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Aspen Technology Inc (AZPN) Q4 2019 Earnings Call Transcript

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Aspen Technology Inc (NASDAQ: AZPN)
Q4 2019 Earnings Call
Aug 7, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Aspen Technology Fiscal Fourth Quarter 2019 Earnings Conference Call.

[Operator Instructions]

I would now like to introduce your host for today's conference, Mr, Karl Johnsen, Chief Financial Officer. Mr Johnsen, you may begin.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Thank you. Good afternoon, everyone, and thank you for joining us to review our fourth quarter and full year fiscal 2019 results for the period ended June 30, 2019.

I'm Karl Johnsen, CFO of Aspen Technology. And with me on the call today 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 and contained in our most recently filed Form 10-Q.

Please note that we are completing our final Topic 606 documentation as part of our fiscal year 2019 Form 10-K filing, which we expect to file on time later this month.

Also, please note that the following information is related to our current business conditions and our outlook as of today, August 7,2019. 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 fourth quarter and full year and then I'll review our financial results and provide guidance for fiscal year 2020. With that let me turn the call over to Antonio. Antonio.

Antonio Pietri -- President and Chief Executive Officer

Thanks, Karl. And thanks to everyone for joining us today. The fourth quarter was a strong finish to a great year for AspenTech returning to double-digit annual spend growth has been our goal and is an important milestone for the Company that reflects broad based strength across end markets, product suites and geographies. I'm grateful for the support of our customers. I'm proud of the hard work by everyone on the AspenTech team during the last three to four years. And in this past year specifically to produce these results in fiscal-year 2019. I'm confident we are well positioned to drive further improvements in the years ahead.

I would like to begin my remarks by looking at our financial highlights for the quarter and the year, including the annual metrics we share at the end of every year. For the fourth quarter, revenue was $195.8 million, GAAP EPS was $1.49 and non-GAAP EPS was one $1.59. Annual spend was $541 million, up 2.8% in the quarter and 10.6% year-over-year. Free cash flow was $84.9 million and we returned $75 million to shareholders by repurchasing approximately 648,000 shares. For the full year, total revenue was $598.3 million, GAAP EPS was $3.71, and non-GAAP EPS was $4.09. Free cash flow was $236.8 million, which was above the high end of our guidance range. And we returned $300 million to shareholders by repurchasing 3.1 million shares.

I would now like to provide you with some additional details about our performance for the full year 2019. From a product perspective, the Engineering business delivered improved performance for the second straight year by growing annual spend 6% for the year, generating 35% of our overall annual spend growth. Our manufacturing and supply chain or MSC business continued to perform at a high level, once again delivering annual spend growth of 13% representing 45% of our total annual spend growth. Asset performance management or APM generated total annual spend growth of over 250%, or 20% of our total annual spend growth for the year, contributing 2.1 points of annual spend growth.

APM's ability to become a material contributor to our overall growth within two years of its launch speaks to the success of this product suite. At the end of the year, our installed base of business was split 60% Engineering and 37% MSC, with APM at 3% on an annual spend basis. Our three core verticals of energy, chemicals, and engineering and construction or E&C contributed 51%, 28% and 12% of our growth in annual spend during the year respectively. One of the trends we're also pleased by is our performance in the global economy industries or GEIs, which contributed 6% of our annual spend growth for the year and the pharmaceutical industry that grew to 3%. We believe the early success we are experiencing in the GIs with the APM suite is a positive indication of the broader opportunity for AspenTech in the asset maintenance market. At the end of fiscal year '19, the energy vertical represented 41% of our business, chemicals 27%, E&Cs 26%, and GEIs including pharma 6%.

For the full year, our attrition rate was 4.7%. We continue to expect improvement in attrition in fiscal year '20 and we expect to return to our historical attrition rate of approximately 3% over time. Our fiscal year '19 annual spend gross growth rate of 15.3% is an indication of the strong underlying growth in the business. Our upcoming guidance for fiscal year '20 assumes an attrition rate of 3.5% to 4.5%. Turning to our fourth quarter performance in more detail, we benefited from the same macro trends we have seen in recent quarters. Together with the growing contribution from the APM suite, we generated double-digit year-over-year annual spend growth for the first time in 15 quarters.

This is a testament to the value of products provided to customers across each aspect of an asset's life cycle. APM had a strong quarter to finish a great year. As mentioned earlier, APM generated 2.1 points of growth contribution, which is just over 2.5 times the contribution in fiscal year '18. The fourth-quarter performance was highlighted by our largest-ever ProMV quarter and second largest Mtell quarter, signing our first agreements in China, Russia and Latin America, and our first multi-site mining and oil upstream agreements. Improving the reliability of an asset and minimizing downtime represent the largest incremental opportunity to increase return on assets for most customers. We have made significant progress in demonstrating to customers that we can deliver substantial additional value through our unique combination of data management capabilities, analytics capabilities, ease of use and deep domain expertise.

Our success in the market and the growing number of reference deployments are driving increasingly strategic conversations with customers about the wider value that APM can deliver across their enterprise. This is translating into expanding APM transaction sizes that in many cases are materially increasing customer spend with AspenTech. We have seen increases in annual spend of 20%, 40% and even 80% from customers who are deploying APM. This is an important indication of the strategic value of the APM suite for customers. We're pleased with the performance in APM. In two years, we have created an entirely new product suite, validated the market opportunity, established the differentiation of our solution and built a direct and indirect go to market organization focused on APM.

As a result, we now have 76 APM customers in 24 countries with nearly $14 million in annual spend and new growth driver in our core verticals, an expanded market opportunity with the GEIs, and a meaningfully enhanced value proposition for customers. We believe this market is still in it's early stages and has not yet crossed the CASM to full market adoption. We remain focused on maximizing the opportunity ahead of us. We had a strong quarter with E&C customers, whose businesses continued to show signs of improvement. The steady mid single-digit growth in capex over the past three years and increasing capex spend on liquefied natural gas or LNG projects is leading to both increase in backlogs and a more confident outlook overall.

One of the most encouraging signs in this vertical is the growing number of final investment decisions being taken by owner operators for new projects, which will lead to increase in software usage as a result of increasing backlogs. As we get closer to the end of this renewal cycle that reflected the 40% decline in global capex budgets, we believe that we're well positioned for solid demand for our engineering suite from E&C customers supported by steady improvement in the business environment. For owner/operator customers, the macro environment continues to be healthy overall, in fiscal year '19. The importance of digitalization to realize and sustain operational excellence is a key theme for these customers. AspenTech is increasingly being recognized as a strategic partner that can successfully deliver on these initiatives.

Refining had a strong fourth quarter with notable strength for our advanced process control planning and scheduling and predictive machine failure solutions. Similarly chemicals had a strong performance in the quarter and the fiscal year. The chemicals industry's increasing focus on Industry 4.0 technologies to drive operational excellence is driving a stronger adoption of our MSC and APM solutions. We also saw the first Aspen GDOT transactions in the quarter and a strong interest for the product in it's first full quarter in the market. As a reminder, Aspen GDOT is the next generation of process optimization technology that extends across multiple process units ultimately reducing the performance gap between planning and execution. Aspen GDOT is a highly differentiated technology that has the potential to generate meaningful benefits for refiners and bulk chemical customers.

Finding new and innovative ways to extend AspenTech's market reach and enhance the value we provide customers is a key priority. During the quarter, we announced a tighter collaboration with Hexagon's PPM division, a leading global provider of engineering software for the detail, design, construction and operation of plants, ships and offshore facilities. This collaboration aligns AspenTech's conceptual and basic engineering software with the Hexagon PPM detailed engineering suite to bring customers a fully data-centric workflow across the asset life cycle and enable them to better manage the financial risks of complex projects, which is a major challenge today.

An interesting new relationship developed over the last year is with Aon, the global insurance group, which is promoting the use of Aspen Mtell and Aspen Fidelis to its customers to reduce unplanned downtime and associated events as an incentive to lower their insurance rates. This is the latest example of how APM is expanding our partner ecosystem to accelerate capturing the opportunity created. I would now like to share five examples of contracts we closed in the quarter. First a global mining company has expanded use of Aspen Mtell to six additional sites after deploying Mtell on a pilot site. The initial pilot accurately predicted failures in crushers, scrubbers and conveyor belts achieving the expected return on investment within 45 days of deploying the Aspen Mtell agents. This contract was a competitive displacement won after an eight-center bake-off, three of which cannot complete the pilot. Second, our US headquarter petroleum refining marketing and transportation company signed one of the first Aspen GDOT agreements for deployment on a middle distillate application at one of its refineries. The expected benefits from the use of Aspen GDOT are $5 million to $10 million annually from optimizing each of the process variables targeted. In addition, GDOT enabled the company to prepare for compliance with the more stringent IMO 2020 environmental regulation. Specifically, starting next year, IMO 2020 calls for an 85% reduction in sulfur emissions from ocean-going vessels. This is a good example of how the advanced technology within an AspenTech solutions can help customers to achieve compliance with increasingly stringent environmental regulations.

Third, we signed an agreement for Aspen Mtell with a leading Eastern European integrated international oil and gas company. This company has been an AspenTech customer for more than 20 years and is a user of our aspenONE engineering and MSC suite across all its refineries and petrochemical sites. An initial Aspen Mtell proof of concept successfully predicted failures on major compressors in use at the main petrochemical plan. The proof of concept project involved three competitors including two major global enterprise software companies and lasted just four weeks. The new agreement increased the customer's annual spend with AspenTech by 35% with the current scope including just one refinery and one petrochemical asset.

Fourth, a Japanese refining company and longtime AspenTech user of the MSC products signed a new agreement to implement Aspen Petroleum Scheduler or APS and PIMS-AO in support of the company's digitalization initiative for increased operational excellence. Previously, the company used and Excel-based in-house scheduling tool and wanted to significantly reduce the gap between the refinery plan and actual production. By using AspenTech's refinery planning and scheduling products in the refinery and AspenTech's plan scheduling product in the lubricants plant, the company can minimize this gap and push its digitalization initiative forward. The transaction involved a collaborative partnership with a global consulting and systems integrator to beat one of our main competitors in this space.

Fifth and the final one of the examples, the agreement signed with a national oil refining company in the Middle East, represented the biggest win to date for Aspen Fidelis Reliability or AFR in that region. The customer wanted to better understand the systemwide risks and financial impacts of unplanned downtime and off-spec production due to the poor asset availability and reliability. It is expected that AFR will reduce capex for new projects by 5% and increased production by 3%. AFR will also be used for value chain optimization across the refinery.

We continue to make investments to enhance our product capabilities and increase the value that we can provide to our customers. We recently made two technology acquisitions, Sabisu and Mnubo, which substantially accelerate our product road map for enterprise digitalization and deployment of applications at enterprise scale, setting the stage for future long-term growth drivers.

As we have stated in the past, we believe AI and machine learning will be key technologies in the next generation of applications for capital-intensive industries. To be truly effective however, they must combine -- they must be combined with models based on first principles of chemical engineering and physics that provide relevant and necessary context to data. We expect that with the formal integration of the technology architecture and functionality from these two acquisitions in our future offerings, we will better support the adoption of these solutions at the enterprise level.

Mnubo has developed a technology infrastructure for cloud deployment capabilities that enables the targeted AI and IoT applications to be assembled and deployed at enterprise scale. It runs as a SaaS service based on a containerized micro services infrastructure. We believe the Mnubo accelerates our R&D efforts by three to five years. Sabisu provides a SaaS enterprise visualization and workflow solution that enable the creation of applications to derive the insights required by businesses at an enterprise level. Sabisu collects data from across different systems and applications so the customers derive insights from for real-time decision support through advanced visualization and workflow across the enterprise.

Sabisu also accelerate our R&D efforts in this area by two to three years. We're confident that these acquisitions will help to further differentiate AspenTech's product offerings in the marketplace.

Our scalable business model and strong balance sheet provides us with the flexibility to make these investments in the business, while continuing to generate high levels of profitability.

The $237 million of free cash flow generated in fiscal year 2019 represented 12% year-over-year growth or 15% on a per share basis. We believe the flexibility that our strong financial position gives us to pursue acquisitions, invest organically in the business and return capital to shareholders via buybacks is an important component of our strategy.

As we look ahead to fiscal 2020, we feel good about the state of the business. We're performing at a high level and anticipate a continuation of the positive demand trends we have seen over the past two years, although the increase in trade friction and its impact on global chemical demand is something that we're mindful of.

As I stated in previous calls, we believe that we're experiencing a secular technology investment cycle in the process and other capital-intensive industries, and we're uniquely positioned to benefit from it. In fiscal year 2020, we plan incremental investments in product development, sales and marketing and APM that will allow us to maximize this long-term opportunity.

We're targeting annual spend growth of 10% to 12% in fiscal year 2020. Underlying this guidance is an expectation that our core engineering and MSC suites will grow in the 7% to 9% range and APM will contribute approximately 3 points of growth.

We anticipate further improvement in the performance of our engineering business and continued strength in the MSC business. We expect greater growth contribution from APM given our current market momentum, increased customer recognition of the value proposition and an expanding pipeline of opportunities.

We believe the longer-term trends just listed for our product suites will support consistent double-digit growth and provide opportunities for improved growth over time. We see several positive drivers across our business that provide us confidence about our future growth prospects.

First, as mentioned, the process and other capital-intensive industries remain in the early stages of technology adoption to support their digitalization initiatives. Digitalization remains a key strategic priority across these industries for improved operational and financial performance. Second, we expect APM adoption to become more mainstream over time since the value -- the value creation drivers in the suite represent a significant incremental opportunity for many customers.

Third, Aspen GDOT represents a major advancement in process optimization technology and provide customers increased value opportunities that have never been available. We're very pleased with the early success of this product and believe there is a significant opportunity with refiners and bulk chemical customers. Fourth, Sabisu's enterprise visualization on workflow solution will be an exciting way to extend the value proposition from our three product suites.

We believe the multitude of use cases to derive insight from all the data and information in the installed base of our products makes these new capability a potentially exciting opportunity.

Finally, Mnubo's ability to scale our future AI power solutions to the enterprise will help drive greater adoption and enable larger customer deployments that we have had historically. This brought our rate of growth opportunities in conjunction with the strong underlying demand for our existing engineering and MSC solutions in a stable macro environment, provide the opportunity for AspenTech to achieve its long-term growth objectives.

Before I turn it over to Karl, I want to make an announcement regarding a transition in our executive management team. Gary Weiss, our Chief Operating Officer, will be transitioning from AspenTech at the end of this calendar year. When Gary joined AspenTech, it was with the understanding that he and his family would relocate from Tampa to the Boston area, which they did. However, over the course of the year, it became apparent that his family was not able to adapt to the Boston area and preferred to return to the Tampa area. As a result, we have agreed on a transition plan under which Gary will leave AspenTech and allow him to rejoin his family at the end of the calendar year. Gary has been a force for positive change at the Company and has made significant contributions to our growth over the past year. I would like to thank Gary for his significant contributions and leadership, and wish him the best. We intend to conduct a search process for a new COO in the coming months.

To wrap up, we're pleased with the performance of the business in the fourth quarter and fiscal 2019. Our expanded product portfolio is accelerating annual spend growth and increasing the strategic value of AspenTech to our customers. In fiscal year 2020, we intend to drive further improvement in the business and make investments to support future growth opportunities. This is an exciting time for the Company and our customers and we're focused on is on ensuring we fully capitalize on this opportunity.

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

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Thanks, Antonio. I will now review our financial results for the fourth 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 contracts 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 this non-linearity 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 and 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 of our term license agreement at the end of each period, was approximately $541 million at the end of the fourth quarter. This represented an increase of approximately 10.6% on a year-over-year basis and 2.8% sequentially.

As we discussed in our Q4 fiscal year 2018 earnings call, on an annual basis, we will be providing a new metric total contract value or TCV. We define total contract value as the aggregate value of all payments received or to be received under all active term license agreement including maintenance and escalation. We believe TCV provides investors with insight into the total amount of revenue under contract in a given period. TCV metric demonstrates both the scale and the growth of our overall business in the context of revenue fluctuations between periods, as a result of the timing of renewal bookings. As of June 30, 2019, the total contract value was $2.57 billion.

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 where the initial licenses are not yet deemed delivered under Topic 606, plus term license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period, was $241 million, 40% increase year-over-year.

The year-over-year increase in bookings reflect a significant increase in the amount of term license contracts up for renewal, as compared to the year-ago period. Total bookings in fiscal year 2019 was $651.8 million, 30% increase year-over-year. Bookings for the year were above our initial expectations and reflects our over-performance in annual spend growth.

Total revenue was $195.8 million for the fourth quarter, 23% increase from the prior-year period. The year-over-year increase in revenue was a result of the increase in total bookings discussed above. Turning to profitability, beginning on a GAAP basis, gross profit was $180.3 million in the quarter, with a gross margin of 92.1% , which compares to one hundred and $146 million and a gross margin of 91.8% in the prior-year period. Operating expense for the quarter was $69.1 million, which was up from $66.3 million in the year-ago period.

Total expenses including cost of revenue were $84.5 million, which was up from $79.3 million in the year-ago period and $77.2 million last quarter. Operating income was $111.2 million compared to $79.8 million in the year-ago period. Net income for the quarter was $103.9 million or $1.49 per share, compared to net income of $76.6 million or $1.06 per share in the fourth quarter of fiscal 2018.

Turning to non-GAAP results. Excluding the impact of stock-based compensation expense, amortization of intangibles associated with acquisition and acquisition-related fees, we reported non-GAAP operating income of $119.9 million representing a 61.3% non-GAAP operating margin compared to non-GAAP operating income and margin of $86.1 million and 54.1%respectively in the year-ago period. The margin performance reflects the positive impact of the incremental revenue recognized during the quarter. We believe focus on annual free cash flow as a percentage of annual spend is the most appropriate way to assess the efficiency of our performance in the period.

Non-GAAP net income was $110.7 million, or $1.59 per share based on 69.6 million shares outstanding. This compares to non-GAAP net income of $81.2 million or $1.12 per share in the fourth quarter of fiscal 2018 based on 72.3 million shares outstanding.

Turning to cash flow. The Company ended the quarter with $79.9 million in cash and marketable securities compared to $65.6 million at the end of last quarter. We ended the quarter with $220 million of debt drawn down from our credit facility. Subsequent to the end of the quarter, we funded our acquisition of Mnubo by drawing down $80 million on our credit facility. From a cash flow perspective, we generated $85.2 million of cash from operation and $84.9 million of free cash flow after taking into consideration, the net impact of capital expenditures, capitalized software, litigation, and acquisition related payments. For the year, free cash flow was $236.8 million, which exceeded the high end of our guidance. 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, providing directional commentary on the timing of annual spend and bookings during the year. We expect bookings in the range of $600 million to $650 million, which includes $317 million of contracts that are up for renewal in fiscal 2020. From a linearity perspective, we currently anticipate 40% to 45% of fiscal year 2020 bookings coming in the first half of the year, with the remainder in the second half.

With respect to annual spend growth as Antonio mentioned, we are now forecasting 10% to 12% annual spend growth with 7% to 9% coming from our engineering and MSC suite, and approximately 3% coming from APM. Similar to fiscal year 2019, we anticipate growth in annual spend will be weighted to the second half of the fiscal year. We expect revenue in the range of $575 million to $615 million. We expect license revenue in the range of $377 million to $410 million, maintenance revenue in the range of $170 million to $175 million, and service and other revenue in the range of $28 million to $30 million. From an expense perspective, we expect total GAAP expenses of $369 million to $374 million. Taken together, we expect GAAP operating income in the range of $206 to $241 million for fiscal year 2020 with GAAP net income of approximately $188 million to $217 million. We expect net income per share to be in the range of $2.70 to $3.11.

As Antonio mentioned, in fiscal 2020, we will be making incremental investments in the business, involve product development, and sales and marketing to best position the Company for sustainable and profitable long-term growth. Our expense outlook also reflects some incremental expense related to the Mnubo and Sabisu acquisitions, which increased our headcount by approximately 80 people. From a non-GAAP perspective, we expect non-GAAP operating income of $272 million to $307 million and non-GAAP income per share in the range of $3.44 to $3.85. From a free cash flow perspective, we are expecting to generate $250 million to $260 million. Our fiscal 2020 free cash flow guidance assumes cash tax payments of approximately $55 million to $60 million. Similar to my commentary regarding expenses for our 2020 free cash flow outlook reflects the impact from the incremental investments we are making in the business. From a timing perspective, we anticipate free cash flow to follow a similar seasonal pattern to fiscal 2019.

One variance will be in the first quarter, which will now have a tax payment related to Topic 606, and as a result, free cash flow will be approximately break even for the quarter. In summary, we have affirmed at a high level in the fourth quarter and for the full year 2019. The investments we have made in our product portfolio and go to market organization are paying off. We believe we are well positioned to continue delivering an attractive combination of growth and profitability that can generate sustained value for the shareholders over time.

With that, we'd now like to begin the Q&A. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Rob Oliver with Baird. You may proceed with your question.

Antonio Pietri -- President and Chief Executive Officer

Hi Rob.

Rob Oliver -- R.W. Baird -- Analyst

Hey Antonio, hey Karl. thanks for taking my question. Antonio, you mentioned and I think I got this, the 20%, 40% and in some cases 80% additional spend with some of your customers that are taking up APM. Can you just walk through that dynamic a little bit? First of all is that incremental spend all APM or is this suggestion that in the process of implementing APM, they're also spending more on the core aspenONE suite and can you maybe dive in a little bit on how those customers are breaking out that spend? And then I had one quick follow-up. Thanks.

Antonio Pietri -- President and Chief Executive Officer

Yeah, now when we refer to that 20%, 40% 80% that's incremental spend in the APM area as compared to the existing spend with Engineering and MSC products. So the APM spend quickly becomes a material amount of the total spend from these customers.

Rob Oliver -- R.W. Baird -- Analyst

And I assume we'll get maybe more on this tomorrow, but I also just wanted to ask as you guys are clearly getting momentum in APM both within your core and outside, how are the pricing conversations evolving? I know that you guys have done a lot of work to try to match the price with the value and just wanted to get a sense when we look at that 3% of APM, annual spend contribution for next year. How to think about that relative to -- how you guys are pricing the product? Thanks a lot.

Antonio Pietri -- President and Chief Executive Officer

Yeah, look, I think we are -- as time has progressed, we become more confident about our pricing for APM in the market. We now have 76 customers, about $14 million annual spend run rate. So, we've learned a lot in the last two years. The one thing that's been happening now In the last six to nine months is we're now beating and in some cases winning enterprise style deal. So volume now becomes a driver for customers and then the length of the contracts as these customers move from an initial one or two-year contract to five, six-year. So we're now getting into the realm of pricing at an enterprise level for deployment of hundreds of thousands of assets. And that's where we're also developing expertise now but we're much more confident when we're pricing on a site basis and by industry.

Rob Oliver -- R.W. Baird -- Analyst

Thank you, guys.

Antonio Pietri -- President and Chief Executive Officer

Great, thank you.

Operator

Thank you. And our next question comes from Matt Pfau with William Blair. You may proceed with your question.

Antonio Pietri -- President and Chief Executive Officer

Hi Matt.

Matt Pfau -- William Blair -- Analyst

Hi guys, thanks for taking my questions. I wanted to first ask on LNG. Antonio, how important is this to your business currently and then when you think about your growth drivers for next year is LNG a material component of the growth for next year?

Antonio Pietri -- President and Chief Executive Officer

Look, I think LNG, what I've told investors as I've met with investors over the last three months since well since our April earnings call is that the projected capex spend for LNG over the next five years is about $200 billion with a lot of -- the majority of it up -- happening upfront in the first three years as these plants are being designed and built. So of course is becoming a material contributor to backlog for some of these engineering companies and not every engineering company has a capability to build these LNG facilities the expertise is located in certain countries and with certain companies. But certainly providing an -- a new source of capex spend that wasn't there a year or two ago.

And as time passes and the industry continues to increase capex spend mid-single digit, then as we come out of all these -- the LNG phase of spend, I think we'll have a much healthier macro environment for E&Cs with greater capex coming out of upstream refining and chemicals.

Matt Pfau -- William Blair -- Analyst

Got it. And just wanted to ask one more, in terms of China. Maybe you can give us how big of a portion of your business that is and do you expect any of the additional tariffs and things that are going on to have any impact there?

Antonio Pietri -- President and Chief Executive Officer

China is less than 5% of our overall annual spend. I believe it's in that sort of 4% range. Now China, you have to separate into sort of two areas, national oil companies or state-owned enterprises, which certainly get their guidance from the government. And then you have the private sector that has some significant investments in huge facilities and they're are now looking more and more to optimize those facilities as a result of the slowdown in their economy and everything that we hear about. So we are seeing healthy business from the private sector in China. Certainly national oil companies or state-owned enterprises are much more reserved about their spending.

But overall, the contribution of China as a country to our annual spend growth on a yearly basis, it's not that significant to our total results every year. But we hope to grow it, as we continue to target the private chemical sector and other sectors. And we'll see what happens with ongoing discussions between the two countries.

Matt Pfau -- William Blair -- Analyst

Great, that's it from me guys, thanks a lot.

Antonio Pietri -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Steve Koenig with Wedbush. You may proceed with your question.

Antonio Pietri -- President and Chief Executive Officer

Hi Steve.

Steve Koenig -- Wedbush Securities -- Analyst

Terrific. Hey, thanks, Antonio. Yeah, I'm curious to know, you said a little bit about Mnubo in your remarks and you have the press release. But maybe can you tell me more about kind of what's prompting you to go to make investment in kind of first principles engineering and physics. And how does that combine with your existing APM products? Would you be looking to combine that with Mtell, and maybe just a little more color on what use cases down the road you see that helping you with?

Antonio Pietri -- President and Chief Executive Officer

Yeah, so Steve, the OPTIMIZE conference when we first introduced the strategy around AI-powered applications, we also talked about the fact that if you want to have AI-powered applications, you also need to put that machine learning in the context of the predictive capabilities of first principle models. Our Engineering and MSC suites are based on first principles models, and when we add either deep learning, machine learning, cognitive capabilities, the expectation is that the predictive capabilities of AI will be in the context of models that are guiding the AI toward reasonable solutions. The thing is that as you embed AI in these products, they are going to start consuming more data. And as you start thinking about larger deployment of these applications whether it's a future AI-powered Engineering and our MSC products or APM with machine learning, we're now in APM we're starting to see deployment sizes where the amount of data and the number of equipment that we're applying Mtell is such that then we need scale to be able to process all that data using high-performance computing, which is available on the cloud, the opportunity then to visualize all those agents and all that information on an enterprise scale.

So that's on one side, we're entering a new phase with APM where the deals are getting bigger, the deployments are getting bigger, a lot more data being consumed. So we have the need to scale and Mnubo gives us that. Once we start release and applications that have artificial intelligence embedded in those our Engineering and MSC applications, we are also going to require the scale and the cloud deployment capabilities of Mnubo book to deploy them our enterprise scale. And that's why we acquired Mnubo.

Sabisu will sit nicely on top of Mnubo and then take all that information, all that data, all those results and visualize, I mean in the context of insights that are derived from all that and be able to do it at our enterprise scale as well.

So we see these as really as getting ready for the next phase of growth and implementation of these solutions where the volumes of data and the need to visualize all this information at enterprise scale calls for a different architecture in our products.

Steve Koenig -- Wedbush Securities -- Analyst

Okay. Well, thank you. That's helpful. I'll leave that question there. If I could do one quick follow up for Karl. The new TCV metric. And I may have missed the remarks you made on. Tell me again kind of how you see that helping us and isn't that going to bounce around a little bit with major renewals as well when a large contract comes to an end and then starts up again?

Karl Johnsen -- Senior Vice President and Chief Financial Officer

No, it will bounce around, because again if you think about what it is, Steve, it's the total revenue we will recognize from that contract. Right. You can look at total revenue, or the total cash is going to come in from that contract. So if you're at the end of the beginning of a contract cycle, the balance would be the same. As it renews it would replace itself and then it would grow because you would assume that it would have escalation from that point.

You got to remember that it includes escalation because it has all the payments. So it won't bounce around, it's really a good metric, as we talked about last year to help you understand kind of what the total revenue is under management or total contract value under management. And you can kind of get by the fluxes in the revenue due to the renewals in the bookings.

Steve Koenig -- Wedbush Securities -- Analyst

Okay. I got it. So it's not like an RPO number. It's more like ACV times the average duration of your contracts, it's kind of run rate of your contract value?

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Yeah, it's not even the run rate. It is the actual revenue that'll be recognized in the contracts, it's a total cash coming in from these contracts.

Steve Koenig -- Wedbush Securities -- Analyst

Got it. Okay, great, thanks. Thanks very much.

Antonio Pietri -- President and Chief Executive Officer

Thank you, Steve.

Operator

Thank you. Our next question comes from Shankar Subramanian with Bank of America. You may proceed with your question.

Antonio Pietri -- President and Chief Executive Officer

Hi, Shankar.

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Thanks for -- hi guys, how are you, guys?

Antonio Pietri -- President and Chief Executive Officer

Great.

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Thanks for letting me ask questions. So I have a question on APM. I know you guys are spending on the sales and marketing side. Final build up to sales capacity. Can you talk about that in a little bit more detail, where you guys are, when do you see that kind of closing in? And maybe talk about when do we kind of expect the mass adoption to happen in the APM suite? Now, I think a lot of the earlier option is happening, but maybe just a little bit of color on the the time frame when we can expect the mass adoption to happen?

Antonio Pietri -- President and Chief Executive Officer

Certainly, as we've seen the growth in APM, we've gotten more comfortable with the potential of that business, and we started planning to increase our investment in that area already three, four months ago, so that we could kick off the recruiting processes and hit the ground running in FY '20. So you will start seeing the impact from some of that investment already in Q1 and then Q2. And we'll continue to monitor the business because we want to make sure that is well resourced as we're engaging more and more with customers. As far as the inflection point or crossing the chasm, I think we'll know when it happens when we're there.

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Okay, got it. So maybe just to switch to the the GDOT business. Obviously, that's a really, it could be a big game changer for you, but if you take into the AI investments you're making, the acquisitions you made, when do you see that integrate with GDOT and how do you see that play out over the long run? As you bring in AI features into the GDOT?

Antonio Pietri -- President and Chief Executive Officer

Yeah, so GDOT is not necessarily one of the products that we're targeting initially for AI, although we see they use cases. We're looking at the number of products and we've talked about high remodel in APC planning and scheduling and so on. Our focus with GDOT is to take it to market as quickly as possible.

One, because it will benefit us, but two, there is strong interest from customers to deploy GDOT on a typical refinery, you're talking about incremental benefits of $30 million to $50 million. It was released in early April and quickly in the quarter, as I said we signed a few transactions and we have a by pipeline of business that is developing. It is certainly one of the new products that we believe will help sustain our performance in MSC going forward.

We have a plan to start releasing AI powered products and applications. I won't talk about the release date or when for competitive reasons, but once we do that we would expect that our customers will see the significant value from this hybrid applications that combine first principles of chemical engineering with machine learning, deep learning and so on in order to drive greater value from their from their assets. But we've been working on this. We're confident. We have they use cases. We've got the prototypes. And you will see it at some point from us.

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Perfect, thank you guys. That's all I have.

Antonio Pietri -- President and Chief Executive Officer

Yeah. Thank you, Shankar.

Operator

Thank you. And our next question comes from Gal Munda with Berenberg Capital. You may proceed with your question.

Antonio Pietri -- President and Chief Executive Officer

Hi Gal.

Gal Munda -- Berenberg Capital -- Analyst

Hey, thanks for taking my questions. The first question is just in terms of the strong performance toward the end of the year. Can you just make a bit of comment? You've definitely performed better on bookings, revenue and EPS metrics. And how much of that is potentially kind of linearity getting some builds earlier on closed before the end of the quarter, that maybe would have come in FY '20 or is it just pure improvement on the annual spend?

Karl Johnsen -- Senior Vice President and Chief Financial Officer

The value, I'm sorry, you broke up in here a little bit. So your question was, how much of the over performance in bookings was the result of the over performance in annual spend?

Gal Munda -- Berenberg Capital -- Analyst

Yeah. Versus potentially some early deal renewals or something that may be originally you would have thought that would come next year.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Yeah, no. So the bookings came in right about where we thought. We didn't have any early renewals come in, because remember that wouldn't be reflected in bookings until the expiration of the original term. So that wouldn't -- it would only be the growth portion that we'd be able to take into bookings and revenue this year.

This is our first year under 606. So we had some assumptions on -- because remember bookings is a function of the annual spend renewed and grow what the actual term and escalation will be in those because it's the full value of the contract. And there were some assumptions that we had that played out a little differently than we thought, and the ultimate over-performance in annual spend even though it's a small percentage, translates into a bigger over performance in bookings. So it's really a combination of where those deals end up coming out with relation to the terms and then the annual spend over perform.

Gal Munda -- Berenberg Capital -- Analyst

Perfect. That's really helpful. And then just, if we look at the APM business, you guys said, you've got about 76 if I got it right, logos right now. So you've added a few more from OPTIMIZE. How many -- I'm not asking direct number, but just kind of, if we look at those 76, how many of those are still kind of proof of concept to at least early stage of adoption versus something that you think, OK, we've kind of well penetrated that account?

Antonio Pietri -- President and Chief Executive Officer

No, look, we talked about an enterprise deal in our Q3 results. Now we talk about a mining company going multi-site. The fact is that the majority of the deployments are still single side or two sides. And we have a significant amount of customers for whom we're doing proof of concepts or pilots. So yeah, no, we're in the very early days of multi-side or enterprise deployments.

Gal Munda -- Berenberg Capital -- Analyst

Perfect, thank you so much.

Antonio Pietri -- President and Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. And our next question comes from Sterling Auty with JPMorgan. You may proceed with your question.

Antonio Pietri -- President and Chief Executive Officer

Hi Sterling.

Jackson Ader -- JPMorgan -- Analyst

Hey guys, it's actually it's Jackson Ader on for Sterling tonight.

Antonio Pietri -- President and Chief Executive Officer

Hi Jackson

Jackson Ader -- JPMorgan -- Analyst

First question from our side. So the planned investments in the APM suite. I know it may be early, but are you having or seeing any problems attracting talent for APM sales or filling you're hiring goals given it's such a tight labor market?

Antonio Pietri -- President and Chief Executive Officer

No, not really. Look -- like I said in my one of my answers, we planned our new investments for APM starting three, four months ago. We approved them. And we've been recruiting and we've made great progress in the recruiting in that area. We were recruiting -- and remember our recruiting is not only the United State, we target recruiting in some places in Latin America, in other industries, Asia, Europe, because this is a global businesses. It's 76 customers in 24 countries. The acquisition of Mnubo brings to us a significant number of talent with AI capabilities and machine learning capabilities. So we are not seeing any challenges on recruiting, we just have to plan ahead and execute to it.

Jackson Ader -- JPMorgan -- Analyst

Okay, and then actually, just another follow-up on the hiring, so can you just remind us like what would be the expected ramp time for a sales person, maybe in your core suite and then how does that compare to what your expectations are for ramp time for an APM sales person?

Antonio Pietri -- President and Chief Executive Officer

Yeah, look, I think, you have to characterize it by suite, but on average our -- well, I run the sales organization, I'd say, six months, six to nine months ramp time. In Engineering, because of the sales cycles, it can be three to six months, you could see faster ramp time in our engineering suite. APM we are seeing similar ramp of around six months before before they start producing.

But it has to do a lot with the sales cycle and whether there are inherent in accounts where there's already a pipeline and so on and so forth.

Jackson Ader -- JPMorgan -- Analyst

Sure. That makes sense. All right, thanks for the color.

Antonio Pietri -- President and Chief Executive Officer

All right, thank you, Jackson .

Operator

Thank you. And our next question comes from Jason Celino with KeyBanc Capital. You may proceed with your question.

Antonio Pietri -- President and Chief Executive Officer

Hey Jason.

Jason Celino -- KeyBanc Capital -- Analyst

Hey guys, thanks for fitting me in. One question on the APM guidance for next year. If you look at the midpoint of your core suite guidance, it is kind of 8% that's in line with what you did this year. I guess, what would it take to get that business to double digits again?

Antonio Pietri -- President and Chief Executive Officer

I think time. We have an MSC business, as we said, that is growing at 13%. The Engineering business is at 6%, and the bulk of the attrition today is going against that Engineering business. When we talk about our gross growth rate of 15.3% in fiscal year '19 and attrition being 4.7%, the bulk of that attrition is in engineering. So over the next 12 to 18 months, we'll get back some of that attrition, which should move our Engineering business into that sort of 8% to 9% growth range. And then as the macro environment for E&C's continues to improve, I think you potentially see a business that they can get into double-digit at some point.

But certainly I can -- we can easily see our way to 8% to 9% growth for that business . MSC sustaining that growth rate and APM growing year-to-year.

Jason Celino -- KeyBanc Capital -- Analyst

Okay, great. And then one quick one for Karl. I noticed that tax rate was lower in the quarter, anything specific on what drove that?

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Yeah, it was a couple of pieces that came in at the end of the year that kind of came in a little bit for more for our benefit than we had anticipated. First was the mix of our customers and the mix of the revenue. As you remember, there is a deduction for the foreign derived income for domestic IP, which makes -- is a pretty significant deduction for us. And we had more foreign income than we thought in Q4, end of Q3 timetable than originally plan. So that added a couple of basis points to it. And then lastly, we have the rising stock price that gives a benefit to us from tax in the excess tax benefit related to our stock comp. So when you look at originally you booked it to book and leave it, but then the spread between what the value creation between that initial and what you end up actually exercising it at is deductible for the Company.

So we had pretty large increase in the stock over the year and that came in a little bit heavier than we had planned originally.

Jason Celino -- KeyBanc Capital -- Analyst

Great, thanks, that's all. And I'ill see you guys tomorrow.

Antonio Pietri -- President and Chief Executive Officer

Thank you, Jason. Looking forward to it.

Operator

Thank you. And our next question comes from Mark Schappel with Benchmark. You may proceed with your question.

Antonio Pietri -- President and Chief Executive Officer

Hi Mark.

Mark Schappel -- Benchmark -- Analyst

Hi guys, thanks for taking my question. Just one question here. Antonio, in your prepared remarks, you mentioned your collaborative partnership with Hexagon particularly with the PPM engineering suite. I was just wondering if you could just go into a little more detail on how you see your solutions working with PPM?

Antonio Pietri -- President and Chief Executive Officer

Yeah. Look, the one thing to note, this is about bringing together our conceptual front-end engineering, our basic engineering and with Hexagon's detailed engineering capabilities. So when you bring the two companies or the solutions together, basically you have, you cover the full asset design large life cycle from conceptualization through detailed design. Hexagon is also involved in the construction of these assets and eventually they have 3D capabilities, where they have a digital twin of an asset once it's in operations. So Hexagon and AspenTech that will be able to deliver to customers end-to-end set of capabilities across the full asset life cycle. We will integrate our basic engineering software with their detailed engineering software, we'll integrate our capital cost estimation of abilities with their project control capabilities, so that customers have better visibility around project management and controls from end-to-end.

We are also developing use cases where we integrate some of our manufacturing and supply chain solutions into their 3D capability. So, you can now be looking at at a 3D representation of an asset and have real-time operational information and information that our product generate. And the one thing about these two companies is that we're number one across every one of the phases in the engineering design life cycle. AspenTech is number one in conceptualization and basic engineering. Hexagon's PPM division is number one in detailed design, number one in construction. So now you have two companies with a huge installed base in the market. Number one in each of the categories that will have integrated capabilities and our customers are loving it. Since we announced the partnership -- the enhanced partnership because the focus the two companies have worked together for the past 20 years on and off, we've had very material number of engagements with owner/operators and E&Cs to understand the business processes and the workflow that they want us to digitize for them. So we're very excited about this. And certainly, we both believe that enhances our competitive stand in the marketplace.

Mark Schappel -- Benchmark -- Analyst

Great, thank you. That's helpful. Look forward to seeing everybody tomorrow.

Antonio Pietri -- President and Chief Executive Officer

Thank you, Mark.

Alright. Well, I want to thank everyone for listening to the call today and we're hosting our Investor Day 2019 tomorrow here in our Bedford headquarters and we look forward to seeing those of you that are coming to our offices or if you're going to be on the phone, look forward to the presentations that we will be making. Thank you.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Antonio Pietri -- President and Chief Executive Officer

Rob Oliver -- R.W. Baird -- Analyst

Matt Pfau -- William Blair -- Analyst

Steve Koenig -- Wedbush Securities -- Analyst

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Gal Munda -- Berenberg Capital -- Analyst

Jackson Ader -- JPMorgan -- Analyst

Jason Celino -- KeyBanc Capital -- Analyst

Mark Schappel -- Benchmark -- Analyst

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