Aspen Technology Inc (AZPN) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Aspen Technology third quarter fiscal 2015 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn today's call over to Mark Sullivan, Chief Financial Officer. Please go ahead.

Thank you Operator. Good afternoon everyone. Thank you for joining us to review our results for the third quarter fiscal 2015 results for the period ended March 31st, 2015. I am Mark Sullivan, CFO of Aspen Tech. With me on the call today is Antonio Pietri, President and CEO.

Before we begin, I will make the usual Safe Harbor statement that during the course of this call, we may make projections 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, in our Form 10-Q for the third quarter fiscal year 2015, which is now on file with the SEC. Also please note that the following information is related to our current business conditions, and our outlook as of today, April 28, 2015.

Consistent with our prior practice we expressly disclaim any obligation to update this information. The structure of today's call is as follows, Antonio will discuss business highlights from the quarter, and then I will review our financial results for the third quarter and our guidance for the fourth quarter and fiscal year, before we open up the call for Q&A. With that, let me turn the call over to Antonio. Antonio.

Thanks Mark, and thanks to everyone for joining us today. We delivered a strong third quarter performance, with each of our key metrics exceeding guidance. We are pleased with our results year-to-date, and believe we are well-positioned to get another strong year of financial and operational performance in fiscal 2015. Looking at our financial highlights for the quarter, this included TLCV growth of 13.2% year-over-year, total revenues of $111.3 million, $2.3 million above the high end of our guidance range. Non-GAAP EPS of $0.37, which was $0.06 above the high end of our guidance range. A non-GAAP operating margin of 44%, and returning $107.7 million to shareholders by repurchasing 2.9 million shares. We delivered a strong sales performance in the quarter that was highlighted by TLCV growth of 13.2% year-on-year, which is slightly above our historical trailing 12-month growth rate, and puts us on track to achieve our full year objective for double-digit TLCV growth. Our performance in the quarter reflected strong activity across each of our major verticals, energy, chemicals, and engineering construction. From a geographic perspective, each of our main regions delivered solid quarters, with notable strength in North America and Asia Pacific.

Our third quarter the results reflect the significant efficiency improvements and cost savings our products can generate for customers across a number of operating scenarios, including periods of oil price volatility. For many owners operators in the chemical and energy verticals, which represent nearly two-thirds of our business, Aspen Tech's products and solutions can help and quickly react to a changing macro and commodity price environment, to produce more profitable operating performance. In the engineering and construction verticals, we saw solid demand during the third quarter, and closed several meaningful transactions. It is important to recognize that the bulk of the work that E&C companies use Aspen Tech for, is to design and retrofit facilities for our downstream energy and chemical owner operator customers, which generally benefit from a lower oil price environment.

We also recognize that this portion of our business can be more sensitive to changes in economic outlook on oil price volatility, but at this point we have not seen a material change in demand. Of our Top 10 transactions by TLCV in the quarter, three were with E&C companies, and the remaining seven were with the owner operator customers in the energy and chemical verticals. All were over $1 million in TLCV, with the majority being multi-million dollar transactions. While we are pleased with our overall performance in the quarter, there were certain areas worth mentioning. The deterioration of the Russian ruble has led to some longer closing cycles in Russia, and increased difficulty getting final customer approvals for transactions denominated in US dollars. We did sign some notable transactions during the quarter. Similarly, there will continue to be political corporate governance, and strategic issues affecting several major estate-owned energy companies in Latin America, that are impacting their decision making time lines. The strength of the US dollar also played a role in a few transactions at the lower end of the customer spectrum, which demonstrated a degree of uncertainty about the macro environment, and the increasing volatility in the price of oil. It is important to note that despite these pockets of weakness, we delivered our strongest TLCV growth in four quarters.

I would like to provide some color on this quarter, with the following five transactions. The first highlighted transaction was closed with a refining joint venture company in the United States, interested in expanding its footprint of advanced process control applications using our latest advance control software, DMC3, to improve operational margins. Despite reductions in its personnel, this customer decided to upgrade to our DMC3 solution, including Adaptive Process Control, which facilitated the upgrade/implementation of 8 applications in a four-week time frame. Second, a large E&C customer in Asia, that faced a financial deficit in 2013 due to cost overruns in projects, decided to expand the use of our products by implementing our capital cost information software to improve its cost estimation accuracy. Third, a large Russian oil company decided to implement our petroleum scheduler solution at one of its large refineries, to improve operational execution by bridging the gap between actual and planned performance, with the ultimate goal of increasing operating cash flow.

Fourth, another large E&C company in Asia, which has seen its back log increase 35% in the last 12 months to over $10 billion, is expanding the use of our engineering software, in the design of recently-awarded LNG projects in the United States. This customer is also considering expanding the use of our products by implementing our capital cost estimation software. The fifth and final transaction, and perhaps one of the most exciting deals of all in the quarter, was with a very large US industrial conglomerate, that increased use of our engineering software by more than 50% in both current and new products, such as Aspen Basic Engineering, Aspen Plus, Aspen Plus Dynamics, and Aspen Capital Cost Estimation, in their power and water division, and their oil and gas division. Equally important, the opportunity for growth still remains in other business units.

I want to highlight an important business trend in the E&C industry, that we have identified in the last 6 to 9 months, the volatility and oil crisis has created uncertainty in the business of E&C companies, with owner operators demanding more aggressive pricing from these companies. We believe that this in turn is driving a notable pickup in the interest and demand or our Aspen Capital Cost Estimation product by E&C companies. As I mentioned, this product was at the center of two of the transactions closed during the quarter. We believe AspenTech is the only company in the world to provide such product functionality in the process industry. Aspen Capital Cost Estimation improves the reliability of estimates, as quoted by our customers from plus or minus 30%, to plus or minus 10%. In the current climate of uncertainty this is a significant benefit for better use of capital.

This trend also validates that the breadth of functionality in our products and solutions, is also a positive in the current environment. During the third quarter the energy, engineering and construction, and chemical verticals, once again represented greater than 90% of our business. Energy was the largest vertical contributor, followed by chemicals, and engineering and construction. Looking at our 10 largest transactions in the quarter, there was again a mix of engineering and manufacturing supply chain deals, and both products which generated positive performance. We are benefiting from their ground level opportunity to grow the total number of aspenONE users, as well as the number of products per user, across both our engineering and manufacturing supply chain platforms.

The significant investment we make each year in research and development, continues to enhance the product capabilities and user experience of the aspenONE platform. Next week we will be hosting our Biannual User Conference, OPTIMIZE 2015 in Boston, where we will demonstrate our latest innovations for more than 500 customers and prospects. We also expand our product capabilities with M&A, and during the third quarter we acquired the BLOWDOWN software technology, which enables oil and gas and chemical customers to model the safest way to depressurize the process plant by releasing through flow from process equipment in a controlled and operationally safe manner. This is a critical safety issue in plant design, and will enhance the capabilities of our engineering suite. We are seeing great interest in this acquisition from our base of engineering software users. While we continue to make meaningful investment in our products to drive future growth, we are also maintaining site expense management, that enables AspenTech to generate substantial free cash flow.

During the third quarter we were able to utilize our strong cash flow and balance sheet, to increase our stock buyback activity, taking advantage of near term opportunity in our stock price. We repurchased nearly 3 million shares for approximately $108 million in the quarter, and now have returned $225 million to shareholders so far in fiscal 2015. We plan to continue to use our strong financial position to enhance shareholder value through share repurchases. In summary, AspenTech delivered a strong third quarter result, that reflect good execution and a healthy demand environment. Our solutions are delivering value to customers every day, as they use the aspenONE platform to increase the efficiency of the complex processes running inside of their facilities. We believe there is a substantial opportunity to continue generating growth in our core verticals, but we are mindful of the fluid macro environment, and other factors mentioned. However, despite the macro environment, we believe in our ability to continue generating high levels of profitability and cash flow going forward. With that, let me turn the call over to Mark. Mark.

Thanks Antonio. Let me begin by reviewing our supplemental metrics, starting with term contract value, or TCV metric, which measures the renewal value of our multi year term contracts. Growing TCV continues to be a key focus for us. We increased the value of this metric by adding new customers, expanding product usage, and increasing prices across our customer base. At the end of the third quarter, our licence only TCV, or TLCV was $2.03 billion, which was up 13.2% compared to the third quarter of fiscal 2014, and up 3.1% on a sequential basis. Including the value of bundled maintenance, our total term contract value was $2.41 billion at the end of the quarter, which was up 14.1% compared to the third quarter of fiscal 2014, and up 3.2% sequentially. Our annual spend which is a proxy for the value of our recurring term license business at the end of each period, specifically the annualized value of our term license and maintenance revenue was approximately $412 million at the end of the third quarter, representing an increase of 11.9% on a year-over-year basis, and 2.9% sequentially.

As we complete our revenue model transition this fiscal year, annual spend will become an increasingly important metric, as it is a leading indicator for growth and subscription revenue, which represents more than 90% or our total revenue. Licensed TCV is calculated using each contracts terminal year annual payment, and therefore takes into consideration the total price escalation over the course of a multi-year time period. Whereas annual spend takes into consideration only the current year's level of spend. The growth of our annual spend metric should be slightly lower than the growth in the license TCV metric, though there can be some quarter-to-quarter variability. As a reminder, beginning in fiscal 2016 we will be providing annual spend growth guidance, and quarterly annual spend results, while updating TCV and TLCV on a milestone or year end basis.

Let me turn to the financial results on a GAAP basis. Total revenue in the third quarter of fiscal 2015 was $111.3 million, up 7.4% from $103.6 million in the prior year period. And $2.3 million above the high end of our guidance range. Approximately half of the out performance in the quarter was due to cash basis revenue that we had expected to recognize in the fourth quarter. We faced a difficult year-over-year comparison in the third quarter, due to approximately $7.6 million of revenue recognized in the year ago period, related to a significant supply chain management arrangement, that was accounted for on a completed contract basis. Adjusting for that revenue, which was one-time in nature, total revenue growth in the third quarter would have been approximately 16%.

Looking at revenue by line item, subscription and software revenue was $102.5 million for the third quarter, which is an increase from $91.3 million in the prior year period, and $98.7 million last quarter. Services and other revenue was $8.8 million, compared to $12.3 million in the year-ago period, and $9.1 million last quarter. Moving down the P&L, gross profit was $99 million in the quarter, with a gross margin of 88.9%, which compares to $88.3 million, and a gross margin of 85.2% in the prior year period. The year-over-year improvement was largely the result of higher subscription revenue, as well as the $2.3 million of incremental expense recognized during Q3 of the prior year, related to the same supply chain management arrangement that I just discussed. Operating expenses for the quarter were $57.3 million, slightly up from $56.9 million in the year ago period. Total GAAP expenses including cost of revenue was $69.6 million, down from $72.2 million in the year ago period.

Our third quarter GAAP total expenses include approximately $3.3 million of incremental expense related to the purchase price of the BLOWDOWN software. Counting for this acquisition is the same as the SolidSim asset acquisition that we made in Q3 of fiscal 2014 for $4.9 million. BLOWDOWN was an asset acquisition, and since we intend to modify and enhance the software prior to making it commercially available to our customers, the accounting rules related to capitalized software, require us to expense the entire purchase price in the period. The $3.3 million BLOWDOWN expense is reflected in R&D on our GAAP income statement. We have excluded it from our non-GAAP results, to be consistent with how we reflect a capitalized asset purchase, as we don't believe expensing the acquired assets accurately reflects the economics of the transaction. Operating income in the third quarter was $41.7 million, an improvement compared to operating income of $31.4 million in the year ago period. Net income for the quarter was $28.2 million, or $0.32 per share, compared to net income of $20.8 million, or $0.22 per share in the third quarter of fiscal 2014.

Now let me turn to our non-GAAP results. Excluding the impact of stock-based compensation expense, restructuring charges, amortization of intangibles associated with acquisitions, and non-capitalized acquired technology, we reported non-GAAP operating income for the third quarter of $48.7 million, which was significantly above the high end of our guidance of $42 million to $44 million. This result was due to the revenue out performance in the quarter, combined with our strong history of expense management. Our non-GAAP operating margin in the quarter was 43.7%, representing a 510 basis point improvement over the year ago period, and is in line with our long-term margin target. Non-GAAP operating income and margin was $40 million, and 38.6% respectively in the third quarter of fiscal 2014.

Moving down the P&L, non-GAAP net income in the third quarter was $32.6 million, which compares to $26.4 million in the year ago period. Our non-GAAP income per share was $0.37 in the third quarter of fiscal 2015, based on 87.9 million diluted shares outstanding. Compared to non-GAAP earnings per share of $0.28, based on 93.4 million diluted shares outstanding in the third quarter of fiscal 2014. We are now in the fourth quarter of fiscal 2015, which means that in this quarter we will complete the revenue model transition that began in fiscal 2010. Our profit margins which weren't meaningful while we were moving through the revenue transition, are now reflective of the true earning power of the business.

Turning to the balance sheet and cash flow. The Company ended the third quarter with $225 million of cash and marketable securities. A $31.5 million decrease from the end of last quarter, after using $107 million of cash to repurchase shares of common stock. As Antonio discussed, we increased the pace of our buyback activity in the quarter, in part to take advantage of some near term weakness in our share price, in addition to the fact that it is our highest free cash generation period. We intend to remain a buyer of our stock going forward, and have $375 million remaining under our current buyback authorization. You should expect us to set our buyback rate at levels supported by our free cash flow, taking into account other cash needs, including the ability to fund acquisitions. Also remember that free cash flow will be unfavorably impacted next fiscal year as we become a US cash taxpayer.

From a cash flow perspective the Company generated $64.6 million of cash from operations during the third quarter. On a non-GAAP basis, operating cash flow was $81.4 million, and free cash flow was $79.7 million. Capital expenditures totaled approximately $1.8 million in the third quarter, of which $1.4 million was related to the build out of our new headquarters. We currently expect to spend an additional $2 million on our headquarters in the fourth quarter, and continue to expect to spend a total of approximately $8 million for the year, of which approximately $7 million will be capital expense.

As a reminder, we are reporting a non-GAAP cash flow from operations metric throughout 2015 in addition to free cash flow. It treats all tax expense and benefits irrespective of source as part of cash flow from operations, in order to show cash flow on a historically comparable basis. In the third quarter of fiscal 2015 we utilized $14.2 million of [Apac] NOLs, we did not make any US federal tax cash payments in the quarter, and our best estimate is that we will not pay any federal cash tax in the fourth quarter. We now expect to become a US corporate cash tax payer early in the first quarter of fiscal 2016. Reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.

Our deferred revenue balance was $273.8 million a at the end the third quarter, representing a 9.7% increase compared to the end of the year ago period. On a sequential basis, deferred revenue increased $35.4 million. As we discussed in the past, the second half of the year is a stronger period for our deferred revenue, due to the same factor that drives the timing of our cash flow, namely the timing of when we bill our customers. With the revenue model transition coming to completion, we anticipate that our deferred revenue will generally exhibit a trend pattern similar to our cash flow, driver by higher customer invoice value in the second half of the fiscal year.

Turning to guidance, I would like to close with some thoughts regarding our updated financial outlook for fiscal 2015, as well as guidance for the fourth quarter. As a reminder, fiscal 2015 represents the final year of our revenue model transition, as GAAP subscription revenue normalizes, its annual growth rate should more approximate the growth rate of our annual spend metric. That said we are tightening our fiscal 2015 revenue guidance to $437 million to $439 million, which increases the midpoint of our range by $1 million. This compares to our prior guidance of $434 million to $440 million. As you are aware over the course of the last year the US dollar has appreciated materially against a number of foreign currencies, while only about 15% of our revenue is denominated in currencies other than the dollar, we estimate we have incurred over $1 million of revenue headwind, from changes in foreign exchange rates year-to-date.

From an expense perspective, we now expect total GAAP expenses of $261 million to $264 million, which compares to our prior guidance of $265 million to $270 million. We now expect GAAP operating income of approximately $175 million to $177 million. Net income of $113 million to $115 million, and GAAP EPS of $1.27 to $1.29. This compares to our prior guidance of GAAP operating income of $167 million to $173 million. Net income in the range of $107 million to $111 million, and GAAP EPS of $1.18 to $1.23. From a non-GAAP perspective, we now expect non-GAAP operating income in the range of $193 million to $195 million, which is up from our prior guidance of $182 million to $188 million for the fiscal year 2015. This would lead to non-GAAP earnings per share in the range of $1.41 to $1.43, which is an increase from our prior guidance of $1.29 to $1.33 for the fiscal year. The diluted share values that we are using to calculate EPS are 86.8 million for the fourth quarter, and 89.3 million for the full year. The dilutive share assumptions reflect the roll forward impact of the shares we have already bought back as of March 31, 2015, and do not include any additional upside impact resulting from potential buybacks in the balance of the fiscal year.

With respect the total licensed contract value growth, we are now targeting fiscal 2015 growth to exceed 11%, up from our prior guidance of double-digit annual growth. We have delivered strong growth through the first three quarters of fiscal 2015, and see a solid pipeline of opportunities for the fourth quarter as well. From a free cash flow perspective, we are increasing our 2015 guidance to $220 million, from our previous guidance of approximately $215 million. As we have noted in prior years, our quarterly cash flow has a significant degree of variability, due to the timing of cash collections, and once again we will have a significant amount of customer payments, that become due at the very end of our fiscal year, which increases the variability for the fourth quarter. Looking at the fourth quarter, we expect revenue in the range $111 million to $113 million. Non-GAAP operating income of $45 million to $47 million, and non-GAAP EPS of $0.33 to $0.35. On a GAAP basis we expect fourth quarter operating income of $42 million to $44 million, and EPS of $0.30 to $0.32.

In summary, we are pleased to report strong third quarter results that exceeded our expectations, on both the top and bottom line. We are executing well and believe we have a long runway of opportunities to generate continued revenue, profitability, and cash flow growth that can deliver increase shareholder value over the long-term. With that, I would like to turn the call back over to Antonio.

Thanks, Mark. Before we begin the Q&A session, I want to make an announcement regarding a transition in our executive management team. After serving as AspenTech's CFO for 6 years, Mark Sullivan will be retiring from full-time work effective September 30, 2015. Mark has been an integral part of AspenTech senior leadership team, and a driving force behind the revenue and cash flow model transition we have successfully completed over the past six years.

Under Mark's leadership we have significantly strengthened the Company's balance sheet, generated consistent double digit growth, and generated Best-in-Class levels of profitability. We will immediately begin an executive search process, that will consider both internal and external candidates. Mark will continue to serve as the CFO during this transition process, to ensure a smooth and orderly transition. I would like to thank Mark for the significant contributions and leadership, and positioning Aspen Tech, as the clear leader in the process optimization industry, and wish him well in his retirement. Now we are happy to take your questions. Operator, let's begin the Q&A.

(Operator Instructions). The first question from the line of Bhavan Suri with William Blair.

Can you hear me okay?

Yes.

Good. Mark, first to you, congratulations for running the business so well for so many years. Any quick comment sort or plans before I jump into other questions?

Not really. Just really what Antonio said. Going to help work through a transition, and then probably take some tame to think about what I want to do next. But as Antonio said, I don't think that will be in the realm of quote/unquote full time employment. You can imagine the range of things that might fall under that umbrella but I will be doing some discovery, and thinking about that through the summer and beyond.

There is a hockey ring north of Boston this might need a CFO sometime.

I'm looking into Uber driver possibilities, but I am not sure about that.

Yes, yes. Okay. Very good. Turning the business, just a couple of questions as we look at obviously great results, but one of the things that sort of we are trying to understand is, if E&C companies are sort of working through the process of rationalizing laying some engineers off which you hear, how is the usage in that business increasing? I guess is the usage for engineering increasing at a rate high enough to offset the head count reductions, or the lack of hiring there?

Let me look at frankly, while we hear of head count reductions, it is not something that dominates the headlines, and the fact is that with our major customers, they are focused on working through billions of dollars of backlog. As I mentioned in my notes and my script, there was uncertainty at the lower end of the market with the small and medium customer segment, perhaps it is because some business is being held back from that customer segment by the big E&Cs, but this is about creating value from the use of our solutions driving productivity, and with our major E&C customers, we have not seen a change in their pattern of usage of our software.

Okay. And then you touched on sort of the cost estimate product. But any area of applications you have seen an increase or shift in usage since last August, since the price of oil has been dropping? You sort of said that there has been no real impact, but on an application level basis or module basis, any material uptick or downtick in any of the application usages, ex the cost estimation one?

Look, certainly cost estimation is becoming a more popular product as per my comments on the call. But in order to deliver the performance that we did in Q3, and if you go back to Q2, all of our products have to be drawn and doing well, and certainly there is a group of products that deliver the bulk of the growth, and those products continue to grow, specifically with E&Cs on the owner operator side. We continue to see very good uptake of the adaptive process control technology, our planning PM sales technology, or scheduling, and also some of our newly-released IP 21 process explorer software. We are seeing good demand.

That is great. Thanks for taking my questions, guys.

The next question from Matt Williams with Evercore ISI.

Hi guys. Congratulations on the quarter, and Mark, congratulations on the upcoming retirement. Maybe want to touch on one area that we sort of picked up in our research, and you guys have talked about it in the past with oil being obviously settled a little bit, but much lower than it was a year ago, theoretically that should be a positive for the chemical companies, and we are starting to sea that a little bit show up in some of the survey work that the firm has done. Wondering if you could comment on what you are seeing in the chemical industry, and if there has been any sort of benefit from the lower price of oil there?

Ye, no doubt chemical customers are feeling good, oil at this level is a tremendous benefit from them. Certainly, a lot of the new construction in the US as a result of shale gas, ethane-based ethylene strikers is still going and ramping up. So overall, we do see more activity with our chemical customers, and more interest as well.

Great. Well, thanks for the color. And I guess the other sort of question that seems to pop up, is just how it relates to your E&C backlog, and I know you have talked about it a little bit. But are customers starting to materially push big projects, or any big change there, or still just business as usual for the most part?

It is interesting, if you read some of the commentary, CapEx by the oil companies is being cut back by 30% to 40%. At the same time, in some of the areas that are most impacted by the drop in oil prices, the tar sands in Canada, Suncor still decided to go ahead with a $1.4 billion investment that they were planning, the customer that I referenced in Asia Pacific, over the last 12 months their backlog has increased to over $10 billion on the back of some awards in the United States. So in the last two or three weeks I have been meeting with customers around the world, and they look at this as a short-term event. What they tell us is that they are focused on a horizon of 10 years, and they are going to continue to invest to make the organizations more productive, and more efficient. I think in general there is a sense that this is a short-term blip, in a way oil prices have stabilized, and we'll see whether they continue in the trend that they are over the next few months. But the key here is for stability. Once the volatility disappears, then you can start planning against a target, and I think perhaps the scenario is being created for that sort of planning. But in all my customer meetings, and I have been very purposeful about this when talking to them, and trying to detect any concerns, they just feel that their job is to really execute with excellence to make a profit, and continue to generate business. So in our Top 250 customer base, I haven't detected a lot of concern.

Great. That is helpful color. I appreciate it. Thanks guys.

Yes.

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

Hi, good evening. And Mark congratulations on your retirement. We will miss you out here.

Thanks, Mark.

Turning to the operations chair, Antonio, wondering if you could give details or color around the BLOWDOWN acquisition, and how you see your customers using the product, and I would assume it is a pretty reputable company for the most part?

BLOWDOWN is the leading technology in this space of depressurization and safety. This technology that was developed by these two professors out of Imperial College. Fact is that it is not commercially available software. What these professors have done over multiple decades, is to actually be contracted, they are normally contracted for a consulting job, and they use the technology that they developed as a tool in their consulting work. Our job, and our plan is to turn that technology into a product that can be used independently of any consulting, and the early feedback from the customers is a lot of excitement, it is perhaps of the recent acquisitions we have made, it is the one that has generated the most excitement in our customer base. This technology has its origins back in the 1970's with the Piper Alpha explosion in the North Sea, when these two professors were contracted to consult on the reasons for that accident, and they began to develop this technology. So it goes back many years, but it was never productized, and our job is to turn it in a product that we believe has the potential to be very successful.

Okay, great. Thank you. And then R&D spiked up. Mark, R&D spiked up this quarter sequentially from last quarter. Is that due to BLOWDOWN, or are there some other reasons for that? Is that the new baseline?

That's right. It is the fact that as I mentioned the BLOWDOWN expenses were expensed in the period. The same somewhat unusual accounting treatment that we saw the same quarter a year ago. But we didn't have a similar event in the second quarter, so that is primarily what explains the spike up.

And should that be the new baseline going forward then for R&D?

The number, no, the BLOWDOWN was a one-time thing, so I would expect it to normalize back down next quarter.

Okay. Thank you.

Your next question comes from the line of Monika Garg with Pacific Crest.

Thanks for taking my questions. Mark, hi, let me add my congratulations to your upcoming retirement as well. Antonio, I kind of want dig a little bit deeper on the point you were trying to make on the volatility on oil prices. If the pricing let's say assume stabilize at these low levels for the next 6 to 12 months, do you think that we could see some more negative impact on your end customers, or are you saying it could be actually positive, and the overhang of low oil prices than you do on your business?

Well, I mean Monika, time will tell, but what I can tell you is that we have certainly feel that it is, and sense, and what we hear from customers, is that it has been a positive for owner operators, for refiners, for chemical producers. E&Cs seem to be holding their own. Their demand for our software hasn't changed. BP announced their results I believe it was yesterday, and they attributed the performance to the excellent performance in their downstream business, where their profits improved from about $798 million a year ago, to $2.1 billion this quarter. So no doubt that this is a positive for refiners and chemical producers. And if it is a positive for them, and by the way back in February, both Chevron and Exxon Mobil said the same thing, they will invest. Most of our, a lot of the users, most of the users of our engineering software is to build plants, refineries, chemical plants. Certainly it is also used in upstream, but it is 12% to 13% of the usage. So if the downstream sector is generating a lot more cash and profitability, we would expect that they are going to be investing.

In addition, I was also in China in the last three weeks, and I'm very excited about the opportunity there, the installed base is still underground, the opportunity there for us to take, regardless of what is happening with the Chinese economy, because it is not about growth, it is about what is already on the ground as well over there. So I think perhaps that is also something to pay attention to, that there are a lot of refiners and chemical plants that have to be optimized that exist today, and that are producing product that has to be produced at a more cost-effective manner, and that is what we do.

Thank you. That's helpful. Question on operating margins, operating margins came 44 points, towards the high end of your long-term target. How do think about going forward on the operating margin side?

Yes, so we obviously set these margin target ranges just about a year ago at Investor Day in 2014. And we have gotten to the target a little faster than we indicated we would. So we are sort of operating in a range that we are comfortable with. We will probably talk about that in a little more detail at Investor Day next week. But this is sort of the operating range that I think that we are looking to sort of sustain over the longer term.

And let me just add that there is a significant opportunity here for us to invest I guess what the chips might be down for, our competition especially in industrials and others, and going forward I still look at Russia, the Middle East, the SMB business, China, as the areas where we still need to invest, to capture the growth opportunity that exist, and as we do that, as Mark said, that is a margin area where we see advance in the short-term. While we put more investment to then capture growth going forward.

Thanks. Just a last one from me. Antonio, could you talk about the demand trends that you are seeing in different geographies, especially given the currency movement like it has been?

Look 85% of our revenue is dollar denominated contracts, so in an interesting way, like we said it is winning the small and medium customer segments, who are perhaps there is more sensitivity to cash flow and revenue in other currencies. Russia has also been a little bit of a problem. We do our software license business in dollar denominated contracts, so that delayed some deals. Latin America, I don't think the issues in Latin America are macro economic issues. Governance issues, Petrabras, political issues in Venezuela, Mexico is reorganizing their oil sector, and that is creating some delay on some things. So overall, certainly there is a little bit of a headwind from the US dollar, but nothing that would cause me too much concern.

The other thing that I want to highlight though, is that most of our customers, because they are exporters, they generate cash flow in US dollars, okay. So they have the ability to take some of that money. They generate revenues in US dollars, and take some of that money toward their operating expenses or capital expenses, and it is what we are seeing in Russia. There is oil companies in Russia, they are exporting, they and generating revenues in US dollars, and therefore they can buy in US dollars. That is a common denominator across most of our customers, so in a way we are somewhat isolated, or insulated with our big customers on this trend of the dollar.

Thank you. That is very helpful.

Your next question comes from the line of Sterling Auty with JPMorgan.

Jack Ader on for Sterling. A few questions from us. The first being, it looks like TLCV outgrew annual spend by a little bit more than it usually does. Any change in contract duration in the quarter?

Yes, I mean we always are careful to reference that we could have quarter to quarter variability, but specifically one of the things that happened this quarter, if you go back and look at the transcript and the discussion from Q3 last year, we noted that we booked an extraordinarily number shorter contracts than average. There were a number of large three year contracts that we talked about, so that caused in that period the opposite effect, annual spend grew a bit faster than TLCV, and really what you see this quarter is a 12-month trailing basis that quarter sort of fell off the average. I would say we have returned to a more normal ratio.

Okay. Great. Next I also think we were a little surprised to see that the guide, the implied guidance on the fourth quarter, or the guidance just given for the fourth quarter is a little bit light of the implied guidance previously, given the strength in the metrics. Is that all from pulling forward some of that revenue from the fourth quarter to third quarter, or is there more to it?

Sorry, does your question pertain to revenue guidance, or TLCV growth?

Revenue guidance, I am sorry.

Again, we have talked about quarter-to-quarter sequential changes in revenue are not going to be like a perfect step function up every quarter, and you definitely referenced to some degree, part of that is the fact that $1 million-plus of revenue that we expected based on our forecasts again in Q4 we actually got in Q3, so that is part of what is going on. If you back that out, you do see kind of a bit of a sequential growth quarter-to-quarter. Again, I think it is more valid to look at our revenue on again a 12-month trailing kind of basis. You really see a more natural growth rate than just kind of looking at it sequentially.

And final one from us. Now that the model transition is complete, how many quarters should we expect for annual spend and revenue guidance to maybe grow more in line?

I mean going forward they will start to be in line in 2016. So now annual spend is a pure metric. It is really if you will, the invoice value going into deferred revenue, so it is a leading indicator a little bit in terms of actual revenue, which obviously amortizes out over a ratable 12-month basis, and it is important to realize the annual spend metric pertains to the subscription portion of our revenue, not professional services, or the other services revenue sources. But really they should be relatively similar, again the other thing not withstanding all of the stuff that GAAP can do to your revenue from a deferral and timing standpoint, but certainly over the long haul those growth rates are approximately the same.

All right. Thanks.

Your next question comes from the line of Richard Williams with Summit Research.

Mark, I was just looking back at the stock chart. When you joined it was between $5 and $6 a share. What a remarkable transformation in the Company, and I guess it also shows that Fusco is not the only one with great timing.

Since he is gone, I will take full credit.

Might as well. Could you help with color on how supply chain is impacted because of the rapid drop in feedstock prices?

I answer that question. Of course the volatility of oil prices in the last six months, and what that does to refiners and chemical producers has an impact, it creates opportunities, and it creates challenges. And those opportunities and challenges are often translated into logistics or supply chain challenges, in that people reconfigure where they are getting their oil from, look at the US with all of the oil production over the last few years, the US has become less of an importer of oil, while all of that oil is going somewhere else, you could say shale gas has created the same thing on chemicals, all of these chemical plants that are being built, and are going to be built in the United States, they are going to start producing chemicals, and that is mostly for the export market. Therefore the supply chain gets reconfigured to take that new route into account. LNG exports, now that the US will probably start exporting LNG, as the new supply chain as I mentioned that didn't exist before, and so on, and so forth. It does create opportunity. We have seen some interest, but the one I would say about the petroleum supply chain at a macro level, it is very complex, and it takes time to, if you are going to do an overall supply chain solution, those are long-term implementations and very complex.

I could see how that would be the case. Is fracking a better market for your services than traditional E&P?

No, I mean I believe I said it in previous calls, fracking and the Midstream segment sort of the shale midstream, it is a lot simpler than producing oil in the North Sea from oil platforms, so there is less intensity of use of our software, so I would say while that is a segment that has grown for us, since really 2009, 2008, the intensity of use of our software is less so than your traditional production oilfield facilities, which are much more complex than the shale fields in the US.

All right. Thanks very much, guys.

Thank you.

At this time there are no further questions. I would now like to turn the call back over to management for any closing remarks.

Okay. Well, I would like to thank everyone for joining the call today. I also want to extend a great word of recognition for the AspenTech team, who continue to perform at a high level over the last few quarters, and really over the last few years. It is a team that I believe is all-in. It is always shaping the outcomes and forcing them, and I would like to send a word of recognition to them. Thank you everyone. And we will talk to you all on the road.

Thanks.

Thank you for participating in today's conference. You may now disconnect.