Mark Sullivan - CFO Antonio Pietri - CEO.

Richard Davis - Canaccord Genuity Sterling Auty - JPMorgan Monika Garg - Pacific Crest Securities Mark Schappel - The Benchmark Company.

Good afternoon. My name is Lori and I will be your conference operator today. At this time I would like to welcome everyone to the Aspen Technology’s Second Quarter 2015 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Mark Sullivan, you may begin your conference..

Antonio will discuss business highlights from the quarter, then I'll review our financial results for the second quarter and our guidance for the third quarter and fiscal year 2015, before we open up the call for Q&A. With that, I'd like to turn it over to Antonio..

Asia, Europe and North America in addition to strong sales from the Middle East and the SMB business. We also generated a strong deal activity across each of our major verticals, closing significant deals with energy, chemicals and E&C customers.

We are pleased to have delivered these solid results during a period of significant volatility in the price of oil which is something that many investors and analysts have asked us about.

One of the compelling characteristics of AspenTech is our target industries including the fact that approximately 65% of our business is with owner operators in the energy and chemicals verticals where our customers utilize our aspenONE platform to optimize the day-to-day operations of their assets.

For many of these customers oil and its derivatives are one of the primary costs associated with operating many of their facilities. Customers typically keep these facilities in operation due to the complexity and costs associated with shutting them down over the short or medium term.

Keeping them operationally means that most likely they will focus on optimizing their performance. We highlighted in the past some of the positive drivers in our end markets such as globalization, economic volatility, change in demographics, environmental and safety regulations and customers’ focus on operational excellence.

AspenTech’s products and solutions drive a complex commercial and operational environment and none of these industry dynamics and drivers for our business has changed due to the current microenvironment.

Engineering and construction which represent 30% of our business is experiencing historically high backlogs of contracted business that is expected to sustain their performance for at least the short to medium-term. E&C companies are under pressure from their owner operator customers to reduce costs and deliver on time in their projects.

AspenTech solutions in this space drive design efficiencies and capital cost reductions as well as increase the productivity of their engineering workforce, therefore making them mission critical to their success.

It's important to recognize that owner operators are contracting with E&C companies as part of multibillion-dollar investment decisions for facilities that will be operational for 20 to 60 years which has delayed many of their investment decisions for from near-term moves in oil prices.

The volatility in the price of oil and an uncertain macroeconomic environment create positives and negatives for our business, or puts and takes as I like to refer to them. An oil price increase can be positive for refining and chemical customers in regions such as Europe, the US, Japan and China that are large orders and/or consumers of oil.

At the same time it can be negative for countries like Russia and Venezuela that depend on oil production and therefore upstream activities to generate revenue.

Overall lower oil prices are a long-term positive for the global economy which then result in higher consumption of our owner operator customers and products, therefore driving improvement in their business and eventually creating the needs for more assets to be built.

Our balanced portfolio of customers across verticals, products and geographies has historically enabled us to deliver positive financial results in periods of volatile oil prices and global economic activity. And it clearly did during the second quarter.

As we look forward we continue to have a solid pipeline of opportunities for the second half of the year and we remain cautiously optimistic about our outlook. We believe it is important for investors to keep several things in mind when evaluating our business.

Our products are mission-critical for our customers in order to increase the efficiency and cost-effectiveness of their facilities. Energy customers primarily deploy our products in their downstream operations with only close to 13% of our revenue coming from the upstream exploration and production sector.

Our term contracts are typically 5 to 6 years in length which provides significant stability and visibility into our revenue performance.

We’re still in the earlier stages of realizing the full benefit of the significant innovation that we have delivered to the market in the last two to three years as less than half of our customers have upgraded to version 8 of the aspenONE suite which is the only way for customers to access these new and expanded feature set.

While we recognize we are not immune from a material worsening of the macro environment we believe the combination of providing mission-critical software that generates significant ROI for our customers and the five to six year duration of our contracts provides AspenTech with a degree of insulation from volatile economic environment.

I now would like to highlight some detail on five transactions that closed during the quarter in order to provide investors with color on what is driving customer demand. We signed an early renewal that included a multimillion dollar upsell with a European E&C company focused on the upstream market to expand their use of our engineering software.

This customer has experienced significant growth in its backlog and will require increased usage of our engineering suite of products, therefore committing to a broader deployment of aspenONE for another six years.

This example also reinforces that even in the most volatile segment of the energy industry which again is a fraction of our customer base we continue to experience solid demand.

Second, a European integrated oil company signed a multimillion dollar contract expansion to roll out our refinery scheduling solutions to complement their existing use of our planning solution. This customer intends to implement these solutions at their existing refineries and estimates they will generate $20 million to $30 million of annual saving.

Third, a global oil major signed a multimillion dollar deal to gain access to our DMC3 solution and specifically the adaptive control functionality since they expect to capture significant incremental value by upgrading from previous versions of our advanced control technology and rolling it out on a global basis.

This is an excellent example of our product innovation producing additional TAM, white space and driving additional growth opportunities.

Fourth, a global US chemical company renewed two agreements with AspenTech that each included a multi-million dollar upsell for a six year term and engineering agreement was renewed early due to expanding usage of our software. The second agreement was an early renewal of their MSC agreement and was extended again for six more years.

And finally a large US refining customer converted to the aspenONE licensing model to gain access to innovation only available in the aspenONE suite.

This customer wanted access to our DMC3 product in our manufacturing and supply chain product suite and also purchased more usage capacity to accelerate the deployment of our products in white space in their refining network.

We believe these customer examples during the second quarter highlight the positive impact that our focus on expanding usage of our products and the product innovation that we’ve brought to market over the last several years including adaptive process control and the engineering software innovation in V8, are having on our ability to drive growth.

We believe we still are at the early stages of benefiting from the innovation introduced in recent years and are focused on continuing to invest in R&D to enhance our product portfolio even further. During the second quarter, energy, engineering and construction and chemicals was again represented greater than 90% of our business.

Energy was the largest vertical contributor followed by engineering and construction and chemicals. Looking at our 10 largest transactions in the quarter, it was again a mix of engineering and manufacturing supply chain deals and both product suites generated positive performance.

Increasing efficiency and productivity are an even larger focus for our owner operator customers in today's environment. We continue to see the opportunity to grow both the number of aspenONE users as well as the number of products per use in our installed base and across both our engineering and manufacturing supply chain platforms.

Our focus remains on sustaining a solid level of growth by making targeted investments while maintaining disciplined expense management in order to generate substantial free cash flow.

Our strong cash flow and balance sheet support our continued return of capital to shareholders and in the second quarter we repurchased nearly 2 million shares for $72 million. Since the introduction of our share buyback program in fiscal 2011, we have returned $380 million to shareholders through the repurchase of 12.4 million shares.

Earlier today we announced that AspenTech’s Board of Directors has authorized a new $450 million share repurchase authorization. This latest authorization is the largest in the company's history and is a key component in utilizing our financial strength to generate sustained shareholder value.

We also continually evaluate opportunities to utilize our strong balance sheet for acquisitions which we believe can be an effective way to expand our market and growth opportunities.

I also want to announce that I have promoted effective January 1, 2015 two seasoned sales leaders in AspenTech to the position of SVP, Sales, Americas and SMB and SVP, Sales, International. Jim Boozer and Paul Taylor respectively will lead their own areas of geographic responsibility and jointly lead the AspenTech sales organization going forward.

Jim was running our North America sales organization and Paul, our EURA -- Europe, Africa, Russia sales organization. They will report to me as CEO and have become members of executive team. In summary, we delivered strong second-quarter results and remain positioned to achieve our full-year objectives.

Our customers continue to turn to AspenTech to provide them with solutions that enable them to manage their complex processes more efficiently and profitably.

While we recognize the macro environment remains uncertain and volatile, our focus is on maximizing this market opportunity while continuing to generate high levels of profitability and cash flow. With that let me turn the call over to Mark.

Mark?.

Thanks, Antonio. Let me begin by reviewing the supplemental metrics we provide starting with our term contract value or TCV metric which measures the renewal value of our multiyear term contracts.

Growing TCV is a key focus for us and we increased the value of the metric by adding new customers, expanding product usage and increasing prices across our customer base. Our license-only TCV was $1.97 billion at the end of the quarter, up 12.8% compared to the second quarter of fiscal 2014 and up 4.5% on a sequential basis.

Total long-term contract value which includes the value of bundled maintenance was $2.33 billion at the end of the quarter, up 13.9% on a year-over-year basis and 4.6% sequentially.

Our annual spend which is a proxy for the value of our recurring term license business at the end of each period, specifically the annualized value of our term license and maintenance revenue was approximately $400 million at the end of the quarter which is an increase of 12.3% on a year-over-year basis and 3.9% sequentially.

As we complete our revenue model transition in fiscal 2015 annual spend will become an increasingly important metric as it is a leading indicator for growth and subscription revenue which represents more than 9% of our total revenue.

License TCV is calculated using each contract’s terminal year annual payment and therefore takes into consideration the total price escalation over the course of a multiyear time period whereas annual spend takes into consideration only the current year's level of spend.

The growth of our annual spend metric should be slightly lower than the growth in our license TCV metric for there can be some quarter to quarter variability. As a reminder beginning in fiscal 2016, we will be providing annual spend growth guidance in quarterly annual spend results, both updating TCV and TLCV on a milestone or year end basis.

Now let me turn to our quarterly financial results, beginning on a GAAP basis. Total revenue came in above the high-end of our guidance range 207.8 million, which was up 9.1% from 98.8 million in the prior year period and essentially flat from 107.1 million last quarter.

We faced difficult comparisons on both a year-over-year and sequential basis in the second quarter due to the timing of recognizing cash basis revenue. Recall that we discussed impact of recognizing cash basis revenue on last quarter's call in the context of this quarter's revenue guidance.

Also in the second quarter last year we had approximately $5 million of nonrecurring cash basis revenue. Adjusting for that revenue, total revenue growth in the second quarter would have been 15%.

Breaking revenue down further, subscription and software revenue was $98.7 million for the second quarter compared to 88.9 million in the prior year period and 98.7 million last quarter. Services and other revenue was $9.1 million compared to 9.8 million in the year ago period and 8.4 million last quarter. Turning to profitability.

Gross profit was $95.5 million in the quarter with a gross margin of 88.6% which compares to $86.3 million and a gross margin of 87.4% in the year ago period. Operating expenses for the quarter were $49 million compared to 50.2 million in the prior year period.

Total GAAP expenses, including costs of revenue were $61.4 million, down from 62.7 million in the year ago period and 62.5 million last quarter. Expenses were positively impacted by two one-time items, totaling approximately 1.6 million.

The first reflected a payment of approximately $700,000 from our intellectual property infringement litigation against M3 Technology. Second item was a business tax refund in China of approximately $900,000. Both of these expense benefits flowed to G&A expense.

Operating income was $46.5 million for the second quarter of fiscal 2015, an increase compared to operating income of $36.1 million in the year ago period. Operating margin was 43.2% for the second quarter fiscal 2015 compared to 36.6% in the year ago period.

Net income for the quarter was $30.5 million or $0.34 per share compared to net income of $23.3 million or $0.25 per share in the second quarter of fiscal 2014. Turning to our non-GAAP results.

Excluding the impact of stock-based compensation expense, structuring charges, amortization of intangibles associated with acquisitions and non-capitalized acquired technology, we reported non-GAAP operating income for the second quarter of $50.2 million which equates to a 46.6% non-GAAP operating margin and was ahead of our guidance of $43 million to 45 million.

We exceeded the high-end of our guidance range by nearly $4 million even after adjusting for the one-time expense benefit I referenced earlier. Non-GAAP operating income and margin was $39.5 million and 40% respectively in the second quarter of fiscal 2014. Moving down the P&L.

Non-GAAP net income in the second quarter was $32.8 million which compares to $25.4 million in the year ago period. Our non-GAAP EPS was $0.36 in the second quarter of fiscal 2015 based on 90.5 million diluted shares compared to non-GAAP EPS of $0.27 based on 93.8 million diluted shares in the second quarter of fiscal 2014.

We are now halfway through fiscal 2015, the final year of the revenue transition that began in fiscal 2010. Our profit margins, which weren't meaningful while we were moving through the revenue transition, are now more reflective of the true earning power of the business, even though GAAP revenue will still be slightly understated in fiscal 2015.

Turning to the balance sheet and cash flow. The company ended the second quarter with $256.5 million in cash and marketable securities, a decrease of $32.7 million from the end of last quarter.

We generated $41.4 million of non-GAAP cash from operations during the second quarter and $40 million of free cash flow, which was offset by 70.9 million that we used to buy back stock in the quarter. Our persistent approach to buying back our stock is having a material impact on shares outstanding.

We had 88.9 million shares outstanding at the end of the second quarter of fiscal 2015 as compared to 92.6 million shares outstanding at the end of the year ago period, reduction of 4%. Since we initiated our buyback efforts in the second quarter of fiscal 2011, we’ve reduced our outstanding share count from 93.1 million to 88.9 million.

Capital expenditures totaled approximately $1.4 million in the second quarter of which $1.3 million was related to the buildout of our new headquarters. We currently expect to spend an additional $3.4 million on our new headquarters in the third quarter which is in line with our $8 million full year forecast.

As a reminder we will be reporting non-GAAP cash flow from operations metric throughout 2015 to show cash flow on a historically comparable basis.

As we discussed in the past most of our remaining net operating losses are considered APIC NOLs for GAAP cash flow reporting purposes, and the benefit derived from APIC NOLs is treated as a financing source of cash flow. Previously the impact of all of our other tax benefits flowed through the operating cash flow section of the cash flow statement.

As a result in order to provide an apple to apples comparison with prior year periods, we are reporting non-GAAP cash flow from operations in addition to free cash flow which treat all tax expense and benefits irrespective of source as part of cash flow from operations. In the second quarter of fiscal 2015, we utilized $7.6 million of APIC NOLs.

We did not make any US federal tax cash payments in the quarter and do not currently expect to become a US corporate taxpayer until the first quarter of fiscal 2016. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.

Our deferred revenue balance was $238.4 million at the end of the second quarter, representing a 6.1% increase compared to the end of the year ago period.

On a sequential basis, deferred revenue decreased $18.4 million As we've discussed previously, the second half of the year is a stronger period for our deferred revenue due to the same factor that drives the timing of our cash flow, namely the timing of when we bill our customers.

With the revenue model transition nearing completion, we anticipate that our deferred revenue will generally exhibit a trend pattern similar to our cash flow, driven by higher customer invoice value in the second half of the fiscal year.

I’d now like to close with thoughts regarding our updated financial outlook for fiscal 2015 as well as guidance for the third quarter. As a reminder, fiscal 2015 represents the final year of our revenue model transition which will conclude during the course of this year.

Fiscal 2015 GAAP revenue will continue to be lower than our fully transitioned revenue value but the difference will be smaller than the prior years. As GAAP subscription revenue normalizes, annual growth rate should more closely approximate the growth rate of our annual spend metric.

With that in mind we expect third-quarter revenue in the range of $107 million to $109 million, non-GAAP operating income of $42 million to $44 million and non-GAAP EPS of $0.30 to $0.31. On a GAAP basis we expect third-quarter operating income of $38 million to $40 million and EPS of $0.27 to $0.29.

Although vast majority of our business is not recognized on a cash basis, the timing of when cash basis customers pass can have an impact on sequential revenue trends. We’re guiding revenue to be flat to modestly up in the third quarter due to the uncertain timing of exactly when certain contracts will be paid over the remainder of the fiscal year.

This variability becomes less significant when comparing annual timeframes. Turning to the full-year, we are adjusting our revenue guidance to $434 million to $440 million from our previous guidance of $432 to $440 million.

From an expense perspective we are adjusting our assumption for total GAAP costs and expenses to $265 million to $270 million which compares to our previous guidance of approximately $270 million to $275 million for the full year.

Taken together we expect GAAP operating income in the range of $167 million to $173 million, net income in the range of $107 million to $111 million, a GAAP EPS of $1.18 to $1.23.

This is up from our previous guidance of GAAP operating income of $159 million to $167 million, net income of approximately $102 million to $107 million, a GAAP EPS of $1.11 to $1.17.

From a non-GAAP perspective, we now expect non-GAAP operating income in the range of $182 million to $188 million which is up from our previous guidance of $175 million to $183 million for full-year fiscal 2015.

This would lead to non-GAAP earnings-per-share in the range of $1.29 to $1..33 which is an increase from our previous guidance of $1.22 to $1.27 for the fiscal year. The diluted share values we’re using to calculate EPS are 89.4 million for the third quarter and 90.3 million for the full-year.

These diluted share assumptions reflect the roll-forward impact of the shares we’ve already bought back as of December 31, 2014. These diluted share assumptions do not include the additional impact resulting from potential buybacks during the balance of the fiscal year.

We continue to target a double-digit growth rate of license contract value for full-year 2015 which we believe we are well-positioned to achieve based on strong customer demand and our pipeline of opportunities. From a cash flow perspective we are reiterating our fiscal 2015 guidance of approximately 250 million of free cash flow.

Consistent with prior years we expect our free cash flow to be weighted to the back half of the fiscal year with the third quarter being the largest contributor to free cash flow. It’s due to the timing of when we invoice customers and their payments become due.

In summary, we are pleased with our second quarter results and our ability to generate both strong growth and profitability. As we look ahead we believe there is a long runway of opportunities to drive increased adoption of aspenONE across our core verticals that will enable us to generate substantial profitability and cash flow.

With that we are now happy to take your questions. Operator, let’s begin the Q&A. .

[Operator Instructions] Your first question comes from the line of Bhavan Suri with William Blair..

Hi guys this is [Albert Tu] getting in for Bhavan Suri. Congrats on the quarter. I just wanted to highlight one area. I know, within the energy or engineering and construction vertical, you guys saw some nice upsell opportunities in the quarter.

And kind of looking at how the price of oil has come down, how have you been able to upsell to customers and continue to see the license portion of the TCV metric go up?.

Look, the fact of the matter is that we have not seen any material change in the buying patterns of our E&C customers and I also referenced in my notes that these E&C customers historically high backlogs and that will sustain their business short to medium-term.

In addition, we’ve introduced a significant amount of innovation that continues to drive productivity increases in the use of -- from the use of our software in addition to the fact that our software is used to optimize the design and the capital cost investments for these customers.

So overall while I remain cautiously optimistic about our outlook, we have not seen any material impact on the E&C business..

Okay. And one quick follow-up.

Is there kind of a price point that you see where the price of oil gets to a level where you become worried that customers may walk away from certain deals?.

You're asking me to try to guess about the purchasing decisions, so I am not going to do that. But time will tell if that price point exists. .

And your next question comes from the line of Richard Davis with Canaccord. .

Mark, just a quick question. When we kind of get to steady-state non-GAAP earnings versus free cash flow, a lot of companies, it's anywhere from, I don't know, a 5% to, I don't know, a 20% difference.

Is that the right range, so the midpoint of that roughly, when we are thinking kind of longer-term on the numbers?.

Sine we are pretty much through the transition, if you look at that relationship now, we’re pretty much at steady state. So I wouldn’t expect over time that of the items that would cause a difference has really changed pretty much. So I think we are there now..

And your next question comes from the line of Sterling Auty with JPMorgan..

Yes, thanks guys. Antonio, great job gutting it out not feeling well. We hope you feel better. And to both of you, thank you guys for the incremental transparency that you gave in the call. I wanted to go into a couple of questions.

The first one, on the engineering and construction, can you give us a flavor for how much of the business or how much of your customers in E&C are really kind of focused on building midstream refining capacity as well as doing other facilities in more of the mid to upstream areas that might be a little bit more sensitive to oil prices?.

Well let me first clarify something.

The facilities that are built in the midstream market are very basic when you compare them to a refinery, there are no refineries that are built for the midstream segment and because all that midstream is really the exploration and production of gas or oil and then that is processed through gas separation or oil separation unit that are very simple and unsophisticated when compared to a refinery and then that gets piped to an oil depot or a gas terminal and processed in refinery.

So the impact on the E&C companies from a reduction in the price of oil and whatever impact they may have on the construction facilities from the standpoint of our software is minimal.

How much of that impact? Well I referred from an upstream standpoint 12% to 13% of our annual spend on revenue is in that segment and now that segment combines the owner operators and E&C companies that are targeting upstream but we don’t have a number that’s – that figure.

The midstream business as a whole is small to us and we again -- we haven't seen a material impact from the changes that we have seen so far in the price of oil..

Okay, so if midstream is small, 12% to 13% looks like it's upstream with E&C and owner operators, then the bulk of it is downstream.

Could you maybe help us all understand the types of use cases or customers, whether it be the owner operator or E&C, in that end of the industry value chain?.

I am not so sure that I fully understood your question, Sterling. .

Maybe just to reword it, if 12% to 13% is upstream, midstream is small.

Give us a little bit better description of the exposure on the bulk of the revenue in terms of what part of the entire value chain, within the oil industry in particular?.

Well, look, to the investors that I talked to and analysts that I talked to in the November to mid-December period, when we were not in the quiet period, I talked to them about our energy business which is about 40% of our total business and breaking down into about 60% refining and marketing, 30% upstream and then the other 10% midstream.

I don’t know if that answers what you're looking for but that would be the value chain that you're talking about..

Yes, no, that's perfect. I appreciate it. And then last question for Mark Sullivan. In terms of APIC NOLs, can you give a sense of how much APIC NOLs there are? You've talked about being taxable kind of first quarter fiscal ‘16.

But what are the drivers between now and then that maybe could increase the amount of APIC NOLs or maybe you become -- you're not paying taxes for a longer period of time or the opposite.

What could cause that amount to shrink, if anything, were you to pay taxes sooner?.

Really at this point, there are really only two drivers, the primary, maybe the only two. One is for obviously profitability, so the rate at which we generate profits and then need to consume whatever our NOLs, in this case APIC NOLs to offset the taxes, obviously drives things in one direction.

And then the other is we generate additional NOLs by – or APIC NOLs to the extent when people exercise stock and or our lapse our Hughes that the tax value of those options of those instruments is higher than the book value. So the higher our stock rate, the higher benefit we get from that.

So those are the two variables and we will presumably generating some level of that as we go forward here in time, that will be offset by if we were to become more profitable faster we consume them faster..

But kind of that steady-state where you are, you would consume all of the APIC NOLs that you see generating between now and the end of fiscal 2015? You expect to consume all those?.

As we sit here today with our existing guidance and outlook we would expect to start paying US cash taxes some time in the first quarter. .

And your next question comes from the line of Monika Garg with Pacific Crest Securities..

Thanks for providing details about upstream downstream details. I have just a question on the same.

So is it fair to think that most impact, it could be from lower prices, is mainly from the upstream line of customers, which is still 12% to 13% of the segment, and downstream guys are not that much impacted and does not impact that business at the current level of low oil prices?.

Monika, let me frame it for you this way. The current drop in oil prices is a supply-driven issue as opposed to in 2008-09 when it was a demand driven issue because the global economy went into recession 4% to 5% contraction, and there was tremendous demand destruction and that certainly impacted everyone across-the-board owner operators and E&Cs.

In this market or this environment what we’re seeing mostly is a supplies driven oil price drop which really hasn't happened since 1986-88. In that scenario owner operators for the most part benefit from lower oil prices and their derivatives because the cost of their feedstocks actually is lower and they can make better margins.

Some of the data that I've read that people are now projecting that the chemicals industry is going to grow by 3% in calendar 2015 when it was being projected at somewhere between 1% and 1.5% before all of this.

Refining is benefiting as well but certainly refining margins are contracting a little bit but still a positive because over the long-term what an oil price drop has demonstrated is a benefit to the global economy and eventually there is a significant pickup in the growth rate of the global economy.

So what happens to E&C during that time? Well it just so happens at this time E&Cs have record backlogs that will sustain them over time. How long that will be? I do not know and I cannot predict but overall like I said we have not seen a material impact to your business from the drop in oil price..

And then any impact from depreciating currencies, especially in Europe-Russia?.

So most of our contracts are in US dollars, like I said somewhere around 15% or maybe even less at this point, is not denominated in US dollars. So yes, to the extent that those invoices come due in a period there can be a unfavorable impact on revenue.

On the other hand, we do have a reasonable number of employees who are -- we benefit from an expense side because they are in countries other than the US and paid in local currency and we’re getting a benefit.

And I would say probably in general at this point we’re getting more of -- a little bit more of a benefit to the bottom line the negative impact but that could vary quarter to quarter depending on what the mix of business is coming out of backlog and going into revenue..

And I have a question on the deferred revenue.

I think you explained, Mark, on the call, but since total deferred revenue has come down two quarters back to back, is it just we will -- going-forward basis, we'll see second half as a bigger quarter than the first half?.

Yes, so we have, I’ll call, very lumpy invoicing on a quarterly basis and you see this when you look at our cash flow timing, typically the first quarter cash flows by far are the lowest in the third quarter, is by far the highest and really what that's a reflection of is we bill our customers in advance on very annual anniversary date, for whatever historic reason a lot of that is around first of the calendar year.

So we would expect to see deferred revenue bounce back here in the second half of the year as that higher level of invoicing favorably impacts that, and our subscription model obviously is sort of coming out of deferred revenue at a fairly linear rate.

So there will be the sort of, call it seasonality, it’s not seasonality in the traditional sense but it’s sort of timing variation quarter to quarter just based on the way the business was booked in the past. .

All right. The last one for me. TLCV grew nicely higher, 12.8%. Maybe you could share your thoughts going forward on the next couple of quarters.

Could we see similar kind of growth in the next quarters as well?.

Well we’ve maintained our guidance on the TLCV growth which is 10%. Of course, we try to deliver as higher percentage as we can.

What I will tell you though is that as I look at our pipeline which is they are sort of forward-looking indicator that I use the most in addition to just my overall knowledge about our industries, our customers and the company, we have a pipeline that supports our historical ratios of conversion to deliver to the performance that we have delivered in this quarter and in past quarters.

So we -- like I said, we have a solid pipeline, we’re cautiously optimistic about the next two quarters and time will tell what we can do here..

[Operator Instructions] Your next question comes from the line of Mark Schappel with Benchmark. .

Antonio, this fiscal year, I believe the company was shifting its focus in its telesales effort in the small -- in the SMB market that you're targeting. You are targeting some smaller chemical companies like biofuels, ethanols and spec. I was just wondering if those efforts are showing any benefit yet or if it's still just too early days. .

Yes, look, we activated what we call our SMB owner operator group which is an inside sales group that is targeting a small owner operators, I should say biofuels and other types of companies in the low range or small range of the spectrum. They had a great Q1 and Q2.

Of course they are starting from a very small base but it’s a business that that is demonstrating the same characteristics of our SMB E&C business when we first set it up and time will tell where we go with it. But so far so good.

We learned a lot when we set up our E&C business and we’re using those learning in the launch and execution around the two business. End of Q&A.

I would now like to turn the call back over to Antonio for closing remarks..

Well thank you operator and thank you -- thanks to everyone for joining the call today. We look forward to talking to you later in the call back or as we go on the road to – with you investors and analysts. Thank you everyone..

This concludes today’s conference call. You may now disconnect..