Karl E. Johnsen - Senior Vice President & Chief Financial Officer Antonio J. Pietri - President, Chief Executive Officer & Director.

Monika Garg - Pacific Crest Securities David E. Hynes - Canaccord Genuity, Inc. Mark W. Schappel - The Benchmark Co. LLC Matthew C. Pfau - William Blair & Co. LLC.

Hello. My name is Lani and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the call over to Karl Johnsen, Chief Financial Officer. Mr. Johnsen, you may begin your conference..

Thank you. Good afternoon, everyone. Thank you for joining us to review our second quarter fiscal 2016 for the period ending December 31, 2015. I'm Karl Johnsen, CFO of AspenTech, and with me on the call today is Antonio Pietri, President and CEO.

Before we begin, I will make the usual Safe Harbor statement that during the course of this call, we may make projections and other forward-looking statements about the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from such projections or statements.

Factors that may cause such differences include but are not limited to those discussed in today's call and those in our Form 10-Q for the second quarter of fiscal year 2016, which is now on file with the SEC. Also, please note that the following information is related to our current business conditions and our outlook as of today, January 28, 2016.

Consistent with our prior practice, we expressly disclaim any obligation to update this information. Also, please note that the U.K. takeover code applies to the potential acquisition of KBC Advanced Technologies announced on January 12.

Under the code, we cannot provide any information beyond that outline and the related 2.7 announcement issued on January 12. And that nothing in the 2.7 announcement is intended as a profit forecast or estimates for any period. Potential acquisition is still subject to the necessary KBC shareholder approvals and other customary conditions.

More information relating to the potential acquisition can be found on the Investor Relations section of AspenTech's website. The structure of today's call will be as follows.

Antonio will discuss business highlights from the quarter and then I'll review our financial results for the second quarter and our guidance for the third quarter as well as our updated outlook for fiscal year 2016 before we open up the call for Q&A.

Antonio?.

Thanks, Karl, and thanks to everyone for joining us this afternoon. We delivered a solid second quarter performance with results that exceeded our guidance across all metrics. Looking at our financial results for the quarter, total revenue of $119.2 million was well above the high-end of our guidance range.

Non-GAAP operating income was $60.9 million, which represents a non-GAAP operating margin of 51.1%.

Non-GAAP EPS was $0.47, which was $0.07 above the high-end of our guidance range and grew 31% on a year-over-year basis due to the combination of our top-line growth, operating margin expansion, and reduction in share count due to the cumulative impact of our share repurchase program.

Free cash flow was $20.3 million and annual spend was $430 million, up 7.6% year-over-year. Overall, our sales performance was solid given the challenging macro environment created by the continued decline of oil prices and further investment costs across the energy ecosystem.

We saw good sales activity among many of our owner-operator customers with notable performance in Russia, the Middle East, and North America. Owner-operators continued to benefit from good demand for their end products which is being driven by positive global GDP growth.

Our solid performance among owner-operators would have been even stronger but we saw one of our renewals with a national oil company customer move out of the quarter. As we mentioned on our last earnings call, we have a higher than normal number of these contracts renewals in FY 2016.

We are highly confident these contracts will renew based on our long-standing relationships and significant business value that our solutions are providing. But there can be some variability in terms of when they are signed relative to the end of our quarter.

Our downstream energy and chemicals owner-operator business, which represents approximately half of our overall business, performed well in the quarter.

However, our upstream and midstream owner-operator verticals, which represent approximately 15% of AspenTech's business, are becoming increasingly challenging as they feel the impact of reduced investment activity and operating budgets.

Turning to the E&C vertical, which represents approximately 30% of our overall business, the macro environment has grown more challenging with a significant portion of E&C customers facing lower engineering activity and continued pricing pressure from their customers.

Renewal rates during the quarter were consistent with what we saw in the first quarter and in line with our expectations for the fiscal year. However, we are seeing demand decelerate in this market segment more significantly than previously anticipated.

The continued decline in oil prices has prevented CapEx budgets from stabilizing, limiting E&Cs customers' visibility on future business. While we believe this will eventually stabilize, we currently expect this dynamic to continue in the second half of the fiscal year.

Based on our current forecast, we now believe that the E&C vertical will not be a positive contributor to growth in FY 2016. Overall, we believe that AspenTech is performing well as we navigate through the most difficult energy industry macro environment in 30 years.

Our performance among owner-operator customers in downstream energy and chemicals has held up well this year and is tracking to plan.

However, the demand environment in the E&C upstream and midstream verticals, along with increased uncertainty in the market is causing us to take a more cautious view on our growth opportunities in the back half of the year.

As a reminder, when we entered the year, oil was trading in the $50 to $60 range and it has traded down into the mid-$20s recently.

The lack of price stability has kept uncertainty high and is leading to broader challenges in segments of the energy industry, especially in some countries that depend on the revenues and profitability of their national oil companies to fund their budgets.

Oil prices in the $30 range or below create a more bearish investment environment than those in the $40 to $60 range for the upstream, midstream and E&C industries. Putting this all together, we are now targeting annual spend growth of 5% to 6% versus our previous expectation of 9% to 10%.

At the same time, we are increasing our FY 2016 non-GAAP EPS guidance, as Karl will review later. AspenTech remains focused on delivering substantial operating margins and cash flow in all market conditions.

While this revised growth profile is below our historical growth rates, it is important to take a step back and look at AspenTech's performance relative to the macro environment facing our customers.

Against this backdrop, we believe our ability to generate mid-single digit growth this year is a strong validation of the resiliency of our business model, the strategic importance of our solutions to customers and the significant improvements in efficiency and profitability we deliver for customers every day.

Looking at the specifics of our second quarter performance, energy, engineering and construction and chemicals once again represented greater than 90% of our business. Chemicals was the largest vertical contributor, followed by energy, and engineering and construction.

Looking at our 10 largest transactions in the quarter, these were dominated by transactions with owner-operators in Chemicals and downstream energy, with a single transaction in the E&C vertical.

The headwinds facing E&C customers have had a greater impact on demand for our engineering solutions than anticipated and which we expect to continue for the foreseeable future. I would like to reference a few key deals that closed in the quarter as to provide insight on how we continue to generate growth.

First, a chemicals customer acquired assets from a global chemical company and expanded the use of our aspenONE MSC suite in the manufacturing execution systems area from the acquired assets into its original sites. In addition, our advanced process control solutions will be used to further support the customer's margin improvement initiative.

The transaction also expanded the use of our aspenONE Engineering suite into the capital cost estimation and models online areas. Second, a global super major with over 3 million barrels per day of refining capacity renewed early their aspenONE MSC agreement.

This extends our 25-year relationship and further cements their commitment to our planning and scheduling products with a focus to expand the use of our PIMS-AO planning technology and refinery scheduling product.

Other products that are used and/or planned for greater use by this customer are the multi-blend optimization product, dock scheduling technology, and collaborative demand management. Third, one of the largest oil and gas companies in Africa and in the top 20 worldwide signed an agreement for the aspenONE Engineering suite.

This company was looking for an engineering solution to fulfill their requirement of all the different business units in both upstream and downstream. They are also looking to perform some initial FEED and pre-FEED work in-house as well as engage more proactively with their E&C partners.

They recognize the value in getting access to the aspenONE Engineering suite since it was prevalent in all their fields of operations as well as being the preferred engineering solution for the majority of the E&Cs they have relationships with.

Fourth, a Russian oil company that is one of the largest in the world renewed and expanded their use of the aspenONE MSC suite.

This agreement supports the continued use of the Petroleum Supply Chain Planner and PIMS products in the company's supply and planning department, and expands usage to new users in the company's Investment and Refining departments. Finally, an independent refiner in the U.S.

consolidated the use of our MSC and Engineering products into two separate aspenONE agreements after acquiring a refinery asset.

This agreement increased token entitlement to support greater usage of advanced process control, refinery scheduling, and PIMS planning products in the MSC suite, and increased entitlement for engineering software products in the aspenONE Engineering suite including access to the capital cost estimation product in one of their refineries.

Our ability to deliver this kind of value to customers and drive greater adoption of our software solutions, particularly among refining customers, will be enhanced by the recent announcement of our intent to acquire KBC Advanced Technologies. KBC will bring several highly differentiated capabilities to AspenTech.

First, KBC's world-class consulting services will strengthen AspenTech's access to the C-level suite and enhance their trusted advisor relationship with our customers.

Second, KBC's operational excellence capabilities would help accelerate adoption of AspenTech's software products by building the organizational capabilities of customers to support and sustain strategic investments in their assets.

Third, the combination of KBC's refining and reactor software models and refinery-wide simulation software with AspenTech's strength in engineering modeling and simulation would create a highly differentiated reactor and process modeling solution for the refining industry.

Fourth, KBC would accelerate our holistic optimization strategy, what we refer to us as asset optimization, which is focused on generating significant value for customers through improved capital and operating efficiency across the entire life-cycle of the plant, from design to operations to maintenance.

We see a long runway of opportunity for greater adoption and increased usage of our software, particularly among owner-operator customers. The addition of KBC to AspenTech would enhance our ability to execute against this opportunity while further increasing the strategic value of AspenTech to our customers.

As a reminder, the transaction has not yet closed. We plan to provide greater insights into the potential for KBC later in the year once the acquisition has been completed. The acquisition of KBC is also a good example of AspenTech's ability to leverage our strong balance sheet and cash generating capability to support strategic M&A activities.

As we have long said, M&A is one of the components of our capital allocation strategy along with share repurchases to maximize long-term shareholder value. Our financial strength is a strategic asset to AspenTech and we will continue to utilize it to benefit our shareholders.

Finally, I am pleased to announce a new addition to our senior leadership team. As you will have seen in our press release issued earlier today, Bill Griffin will be joining AspenTech on February 8 as our new Executive Vice President of Worldwide Field Operations, where he will be responsible for overseeing all global sales and services.

Bill has had a distinguished 25-year career in the technology industry, most recently as the Vice President of Worldwide Named Accounts and Emerging Products at Autodesk. In his prior roles, Bill has managed a global team of more than 500 employees and was responsible for more than $1 billion in annual revenue.

We're excited to have Bill join the team and believe he will have a positive impact on our sales and operations efforts going forward including the integration of KBC. In summary, we posted solid second quarter results as we continue to perform well in a difficult market.

Despite an increasingly challenging macro environment, AspenTech continues to grow while generating significant cash flow and best-in-class profitability. Our results this year demonstrate the fundamental strength and scalability of our business model, the mission critical nature of our products, and the value we deliver for our customers.

With that, let me turn the call over to Karl..

Thanks, Antonio. I will now review our financial results for the second quarter of fiscal 2016, beginning with annual spend.

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 $430 million at the end of the quarter, which is an increase of approximately 8% on a year-over-year basis and 2% sequentially.

Let me now turn to our quarterly financial results beginning on a GAAP basis. Total revenue of $119.2 million was up 11% from $107.8 million in the prior year period was well above the high end of our guidance range of $111 million to $113 million.

Our revenue outperformance in the quarter was largely due to several cash basis customers paying us earlier than expected. As a reminder, although the vast majority of our business is not recognized on a cash basis, the timing of when cash basis customers pay can impact revenue trends.

Breaking this down further, subscription software revenue was $110.1 million for the second quarter, which is an increase of 12% from $98.7 million in the prior year period and compares to $111.9 million last quarter. Services and other revenue was $9 million compared to $9.1 million in the year-ago period and $8.4 million last quarter.

Turning to profitability. Gross profit was $107.3 million in the quarter, with a gross margin of 90%, which compares to $95.5 million and a gross margin of 89% in the year-ago period. Operating expenses for the quarter were $51 million compared to $49 million in the prior-year period.

Total GAAP expenses, including cost of revenue, were $62.9 million, up from $61.3 million in the year-ago period and down from $64.9 million last quarter. Included in our second quarter results is approximately $1 million of expenses related to the acquisition of KBC.

Operating income was $56.3 million for the second quarter of fiscal 2016, representing an operating margin of 47%. This is an increase compared to $46.5 million or 43% operating margin in the year-ago period.

Net income for the quarter was $36.7 million or $0.44 per share compared to net income of $30.5 million or $0.34 per share in the second quarter of fiscal 2015. Turning to our non-GAAP results.

Excluding the impact of stock-based compensation expense, restructuring charges, amortization of intangibles associated with acquisitions, acquisition-related expenses and non-capitalized acquired technology, we reported non-GAAP operating income for the second quarter of $60.9 million, representing a 51.1% non-GAAP operating margin compared to non-GAAP operating income and margin of $50.2 million and 47%, respectively, in the year-ago period.

The better than expected earnings and margin performance was largely the result of revenue outperformance during the quarter.

Non-GAAP net income was $39.6 million or $0.47 of non-GAAP EPS in the second quarter of fiscal 2016 based on 83.7 million shares outstanding compared to non-GAAP income of $32.8 million or $0.36 of non-GAAP EPS in the second quarter of fiscal 2015 based on 90.5 million shares outstanding. Turning to the balance sheet and cash flow.

We ended the second quarter with $200.6 million in cash and marketable securities, an increase of $19.1 million from the end of last quarter. The increase in our cash balance reflects our cash generation performance.

In addition, during the second quarter we did not repurchase any shares under our stock repurchase program, but we intend to resume our share purchase activity during the third quarter.

Subsequent to the end of the quarter, we placed $115.1 million of cash in escrow and entered into a $140 million bridge credit facility related to the pending offer for KBC.

Our deferred revenue balance was $230.1 million at the end of the second quarter, representing a 4% decrease compared to the end of the year-ago period and 9% decrease on a sequential basis.

The decrease in our deferred revenue balance year-over-year was due to the recognition of deferred revenue which was recognized on a completed contract basis and the impact of renewals on invoicing.

As a reminder, our deferred revenue balance is heavily influenced by the timing of invoices and over the course of the year we expect deferred revenue growth to generally be in line with the underlying growth of the business. However, there can be some quarter-to-quarter variability.

From a cash flow perspective, we generated $20.7 million of cash from operations during the second quarter and $20.3 million of free cash flow after taking into consideration the net impact of $662,000 in capital expenditures in capitalized software and $254,000 of excess tax benefits from stock-based compensation.

Our second quarter cash flow reflects approximately $30 million of U.S. corporate cash taxes paid during the period. As you know, we have become a full corporate U.S. taxpayer in FY 2016 following the full utilization of our historical NOL balance. We expect to pay approximately $65 million to $70 million in U.S.

corporate cash taxes this year, with the remaining $35 million to $40 million to be paid in the third and fourth quarters. In future years, we expect to pay our taxes on a similar pattern. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.

I'd now like to close with thoughts regarding our updated financial outlook for fiscal 2016 as well as guidance for the third quarter. Please note this guidance does not include any contribution from KBC since its transaction has yet to close.

For the third quarter, we expect revenue in the range of $116 million to $118 million, non-GAAP operating income of $51 million to $53 million, and non-GAAP EPS of $0.40 to $0.42.

On a GAAP basis, which includes approximately $5.5 million of acquisition costs associated with the pending KBC acquisition, we expect third quarter operating income of $42 million to $44 million and EPS of $0.33 to $0.35. Turning to the full year. We are reiterating our previous revenue guidance of $465 million to $473 million.

From a mix perspective, we continue to expect subscription and software to comprise greater than 90% of revenue, with our services and other revenue representing the remainder.

From an expense perspective, we are adjusting our assumptions for total GAAP cost and expenses, which includes $6.5 million of cost associated with the KBC acquisition, to $270 million to $275 million, which compares to our previous guidance of $268 million to $273 million for the full-year.

Taken together, we expect GAAP operating income in the range of $193 million to $201 million, net income in the range of $125 million to $131 million, and GAAP EPS of $1.49 to $1.56.

This compares to our previous guidance of GAAP operating income of $195 million to $203 million, net income of $125 million to $130 million, and GAAP EPS of $1.49 to $1.55.

From a non-GAAP perspective, we now expect non-GAAP operating income in the range of $215 million to $223 million, which is up from our previous guidance of $211 million to $219 million for full-year fiscal 2016.

This would lead to non-GAAP earnings per share in the range of $1.66 to $1.72, which is an increase from our initial guidance of $1.61 to $1.67 for the full fiscal year. Please note our non-GAAP results exclude the cost associated with the pending KBC acquisition.

With respect to annual spend, as Antonio mentioned, we're revising our guidance to 5% to 6% growth compared to 9% to 10% previously. Our updated outlook takes into account the impact of the continued oil price declines and market uncertainty is having on demand in certain verticals.

Looking at cash flow, we are revising our fiscal 2016 guidance to approximately $155 million to $160 million of free cash flow compared to our previous guidance of approximately $170 million to $175 million. Our updated free cash flow guidance reflects the impact of our revised annual spend growth target.

To summarize, we generated a solid second quarter performance from both a financial and operational perspective.

While we're taking a more cautious view on growth in the near term, the mission-critical nature of our software continues to drive usage across the entire the aspenONE platform despite ongoing challenges in the macro environment and we believe we are well positioned to continue driving growth and profitability going forward.

With that, we're now happy to take your question. Operator, let's begin the Q&A..

And your first question comes from the line of Monika Garg, Pacific Crest Securities..

...for taking my question. First is on the revised annual spend guidance.

Antonio, if you can kind of talk about the revision is just mainly to do with E&C customers or with some upstream customers also? And then kind of you talked about now you don't expect any positive contribution to growth from E&C, but are your customers renewing at the same flat levels? Or are you seeing any cancellations?.

Okay. So, Monika, our guidance reflects a lot of what we said on my talk, which is we don't expect the E&C vertical to be a positive contributor to growth in 2016. That means a combination of many things. Some customers are renewing with growth, some customers are renewing flat, some customers are cancelling their contracts.

We have talked about over the last couple of quarters about the second and third tier customers and increased rate of non-renewals in that segment and why our non-renewal rate has moved up to 4% to 5% on a yearly basis.

But our guidance also reflects the dynamic that we're seeing with our customers after the quarter ended and over the next six months, in that we're seeing them be much more cautious with their spending. We're seeing them moving some transactions out of our fiscal year into later in the year.

And in general we believe that with oil prices where they are, we just think it's very prudent to take a much more cautious stance on our growth guidance and that's what is reflected in that 5% to 6% now..

Then you talked about delay in renewal of big oil and gas customer.

How confident do you feel that in the current quarter that contract could be signed?.

Well, look, we've been engaged with this customer and this is a customer that depends on the use of our software to run their operations and we believe that this transaction will close at some point. And we continue to work it..

Just how big is this contract?.

Well, we've said in the past that some of these contracts that we've talked about with national oil companies are multimillion dollar contracts and this is one of them..

Okay. Thank you so much..

Yes..

Next question comes from the line of David Hynes from Canaccord..

Hey. Thanks, guys. Just a couple questions on the numbers. So as we think about the new free cash flow guidance, at this point halfway through the year last year you guys had collected about 36% of full-year free cash flow. This year that number is 26%.

Maybe this is tied to the deferred revenue piece as well, but maybe, A, help me gross up why I should be comfortable with your having collected a lot less cash this year? And then, B, if annual spend is growing kind of mid-to-high single digits here in the first half of the year, why have deferred revenues declined year-over-year?.

Sure. So this is Karl. So I'll take the last one first. So the deferred revenue really what's going on there, as you saw, we have about $8 million that was in the year-ago balance, the 12/31/14 balance, and that came out. It wasn't replaced. That was sort of completed contract had kind of been in there for a while.

And in addition, we used to have a lot larger amount of professional services that got deferred and then got tied to a license deal and then amortized over time. So really when you take those down and then little bit of the impact of the renewals, you get right back in line with where you want to see the deferred revenue or you'd expect it.

The deferred revenue is tracking where you'd expect it to be. It's just a little bit of the cleanup of the old deferred revenue coming out of it..

Okay..

So in your first question was really kind of on the cash flow. Yes, we're a little bit heavier toward the end of the year. I think that's been traditionally how we do it. And it's really kind of the same phenomenon that's driving deferred revenue, as you alluded to.

It's how we invoice, which is driven by a little bit of the annual spend growth, which is a little heavier in the Q2, Q3 timeframe. And so that shows up as more invoices being due in the Q3, Q4 timeframe, which also you see that same phenomenon in your deferred revenue.

So you see kind of Q2 going up for deferred revenue, Q3 it goes up a lot more, and then it kind of starts coming down a little bit in Q4..

It just seems like a bigger delta this year. Historically, I think it's been 35% front-half, 65% back-half. And this year it's more 25%, 75%. So just we're trying to gauge kind of the risk to the free cash flow..

Yes, you have to remember in Q1 of 2015, we had a little bit extra. I think it was we talked about having accelerated collections in that period that were not what you would expect on a go-forward basis. I think that was somewhere in that $8 million to $9 million range.

So when you factor that in, you start getting a little bit – 2016's profile looks a lot more like that..

Yes, okay. And then I guess, Antonio, kind of at a strategic level, how are you thinking about the use of cash for buybacks going forward? I mean, obviously, you guys generated a ton of cash, but the cash balances is being almost cut in half with the KBC acquisition.

Will we see buybacks at kind of the same – I mean it had been pretty aggressive, $50 million, $60 million a quarter before this quarter.

Can it resume that pace? Or how are you thinking about that?.

Well, look we've never talked about how much buyback we would do. Certainly we have a program in place that was authorized by the board and in the context and in the KBC acquisition, of course we'll have to be judicious in the use of cash vis-à-vis how much debt we're putting on the balance sheet.

But we're committed to the share repurchase program and we'll start executing on it again..

Okay. All right. Thanks..

And your next question comes from the line of Zack Shafran..

Hi, Zack.

How are you? Zack, are you there?.

We have another question from the line of Mark Schappel from Benchmark..

Hi. Good evening. Nice job bringing the quarter despite the troubling environment out there. Antonio, first question for you. I was surprised that the full year revenue outlook is staying intact despite the lowered annual spend guidance. I was wondering if you could just go into why that is.

Or maybe just remind us of the linkage between annual spend and total revenue?.

I'll let Karl take that question and then I'll supplement it. Go ahead, Karl..

Sure. Annual spend, the revenue related to annual spend will come – it trails one quarter. So when you look at whatever annual spend growth you had in Q2, you'll see that starting in Q3.

So, when we look at how the annual spend is coming in, we still feel comfortable in that full year guidance based on what we're seeing for Q2, what we did in Q2 and what we see for Q3 and Q4..

Okay. Great. Thanks. And then, Karl, while I have your attention here, in your prepared remarks you mentioned that I believe several cash basis customers paid earlier than expected.

I was wondering if you could provide any more details around that?.

Yeah, there was – we've kind of alluded to that in the last call. So, we had one that came in a little bit larger but then when you get to year-end, a lot of the customers who want to manage their cash balance at 12/31 because that's their fiscal year-end.

So sometimes you expect it to come in the subsequent quarter and they accelerate it ahead of when you normally expect it. That's really what it is. Sometimes it's predictable. Sometimes it's a little bit of a surprise and in this quarter some of the collections a little bit accelerated..

Would you say that those accelerated collections were largely due to the upside on the top line?.

Yes. So again, so the difference between kind of our guidance and where we came in was predominately due to the cash basis customers coming in..

Okay. Great. Antonio, bringing you into the mix here, now I realize you're limited in what you can say about KBC, but regarding KBC, they have a pretty extensive set of predefined reactor models, many of which appear to overlap with your HYSYS modeling tools.

And I would imagine at the end of the day you plan to go forward with a single set of modeling tools.

I was just wondering if you could just walk us through maybe your thought process on how you may determine what tools to go forward with and which ones to sunset?.

Yeah. Mark, that's exactly what we're prevented from discussing under the 2.7 announcement rule, anything that we haven't disclosed in the 2.7 announcement including any plans around integration, products, people, offices, whatever, we cannot discuss it.

So you're going to have to be patient until the transaction closes and we're ready to talk about some of these things..

Got it. I kind of figured as much, but I thought I'd try. But thank you anyways. And then, I guess finally going back to the large contract with that multi-national oil company that was a push out. I remember maybe it was 12 months or 18 months ago, I think it was PDVSA had a similar issue and eventually things – it got resolved as expected.

But with this particular deal, were there political factors involved here? Or was this just strictly – or other factors? Or is this strictly just due to specifics of the deal such as like terms and pricing?.

No. Look, there are many reasons with some of these national oil companies why deals don't get done on time, including with some of them – and I would say perhaps most of them – the fact that they cannot sign an agreement before it expires or the day that it expires. But there's also execution issues.

There's many other factors involved, budgets that have to be rolled up from different business units, extensive terms and conditions, reviews, all sorts of stuff. And this deal falls in one of those categories or multiple of those categories.

We're confident that this customer will renew the agreement because it's software that's used in their operations and is mission critical, so. And we're working it..

Okay. Very good. That's all for me. Thank you..

Yeah..

And your next question comes from the line of Matt Pfau with William Blair..

Hi, Matt..

Hey, guys. Thanks for taking my questions. First I was wondering if you could give us a bit more detail and exactly what you're seeing in the E&C segment and the upstream segment.

I know previously back in August when the guidance was originally revised, I think the situation there was you did have a lot of customers that were still potentially hitting their token limits, but just opted not to increase due to uncertainty in their business.

So how have you sort of seen usage within those customers trend? Is it a factor of usage being down and so people are renewing for less or is it more of usage is still somewhat okay, but it's mainly uncertainty within their businesses that's impacting their willingness to renew for their prior contract value or not increase their contract value?.

Yeah. Look, I have to separate it between the sort of upstream and midstream sub verticals which is about 15%, 16% of our business and those industries are under tremendous stress both from a CapEx budget standpoint and operating expenses standpoint as well.

So there's tremendous caution in that segment and they're also looking to review their spend, so that's that segment which I think perhaps is having a much bigger impact. With the E&Cs what we're seeing is just caution. What we saw at the end of Q2 is deals that we felt were progressing well and they got pushed out.

As we looked at Q3 and Q4 and over the last two weeks or three weeks, we feel that in the current oil price environment we can only expect more caution from these customers as far as their willingness to commit to greater entitlement. So we're just pushing out stuff, we're being cautious ourselves.

There's a pipeline of business there that is not getting canceled. It's just getting pushed out into the future and then look with sort of tier 2 and tier 3, the group of customers that we manage in the SMB organization, we're still seeing a higher rate of cancellation which is the same thing as we saw in the Q1 quarter and we started to see in Q4.

So we just have to be cautious and also in listening to customers, we'd rather take a more cautious approach here now..

And when you say you're seeing some deals getting pushed out into the next quarter, are those early renewals, are those new customers signing the contract that are getting pushed out?.

I would say early renewals or new entitlement on existing contracts..

Got it. And when we think about the annual spend guidance that you updated for this year, maybe you could give us a little bit more detail in terms of what you're expecting, or what that factors in.

And in terms of demand, does it factor the environment staying the way it currently is, or a slight worsening? Or what sort of inputs are expected in that guidance?.

First of all, I just want to say, despite the macro environment and the oil price environment, that we're seeing are owner-operator business, the downstream energy and chemicals owner-operators are doing very well for us. We continue to drive good business for them.

And in a way the growth that we're posting in that segment is what's allowing us to overcome some of the headwinds that we see out of E&Cs in upstream and midstream. So we expect that to continue in the Q3 and Q4 quarter because even at these price levels for oil, we continue to see the business.

But then, when you add E&Cs upstream and midstream, totaling to about 45%, and if you consider that perhaps E&Cs will not be positive growth contributors, then you're in that 45% to 50% of our business that will be flat or negative for the year. So that's why we believe that this 5% to 6% is in the range of what we can achieve..

Got it. And last one for me, just on the national oil company renewals like there was the one that was delayed this quarter.

But where are we at in terms of signing the renewals with these deals? Are there still multiple multimillion dollar contracts that are out there? Or have the majority of them, except for this pushed one, been closed already?.

Well, if you look, while national oil companies are a group of customers with similar behaviors and characteristics, they are not all the same. And some of them do work to renew agreements on time. And we've had a track record of renewing agreements some time with some of them, and others takes a little bit more work to renew them.

We have some in Q3 and Q4 as well, but our guidance reflects our point of view on our ability to renew them in the fiscal year, so..

Got it. That's it for me, guys. Thanks for taking my questions..

There are no further questions at this time. Mr.

Antonio Pietri, do you have any closing remarks?.

Yes. Well, I'd like to thank everyone for joining on the call today and we look forward to talking to you over the next few weeks and months. I know we're going to be out in San Francisco doing a no-deal roadshow and I look forward to talking to some of you. Thank you..

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