they will be submitting new upward revisions this week as they digest the report and re-calibrate their models.

AZPN Quarter Details

AspenTech reported first-quarter fiscal 2023 non-GAAP earnings of $2.20 per share, beating the Zacks Consensus Estimate of $1.23. The company reported non-GAAP earnings of 31 cents per share in the year-ago quarter.

Revenues of $250.8 million surpassed the Zacks Consensus Estimate by 10.3%. The company reported revenues of $77 million in the year-ago quarter.

The top-line performance was driven by the acquisition of Emerson's business units. The integration of Emerson's OSI and GSS businesses with Aspen will aid the the company to move toward its token licensing model.

AZPN Analyst Reaction

KeyBanc analyst Jason Celino raised the firm's price target on Aspen Technology to $280 from $270 to reflect his growing confidence in acceleration opportunities, and how the company has executed on multiple fronts regarding its integration plans with DGM and SSE

Celino noted that AspenTech posted slightly better Q1 ACV growth of 7.7%, though heritage annual spend growth came in modestly below. "The company continues to see positive demand trends across its business, though remains vigilant on macro, and is reiterating its full year 2023 ACV growth guidance of 10.5%-13.5%."

Celino has been a diligent and accurate bull on AZPN for several years as we'll see coming up. It's worth noting that he hiked his outlook and PT from $227 to $270 just a week ago ahead of earnings.

And here was his move in July as AZPN was about to acquire significant Oil & Gas asset technology and contracts from Emerson Electric (EMR), which acquired 55% of the company in May...

KeyBanc analyst Jason Celino raised the firm's price target on Aspen Technology to $210 from $175. The analyst believes Aspen is positioned to "see a multi-quarter acceleration back to double-digit annual spend growth, which is supported by a strong oil and gas end market backdrop."

Celino added that, with the transaction with Emerson now behind it, he rolls forward the firm's model to FY24 for the combined company, with a higher price target of $210 based on 30x FY24 enterprise value/free cash flow and a bull case price target of $235 based on 32x FY24.

What Is APM and Why Does It Matter?

AspenTech solutions aid in optimizing process manufacturing by supporting real-time decision making, predicting equipment failure, and providing the ability to forecast and simulate potential actions.

Asset management solutions not only assist manufacturers in understanding the operating conditions of their assets but also to take appropriate actions to increase their productivity in an efficient way.

In the era of automation and artificial intelligence (AI), AspenTech talks of the "self-optimizing plant" that can use Industrial AI technology to enable companies to make plants increasingly autonomous and optimize across functions.

For more on AI in the latest industrial developments, see my recent Zacks Confidential report on the primary architect of Industrial AI, NVIDIA...

Omniverse is the Engine for the Metaverse

You can request a copy by contacting Ultimate@Zacks.com -- and tell them Cooker sent you!

Old School Modeling Gets AI Facelift

Here's what I wrote in my 2020 article...

AspenTech is the oldest industrial software company you've never heard of. They got their start over four decades ago modeling chemical processes for oil and gas companies during the energy crisis that began in the 1970s.

As their PR video says "Not long after that, we started moving companies away from the dials and knobs and kicked off a digital revolution in the process industries."

AspenTech was put on my radar not merely because of its frequent visits to the upper realms of the Zacks Rank earnings momentum model, but also because of a significant AI acquisition they made almost four years ago. Here was the press release...

AspenTech Acquires Mtell

Will Add Predictive and Prescriptive Maintenance Technology to aspenONE® Software; Extends Company's Asset Optimization Offerings

Bedford, MA -

Aspen Technology, Inc., a leading provider of software and services to the process industries, announced it has acquired Mtelligence Corporation (known as Mtell), a San Diego, California-based pioneer in the field of predictive and prescriptive maintenance for asset performance optimization.

Mtell products enable companies to increase asset utilization and avoid unplanned downtime by accurately predicting when equipment failures will occur, understanding why they will occur, and prescribing what to do to avoid the failure.

The products provide a low-touch, rapidly deployable, end-to-end solution that combines a deep understanding of operations and maintenance processes, real-time and historical equipment data and cutting-edge machine learning technologies. As a result, customers can:

Monitor the health of equipment, detect early failure symptoms, diagnose their root-cause and recommend the best responses to avoid the failure

Continually learn and automatically adapt to changing equipment and process behaviors

Automatically share findings across a network of similar equipment to improve the overall process performance.

Some of the world's largest process manufacturing companies use Mtell software to detect and avoid failures well in advance of an actual breakdown, optimizing the performance of their assets. Customer results have shown significant benefits including improved industrial safety, removal of risk, reduced failures, enhanced productivity and increased profitability.

The AI Brains Behind Mtell

The co-founder of Mtell was Alex Bates who performed DARPA-funded research in neural networks as an undergrad, as well as research in memory and computational diagnostics. Next he jumped into the private sector, applying analytics on some of the world's largest data warehouses at Teradata, a pioneer in big data / MPP database technology.

A lead inventor on 3 patents in the area of sensor networks and machine learning, in 2006 Bates co-founded Mtelligence (Mtell) to harness the deluge of sensor data in the industrial IoT, with a mission to create a world that doesn't break down. Mtell's machine learning platform is used to monitor global fleets of offshore drilling rigs, railroad engines, and process equipment, in effect creating a distributed immune system to protect equipment and personnel.

The AspenTech website describes a case study where Mtell technology examined pump and compressor assets for a major oil & gas refinery with hundreds of sensors in play at once. Aspen Mtell analyzed 220 million sensor values to identify the top 10 maintenance cost failures and predicted a compressor breakdown 49 days in advance.

This is similar to what Alteryx (AYX) allowed Royal Dutch Shell to do, helping them create predictive analytics for forecasting asset failures on off-shore drilling rigs.

Here's how AspenTech describes the evolution of Industrial AI for modern asset performance management...

Traditional preventive maintenance alone cannot solve the problems of unexpected breakdowns. With asset performance management powered by low-touch machine learning, it's now possible to extract value from decades of process, asset and maintenance data to optimize asset performance.

Since Bates was clearly ahead of the curve with machine learning, I'm eager to learn more from him and am currently reading his book Augmented Mind: AI, Humans, and the Superhuman Revolution that he published in 2019 through his investment and research firm Neocortex Ventures.

Big Beat & Raise Quarter

Clearly, the downturn in oil and gas markets impacted AspenTech business and the company had to lower expectations in their Q3 report in May 2020. But you'd never know it looking at what just happened, causing shares to jump from $98 to $128 this month.

KeyBanc analyst Celino wrote "While the downturn in oil end markets presented near-term headwinds, we are confident in the company's best in class execution and more durable business model."

And so after his thesis about AZPN was confirmed in the June quarter, Celino felt compelled to raise his outlook again. On August 13, he raised his price target on AZPN to $137 from $120. Most impressive to him was the 6%-9% 2021 annual spend guidance, which was much higher than his previewed expectations of 3%-5% year-over-year growth. Celino also pointed out that despite a tough end market backdrop, the company's continued execution reinforces his long-term confidence that Aspen remains a core name to own.

While that spend metric is important to the KeyBanc analyst, I'm more focused on the company's growth in a total addressable market for big data and machine learning analytics in the tens of billions. AZPN's projected surge of 23.5% in revenues to $729 million this fiscal year will exceed the last TTM peak of $618M by 18%.

And the 37% expected jump in profits is just icing on that Industrial AI cake. While the valuation at nearly 12X sales is rich, I would look to be a long-term buyer on pullbacks under $120.

(end of my 2020 research notes)

Bottom line: Buy AZPM on this pullback. And follow Celino and Cooker to keep up with latest developments in AI/ML and "deep learning" automation technologies from NVIDIA and others.

Disclosure: I own shares of NVDA and Alteryx competitor Splunk in the data "mining and modeling" space for the Zacks TAZR Trader portfolio.

Bear of the Day:

Atlassian is a $50 billion provider of a suite of cloud-based software solutions that help organizations collaborate and manage their workforce such that the teams communicate and work better together.

Initially, Atlassian's products, like JIRA, were designed to help software developer teams communicate, collaborate, and manage the design and delivery cycle of software, similar to the ubiquitous Slack app that Salesforce acquired last year.

Over the years, uses of Atlassian's solutions have expanded virally to teams across diverse industries.

EPS Estimates Drop After Analyst Reactions

Atlassian reported fourth-quarter fiscal 2022 non-IFRS earnings per share (EPS) of 27 cents beating the Zacks Consensus Estimate of 26 cents. The figure increased 12.5% from the year-ago quarter's non-IFRS earnings of 24 cents per share.

Atlassian's fiscal fourth-quarter revenues surged 36% to $760 million and surpassed the consensus mark of $717.8 million. The company witnessed solid demand for its cloud-based products, primarily led by smaller customers. Meanwhile, the cloud migration momentum continued for larger clients.

Since first-quarter fiscal 2022, Atlassian modified its revenue reporting style. Based on deployment options, the company started reporting revenues under four segments — cloud, data center, server, and marketplace and services. Also, it started excluding Trello single-user accounts while updating its active customer count from the first quarter of fiscal 2022 onward.

During the quarter under review reported in early August, cloud revenues were $434 million, indicating 55% year-over-year growth. Meanwhile, revenues from the data center surged 60% to $158.9 million. Marketplace and services revenues were $49.3 million, reflecting a 24% year-over-year downfall. Revenues from Server declined 16% to $117.6 million.

The company's non-IFRS gross profit climbed 35.9% year over year to $644 million. Non-IFRS gross margin contracted 10 basis points (bps) to 84.8% during the quarter.

Atlassian's non-IFRS operating income increased 14.8% year over year to $108.9 million, while its operating margin contracted 300 bps to 14%.

In late October, Mizuho analyst Gregg Moskowitz lowered the firm's price target on Atlassian to $320 from $360 and kept a Buy rating on the shares. Software stocks "remain besieged" by high inflation, rising yields, supply chain constraints, currency headwinds, and the ongoing Russia-Ukraine war, the analyst told investors in a research note.

While fundamental checks "have been healthy overall," they have "again picked up indications of uneven demand," he noted. The analyst cut price targets but says a lot of risk is now priced into software shares.

Fiscal 2022 Highlights

Atlassian's fiscal 2022 revenues grew 34% year over year to $2.8 billion and surpassed the Zacks Consensus Estimate of $2.76 billion. The company reported non-IFRS earnings of $1.69 per share for the fiscal, which matched the Zacks Consensus Estimate but outpaced the year-ago quarter's earnings of $1.40 per share.

Balance Sheet

The company ended the fourth quarter of fiscal 2022 with cash and cash equivalents and short-term investments of $1.46 billion, up from $1.28 billion at the end of the third quarter.

During the fourth quarter, TEAM generated operating and free cash flow of $230 million and $194.7 million, respectively. In fiscal 2022, the company generated operating and free cash flow of $883.5 million and $763.8 million, respectively.

TEAM Outlook

For the first quarter of fiscal 2023, the company anticipates revenues between $795 million and $810 million. Atlassian's fiscal first-quarter revenue guidance is higher than the Zacks Consensus Estimate of $761.9 million.

Non-IFRS gross margin is estimated to be 84-85%. Non-IFRS operating margin is projected to be approximately 18%. The company anticipates reporting non-IFRS EPS of 37 to 38 cents approximately. The Zacks Consensus Estimate for fiscal first-quarter earnings is pegged at 33 cents per share.

Quarter Details

During the fourth quarter of fiscal 2022, Atlassian added 8,048 net new customers, bringing the total count to 242,623 customers on an active subscription or maintenance agreement basis. A large number of customers are opting for cloud offerings amid the ongoing cloud migration. Such new additions and increased pricing on certain products contributed to the company's quarterly revenues.

Segment-wise, Subscription revenues surged 55% year over year to $597.3 million. Sales from the Maintenance business decreased 11% year over year to $117.1 million, while Other revenues (which included perpetual license revenues) jumped 6% year over year to $45.4 million.

Additional content:

What Is Happening in the Cloud?

This is turning out to be one of the worst quarters for technology companies in a long time. Most are missing estimates on multiple fronts, or managing to beat lowered expectations. One area that deserves special focus just because it has been so strong of late is the cloud. Alphabet, Microsoft and Amazon are three major players in the space. So management commentary coming out of their earnings calls tells us a lot about the state of the market.

It turns out that the general sentiment, near term challenges and long-term potential that the companies are seeing are very similar.

Alphabet's management said on the call that "As companies globally are looking to drive efficiencies, Google Cloud's open infrastructure creates a valuable pathway to reduce IT costs and modernize."

Microsoft said, "The way we see it is, overall, macro will mean that everybody is going to optimize their build. In fact... our job number one for large swaths of our sort of even customer-facing organizations is to proactively help them optimize. In fact, our incentives in our customer success teams are lined up with them, helping customers 'do more with less.'

"So that's sort of one side. The thing, though, from a customer perspective, the best way for them to align their spend with what is uncertain demand is to move to the cloud. So we see the value prop of the cloud. So the big winner in all of this will be public cloud, because public cloud helps businesses offset the risk of taking demand risk."

Amazon's management also upheld this view: "We think the benefit of cloud computing is really showing up right now because we allow customers to turn what can normally be a fixed expense into a variable expense, and they can let us manage the highs and lows of inflation and other cost of electricity and everything else. So I think just like in 2020, these time periods are good for long-term adoption on cloud computing."

However, while Alphabet's cloud revenue in the just-reported quarter was better than expected, the others were not so lucky. The stronger dollar hurt all three, because of the volume of revenues generated overseas.

Alphabet said, "We are pleased with the ongoing momentum. It's across a wide range of industries and geographies. And it really comes back to the team's focus on helping them solve unique business issues and innovate in new areas as they digitally transform."

But management's tone about the near-term outlook was cautious, recalling what they said last quarter as well: "in some cases, certain customers are taking longer to decide, and some have committed to deals with shorter terms or smaller deal sizes, which we attribute to a more challenging macro environment. Some are impacted due to reasons that are specific to their business. But overall, as you can see from the results here again, we're pleased with the momentum in Cloud."

While reiterating that the company continued "to see growth in the number of large long-term Azure and Microsoft 365 contracts across all deal sizes," Microsoft's management also said that they expect moderation in the 365 growth rate given the size of the installed base.

The other factor that impacted results in the last quarter is also expected to influence results in the current quarter: The lower-than-expected growth in Azure and other cloud services revenue was "driven by the continued moderation in Azure consumption growth, as we help customers optimize current workloads while they prioritize new workloads." Hybrid demand continued to spur the on-premise server business with particular strength on the annuity side, ahead of the SQL Server 2022 launch.

Amazon attributed the last quarter's performance to macro weakness. "With the ongoing macroeconomic uncertainties, we've seen an uptick in AWS customers focused on controlling costs. And we're proactively working to help customers cost optimize, just as we've done throughout AWS' history, especially in periods of economic uncertainty. The breadth and depth of our service offerings enable us to help them do things like move storage to lower-priced tiers options and shift workloads to our Graviton chips."

Margins are also a concern for Amazon: "We're also seeing energy costs that are materially higher than they had in pre-pandemic, electricity and the impact of natural gas pricing. So those prices have up more than two times over the last couple of years and contribute to about 200 basis point degradation versus two years ago. So we're fighting through some of that as well, which is a new thing for the AWS business. But we'll continue to look for ways to optimize our operations to use less energy."

Amazon also thinks there is considerable uncertainty in the short run: "The offset in the short run is that some companies have demand that drops. I think what was different in 2020 was there were companies that went down and there's companies that went up quite a bit that were servicing high volumes during the pandemic. So that dynamic is not in place right now, and I think everyone is just cautious and they want to, again, watch their spend."

The Bottom Line

All three companies recognize the fact that this is an important time to bring new customers on board because of the cost efficiencies that the cloud can provide in times of macro uncertainty. The idea seems to be to get more customers in the door, even if they don't commit to long-term agreements. There is a tremendous amount of confidence in the longer-term potential of the cloud because businesses and governments are still in the early days of public cloud adoption. This confidence is reflected in the significant capital they are investing in the business.

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