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Edited Transcript of AZPN earnings conference call or presentation 7-Aug-19 8:30pm GMT

Q4 2019 Aspen Technology Inc Earnings Call

Burlington Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Aspen Technology Inc earnings conference call or presentation Wednesday, August 7, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio J. Pietri

Aspen Technology, Inc. - President, CEO & Director

* Karl E. Johnsen

Aspen Technology, Inc. - Senior VP & CFO

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Conference Call Participants

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* Gal Munda

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Gowrishankar Subramanian

BofA Merrill Lynch, Research Division - VP

* Jackson Edmund Ader

JP Morgan Chase & Co, Research Division - Analyst

* Jason Vincent Celino

KeyBanc Capital Markets Inc., Research Division - Associate

* Mark William Schappel

The Benchmark Company, LLC, Research Division - Director of Research & Supervisory Analyst

* Matthew Charles Pfau

William Blair & Company L.L.C., Research Division - Analyst

* Robert Cooney Oliver

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Steven Richard Koenig

Wedbush Securities Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Aspen Technology Fiscal Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

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Karl E. Johnsen, Aspen Technology, Inc. - Senior VP & CFO [2]

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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 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?

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [3]

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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 it's an important milestone for the company that reflects broad-based strength across end markets, product suite and geographies.

I'm grateful for the support of our customers and proud of the hard work by everyone on the AspenTech team during the last 3 to 4 years and in this past year specifically to produce this result in fiscal year 2019.

I'm confident we're 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 shared 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 $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 continues 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 2 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 3 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 pharmaceuticals industry that grew to 3%.

We believe the early success we're experiencing in the GEIs 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 grant 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 aspects 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 2.5x 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 multisite 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 are pleased with the performance in APM. In 2 years, we have created an entirely new product suite, validated a 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, a 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 its early stages and has not yet cross the chasm to full market adoption.

We remain focused on maximizing the opportunity ahead of us.

We had a strong quarter with the E&C customers, whose businesses continue to show signs of improvement. The steady mid-single-digit growth in CapEx over the past few years and increasing CapEx spend on liquefied natural gas or LNG projects is leading to both increasing 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 increasing 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 a steady improvement in the business environment. For owner-operator customers, the macro environment continued 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 its first full quarter in the market.

As a reminder, Aspen GDOT is a 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 to 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 detailed 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 and ecosystem to accelerate capturing the opportunity created.

I would now like to share 5 examples of contracts we closed in the quarter: First, a global mining company has expanded use of Aspen Mtell to 6 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 8 vendor bake-off, 3 of which could not complete the pilot.

Second, our U.S. headquarter petroleum refining marketing and transportation companies signed one of the first Aspen GDOT agreements for deployment on a middle distillate application at one of its refineries.

Expected benefits from the use of Aspen GDOT are $5 million to $10 million annually, from optimizing each of the closest variables targeted.

In addition, GDOT enabled the company to prepare for compliance with a 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 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 suites 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 plant.

The proof-of-concept project involved 3 competitors, including 2 major global enterprise software companies and lasted just 4 weeks. The new agreement increased the customer's annual spend with AspenTech by 35% with a current scope, including just 1 refinery and 1 petrochemical asset.

Fourth, a Japanese refining company, a long-time 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 an 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 plant 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 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 system-wide 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 increase production by 3%. AFR will also be used for value chain optimization across that refinery.

We continue to make investments to enhance our product capabilities and increase the value that we can provide to our customers. We've recently made 2 technology acquisitions, Sabisu and Mnubo, which substantially accelerate our product roadmap for enterprise visualization 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 2 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 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 Mnubo accelerates our R&D efforts by 3 to 5 years.

Sabisu provides a SaaS enterprise visualization and workflow solution that enables the creation of application to drive the insights required by businesses at an enterprise level. Sabisu collects data from across different systems and applications so that customers derive insights for real-time decision support through advanced visualization and workflow across the enterprise.

Sabisu also accelerates our R&D efforts in this area by 2 to 3 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 this investments in the business, while continue 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 are performing at a high level and anticipate a continuation of the positive demand trends we have seen over the past 2 years. Although the increase in trade friction and its impact on global chemicals 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 are uniquely positioned to benefit from it. In fiscal year 2020, we plan incremental investments in product developments, sales and marketing and APM, that will allow us to maximize this long-term opportunity.

We are 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 continuous trends 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 creation drivers in this suite represent a significant incremental opportunity for many customers.

Third, Aspen GDOT represents a major advancement in process optimization technology and provides 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 and workflow solution will be an exciting way to extend the value proposition from our 3 product suites. We believe the multitude of use cases to derive insights from all the data and information in the installed base of our products makes this new capability a potentially exciting opportunity. Finally, Mnubo's capability to scale our future AI power solutions to the enterprise will help drive greater adoption and enable larger customer deployments as we have had historically. This broad array of growth opportunities in conjunction with a 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 the 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, he 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 the transition plan, under which Gary will lead 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 the search process for our 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 ensuring we fully capitalize on this opportunity.

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

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Karl E. Johnsen, Aspen Technology, Inc. - Senior VP & CFO [4]

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Thanks, Antonio. I will now review our financial results for the fourth quarter 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 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 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 agreements, including maintenance and escalation.

We believe TCV provides investors with insight into the total amount of revenue under contract at a given period. The 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 defined 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, a 43% increase year-over-year.

The year-over-year increase in bookings reflects a significant increase in the amount of term license contract up for renewal as compared to the year ago period.

Total bookings in fiscal year 2019 were $651.8 million, a 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, a 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 $146 million and a gross margin of 91.8% in the prior year period.

Operating expenses for the quarter were $69.1 million, which was up from $66.3 million in the year ago period.

Total expenses include 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, the amortization of intangibles associated with acquisitions 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 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 a period.

Non-GAAP net income was $110.7 million, $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 operations 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 and 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 booking 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 suites 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 a 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 GAAP -- total GAAP expenses of $369 million to $374 million. Taken together, we expect GAAP operating income in a range of $206 million 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'll be making incremental investments in the business in both 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 head count 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 payment 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 breakeven for the quarter.

In summary, we [performed] at a high level in the fourth quarter and for the full year 2019. 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rob Oliver with Baird.

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Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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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 are 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 have a quick follow-up.

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [3]

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Yes. No, when we refer to the 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, it quickly becomes a material amount of the total spend from these customers.

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Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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And I assume you'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?

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [5]

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Yes. No, look, I mean I think we are -- as time has progressed, we've become more confident about our pricing for APM in the market. We now have 76 customers, about a $40 million annual spend run rate. So we've learned a lot in the last 2 years, the one thing that -- that's been happening now in the last 6 to 9 months, is that we're now bidding, and in some cases, winning enterprise style deals. So volume now becomes a driver for customers and then the length of the contracts as these customers move from an initial 1 or 2-year contract to 5, 6-year.

So we are now getting into the realm of pricing at an enterprise level for deployments of hundreds of thousands of assets. And that's why we are also developing expertise now. But we're much more confident when we're pricing on a site basis and by industry.

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Operator [6]

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And our next question comes from Matt Pfau with William Blair.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [7]

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Wanted to first ask on LNG, and 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 the next year?

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [8]

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Well, I mean, look, I think LNG, what I've told investors as I've met with investors over the last 3 months since -- well, since our April earnings call, is that the projected CapEx spend for LNG over the next 5 years is about $200 billion, with a lot of -- the majority of it up -- happening upfront in the first 2 years as these plans are being designed and built. So of course, it's becoming a material contributor to backlog for some of these engineering companies. And not every engineering company has a capability to build its LNG facilities. The expertise is located in certain countries and with certain companies. But it's certainly providing a new source of CapEx spend that wasn't there a year or 2 ago. And as time passes and the industry continues to increase CapEx spend mid-single digit, then as we come out of all of this, 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, so.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [9]

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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?

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [10]

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Yes. Look, certainly, I think 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 it into sort of 2 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 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 is 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 2 countries.

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Operator [11]

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And our next question comes from Steve Koenig with Wedbush.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [12]

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Yes. I'm curious to know -- you said a little bit about Mnubo in your remarks and you had 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 U.S.

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [13]

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Yes. So Steve, at 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 power applications, you also need to put that learning -- machine learning in the context of the predictive capabilities of first principle models. Our engineering and MSC suites are based on first principle 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 towards reasonable solutions. The thing is that, as you embed AI in these products, they're going to start consuming more data. And as you start thinking about larger deployments of these applications, whether is it future AI power, engineering or 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 were -- where we're applying Mtell is such that -- and 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 their information on an enterprise scale. So that's on one side. We are 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 are -- we have the need to scale, and Mnubo gives us that. Once we start releasing applications that are -- 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 to deploy them at 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 being able to do that on enterprise scale as well. So we see this, really, as getting ready for the next phase of growth and implementation of the 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.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [14]

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Okay. 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 remark you made on it. But is -- tell me again kind of how that -- how you see that helping us. 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?

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Karl E. Johnsen, Aspen Technology, Inc. - Senior VP & CFO [15]

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No, it won't bounce around because, again, if you think about what it is, Steve, it's the total revenue we'll recognize from that contract, right. So or you can look at a total revenue where 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. And as it renews, it would replace itself and then it would grow, because you would assume that it would have escalation from that point. So 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 it 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.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [16]

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

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Karl E. Johnsen, Aspen Technology, Inc. - Senior VP & CFO [17]

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Yes. It's not even the run rate. It's the actual revenue that's going to be recognized on the contracts. It's a total cash coming in from these contracts.

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Operator [18]

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And our next question comes from Shankar Subramanian with Bank of America.

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Gowrishankar Subramanian, BofA Merrill Lynch, Research Division - VP [19]

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So I have a question on APM. I know you guys are spending on the sales marketing side, final buildup 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 come to fruition? 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 timeframe when we can expect the mass adoption to happen.

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [20]

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Yes. Well, I mean look, 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 3, 4 months ago so that we could kick off the recruiting process and hit the ground running in FY '20.

So you'll 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.

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Gowrishankar Subramanian, BofA Merrill Lynch, Research Division - VP [21]

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Okay. Got it. So maybe just to switch to the GDOT business. Obviously, that's really -- could be a big game changer for you. But if you take into account 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?

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [22]

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Yes. So GDOT is not necessarily one of the products that we're targeting initially for AI, although we see the use cases. We're looking at the number of products. We've talked about hybrid model 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's a 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 pipeline of business that is developing. It is certainly one of the new products 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 these 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 assets.

But we've been working on this. We're confident with -- we have the use cases, we've got the prototypes and you'll see it at some point from us.

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Operator [23]

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And our next question comes from Gal Munda with Berenberg Capital.

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Gal Munda, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

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The first question is just in terms of the strong performance towards the end of the year. Can you just make a bit of comment -- you've definitely performed better on more bookings, revenue and the EPS metrics. And how much of that is potentially kind of linearity getting some deals early 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?

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Karl E. Johnsen, Aspen Technology, Inc. - Senior VP & CFO [25]

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So Gal, 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?

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Gal Munda, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [26]

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Yes, versus potentially some early deal renewals to something that may be originally you would have thought that would come next year?

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Karl E. Johnsen, Aspen Technology, Inc. - Senior VP & CFO [27]

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Yes. No, 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 of 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 grown, but 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 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 performance.

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Gal Munda, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [28]

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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 after a 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, okay, we've kind of well penetrated that account?

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [29]

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No. Look, I mean we talked about an enterprise deal in our Q3 results. Now we've talked about a mining company going multisite. The fact is that the majority of the deployments are still single-site or 2 sites. And we have a significant amount of customers for whom we are doing proof-of-concepts or pilots. So yes, no, we're in the early -- very early days of multisite or enterprise deployment.

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Operator [30]

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And our next question comes from Sterling Auty with JP Morgan.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [31]

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It's actually, it's Jackson Ader on for Sterling tonight. 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 your hiring goals given that it's such a tight labor market?

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [32]

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No, not really. I mean look, like I said in my -- in one of my answers, we planned our new investments for APM starting 3, 4 months ago. We got -- 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 in the United States, we target recruiting in some places in Latin America, other industries, Asia, Europe because this is a global business. 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, so.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [33]

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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 salesperson maybe in your core suite? And then how does that compare to what your expectations are for ramp time for an APM salesperson?

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [34]

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Yes. Look, I think you have to characterize it by suite, but on average, our -- well, I run the sales organization, I'd say 6 months, 6 to 9 months ramp time. In engineering, because of the sales cycles, can be 3 to 6 months. You could see faster ramp time in engineering and our engineering Suite. APM, we're seeing similar ramp of around 6 months before they start producing. But it has to do a lot with the sales cycle and whether they're inheriting accounts where there's already a pipeline and so on and so forth.

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Operator [35]

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And our next question comes from Jason Celino with KeyBanc Capital.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Associate [36]

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

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [37]

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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 the 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&Cs continues to improve, I think you potentially see a business that 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 is sustaining that growth rate and APM growing year-to-year.

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Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Associate [38]

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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?

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Karl E. Johnsen, Aspen Technology, Inc. - Senior VP & CFO [39]

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Yes. There's 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, the mix of the revenue. As you remember, there's 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 that we thought in Q4, end of Q3 time table than kind of originally planned. So that added a couple of basis points to it. And then lastly, we have -- the rising stock price gives a benefit to us to from tax in the excess tax benefit related to our stock comp. So when you book it 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 a pretty large increase in the stock over the year, and that came in a little bit heavier than we had planned originally.

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Operator [40]

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And our next question comes from Mark Schappel with Benchmark.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Director of Research & Supervisory Analyst [41]

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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.

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [42]

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Yes, yes. So look, the one thing to note, this is about bringing together our conceptual front-end engineering, our basic engineering with Hexagon's detailed engineering capabilities. So when you bring the 2 companies or the solutions together, basically, you have -- you cover the full asset design 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 will be able to deliver to customers an 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 capabilities with their project controls capability 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 capabilities. So you can now be looking at a 3D representation of an asset and have real-time operational information and the information that our products generate.

And the one thing about these 2 companies is we're #1 across every one of the phases in the engineering design life cycle. AspenTech is #1 in conceptualization and basic engineering. Hexagon's PPM distribution is #1 in detailed design, #1 in construction. So now you have 2 companies with huge installed base in the market, #1 in each of the categories that will have integrated capabilities, and our customers are loving it. We have -- since we announced the partnership or the enhanced partnership because the fact is that 2 companies have worked together for the past 20 years on and off. We've had a very material number of engagements with owner/operators and E&Cs to understand the business processes and the workflows 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.

All right. 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.

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Operator [43]

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Thank you. Ladies and gentleman, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.

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Antonio J. Pietri, Aspen Technology, Inc. - President, CEO & Director [44]

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Thank you.