Good afternoon, my name is Mary, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Technology Third Quarter Fiscal 2019 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.

[Operator Instructions] Thank you. I’d now like to turn the call to one of our host, Mr. Karl Johnsen, Chief Financial Officer. Sir, you may now begin your conference..

Thank you. Good afternoon, everyone, and thank you for joining us to review our third quarter fiscal 2019 results for the period ended March 31, 2019. I’m Karl Johnsen, CFO of AspenTech; and with me on the call is Antonio Pietri, President and CEO.

Before we begin, I will make the Safe Harbor statement that during the course of this call, we may make projections or 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 might cause such differences include, but are not limited to, those discussed in today’s call and in our Form 10-Q for the third quarter of fiscal 2019, which is now on file with the SEC. Also, please note that the following information relates to our current business conditions and our outlook as of today, April 24, 2019.

Consistent with our prior practice, we expressly disclaim any obligation to update this information. The structure of today’s call will be as follows; Antonio will discuss business highlights from the third quarter, and then I will review our financial results and discuss our guidance for fiscal year 2019.

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

Antonio?.

Thanks, Karl, and thanks to everyone for joining us today. We’re pleased with our third quarter performance which demonstrates a continuous strong execution by the AspenTech team and positive demand across all major geographies and product suites. Looking at the financial highlights for the quarter, revenue was $148 million.

GAAP EPS was $0.88 and non-GAAP EPS was $0.96. Annual spend was $526 million, up 9.7% year-over-year. Free cash flow was $89.1 million and we returned $75 million to shareholders by repurchasing approximately 800,000 shares.

Overall, our business continues to benefit from a positive macro environment and a new product suite that is gaining greater traction. We delivered accelerating annual spend growth for the sixth consecutive quarter.

And the third quarter’s year-over-year annual spend growth of 9.7% is our best performance since the first fiscal quarter of 2016 when our business started to feel the impact from the reduction in CapEx spend by oil companies. Specifically, our E&C customer’s business continues to demonstrate signs of recovery.

Albeit in the context of consistent mid single digit growth in global upstream CapEx spend that remains well below the peak levels seen four years ago. We believe this makes the acceleration of our engineering business even more encouraging.

We also believe that incremental CapEx spend in other energy sectors such as LNG and refining and in the chemicals industry are contributing to the improvement in engineering software usage.

In the quarter, we saw again a few renewals with lower reduction in spend and expected more cases of customers who had renewed in recent years increasing their token entitlement after reaching their entitlement limits.

In particular, during the third quarter, we saw notable improvement in our North American E&C business, which has experienced improving trends for the past four quarters and is now a materially positive contributor to annual spend growth for the first time in several years.

At the same time, the macro environment remains favorable for owner-operator customers, which gets us on track to deliver another year of double-digit growth in our MSC suite, supported by the performance of our multivariate control and refinery planning products.

The focus on digitalization as a driver of operational excellence is a top priority for these customers and remains in its earliest stages. We believe this is one of the key long-term opportunities for our business.

Customers are also realizing the sustainability benefit from our products such as when operations are optimized to lower emissions or to decrease the amount of our spec product for example.

As I reminder, AspenTech is an operator and expense for owner-operators as they run their assets daily, which drives the consistently strong performance of our MSC suite. Turning to our APM suite, we had a particularly strong quarter with a second consecutive quarter of record growth in annual spend.

The third quarter performance was highlighted by the first seven figure annual spend APM transaction, which equates to an eight figure booking value for the contract with a customer with multiple refinery and midstream assets. There are several exciting points about this win that we would like to highlight.

First, this customer had been spending millions of dollars annually on reliability maintenance with no discernible incremental return and a continued problem with unplanned breakdowns. This will be the initial focus of its Aspen Mtell deployment.

Second, based on the strength of our customer reference, we were able to win this business through a sole sourced pilot rather than a competitive bake-off. We believe this is a positive indication of the value we’re delivering to customers and our differentiated market position.

Expanding this customer to a full-end enterprise license could result in incremental annual spend that would be several times larger than the initial contract signed in the third quarter. And third, this customer is also interested in leveraging the integration of Aspen Mtell with Aspen PIMS.

They interplay between downtime alerts, and planning and scheduling is a common topic in digital initiatives. The motivation is compelling with tens of millions in potential gains that could be realized from more optimum asset planning and scheduling enabled by much earlier warnings of assets failure.

This is just one example of the kind of cross functional transformation our customers are seeking with digital initiatives.

Mtell’s ability to identify failure signatures in data that encompass both the equipment and operate an envelope, where the equipment resides is critical to the term in the source that impacts and degrades the performance of the physical assets.

We believe this approach is highly differentiated and significantly improves the rate of detection of failures.

The combination of domain expertise, data management capabilities and machine learning technology that can be implemented and scaled by engineers without the need for data scientists distinguishes AspenTech’s offerings in the predictive and prescriptive analysis space.

In the GIs, we’re seeing a strong market interest, resulting in a meaningful number of customers and a growing pipeline of opportunities. Our success with GI customers shares the same fundamental value proposition with our core markets, improving the uptime and reliability of the equipment used in operations and predicting process degradation.

Customers are increasingly recognizing the cost savings and reliability improvement benefits that APM solutions can deliver across their assets. This is driving a strong interest for APM, including continued growth in pilot opportunities.

We believe APM can be one of the largest areas of incremental investment for customers in the coming years and our focus is on ensuring we’re best positioned to capitalize on this opportunity.

Given the strengths and the size of the APM market opportunity, we will expand our APM team to extend our go-to market presence and increase the number of pilots we can manage at any given time. We will also bolster our implementation services capacity to meet the increasing number of deployments as we win business.

Based on the strength of our performance year-to-date and our outlook for the fourth quarter, we’re revising our annual spend growth forecast to 9.5% to 10%, which compares to our prior guidance of 8.5% to 9.5%. At the midpoint, this would represent a 335 basis point increase in growth year-over-year.

We’re also adjusting and titling the guidance range for the APM business to 1.5 – to 1.75 to 2.75 points of growth contribution. And we’re confirming our attrition guidance of 4% to 5% with a bias towards the lower end of that range.

In addition, we foresee that the growth momentum built over this fiscal year will carry over into the next fiscal year and position us for double-digit growth. The following are a representative sample of transactions closed in the quarter and reflective of growth we’re experiencing.

First, we signed a renewal and expansion agreement with a leading North American integrated energy company with operations including oil, sands development.

This longtime AspenTech customer which has implemented our Aspen DMC3 product with an estimated $150 million in annual benefits plans to standardize on Aspen DMC3 across all in-situ operations while also increasing its engineering software entitlement.

Second, a top five global chemical company and long-term user of our aspenONE Engineering and MSC suites selected Aspen Mtell as part of the company’s strategic digital transformation initiative. This customer has identified hundreds of millions of dollars in potential predictive and prescriptive maintenance benefits.

After evaluating 26 software vendors and selecting nine to compete for its business, the company selected Aspen Mtell for deployment of one of its petrochemical side as the first project in the adoption process of an eventual global rollout.

The customer selected Aspen Mtell since it delivers the fastest time to value, as it can be implemented and scaled rapidly by process and reliability engineers without the need for data scientists.

Third, a global EPC and operations and maintenance services leader in subsea, on-shore, off-shore and surface technologies expanded its entitlement to the aspenONE Engineering suite.

This long time AspenTech customer has significantly increased its focus in engineering efficiency and cost accuracy in recent years in response to the decreasing capital investment activity in the oil and gas industry.

As a result, this customer has increased its usage of Aspen Basic Engineering and Aspen Capital Cost Estimator, leading to significant wins to develop multiple process design packages for one of the world’s largest chemical companies.

The customer has also begun to use Aspen Capital Cost Estimator to replace its previous use of simple factor based estimation methods, allowing it to produce more accurate estimates with less resources. Fourth, a global food processing company selected Aspen ProMV Online Batch after a five vendor bake-off.

The customer chose Aspen ProMV as the winning solution due to our advanced data driven process optimization tools that is unique in the industry as well as our modern intuitive web-based interfaces for real-time model implementation. The customer will be presenting three use cases at our upcoming OPTIMIZE conference.

And fifth and final, a top 10 global pharmaceutical company that has been an AspenTech customer for over 25 years with extensive use of the aspenONE MSC suite across nearly all its major manufacturing sites, expanded it deployment of Aspen Mtell in the third quarter.

One of the four strategic initiative of our partnership with this customer is productivity and asset performance, which has led to the increased usage of the APM suite. And initial Aspen Mtell prove of concept successfully predicted failures on filling machines and packaging lines and led to the expansion across six other sites.

This new license extent is used to a seventh site with additional opportunity to expand usage to the rest of the customers’ major manufacturing sites. These wins demonstrate a strong customer demand we saw in the quarter and the growth opportunities in each product suite across multiple industries.

Turning to profitability, we generated $89.1 million of free cash flow in the third quarter, which reflects our positive business momentum as well as strong collections. As a reminder, free cash flow is the best way to evaluate the profitability of AspenTech due to the variability of our income statement under Topic 606.

We believe our ability to sustain profitability, while continuing to invest in the growth of APM and the overall business is a key differentiator for AspenTech. A great example of the investments we’re making in is the recent release of aspenONE Version 11, which includes exciting product innovations across all three product suites.

Key advancements include, first, the introduction of Aspen GDOT dynamic optimization software, which unifies production optimization for energy and bulk chemical companies in complex industrial environments.

Aspen GDOT is the next generation of optimization technology and will enable dynamic multi-unit coordination and help owner-operators reduce gaps in planning and scheduling. The Aspen GDOT technology was part of the Apex Optimisation acquisition over a year ago.

Second, we have updated the APM suite to now incorporate predictive equipment failure alarming into Aspen PIMS and Aspen Petroleum Scheduler or APS, so that future equipment failures are incorporated in the planning and scheduling process producing a more optimal plan or schedule more representative of future operational constraints.

Third, we have updated Aspen DMC3 and incorporated non-linear process control, so that our customers now have one integrated solution for optimizing linear and non-linear processes in one control environment.

In addition, our customers can improve operating margins across the enterprise through a centralized monitoring environment that provides greater visibility of the performance and benefits of older APC applications.

Four, the release of Aspen ProMV online batch in Version 11, enables our users to take the offline multivariate models they had developed to find the true sources of variation in their batch production processes and put those models online for 24/7 real-time monitoring.

The online monitoring provides earlier warning of deviations in the batch process condition so the corrective actions can be taken.

And finally in V11, we introduced new capabilities in Aspen HYSYS with first of its kind molecular modeling of reactors for hydrocracking unit operations and propagation of molecular information throughout the asset model.

Molecular modeling significantly improves the predictive capability of the reactor operation resulting in higher profitability and improved environmental impact. The V11 release begins to demonstrate the value and use cases from the integration of the APM functionality across to our Engineering and MSC suites as just mentioned.

Going forward, we also plan to increase our investment in APM R&D to further integrate the products in the suite and with Engineering and MSC suites. We believe that our market position and the analytics and AI technologies and expertise that we now process positions us well for the future.

We will continue to build AI capabilities in our products and strive to be the leading digital solutions provider to capital-intensive industries. We will be highlighting these and other product innovations at our biennial user conference, OPTIMIZE 2019, next month in Houston.

OPTIMIZE has become the leading gathering of asset optimization expertise and a great opportunity for customers to share best practices and learn how AspenTech solutions can drive value in their businesses. We’re also able to deploy our cash flow and balance sheet to consistently return capital to shareholders.

As mentioned, we spent $75 million to repurchase 800,000 shares during the third quarter and we expect to repurchase another $75 million of stock in the fourth quarter subject to market and business conditions.

Our ability to invest capital back into the business to capitalize on growth opportunities and return excess cash to shareholders provides multiple avenues for value creation. Before closing, as we announced last week, I would like to welcome Georgia Keresty to the Aspen Technology Board.

Georgia’s proven success in managing complex operations within the pharmaceutical industry will complement the expertise of the existing Board. Please refer to the press release issued on her appointment for more details.

To summarize, AspenTech’s strong third quarter and year-to-date performance reflects a strong execution and improving macro environment and the positive impact of our growth investments.

Our focus is to continue executing on our strategy and capitalizing on our multiple opportunities to drive additional growth and value creation for customers and shareholders. With that, let me turn the call over to Karl.

Karl?.

Thanks, Antonio. I will now review our financial results for the third quarter of fiscal 2019. As a reminder, these results are being reported under Topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts.

Our license revenue is heavily impacted by the timing of bookings, and more specifically, renewal bookings. A decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license contract up for renewal is not an indicator of the health or growth of our business.

The timing of renewals is not linear between quarters or fiscal years, and its nonlinearity will have a significant impact on the timing of our revenue. As a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods.

In our view, annual spend will continue to be the most important metric in assessing the growth of our business; annual free cash flow, the most important metric for assessing the overall value our business generates.

Annual spend, which represents the accumulated value of all the current invoices for our term license agreements at the end of each period was approximately $526 million at the end of the third quarter. This represented an increase of approximately 9.7% on a year-over-year basis, and 2.6% sequentially.

Total bookings, which we define as the total value of customer term license contracts signed in the current period less the value of term license contracts signed in the current period but where the initial licenses are not yet deemed delivered under Topic 606, plus term license contracts signed in the previous period for which the initial licenses are deemed delivered in the current period, was $160 million, a 29% increase year-over-year.

The year-over-year increase in booking reflect a significant increase in the amount of term license contracts up for renewal as compared to the year-ago period. As I mentioned earlier, bookings can fluctuate significantly between periods since it is driven in large part by the timing of when customer contracts are up for renewal.

Year-to-date total bookings were $410.8 million, a 23% increase year-over-year. Total revenue was $148 million for the third quarter, a 16% increase from the prior year period. The year-over-year increase in revenue was the result of the increase in total bookings discussed above. Breaking revenue down by line item.

License revenue, which represents a portion of a term license agreement allocated to the initial licenses, was $98.5 million, a 25% increase year-over-year. As mentioned earlier, the increase is the result of the higher amount of term license agreements coming up for renewal in the quarter as compared to the year-ago period.

Maintenance revenue, which represents the portion of the term license agreement related to ongoing support and the right to future enhancements, was $41.9 million, a 2% increase from the prior year period.

Maintenance revenue is recognized on a daily ratable basis over the life of the term license contract and will grow more in line with our annual spend. Services and other revenue was $7.6 million, a 2% decline from the year-ago period. The decline in service revenue was largely driven by the timing of projects.

Turning to profitability, beginning on a GAAP basis. Gross profit was $133.6 million in the quarter, with a gross margin of 90.3%, which compares to $115 million and a gross margin of 90% in the prior year period. Operating expenses for the quarter were $62.8 million compared to $61.4 million in the year-ago period.

Total expenses including cost of revenue were $77.2 million, which was up from $74.1 million in the year-ago period, and $76.7 million last quarter. Operating income was $70.8 million for the third quarter of fiscal 2019 compared to $53.6 million in the year-ago period.

Net income for the quarter was $61.6 million or $0.88 per share compared to net income of $44.5 million or $0.61 per share in the third quarter of fiscal 2018. Interest income in the third quarter was $6.8 million, up from $6.3 million in the year-ago period.

Recall that under Topic 606, there is an implied financing component to our term license contracts. The imputed value of this financing component is taken from the license fees and recognized as interest income over the payment term. Turning to non-GAAP results.

Excluding the impact of stock-based compensation expense, amortization of intangibles associated with acquisitions and acquisition-related fees, we reported non-GAAP operating income for the third quarter of $78.3 million, representing a 52.9% non-GAAP operating margin compared to non-GAAP operating income and margin of $59.9 million and 46.9%, respectively, in the year-ago period.

Non-GAAP net income was $67.5 million or $0.96 per share in the third quarter of fiscal 2019, based on 70.2 million shares outstanding. This compares to non-GAAP net income of $49 million, or $0.67 per share in the third quarter of fiscal 2018, based on 72.7 million shares outstanding. Turning to the balance sheet and cash flow.

The company ended the quarter with $65.6 million in cash and marketable securities compared to $54.4 million at the end of last quarter. We ended the quarter with $220 million of debt drawn from our credit facility. As Antonio mentioned, during the third quarter, we repurchased approximately 800, 000 shares of our stock for $75 million.

Contract assets at the end of the third quarter were $673.5 million. Recall this line item on the balance sheet under Topic 606, represents the portion of the initial license performance obligation that has been recognizing revenue but not invoiced. This is sometimes referred to as unbilled accounts receivable.

From a cash flow perspective, we generated $90 million of cash from operations during the third quarter, and $89.1 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software, litigation and acquisition-related payments.

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 would now like to close with guidance. Remember, that we will now only be providing guidance on an annual basis, and providing directional commentary on the timing of annual spend and bookings during the year.

We are increasing the guidance we provided on our fiscal second quarter earnings call. We now expect bookings in the range of $575 million to $600 million, which includes $398 million of contracts that are up for renewal in fiscal 2019. This is an increase from our prior guidance of $565 million to $590 million.

With respect to annual spend growth, as Antonio mentioned, we are now forecasting 9.5% to 10% annual spend growth. We’re also adjusting in tightening guidance range for the APM business to 1.75 points to 2.5 points. We now expect revenue in the range of $549 million to $569 million.

We expect license revenue in the range of $356 million to $372 million. Maintenance revenue in the range of $166 million to $169 million and service and other revenue in the range of $27 million to $28 million. From an expense perspective, we expect total GAAP expenses of $309 million to $312 million.

Taken together, we expect GAAP operating income in the range of $240 million to $257 million for fiscal 2019, with GAAP net income of approximately $217 million to $231 million. We expect GAAP net income per share to be in the range of $3.07 to $3.26.

From a non-GAAP perspective, we now expect non-GAAP operating income of $272 million to $289 million and non-GAAP income per share in the range of $3.42 to $3.62. This compares to $258 million to $287 million and $3.37 and $3.50 previously. From a free cash flow perspective, we reiterate our guidance of $223 million to $228. million.

Our fiscal 2019 free cash flow guidance assumes cash tax payments of approximately $45 million to $50 million. In summary, we delivered a strong financial and operational performance in the third quarter. The business is performing well and we are seeing a positive impact from the investments in our growth initiatives in recent quarters.

We believe we are well positioned to continue delivering an attractive combination of growth and profitability that can generate sustain value for shareholders. With that, we would now like to begin the Q&A.

Operator?.

[Operator Instructions] Our first question comes from David Hynes of Canaccord. Your line is open..

Antonio, I want to ask you about APM, obviously, a lot of momentum.

Just as we think about where you’re seeing success, I mean, is it still largely in your core markets or I mean part of the story was APM is diversifying kind of the customer base, are you seeing traction outside of kind of your core markets and I guess how would you qualify kind of the competitive environment there versus maybe where you have a better foothold with your customers?.

Well, I mean, I think that’s a good question because it’s certainly in the process industries, chemicals and energy, we’re having a lot of traction, and that’s where we see a little more competition. In the so called GI industries, we’re getting traction.

Two of the five vignettes that I gave you, one in a food company, the other one a pharmaceuticals company, but we also have a number of customers already in mining and metals. So we were gaining traction.

And the thing in those markets, not so much in pharmaceuticals, but in other – and in some of these other industries is that we also need to establish our brand AspenTech, but at the same time, once we are given the chance to do the pilot, I think these customers quickly realize the advantages of our technology and we’re successfully closing business..

Yes. And then you mentioned Apex and the GDOT upgrade cycle in your prepared remarks. I remember you guys are pretty excited about that acquisition. I guess it was back in February of last year when you did that. Just help us kind of quantify how material the potential upgrade cycle is there.

I don’t know what the best way to do that is, but is it kind of percent of your manufacturing base that it’s applicable to? And I guess, I’m curious, how much of a spend uplift could it be for a customer who chooses to take on GDOT?.

So, we’re very excited about GDOT. And the fact is that, there was – the Version 11 was released and there was a quiet release of Version 11 in early March. It was announced to the market in April, but in that period between March and April, early April, we actually signed a customer for GDOT.

It’s mostly applicable in refining and bulk chemicals, really ethylene and there is significant excitement in the market. But this is not an upgrade, is a new technology that has its own space in the technology stack between planning and scheduling and multivariable process control. So this is all white space.

And really, the spend – you could equate it to the spend that we get from refiners and chemical – and ethylene producers around multivariable process control, perhaps a little bit bigger. So we’re very excited about this and the fact that it’s a total white space is even more exciting..

Okay, that’s helpful. One last one, quickly if I may for Karl.

Karl, you guys have shared slides in the past that kind of depict what you expect from a renewal portfolio on an annual basis, right? And I think the pictures, no numbers described to it, show that fiscal 2020 is going to be a down potential bookings year just based on that renewal backlog.

Is there any way you can quantify? I mean, we all obviously have to put numbers out there for revenue for fiscal 2020, and I don’t know if this is something you’ll hold for an Analyst Day, but is there any way you can kind of give us an early feel for just how much that renewal portfolio dibs? I think you’ve said is, look at my numbers, $398 this year.

What that could be in fiscal 2020?.

Yes. I mean, we’ll give that to you at Analyst Day, DJ and we’ll update that what that range looks like or what that picture of the mountain range looks like there, mainly because it can change as we’ve talked about it. It’s almost like a living organism that it can change depending on early renewals and supersedes and the likes.

So we will give that number out when we do Analyst Day in August..

Okay. All right guys, thanks very much..

Thank you..

The next question comes from Rob Oliver of Baird. Your line is open..

Hi, Rob..

Great. Hey, Antonio. Hey, Karl. Thanks for taking my question. Just to follow-up on DJ’s question, I wanted to lead with APM. So, first off, I know you mentioned the one large deal that was a eight figure total booking. It sounds like clearly even more expansion opportunity there.

I wanted to talk about the strategic digital transformation deal that you mentioned where you guys won among the 26 vendors at a petrochemical company. And it sounds as if that was out of one site, Antonio. And I just wanted to try to drill down on that a little bit and get a sense for what the land and expand magnitude of that deal could be.

And then I just had one follow-up as well..

Well, let me – we also said that that’s one of the top five global chemical companies in the world. So this is a company of significant size and number of manufacturing assets. It is a deployment on one side, and that’s normally the pattern that we see from customers.

If they go through a competitive pilot, they select one company and then the technology gets implemented on one side. Once they get comfortable with the value and the technology, then they start expanding it to other sites.

But think of any top five global chemical company and the number of manufacturing assets that they have, and certainly the potential upside there is significant..

Great, thanks. And I wanted to follow-up by asking about the expansion of the APM team. I know recently you guys have been commenting on how you’re full in terms of your ability to go out and meet the demand for a pilot. So it sounds like that’s a great sign.

How – what’s the visibility on hiring there and are you still gathering hires from kind of the usual suspects? And what is the thought process on kind of building that out versus going to partner route? Thanks guys..

Yes. So there’s three main areas that we’re targeting for incremental headcount in APM; one is our customer facing organizations, really business consultants, a little bit of sales, and certainly some product marketing there, so that’s one area and the business consultants around the world.

Then there’s the professional services implementation capacity, and we set up a center of expertise to be able to scale deployment efficiently. So we will continue to expand that center of expertise because it’s actually working very well for us. But now we’re going to – so that center of expertise is in the Americas.

We’re now going to start expanding our implementation capacity in Asia and Europe as well. But, yes, the ultimate goal is to have most of the APM deployments being done by partners or third parties. And we’re already training some third parties. We have engaged a handful of third parties already and we’re training them.

They’re working with us on deployments to get trained. And eventually takeover or be the lead on future wins, so that we’re not involved. And then the third bucket is R&D. I also talked about that.

In these sort of 18 months, 19 months or 21 months that we’ve been going to market, we’ve learned a lot, especially about use cases and the ability to leverage the cross pollination of the products in the APM suite, so we’re going to start celebrating that work.

But also as I said, there’s also an opportunity to integrate through the MSC and engineering suites, and we’ll also start that work as well, so starting in R&D professional services and customer facing groups..

Okay, great. That’s helpful color. Thanks guys. Appreciate it..

Thank you. I thought you had another question..

I could go on, but I’ll let someone else [indiscernible] Thanks. Thanks guys..

Thank you. All right..

Our next question comes from Matt Pfau of William Blair. Your line is open..

Hi, Matt..

Hey guys, thanks for taking the questions. First, just wanted to follow-up on APM. So a lot of positive commentary around that in terms of the deal signed and expanding the team and everything else. But high-end of the guidance for the contribution for annual spend is coming down a bit.

So help me understand why the high-end of the guidance is coming down a bit while the product seems to be doing quite well..

Well, look, the guidance is something that we determine at the beginning of a fiscal year. We give that range of 1.5 to 2.5. And now with basically a couple of months left in the fiscal year and the outlook that we have we have tightened that range 1.75 to 2.25 point of growth contribution. And so we feel very comfortable with that.

But I also want to frame that range because this point of growth contribution into a very large base of business, if you – even if you assume the midpoint of that range and what we did in fiscal 2018 plus what the midpoint assumes we would do in fiscal 2019, you’re talking about a business that in fiscal 2019 would grow almost 350% versus the previous year – 250%, I think is a number, and would be almost $14 million to $15 million run rate business in a couple of years.

So we were very satisfied with what we are achieving in APM and we also have an outlook into FY 2020 that we’ll talk about in August, but we’re happy with what we’re giving you..

Got it, okay. And then in terms of the increase in annual spend on for the Engineering and MSC products, you’re maintaining the churn expectation.

So what’s primarily driving that upside in the annual spend and is it expansion of some customers that you weren’t anticipating or are there other areas there that are contributing to that increase?.

Yes. So certainly the attrition guidance is staying the same. So that means our product suites are generating more gross growth and specifically the Engineering suite. The Engineering suite, as we’ve mentioned in the call, is over-performing versus our expectations at the beginning of the fiscal year.

Certainly, we said from the very beginning that we expect the MSC suite to deliver double-digit growth, but the MSC suite is also having a solid year, and then, APM. So I think is an over performance on new growth against the same amount of attrition that we expected..

Okay, great. That’s it from me, guys. Thanks a lot..

Thank you..

Our next question comes from Sterling Auty of JPMorgan. Your line is open..

Hi, Sterling..

Great. Thanks. Good evening, guys. It’s Jackson Ader on for Sterling tonight. Couple of quick questions from our side.

In terms of the – Antonio, the improving environment of CapEx in your core suite, can you give us a sense for the balance between how much of the improvement is coming from a recovery of CapEx from your oil customers and how much of the improvement is coming maybe chemicals or other areas picking up the slack?.

Yes. I mean, look, certainly, we’ve talked about CapEx growing – CapEx in upstream – oil and gas upstream growing sort of low- to mid-single digit the last four years.

And while it is sort of low- to mid-single digit growth rate over four years that has an accumulating – cumulative impact of probably over 20% of CapEx growth from the bottom of the market in 2016, 2017.

So that slow increase is having – is starting to have an impact on the use of our products in EPC, E&C companies because they’ve been hiring a little bit. The chemicals market continues to be a strong CapEx market.

Certainly, we’re seeing investments in the Middle East, the ongoing investments in the United States, big investments in Asia, in China specifically, but also, Southeast Asia and India. And then, what I think is new certainly, refining has continued to do what it’s done, but what is new is LNG.

And there’s a number of massive LNG projects that have been sanctioned and basically this is taken all that shale gas production in the United States or in general gas production around the world and liquefying that gas, so that then it can be used for energy to power homes and everything else, and there’s quite a number of LNG facilities that are getting sanctioned for investment and we’re seeing engineering companies, especially the Japanese and the Koreans but also here in the U.S.

that are benefiting from that investment..

Great. That is really helpful. Thank you. And then a follow-up on the APM deal phase. You mentioned the competitive deal – so they were kind of two phases, right, started out with 20-plus competitors and then it was narrowed down the eight and then Mtell was selected.

So can you just walk us through in those two stages, what was the initial criteria that narrowed the field down to eight and then what was the biggest driver of Mtell winning?.

Yes. The numbers were 26 and 9; I mean, look at – I don’t know about the criteria for how they come up with 26, maybe it was a 26 different companies that had approached them by analytics and machine learning. We hear that a lot when we go and talk to customer that they’re getting inundated by companies offering AI capabilities.

How it gets down to nine, I think, eventually they sort the real technology from one of these.

Especially, what we’re hearing from customers is that, yes, there is a lot of companies talking to them about machine learning and AI, but very quickly, they’re able to discern those companies that have both data management capabilities and domain expertise, and by data management capabilities, I mean, understanding of process industries data, time series data and all other types of data that are involved in a refinery or chemical plant.

That’s one criteria they quickly use to sort of select companies. And then the other one is domain expertise.

So this company know anything about our business about refining, about chemicals, and with that then, I’m sure they got down to the nine and the nine is probably a list of who is who in the process industries, industrial companies, some IoT platform companies, AspenTech, some software companies and they look at their technologies and we feel very good that they selected us..

All right, thank you very much..

Yes. No problem..

Our next question comes from Shankar Subramanian of Bank of America Merrill Lynch. Your line is open..

Hi. Thanks for letting me ask a question, and congrats on the strong results.

I have – last question on APM and there are lot of questions asked on this, but we did a recent survey, and it seems like there is a – I mean, obviously, you elaborated on all the use cases that you’re seeing, there seems to be a huge interest in running proof of concepts, right, with the APM solution, and based on the survey that says about 25% of 500 customers are evaluating your products and they will go to production in the next three to six months.

But – and you’re also increasing capacity on the – on APM team and try to see how you can convert that to production.

My question is, the improvements you’re making, can it shorten the lead time of the proof of concepts to production, and if it is the case, then do you see these opportunistically quickly convert over by fiscal 2020? And kind of walk us through how it was at year ago and maybe how can it change in terms of the lead time from conversion to the pool of concepts to production..

Yes. Thank you, Shankar. Look, absolutely, one of the things that – we’ve learned many things over the last two years in APM and certainly our ability to execute pilot efficiently and effectively is, it has been one of the things.

In the process, our teams have developed tools to accelerate the identification of failure signatures in the data, will be productizing those tools, so that they can then be available to anyone that uses Mtell, whether in pilots or in operations, in order to accelerate the deployment, but also make the deployments more efficient and easier for the AspenTech team, third parties, customers and so on.

So this is part of our focus, and with respect to your comment on the number of pilots and what you’re seeing in the market, absolutely, we’ve seen a handful of customers that have moved forward without a pilot based on our reference and this is why references are important.

While most customers because the technology is new are doing pilots and this is no different than what we saw over the last 20 or 30 years that we’ve rolled out new technologies to the process industries.

And I just want to add – the only other thing that I would highlight is that, in AspenTech, we’re focused on the application of AI on predictive equipment failure as opposed to IoT platforms, which is really setting up a data infrastructure and so on. So but, yes, no, pilots are a common theme at the moment..

Got it.

Just one question on the product side, I know you are winning a lot of deals on Mtell and it seems to be the work cause in terms of APM wins, but in the survey we also picked up the route cause analytics and Fidelis being another other important use case, can you talk about how the adoption is trending for other products in the APM suite?.

Yes. So – and thank you for that question, because it’s also a good one. So in the prepared remarks, I talked about ProMV and really ProMV online. So, in the APM suite, we’ve ProMV offline, which is, an engineer can get some data analysis – do an analysis of the data and then based on that analysis, go – and manually take some action.

The version that was released is an online version, which is basically you can then put the technology online, a stream data are continuously through the product.

The product is able to the detect deviations in the preparation of a batch of product, and based on that detection of a deviation then take corrective action to put the batch back in on the right track, if you will.

We believe that the online version of ProMV will accelerate the adoption of that product and we actually, again, there was a soft launch of Version 11 in early March.

We closed the first couple of site licenses for ProMV; I talked about one of those deals in the vignette, but we’re very – we have a lot of expectations about the acceleration of the ProMV business, and then Fidelis, we’re working on the integration of Fidelis with our Engineering suite, and we believe that will also help that product get better traction in the market..

Perfect. thank you, guys..

Thank you..

Our next question comes from Steve Koenig of Wedbush. Your line is open..

Great. Hi. Thank you for taking my question. I appreciate it. I’ll hit you guys with both my questions up front at once here. Just two quick ones. First one is, I’m particularly interested in the multi-site deal for the pharmaceutical company with Mtell.

As we look forward to more multi-sited Mtell type deals, if you could maybe give us some more color on what were the enablers there and are those enablers relevant to other customers? And then just to finish it off, my other question would be, perhaps you explained it and I just didn’t understand, but maybe more color on the work you’re doing to integrate the APM alarms into planning and scheduling.

What does that do for your customers and what kind of specific actions that facilitate? Thanks very much..

Thank you. All right. So, look, on the multi-site pharma customer, first of all, Mtell is agnostic to equipment or industry, is machine learning capabilities and you can feed data from any type of equipment. So we start with our premise.

In pharmaceuticals, certainly, this customer has a medicine that is delivered via an atomizer into your mouth and they are full out on demand. Basically, they have a lot more demand than the supply that they can generate.

So – but also their manufacturing line this fill-in machines and the packing plans, the equipment was failing and when you’re maxed out on supply – on what you can supply to the market then failure means a lot of revenue and profitability.

So they were looking for technology to predict when these equipment was going to fail and this has been a longtime customer of AspenTech. We introduced them to Mtell. We did a pilot and based that pilot, really that was completed about a year ago, now they’ve rolled out the technology to – it is going to be a seven site now.

But that similar case exists across other pharmaceutical companies and the fact is that we have another pharmaceutical company already with the technology. The one thing I would tell as well about pharmaceutical companies is that ProMV is specifically developed for the type of batch processes that you find in pharmaceuticals and specialty chemicals.

So we expect pharmaceutical companies to be big customers in the ProMV area. And then, your second question around integrating….

Yes, integrating ATM alarms into planning and scheduling..

Yes, integrating.

So, look, now that we have predictive capabilities around equipment failure, this is a sort of no-brainer, because normally in a refinery or ethylene plant, when you come up with a plan and that is done on a sort of weekly basis, a forward-looking plan for a month, and you’re making crude oil purchases decisions on that basis, you want to execute that plan as close as possible to that plan, because as there are optimum.

That plan you break it down into schedule and the schedule likely is a set of instructions on how you’re going to operate your refinery. But if you don’t know that piece of equipment is going to fail, and then it fails, then basically then you have to reschedule and possibly replan because you were hit with a failure.

If you then have the ability to know when critical equipment is going to fail in your refinery or chemical plant, then you can use that information as a feed forward to your planning function or scheduling function, so that you can proactively plan around it or schedule around it and that alone can represent millions, if not tens of millions of dollars in revenue and profitability.

And like that there are many cases in refining and chemicals where we will start seeing the synergies from integrating APM capabilities into Engineering, into MSC, but also embedding AI capabilities in general in our Engineering and MSC products and that’s an area that we are all going to research in and we’ll talk about it at OPTIMIZE.

We’re very excited about it. But, yes, alarming or potential failures into planning and scheduling, it’s going to open up a whole area of new profitability..

Terrific. Thank you, Antonio. Congratulations..

Yes. You’re welcome. Thank you..

Our next question comes from Gal Munda of Berenberg. Your line is open..

Hi, Gal..

Hi, guys. This is actually [indiscernible] for Gal. We just had one quick question about your APM business.

So we just wanted to know how do you plan to compete in the market with lots of competitors who claim to be able to provide a similar service and maintain comparable margins to that of your core business?.

Well, I mean, look, I’d say for 35 years we’ve been competing against companies that claim to have the same capabilities that we have in our products, use software as a loss leader because they are more interested in selling hardware than software.

And in that context, we’ve been able to maintain to achieve the market leadership position that we have achieved with the margins that we have. In APM, we believe we have very competitive technology.

When we talk about pilots and bake-offs and competitive evaluations that’s against those companies that you’re referring to and they also tend to use price as a competitive tool as opposed to the value creation.

We are striving to maintain the pricing that we believe equates to the value that the product is generating, and time will tell, but at the same time, this is a total white space where initially there’s opportunity for a lot of people and over time I think the leadership – the leaders will separate from the laggards and we’ll see what happens, but we’re very confident about what we’re seeing..

Okay, great. That’s very helpful. Thank you..

You’re welcome..

Our next question comes from Jason Celino of KeyBanc. Your line is open..

Hi, Jason..

Hi, guys. Thanks for taking my question..

You’re welcome..

Thank you. Really one around APM.

So it seems like that business is doing really well and as you are building your pipeline, so you might be adding some capacity this year directly, but as I kind of take a step back and look at where we were a year ago, you were kind of building out your distribution channels, you added Emerson, you’ve added number of resellers and site partners.

I think last quarter you said that GEIs was 10% of kind of the pipeline. So going forward as we think about over the next year, I mean, could we – I mean, it seems like we’re kind of reaching an inflection point.

I mean, do you kind of agree with that from like a capacity standpoint?.

Well, yes, I mean, we have been very careful about not getting ahead of our skis on APM. We like what we’re seeing. We like the pipeline that we see into the future. We like how the business is developing and the risk here is to fall behind on investments.

So we’re taking – we made the decision to basically put in play additional investment as to capture the opportunity. I think what you mean by inflection point is that we are now crossing the CASM. I don’t think we’re there yet, but we’re certainly closer than we were 18 months ago, but we feel good about what we’re seeing..

Okay.

And then kind of last question around kind of APM, as we kind of look at the use cases and kind of the pricing for some of the savings that you’re driving, I mean, do you have any updates on kind of how you’re looking to maybe evolve pricing over time?.

Well, let me, look, from the very beginning – so about initially we thought we’d go to top hands by machine and we quickly figured out that that wasn’t the right pricing model. So we went to site licensing for Mtell and for ProMV as well and Fidelis.

And really from the beginning we established what we thought was going to be fair pricing in the market for our customers based on the value we would create and for AspenTech as well. We’ve tried to maintain that pricing initially; certainly, we were keen on getting some references and we achieved that and those references have worked wonderfully.

But as we go to market, we are going to the market with a pricing that we originally estimated was fair.

This customer that I talked about the first seven-figure deal, eight-figure total booking value that’s pricing representative of what we initially felt was proper pricing and that customer if we were together to on enterprise deal, the APM suite would become the largest portion of their spend with AspenTech.

So we’re satisfied with what the value we’re getting in the market at the moment, and we’ll see how things develop..

Okay. No, I really appreciate the color. Thank you..

Thank you, Jason..

All right. Well, I think that was the last set of questions. So I appreciate everyone joining and look forward to certainly see hopefully all of you or as many of at OPTIMIZE 2019 in Houston, May 13th through the 16th, and then when we attend investor conferences and we do not do roadshow. So thank you everyone..

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