Karl Johnsen - CFO Antonio Pietri - President and CEO.

Monika Garg - Pacific Crest Sterling Auty - JPM David Hynes - Canaccord Matt Pfau - William Blair Mark Schappel - Benchmark Michael Morosi - Avondale.

Good afternoon. My name is Stefanie and I will be your conference operator today. At this time, I would like to welcome everyone to the AspenTech Second Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Mr.

Karl Johnsen, CFO, you may begin your conference..

Antonio will discuss business highlights from the quarter, and then I'll review our financial results for the first quarter and our guidance for the third quarter as well as our updated outlook for fiscal year 2017 before we open the call up 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, annual spend was $450.1 million, up 2.6% year-over-year.

Total revenue of $119.9 million was above the high end of our guidance range. GAAP operating income was $56.1 million and non-GAAP operating income was $60.9 million, which represents a non-GAAP operating margin of 50.8%. GAAP EPS was $0.48 and non-GAAP EPS $0.52, both of which exceeded the high-end of our guidance ranges.

Free cash flow was $27.5 million and we repurchased 1.3 million shares for $70 million, which included the remaining $20 million from the ASL program we announced in August.

We are pleased with our performance in the second quarter and through the first half of fiscal 2017 especially in the context of the difficult macro environment and challenging spending environment in the E&C and upstream market segments. In the quarter, Europe, Russia, the Middle East and our S&B businesses delivered solid performances.

This performance reflects the continued opportunity for AspenTech in enabling owner operators to operate their assets more efficiently and profitably. The second quarter was highlighted by a significant milestone for AspenTech with introduction of a new product suite, aspenONE Asset Performance Management or APM.

Early customer response has increased our belief that there will be strong interest in reliability on analytics software to help customers reduce their operational risk, increase production and improve profitability.

As we announced in November, the initial version of the APM suite includes the Aspen Fidelis Reliability product and the Aspen Asset Analytics product.

The Aspen Fidelis Reliability product which we acquired last June enables customers to leverage the design and process knowledge that resides in aspenONE products to analyze process reliability, quantify improvement opportunities and optimize the availability of assets.

The Aspen Asset Analytics product combines our modeling and simulation capabilities with a robust set of analytics that can predict a specific process problem event and prescribe actions to prevent their occurrence. Early feedback from the initial customers for targeting in the first phase of the APM release has been positive.

For example, during the quarter a large international chemical company expanded its use of Fidelis product with a purchase of additional Aspen Fidelis Reliability software. We believe this will help to pave the way for a long term multi-region contract with this customer, as is indicative of the sizeable opportunity for this product.

In the analytics area, customers participating in the Lighthouse program continued to be enthusiastic about the benefit that can be derived from using our Aspen Asset Analytics products.

Several chemical companies in the US and Europe are participating in the Lighthouse program and are using Aspen Asset Analytics to gain valuable insight on the process conditions that contribute to undesirable process events, allowing the operators to act before adverse events occur.

Used cases included predicting environment emission spikes, off-quality production and abnormal reactor conditions. LyondellBasell a global top 10 chemical company recently called Aspen Analytics a unique and promising new software solution that brings with it the potential to create significant value and generate a quick payback.

In Q2, we also saw solid early interest on demand for our recently acquired Aspen Mtell products. The Mtell products utilize machine learning capabilities to deliver predictive and prescriptive maintenance solutions in a wide variety of global industries.

Mtell products are not included in the current version of the APM suite, but they are available as standalone products. In the quarter, a large US based [salt] and paper company added to its existing Mtell implementation.

The company has had significant success using Mtell to monitor driers and other equipment for failure targeting annual savings in the 10s or millions of dollars. With this new transaction, the company will be using Mtell products in the paper part of their business.

Additionally, an oil exploration and production company in the United States licensed the base Mtell product for condition monitoring, to monitor approximately 30,000 sensors across a pipelines network with expectation to save $5 million to $10 million in environmental mitigation cost.

We expect this customer to begin utilizing the advance machine learning capabilities of the Mtell product over time.

Furthermore, surely after depreciation, the Mtell team was recognized by CSX Corporation, a premiere transportation service provider as a select supplier and awarded it their 2016 Supplier Innovation Award for “delivering extraordinary value and productivity, saving the company millions of dollars in costly downtime.” Our asset performance management solutions represent a major step forward in our asset optimization strategy and expand AspenTech’s product portfolio from our traditional strength in engineering and manufacturing and supply chain to include maintenance of the physical assets.

They also expand our core capabilities in modeling assimilation in to analytics and machine learning. The extension in to the maintenance phase from buying with analytics and machine learning will also open up all new areas of value-creation for AspenTech and our customers.

As we leverage the synergies from the combination of this new technical capabilities across all three areas of the asset life cycle.

We can now enable companies to optimize their assets throughout plant lifecycle by addressing key business challenges like process disruptions, lower asset availability and a planned downtime early in the design of these assets.

We believe the unique capabilities of our asset performance management solutions provide customers with a better understanding of how their assets are impacted by operational conditions over the long term and can generate significant cost savings for us.

We also believe that there is a large opportunity for asset performance management solutions outside of our existing customer base.

It is clear that these solutions and specifically functionality in the areas of reliability modeling, statistical analysis and machine learning can generate significant value for customers in industries for maintaining equipment reliability and avoiding equipment breakdowns to our critical business issues, for example, transportation, waste water treatment, consumer packaged goods and more.

We have developed a meaningful pipeline of transactions for our asset performance management solutions in a few short months which is a testament to the interest that I just referred to. We are excited at the new opportunities APM represents for AspenTech and believe it will be a key driver of our long term growth.

We intend to provide greater commentary on this opportunity during our investor day in June. We are committed to accelerating the product roadmap for asset performance management solutions through investments in our R&D organization.

A validation of the market opportunity both in and outside of the process industries has also convinced us to accelerate investment in our field operations and marginal organizations to fully capitalize on this opportunity.

We will make these incremental investments by redeploying some of the earnings outperformance we have achieved year-to-date, our focused execution discipline and the scalability of our business allows to reallocation of our resource in our go-to-market and R&D organizations to support our growth strategy.

This reflects one of the most attractive aspects of AspenTech operating model. We are introducing products in to the aspenONE APM suite in stages and plan to expand its capabilities with additional functionality from internal R&D efforts and through additional acquisitions.

We will make further announcement about the aspenONE APM suite at our optimized 2017 user conference in late April. Before I review our second quarter performance in more detail, let me first start on our view of our microenvironment in the oil and gas industry. As expected, spending continues to reflect a level of caution among customers.

The breadth of sales activity in Q2 while encouraging what’s mitigated by headwinds from reductions in spend in [AMC] and upstream, as we have seen in the last 12 months. In general, from direct interaction with our customers that were happy to see calendar 2016 in the rearview mirror and are focusing on 2017.

A stability of oil prices in the high 40s and low 50s is encouraging and the longer oil stays at this or higher levels the better it will be for confidence and customer demand over time.

It is too soon for us to have a definitive read on 2017 budgets, but we continue to expect that customers will likely remain cautious and that any budget increases will be marginal. Looking at our second quarter performance energy, engineering and construction and chemicals once again represent a greater than 90 of our business.

Chemicals was the largest vertical contributor followed by energy and engineering and construction. Let me now provide some color on a few of the deals in our engineering and manufacturing and supply chain areas.

First, a joint venture refiner in the Middle East that had started operations in 2013 and signed an agreement for access to the MSE suite acquired additional token entitlement to expand its use of refinery planning and optimization software, PMCO.

We expect further expansion in to other product areas of our petroleum supply chain solution in the coming quarters.

Second, as part of the divestiture process of a joint venture refining company in the US, the new independent company agreed to continue its use of our planning and scheduling products for expanding its token entitlement and also standardizing on our adapted control technology, Aspen DMC3, after a careful evaluation of our competitors product.

Third, a European chemicals company expanded use of our MSE suite and specifically our MES solutions to a new business unit joint venture focused on improving product quality and reviews in off-spec production. The new agreement also adds incremental entitlement to expand use of the MES solutions at the parent company level.

Fourth, an engineering company based in northern Europe expanded its entitlement for the use of Aspen HYSYS and other products to execute a front end engineering design key project for one of the largest oil companies in the world based in Scandinavia.

And finally, a central European oil and gas company with operations in Poland, Germany, the Czech Republic and Baltic states renew SME suite agreement and expanded entitlement to PMCO on petroleum supply chain products. During the quarter we also continued to use our strong balance sheet and cash flow to fund our share repurchase program.

In the second quarter, we repurchased another 1.2 million shares for $70 million which included the remaining $20 million from the accelerator share repurchase program we announced in August.

We have bought back $200 million of our shares in the first half of the fiscal year and we intend to execute on the remaining $200 million of our $400 fiscal ’17 buyback program over the next two quarters, assuming market and business conditions remain favorable.

To summarize, AspenTech continued to perform well across all areas of the company for producing good growth in a challenging spending environment and are on track to achieve our fiscal 2017 annual spend guidance of 3% to 6%.

At the same time, we took a major step forward in our strategy, positioning the company for improved long term growth performance with introduction of the aspenONE asset performance management suite.

Our expanded product portfolio further extends AspenTech market leadership in the process industries, enhances our ability to benefit from any improvements in customer demand and will open opportunities new industries as well. We are confident in our strategy and its ability to generate meaningful value for shareholders overtime.

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 2017, beginning with annual spend.

Annual spend which is a proxy for the value of our recurring term licensed business at the end of each period, specifically the annualized value of our term license and maintenance revenue was $450 million at the end of the quarter, which is an increase of 4.6% on a year-over-year and 0.9% sequentially.

Let me now turn to our quarterly financial results beginning on a GAAP basis. Total revenue of a $119.9 million was up 1% from a $119.2 million in the prior year period, and was above the high end of our guidance range of a $117 million to $119 million.

It’s worth noting that revenue in the second fiscal quarter of 2016 included several cash basis customers paying us earlier than expected and we didn’t have similar revenue in the second fiscal quarter of 2017.

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 and software revenue was $112.9 million for the second quarter, which is an increase of 3% from a $110.1 million in the prior year period and compares to a $113.4 million last quarter. Services and other revenue were $7 million compared to $9 million in the year ago period and $6.6 million last quarter.

This is in line with our expectation set at the beginning of the year. Due to the macro environment customers are reducing their training and professional services projects.

Turning to profitability, gross profit was a $108.4 million in the quarter, with a gross margin of 90%, which compares to a $107.3 million and a gross margin of 90% in the year ago period. Operating expenses for the quarter were $52.3 million compared to $51 million in the prior year period.

Total GAAP expenses including cost of revenue were $63.9 million up from $62.9 million in the year ago period and down from $65.3 million last quarter. Expenses in the second quarter were somewhat below plan due to the timing of certain investments and hiring.

Operating income was $56.1 million for the second quarter of fiscal 2017, representing an operating margin of 47% consistent with an operating income and margin of $56.3 million and 47% respectively in the prior year period.

Net income for the quarter was $37 million or $0.48 per share compared to net income of $36.7 million or $0.44 per share in the second quarter of fiscal 2016.

Turning to our non-GAAP results, excluding the impact of stock based compensation expense, amortization of intangibles associated with 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% non-GAAP operating margin consistent with the non-GAAP operating income and margin of $60.9 million and 51% respectively in the year ago period.

Non-GAAP net income was $40.2 million or $0.52 of non-GAAP EPS in the second quarter of fiscal 2017 based on 77.3 million shares outstanding compared to non-GAAP net income of $39.6 million or $0.47 of non-GAAP EPS in the second quarter of fiscal 2016 based on 83.7 million shares outstanding.

Turning to the balance sheet and cash flow, we ended the second quarter with a $140 million in cash and marketable securities, a decrease of $51.6 million from the end of last quarter. During the second quarter, we repurchased 1.3 million shares for $70 million under our stock repurchase program.

Through the first half of fiscal 2017, we’ve repurchased 4.2 million shares returning $20 million to shareholders, demonstrating our commitment to enhancing shareholder value through our capital allocation strategy.

Our deferred revenue balance was $241.3 million at the end of the second quarter, representing a 5% increase compared to the end of the year ago period and a 5% decrease on a sequential basis. As a reminder, our deferred revenue balance is heavily influenced by the timing of invoices.

Over the course of the year, we expect deferred revenue growth to be generally in line with the underlying growth in the business. However there can be some quarter-to-quarter variability.

From a cash flow perspective, we generated $27.2 million from cash from operations during the second quarter and $27.5 million of free cash flow after taking in to consideration the net impact of capital expenditures, capitalized software and excess tax benefits from stock based compensation and acquisition related expenses.

A reconciliation of GAAP to non-GAAP results is provided in the table 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 2017, as well as guidance for the third quarter.

For the third quarter, we expect revenue in the range of a $116 million to $118 million. It is important to note that we recognize subscription revenue ratably on a daily basis, which equates to approximately $1.2 million of subscription revenue per day on a current subscription base.

Our third fiscal quarter has two less days in the second fiscal quarter. So our guidance reflects approximate $2.5 million sequential reduction in subscription revenue before taking in to account the impact of annual spend growth.

Overall there are three less days in the second half of our fiscal year which results in approximately $4 million less in subscription revenue before taking in to account the impact of annual spend growth.

This is a normal aspect of our revenue model that was not readily apparent in the past through the revenue model transition and the impact of one-time revenue items last year. In terms of profitability for the third quarter we expect non-GAAP operating income of $49 million to $51 million and non-GAAP EPS of $0.40 to $0.42 per share.

On a GAAP basis, we expect third quarter operating income of $45 million to $47 million, and EPS of $0.36 to $0.38 per share. Turning to the full year, we are updating our revenue guidance to $473 million to $477 million, which compares to our previous guidance of $470 million to $477 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 assumption for total GAAP cost and expenses to $270 million to $273 million which compares to our previous guidance of approximately $268 million to $273 million.

The adjustment expense guidance takes into account our first half performance, as well as the incremental transactions Antonia referenced earlier. We expect GAAP operating income in the range of $201 million to $206 million, net income in the range of $127 million to $131 million, and GAAP EPS of a $1.63 to a $1.67 per share.

This compares to our previous guidance of GAAP operating income of $199 million to $206 million, net income of $126 million to $131 million and GAAP EPS of $1.58 to $1.64 per share.

From a non-GAAP perspective, we now expect non-GAAP operating income in the range of $218 million $224 million, which is up from our previous guidance of $217 million to $224 million for the full year fiscal 2017.

This will be to non-GAAP earnings per share in the range of a $1.79 to $1.83 which is an increase from our previous of $1.73 to $1.78 per share for this fiscal year. With respect to annual spend, we are maintaining our guidance of 3% to 6% annual spend growth in fiscal 2017.

Looking at cash flow, we are increasing our free cash flow guidance to a $165 million to $170 million for the year, from our previous guidance of $160 million to $165 million. From a timing perspective we continue to expect to pay the remaining 50% of our cash taxes equally in the third and fourth quarters.

Finally, I want to quickly discuss the upcoming implementation of FASB Topic 606 relating to revenue recognition. We are currently in the process of evaluating Topic 606 and the impact it will have on our reported revenue.

We’ve run a number of scenarios, and at this point we do not believe it to have a material impact to our reported revenue on an annual basis. However, we do anticipate it to have some impact on the timing of revenue recognition on a quarterly basis, which is related to the timing of when annual spend is contracted.

In summary, we are pleased with our second quarter performance from both the financial and operational perspective. We’re delivering solid financial result in a difficult environment while making significant progress on a strategic priority that will deliver long term growth. With that we are now happy to take your questions.

Operator, let’s begin Q&A..

[Operator Instructions] our first question comes from the line of Monika Garg with Pacific Crest..

Antonio first on the annual spend, its tightened the range of your guidance 3% to 6%, but just modestly lower than what we saw in last quarter which was 5.3 and this is 4.7.

So may be any color you can add there?.

Yeah, I think it’s what I said in my comments. So from a generation of new business sort of cross roads it was a solid quarter, but we had the headwind of reductions in spend and some losses that mitigated our growth and it reflected on our rate of growth for the quarter.

But overall it was indicative of the environment that we saw in all of calendar 2016..

Then you kind of commented on the EPM that you will provide more details on the analyst events, but maybe qualitatively and you can talk more about on the Mtell side and also when can we start seeing any revenue from APM..

Yeah, we’ve said before that we’re really don’t expect any revenue from or material revenue from APMs site and especially until in fiscal ’17 and we are simply targeting for contribution from the suite in fiscal ’18 and we’ll talk about that at investor day, but we do expect the APM suite and the Mtell products to contribute in to our growth in the future.

.

Just a last one, you also commented it seems the oil prices has recovered a lot form recent levels. Can talk about if you have seen any tone changes with your customer and discussion how they are going on with their customers. Thank you..

Certainly in 2017 I had a number of customer interactions in November and December. And like I said in my comments most customers certainly ENC, off-stream, even the oil companies, they were just happy to see calendar 2016 behind them. Chemical companies had a good year, a solid year in 2016 and that wasn’t the case with those customers.

But it’s too early I haven’t been out there yet with customers even though we’ve hosted couple of them already this year here in our headquarters. But it’s too early to tell what the decisions are going to be with regards to spending and the associated budgets.

But I’ll just add another caution in the two meetings that we had, I’m especially waiting to see if this planned cost by OPEC will really materialize. .

Our next question comes from the line of Sterling Auty with JPM..

Just actually continue that train of thought, if the OPEC cost due materialize, what do you think that does to your business in that region of the world, and is APM and some of the other thing is enough to offset any impacts?.

I don’t think the impact of the OPEC cost if it’s positive will be localized to a specific region because I think everyone will benefit. You’ve already seen US oil producer ramping up their activities. Really the best way I can answer that is that time will tell.

I really think that it will probably be some time in the second calendar quarter when we really start getting a clear view or understanding of how oil companies are thinking. But having said that I do think ’17 feels better than `16 in at least the customers I’ve talked to.

With regards to APM, look we believe that APM presents a unique opportunity and especially the Mtell products. It’s an area where we haven’t been selling in to before in the process industries and we have that churn off. It’s an area that is very fragmented and the use of technology is not as prevalent in operations and the design.

So we believe that the opportunity will be important there in the future. And the other side to Mtell is that outside of our process industries, the machine learning technology and products from Mtell are very relevant, and certainly their most successful references today are in transportation, consumer packaged goods, water treatment plans.

So there’s also an opportunity there that we understand a lot better now and will be positioning ourselves as well to capture growth out of those markets going forward. .

And looking at the renewals that you did during the quarter, any qualitative commentary you can give us around what you experienced in terms of churn, did churn get better or still the same is what you’ve been seeing?.

It was very consistent with the calendar year ’16. In the small customer segment certainly non-renewals with our bigger customers came up for renewal reductions in spend and that’s what we are focusing on is putting in place and executing on the strategies that try to mitigate some of these reductions.

And we believe over time those strategies will pay off but I think as we get to the end of the calendar year customers were also looking forward to closing out the year and moving to 2017..

And last question is on the expense investment. You talked about full year GAAP expenses actually going past, but the non-GAAP operating income is actually - the high-end is the same and you’re raising the lower end.

The delta between those I would think is stock based compensation is that the only meaningful change or is there more moving parts underneath that you’re increasing the non-GAAP investment just within that threshold that you already have for the operating income forecast. .

Mtell is adding a little bit of amortization expense, I mean that’s the only item that’s in there. .

Our next question comes from David Hynes with Canaccord..

I was wondering if you can help us just think about or quantify the APM opportunity a bit more.

How material of an upsell is this or I guess another way you could ask it, if a major customer were to adopt APM in its entirety, what would that do to that customers ACB? Is it a 5% lift; is it a 10% lift? Just help us frame how material this could be to growth?.

And we’ll frame it for you at investor day in early June David. It is material and with our process industry customers we’ve estimate the potential time creation from the solutions.

So we already know that number, we’re certainly going to fine tune it as we get closer to investor day, but it is a material contribution to expansion of our time in the closest industries with our existing customers, but equally important we believe is the potential time expansion outside of our traditional core industries, the process industries.

And that’s a more difficult time to estimate just because we have less knowledge of customers and the potential size of the opportunity across so many industries in the global economy. But it is also a material time expansion as we focus on it in the future. We’ll talk about that as well at investor day. .

Sure.

And may be just one follow-up there? So as you think about growth outside of your core markets, does that mean hiring sales folks with expertise in those verticals or is that something you think about via acquisition? How do you reach those new markets where you traditionally haven’t had a presence?.

I think our initial instinct there will be to leverage an ecosystem of third parties, resellers, implementation service partners, OEMs as well.

Mtell had signed an OEM relationship with one of the industrial automation companies and that company a competitor of ours in other areas of our products in the process industry is now an OEM for Mtell products in to those markets.

And we hope to sign more of those relationships in the future as well as set up a significant network of resellers and implementation services partners. .

Yeah, makes sense. And then two quick ones may be on the financial side? Access to capital as you’re thinking about executing against the buyback in the back half of the year, I know you guys have access to a line of credit and I think the plan implies kind of you’re half way through your buyback activity for the year.

Just what are your intentions there?.

So I think it is two question. The intent right now is to continue the buyback for the full 400 based on the current business market conditions. As far as access to capital, I think if you take the high end of the new guidance of the free cash flow we talked about, you kind of end up with about somewhere in that $50 million to $60 million cash range.

So we wouldn’t need to draw down on the line of credit to execute against the buyback, but we more than likely were just to get the cash balance in the $80 million to a $100 million range till we target. .

And then one more if I may. So just help me understand what is the delta between the subscription growth we’re seeing showing up on the P&L which is flat to 3% for the four quarter including the one you just guided for, and then the annual spend growth which has been kind of 4%-5%.

Why does subscription growth not match up within your spend?.

It depends on what period you’re looking at. So again we talked about if you go from Q2 to Q3 or to the second half of this year you’re losing days. So when you take - you factor out those days at about 1.25 million a day revenue, you kind of using that in the annual spend growth converting to revenue. It flows just like you think it would.

In Q1 of this year, you saws a little bit of about $1.5 million of accelerated cash basis. Should we take that out of Q1 and roll forward based on the annual spend growth and running the revenue again it tractions like you think it would.

If you’re comparing the last year, you have to pull-out all the one-time items that we’ve talked about in Qs one, two and three and then pull those out and then when you again roll the annual spend and convert it in to revenue, you get the growth rate you would expect. But it is kind of on a line by line.

So you got to look at the subscription software line and do it that way and look at professional services separately. .

[Operator Instructions] our next question comes from Matt Pfau with William Blair. .

First, when you talk about budgets in the energy industry for 2017, it seems like expectations aren’t very high there in terms of a potential increase, yet it seems like you’re fairly positive on the APM suite and getting some traction there.

So just help me bridge that, is that the APM suite the money for that coming from other areas or new areas of budgets for your customers or is that because you’re expecting to have some success with the APM suite outside of your traditional industries and ones that are potentially doing better than energy?.

I think it’s a combination of both, certainly the APM suite is targeted at the maintenance phase with machine learning where we’re targeting predicting the breakdown of equipment which is in the maintenance phase. So it’s really budgets in that area and all these assets maintenance budgets.

It’s an area that is attracting a lot of attention as we talk to customers in the process industries, and at the same time we see opportunities outside of the process industries for APM.

As I state in my comments some of the existing customers of Mtell when we acquired them are coming back to increase their entitlement based on their success that they are having.

So in a matter of really three to six months we’ve created a pipeline of business that is material to the overall pipeline of the company, and also it really gives us hope that this will be an important contributor to growth going forward. .

Got it. And then one last one from me just on the specialty chemicals space, last quarter you talked about potentially moving a bit more in to that space with the acquisition of ProMV and then potentially re-queuing a few of your other products to target that space.

Any update there?.

Yeah, we are working on that and in the next release of our suites you’ll see some of that R&D work show up. So its work-in-progress but again the customers that are doing beta test in for all those functionality are very excited about what we are doing.

Some of the batch control that acquired from (inaudible) sensors that will take a little longer to deliver to the market just because we’re going to make sure that that is well tested on product eyes considering that it’s going to be controlling the process directly.

But overall I think eventually we’ll have a very solid offering for spec chem and some of our functionality actually can bleed over in to pharmaceuticals. .

Our next question comes from the line of Mark Schappel with Benchmark..

Antonio with respect to operating expenses it appears that you didn’t hire out or spend as much as may initially anticipated. I was wondering if you could just address the hiring environment.

Are you finding it difficult to find the people you’re looking for quality wise or are there just maybe something or distractions in the company the last quarters or two that have slowed the hiring process down?.

No, I think the hiring environment is fine and we’re finding no trouble identifying the right talent to hire into the company. As always, we’re always cautious on getting ahead of our skies here.

We evaluated very carefully throughout the quarter, whether what should be the investment that we make with regards to our APM suite both in R&D field operations and marketing, as and some of that will start showing up in the P&L in Q3 and Q4.

It’s our expectation, but I look at as far as hiring and starting the environment, we’re well stuffed for the macro environment that we see in the market place. .

And then finally here in your prepared remarks you noted that you had a large chemical company come in and expand the juice of Fidelis, that’s nice to see. I was wondering if you could just give us a few more details on how this particular company is using the product in the hope to expanding the use of the product..

Let me look at, this was an existing customer of Fidelis when we acquired them. The way these companies are using the technology is really as they do designs for new clients, they also take in to account their reliability of those assets from the standpoint of their availability and historical performance of assets of the same kind.

And the real goal being to optimize the design of those assets not only for capacity throughput and the type of product you’re going to produce, but also the availability of the equipment and the reliability of that equipment when you build that asset, so as not to over design, because traditionally what a lot of companies do is they over design on some of the equipment or have many more of the same equipment, for example compressors or pump to account for failures.

But if you take into account the reliability and availability of equipment based on historical performance then you can optimize the design of those assets and the big savings then really comes in to play by reducing the CapEx.

And we have some customers that I talk about this I believe in my Q1 earnings call that claim savings from $300 million to $600 million in CapEx savings during the construction of their assets.

So that’s how they do it, but the statements are not always about magnitudes, sometimes they are just designing a new process unit has a much smaller spending but nonetheless the goal here is instead of designing assuming that equipment is going to available 100% of the time, the design takes into account the reliability and availability of that equipment, and therefore is optimized for that.

And it could be sizing up equipment, it could be numbers of pieces of equipment and it’s an area that is attracting more and more interest as well. .

We have reached the allotted time for questions. We’ll take one final question from Michael Morosi with Avondale. .

I was wondering if you could update me on the mix of downstream leverage spend versus upstream as a percentage of total?.

Downstream, if I understood your question correctly, if we refer to downstream that’s just refining or refining and chemicals. If we say refining and chemicals, refining and chemicals is about 54% of our business, while upstream we’ve said is about 12% of our business, E&C is about 30%. .

And within that E&C how does that breakdown with respect your upstream versus downstream kind of broadly speaking?.

We are not able to tell, we get usage logs from our customers. What we understand the products that they are using, their frequency of usage, but we are not able to understand for what purpose they’re using them..

With respect to APM, I wondered if you could just speak a little bit about the competitive landscape and what products and solutions you see in the market place that should go head-to-head with or what are some of the existing solutions that you might be able to placing, just any dynamics around where the spend is coming from?.

You have to break it down because some of these products have very different functionality. So Fidelis has its own set of competitors. There’s a very big company called B&B that has similar capabilities in their products and that’s who they compete with head to head.

On the analytics and asset analytics we believe we have a unique solution that we developed and we don’t know of any of the company that is able to deliver that type of solution where you’re combining engineering models with real time data, search and pattern recognition, vertical analysis to do analytics in a tower.

So we think that’s pretty unique and something that we don’t believe has any competition at the moment. And then you have Mtell and machine learning and that space is very fragmented as we look more and more in to it. Of course GE has a big horn and a big marketing organization and they’re out there. They’ve made some acquisitions in this space.

At the same time, we believe that they are focusing on enterprise asset management, they’ve maintenance strategy. Aspen [Tech] we are focusing is on the engineering the technology of machine of equipment with machine learning. And I think in a way we may have congenial solutions GE and ourselves.

But time will tell how they evolved our strategy in this space and how we evolved ours. But also there’s many, many little companies out there. .

I’ll now turn the conference back over to Antonio for closing remarks. .

Well thank you Stefani. And I want to thank everyone for joining us this evening on our second quarter fiscal ’17 earnings call. Look forward to seeing some of you on the road in the next few weeks. Thank you..

Thank you. This concludes today’s conference, you may now disconnect..