Aspen Technology Inc (AZPN) 2016 Q3 法說會逐字稿

Good afternoon. My name is Amber, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Technology third-quarter 2016 earnings call. (Operator Instructions) Thank you. CFO Karl Johnsen, you may begin your conference.

Thank you. Good afternoon, everyone. Thank you for joining us to review our third-quarter fiscal 2016 for the period ending March 31, 2016. I am Karl Johnsen, CFO of AspenTech and with me on the call today is Antonio Pietri, President and CEO.

Before we begin, I will make the usual Safe Harbor statement. 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 those in our Form 10-Q for the third quarter fiscal year 2016, 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, 2016. 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 quarter, and then I will review the financial results for the third quarter and our guidance for the fourth quarter, as well as our updated outlook for fiscal year 2016 before we open up the call to Q&A. Antonio?

Thanks, Karl. And thanks everyone for joining us this afternoon. Let's begin by looking at our summary of financial results for the quarter. Total revenue of $119.2 million was above the high end of our guidance range. Non-GAAP operating income was $59.3 million, which represents a non-GAAP operating margin of 50%. Non-GAAP EPS was $0.49, which was $0.07 above the high end of our guidance range, and grew 32% on a year-over-year basis due to the combination of our top-line growth, operating margin expansion, and reduction in share count due to the cumulative impact of our share repurchase program. Free cash flow was $77.2 million, and annual spend was $430.6 million, up 5% year over year.

In addition, today we announced a $400 million increase in our share repurchase authorization. which is in addition to the $196 million that was remaining as of March 31. Based on current market conditions and business outlook, it is our intent to repurchase $400 million worth of stock during fiscal 2017.

Today's announcement demonstrates the strength and predictability of our cash flow and balance sheet, which we further reinforced during the quarter with a $250 million credit facility. Since starting our share repurchase program in fiscal 2011, we have bought back 19.9 million shares for $666 million, including 1.4 million shares for $50 million in the third quarter. We remain committed to deploying our substantial financial resources in ways that produce significant value for our shareholders.

Our reported revenue and profitability metrics were both solid and exceeded our expectations for the quarter. At the same time, the sharp drop in oil prices early in the quarter compounded the already challenging macro environment facing some of our customers. More specifically, our bookings performance in the quarter was negatively impacted by the particularly difficult macro and business environment impacting some Latin American oil-producing companies.

As we have discussed on recent calls, in FY 2016 we have a higher-than-usual concentration of contracts up for renewal in the second, third and fourth quarters with national oil companies, NOCs. In our Q4 earnings call, we also referred to one of these contracts not renewing in Q2, which had a material impact on annual spend growth that quarter. Our expectation was that this contract, along with two other large Latin American NOC contracts that were up for renewal in the third quarter, would close at the end of March. We have not yet renewed these contracts in Latin America, but we are actively engaged with these customers.

These three contracts represent a large portion of our NOC exposure for fiscal 2016. The remaining NOC contracts that are up for renewal in the fourth quarter are based outside of Latin America, and we expect to close them based on our discussions with those companies. We are more optimistic on our ability to close these contracts outside of Latin America because of the more favorable macro and business environment in these countries.

Turning to the E&C and upstream energy verticals, these segments remain challenging. We experienced some additional pressure on annual spend in the form of entitlement reductions and price adjustments that we believe reflected the challenge of the further drop in oil prices early in the quarter.

In the face of these challenges, it is important to highlight that we do have several positive areas during the quarter. We continue to see positive demand from the downstream segment, with international oil companies and independent refiner owner-operator customers delivering a solid performance during the quarter.

Second, chemicals remained a source of strength as we saw good demand from this segment, which represents roughly 25% of our overall business.

Third, we experienced a positive growth quarter for our SMB E&C business. This is the first time in three quarters realizing growth in this segment and perhaps an early sign of the beginning of the stabilization process in that vertical.

And fourth, we continue to generate best-in-class profitability and free cash flow and are still on pace to exceed the initial non-GAAP EPS guidance we issued at the beginning of FY 2016. Our business small model is highly scalable, and we are committed to managing our cost structure while continuing to make investments to properly position the business for long-term growth.

From a guidance perspective, we are widening our range on annual spend growth to 3% to 6% for fiscal 2016 versus our previous outlook of 5% to 6%. This update is due to the timing associated with certain transactions with existing customers, including the potential renewal of the Latin American NOC contracts I referenced earlier. As well as some other sizable transactions with owner-operator customers that are currently in our pipeline. We would expect to come in toward the lower end of this range if none of these transactions close during the quarter and near the high end if all of them do. It's not our intent to provide this much context in our focus on a regular basis, but we thought the additional color would be helpful to investors in light of the unprecedented situation with our NOC customers.

Looking at additional details of our third-quarter performance, energy, engineering and construction, and chemicals once again represent a greater than 90% of our business on a gross growth basis. Chemicals was the largest vertical contributor, followed by energy 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. I would like to reference a few key deals that closed in the quarter to provide insight on how we continue to generate growth.

First, the refining subsidiary of a national oil company in Southeast Asia expanded its relationship with AspenTech by committing to upgrade our PIM scanning solution to PIMS-AO, which it believes will produce an incremental $5 million annually in benefits.

Second, a refining joint venture in Saudi Arabia that has been considering advanced control solutions for some time evaluated our DMC3 adaptive process control software. The evaluation convinced the customer that the work process automation in DMC3 would enable it to successfully capture and maintain the benefits from advanced control, which led to a new token agreement to gain access to DMC3.

Third, a global industrial company expanded its relationship with AspenTech a year into an existing six-year agreement in order to introduce and expand the usage of AspenTech engineering products across multiple business units. This expanded usage will displace one of our competitive software products as the customer standardizes on our engineering suite.

Fourth, a South Korean engineering company renewed and expanded a six-year agreement to increase the use of our engineering suite into the front-end engineering design area by using our basic engineering and cost estimation products.

And finally, a leading power company in the United States expanded the use of our real-time data management solutions across all of its power generation facilities including nuclear power plants. By doing so, this power generator gains access to our latest AspenOne process explorer product which enhances the customer's operational visualization capabilities, one of the new features in our recent AspenOne 8.8 and 8.8.8.1 product releases.

A key focus for AspenTech is to continuously invest in our products to provide greater value to our customer. Specifically, AspenTech has been investing in the development of a new analytics solution that leverages two areas of technical and market strength of the Company: models, and data capture and visualization. We are encouraged by the feedback from customers testing the alpha version of the new analytics product. These customers recognize the potential value creation from combining the predictive power of engineering models with powerful search and pattern recognition algorithms, enhanced by leading visualization technology to deliver real-time predictive and prescriptive analytic capabilities in the area of process operations and maintenance.

Our new analytics solution is an initial product in our asset optimization strategy which leverages our existing strength in asset design and asset operations with asset maintenance to allow our customers even more optimization capability across the entire asset lifecycle. Our ability to service a full plant life cycle for owner-operator customers will significantly increase the value AspenTech can deliver while expanding our addressable market opportunity.

During our investor day in June, we will provide greater insight into our asset optimization vision and our product strategy, which we are confident will further strengthen AspenTech's ability to deliver future growth as markets improve.

A key part of our product strategy is to augment our R&D investments with M&A. In recent years, we have completed a number of tuck-in acquisitions to expand our capabilities and the value we are delivering to our customers. We expect to continue doing more of this as we look ahead.

In addition, we recently showed our willingness to engage in larger transactions if there is a compelling fit, and we're confident in our ability to execute from an integration perspective.

Our decision to no longer pursue KBC highlights that we're disciplined and take our stewardship responsibilities very seriously. Big or small, we will look forward only if acquisitions make both a strategic and financial sense. We are confident about the assets AspenTech has in place today, and, moving forward, we will continue to evaluate opportunities that augment our internal development efforts.

In summary, AspenTech continues to generate solid results in the face of a challenging time for many of the industries we serve. We continue to generate positive growth, and we are delivering best-in-class profitability and significant cash flow. In fact, we are on pace to generate a record non-GAAP operating margin and, as I noted earlier, exceed our non-GAAP EPS targets established at the beginning of the year. We remain focused on what we can control to position AspenTech well through this challenging period and to thrive when market conditions improve, supporting our customers, extending our product leadership through continued innovation, maintaining a sharp focus on expense discipline and operational excellence, and leveraging our strong profitability and cash flow to enhance long-term shareholder value.

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

Thanks, Antonio. I will now review our financial results for the third quarter of fiscal 2016 beginning with annual spend.

Annual spend, which is a proxy for the annualized value of our recurring term license and maintenance business at the end of each period, was $430.6 million at the end of the quarter. This is an increase of approximately 5% on a year-over-year basis, essentially flat sequentially. Let me now turn to our quarterly financial results, beginning on a GAAP basis.

Total revenue of $119 million was up 7% from the prior-year period and was above the high end of our guidance range of $116 million to $118 million. Included in our Q3 revenues are approximately $3.9 million of revenue that is nonrecurring in nature. This was consistent with our expectations when we provided our guidance.

Breaking this down further, subscription software revenue was $111.7 million for the third quarter, which is an increase of 9% from $102.5 million in the prior-year period. Services and other revenue were $7.5 million, down from $8.8 million in the year-ago period.

Turning to profitability, gross profit was $107.2 million in the quarter, with a gross margin of 90%, which compares to a gross margin of 89% in the year-ago period.

Operating expenses for the quarter were $56.5 million, compared to $57.3 million in the prior-year period. Total GAAP expenses, including cost of revenue, were $68.5 million, down from $69.6 million in the year-ago period and up from $62.9 million last quarter. Our operating expenses for the quarter included $4.2 million of transaction costs related to our bid for KBC, while our prior-year operating expenses included $3.3 million in non-capitalized technology expenses. Operating income was $50.7 million for the third quarter of fiscal 2016, representing an operating margin of 43%. This is an increase compared to $41.7 million, or 37% operating margin in the year-ago period.

Net income for the quarter was $33.2 million, or $0.40 per share, compared to net income of $28.2 million, or $0.32 per share, in the third quarter of fiscal 2015.

Turning to our non-GAAP results, excluding the impact of stock-based compensation expense, restructuring charges, amortization of intangibles associated with acquisitions, acquisition-related expenses and non-capitalized acquired technology, we reported non-GAAP operating income for the first quarter of $59.3 million, representing 50% non-GAAP operating margins compared to non-GAAP operating income and margin of $48.7 million and 44%, respectively, in the year-ago period. Please note, our non-GAAP results include $4.2 million of KBC-related expenses.

Non-GAAP net income was $40.9 million, $0.49 of non-GAAP EPS in the third quarter of fiscal 2016 based on 83.4 million shares outstanding, compared to non-GAAP net income of $32.6 million, or $0.37 of non-GAAP EPS in the third quarter of fiscal 2015 based on 87.9 million shares outstanding. Please note, our non-GAAP net income excludes the $4.2 million of KBC-related operating expenses and $3.4 million in FX losses and fees related to the escrow account for our bid for KBC. This exceeds the high end of our guidance range of $0.40 to $0.42.

Turning to the balance sheet and cash flow, we ended the third quarter with $105.9 million in cash and marketable securities, a decrease of $94.6 million from the end of last quarter. The decrease resulted from using $115 million of our cash on hand to fund an escrow account related to our KBC bid. In addition, we funded the KBC escrow account with an additional $140 million on a $250 million revolving credit agreement we entered into during the quarter.

Subsequent to the end of the quarter, the cash held in escrow returned to us, and we currently have approximately $350 million in cash from marketable securities on our balance sheet. It is not our current intention to pay down the $140 million that is outstanding on our revolving credit agreement in the near term. During the quarter, we repurchased 1.4 million shares of our stock for approximately $50 million.

Our deferred revenue balance was $264.8 million at the end of the third quarter, representing a 3.3% decrease compared to the end of the year-ago period and a 15.1% increase on a sequential basis. The year-over-year decline reflects the continued impact of approximately $9 million in nonrecurring revenue recognized over the past year that was recognized from deferred revenue combined with lower levels of deferred services revenue.

From a cash flow perspective, we generated $69.7 million of cash from operations during the third quarter and $77.2 million of free cash flow after taking into consideration the net impact of $749,000 in capital expenditures and capitalized software.

Our free cash flow also adjusted for a $2.1 million litigation payment and $6.1 million related to our KBC bid. Our third-quarter cash flow reflects approximately $17.1 million of US corporate cash taxes paid during the period. We are pleased with our cash flow in the quarter, which reflects the high level of profitability in the business, strong cash collection activity and the value our customers receive from our products.

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 us regarding our updated financial outlook for fiscal 2016 while guiding for the fourth quarter. For the fourth quarter, we expect revenue in the range of $111 million to $114 million. Non-GAAP operating income of $47 million to $50 million. Non-GAAP EPS of $0.37 to $0.40. On a GAAP basis, we expect third-quarter operating income of $43 million to $46 million and EPS of $0.35 to $0.37.

Turning to the full year, we are raising the low end and midpoint of our revenue guidance with an updated range of $469 million to $473 million comparing to our previous range of $465 million to $473 million. From a mix perspective, we continue to expect a subscription in software to comprise greater than 90% of our revenue, with our services and other revenue representing the remainder.

From an expense perspective, we are favorably adjusting our assumption for total GAAP costs and expenses, which includes approximately $5.2 million of costs associated with the KBC bid, to $262 million to $266 million, which is lower than our previous guidance of approximately $270 million to $275 million which included approximately $6.5 million of costs associated with the KBC bid for the full year.

Taken together, we expect GAAP operating income in the range of $205 million to $209 million, net income in the range of $134 million to $137 million, and GAAP EPS of $1.61 to $1.64. This is an increase compared to our previous guidance of GAAP operating income of $193 million to $201 million, net income of $125 million to $131 million, and GAAP EPS of $1.49 to $1.56.

From a non-GAAP perspective, we now expect non-GAAP operating income in the range of $226 million to $230 million, which is up from our previous guidance of $215 million to $223 million for the full year 2016. This would lead to non-GAAP earnings per share in the range of $1.80 to $1.83, which is a meaningful increase from our previous guidance of $1.66 to $1.72 for the fiscal year. We expect annual spend, but, as Antonio mentioned, we are adjusting our guidance to 3% to 6% growth. Looking at cash flow, we are reiterating our fiscal 2016 guidance of approximately $155 million to $160 million of free cash flow.

In summary, our third-quarter performance was solid in light of the challenging macro environment facing our customers. Our highly scalable business model and ongoing expense discipline is enabling us to continue generating substantial profitability and free cash flow that we are leveraging to protect and enhance long-term shareholder value.

With that, we are not happy to take your questions. Operator? Let's begin Q&A.

(Operator Instructions) Matt Pfau, William Blair.

First, I wanted to start off on some of the national oil company renewals that you mentioned. So I guess, first of all, my question is what are these companies doing in the meantime while these contracts are being pushed? Because I'm assuming that they don't have access. So I guess, one, is that correct? And then, two, what are they doing? And then is there any possibility that these contracts are not renewed at all, or is it in your view just a factor of time before they get renewed?

Okay, Mike. Thanks for the question. This is Antonio. So -- and first of all, of course, these customers are longtime customers of Aspen Technology. And, therefore, we are working closely with them to make sure that they continue to capture value from the use of our technologies. We have made arrangements so that they maintain access to our software while we are engaged them in finalizing the negotiation for those contracts.

There are multiple reasons why these contracts are getting delayed, and I'm not going to get into the specifics of why they didn't renew on time. And also, I'm not going to speculate whether they would renew it or not but we are engaged with them. And as we said, our guidance -- we want to make sure and be conservative and reflect the fact that we've had a difficult time disclosing them according to our expectations. But we are engaged with those customers.

Got it. And then excluding those customers, is the pressure in renewals and the ENC and upstream portions -- is that consistent with what you guys had expected from the -- when you gave guidance on the prior earnings call? And I guess it would seem so given that guidance is -- with the -- ex of the annual spend, it hasn't been changed.

The fact is that Q3 from a metric standpoint is sort of an anomaly because the impact of this contract -- these two large NOC contracts that did not renew skewed the results both from losses and non-renewals to some point. If you were to -- if those contracts had renewed, the performance in the quarter would have been in line with our expectations, but that was not the case.

Got it. And last one for me, does the increased share repurchase program change anything related to your acquisition strategy in terms of potential size of acquisition or number that you were going to pursue?

Look, our priority continues to do M&A. And certainly -- even with the announcement of that $400 million share repurchase program for fiscal 2017, we look to do tuck-ins. In a way, the announcement of that program signifies that we don't see anything of significant size in the horizon. And that's what we have made the decision to get the approval for the size of the repurchase program and then announce it.

But should anything change, we always -- like we did with the KBC transaction, would change our plans on the repurchase. But at the moment, we don't see anything and that's why we have announced it.

Got it. Thanks for taking my questions, guys.

David Hynes, Canaccord.

Impressive operating margins. Again, nice work there. A question on the E&Cs that are challenged. You guys signed multi-year deals with them. I don't know if they are shorter on the E&C side, but typically you guys assigning five- or six-year deals.

So with the assumption that you are only touching 20% of your customer base a year, is it fair to think that the headcount reductions in this space are going to have a multi-year impact on renewals on that 30% of the business?

Certainly, usage in the E&Cs is all about -- it's all about headcount, eyeballs on the software. At the same time, your statement assumes that there is not going to be a pickup in spend for multiple years. And I would argue that if there is a pickup in CapEx spend and construction, then the E&Cs will start hiring people again and, therefore, usage of the software will pick up again.

So this is the strength of our model that during this downturn, only a segment of the population of customers coming up for renewals. That gives us time to weather the downturn. And hopefully, spend will pick up in the future, and they will start hiring more people and usage will start picking up again. And we won't be dealing with reductions in spend or non-renewals.

But don't those customers who have cut heads now have excess capacity to grow into? Like, in other words, if they hire a bunch of folks, they already have those entitlements. Right? They're not going to have to buy more from you to feed those guys. Am I thinking about it the right way?

Yes, no, you're right in that regard.

Got it. And then, second, obviously we've seen a pretty sharp recovery here in the price war in the last month. I guess have you -- has there been any notable change in -- I assume sentiment has improved. How about appetite for investment from the customers that you are currently dealing with with with the recovery in oil prices?

Well, look. What we really focus on is on budget. I think calendar 2016 is about the budgets that were set late last year for calendar 2016 and any adjustments that have taken place since then.

Just because oil recovery -- the oil price is recovering, I don't want to try to read how our customers would behave. But I would imagine that you have to see oil consistently at a certain level for that confidence to come back into the market and customers to really increase their spend.

So I think this is only a month of higher oil prices. Time will tell what that means.

Yes. And then maybe one for Karl, if I can. Karl, help me understand the relationship between the growth we see in annual spend and then what is happening in deferred revenue. I would think over an extended period of time, growth in deferred revenue would closely approximate growth in annual spend now that we have lapped the model transition and all that stuff in the past. Why is that not the case? Or should it be at some point in the future?

Deferred revenue will have a relationship with annual spend because they are highly correlated. What you're seeing now is two -- three things going on that's making that unclear.

First is we are kind of getting through the transition. So, looking at 2016 to 2017 will be a little bit clearer than looking at 2016 to 2015. We have about $9 million, $10 million of deferred revenue that was on the balance sheet a year ago that was what we talked about before, which was recognized -- it wasn't recognized in a radical way, so it came in. It's one of those numbers that we talk about in quarters that came in and on a nonrecurring basis. So that came off and it is not replaced.

Then you are seeing the phenomenon of the professional services isn't getting hung up on the balance sheet like it used to be historically when it was sold with licenses.

So you take those into account, reset what a year ago looked like and you have some pretty healthy growth. But when you are really trying to judge it, I would still point you back to the annual spend metric.

Okay. And then last one, if I may. Antonio, at this time last year, you gave a view on what you thought fiscal 2016 was going to look like. Curious if you have any high-level thoughts on what fiscal 2017 is going to look like. I know that's a long way out, and it's a shaky macro environment. But that's the question that I get asked most often, so I figured I would pass it on to you.

Well, great. Thank you. Well, let me look. Clearly as we are now -- we have had to lower our guidance for fiscal 2016, I think visibility in this environment has been a big challenge. And I would state that I think the visibility is really no more than three months out.

Hopefully as oil prices stabilize or continue to slowly increase, visibility would get better. But we will talk about 2017 during our investor day coming up in June. And of course we will be prepared to talk about 2017 and what we think about that fiscal year.

Understood. Okay. Thanks for the color, guys.

Sterling Auty, JPMorgan.

I'm wondering with the June guidance, you mentioned kind of your expectations for those renewals and the impact on annual customer spend, that 3% to 6%. But what did you factor in in terms of those renewals -- both the contracts that have not renewed yet as well as the ones that are coming up for renewal?

Those are baked into the guidance because we've talked about a nonrenewal rate or a rate of losses in the past. That is baked in the guidance. Of course, the nonrenewal of now three large NOC contracts in Latin America -- these are losses that -- in a way for us to deliver the growth that we have delivered, we have had to mitigate through growth.

And I just want to emphasize that, despite flat growth in the Q3, the Company had to generate enough gross growth to mitigate the impact from the significant losses in the nonrenewal of the Latin American contracts. So we are still generating a lot of new growth in our customer base. It's just that we are having to deal with these non-renewals. The guidance that we've established at the low end of the range, 3%, says that we don't renew in time any of these contracts that are already being renewed, and on the high end says that we renew them whole and some more. Because we do have a pipeline of business in Q4 that has nothing to do with NOCs. There are some sizable transactions, as we stated in my script just now, that we are also hoping to close. So that is all baked into the guidance.

The $111 million revenue for the low end for June assumes that the couple that have not renewed that have slipped continue to slip?

Yes. When you think about the revenue in Q4, that's not going to be impacted by the annual spend in Q4. So when you close annual spend in the quarter, you get little to no impact to revenue in that quarter.

Okay. And then -- and so you mentioned outside the national oil companies and outside of Latin America, you mentioned growth in the customer base. Can you give us a sense for the customers that are renewing outside of that environment? What kind of increase are you seeing on their annual run rate? Are they up 5%, 6%, or are they also challenged below that number?

It's all over the place. We have customers that are buying a lot more, and growth above 10%, 15%. There are some customers that buy barely enough for growth. There are others in that 5% range. Is a complete mix.

But, look, we have so healthy segments. Chemicals -- we're seeing good demand in chemicals, and you can expect that that is where we are seeing some healthy growth. Independent refiners is also an area where business is good, is solid. International oil companies, the larger oil companies -- the Shells, the BPs, the Totales. It is NOCs that are tied to -- I should say it this way, NOCs that provide a significant portion of the fiscal revenue for our country where you see some challenges. And -- but we are working through that.

All right. Great. Thank you.

Monika Garg.

First on the NOC side, Antonio, could you maybe talk about that you are not seeing any kind of competition or anything in those deals and it is just given the macro environment in these countries that these are getting delayed?

No, we are seeing competition. Certainly in this sort of environment, you would expect everyone to be operating at a higher gear from a competitive standpoint. I would single out a specific region in the world where we saw some pretty odd behavior from one of our competitors.

Interestingly enough, a couple of weeks later, we also found out that a competitor was closing down their software operations that compete with us in that region and moving most of them to a country in Asia. So it signaled to us that there was a little bit of desperation in some of the moves that we were seeing from that competitor.

But, no, of course there is more competition. There is less business out there, and therefore everyone has to compete harder.

Got it. Then on the SMB side, the comment was encouraging: some stabilization in what you have seen. Could you maybe provide more details on it?

We had positive growth. It wasn't a barn burner, but it was positive. It is only one data point, but it was the first positive growth out of the SMB ENC group in a few quarters. I would like to see two or three or four data points of growth before I claim -- we claim victory or that we are out of this. But it's only one quarter, and we will see what happens this quarter and in the next couple.

Then the -- oil has decently recovered. Depending on your discussions with your end-customers, how long do you think we need to see some stabilization in oil prices? Like three months, six months before you see and we can see some pickup activity either in the E&C segment?

Monika, the way we think about it and I think about it is everyone is forecasting that oil will be $45, $50 by the end of the year, and it is already there somewhat. I think it's about the budgeting process at the end of this calendar year. Sort of September, October, November when all these companies are then looking at their budgets for calendar 2017. And then those budgets then set the spend for calendar 2017.

If oil is at a level and it has been sustaining at a level that gives confidence to people that they can spend against a higher oil price number, then we will totally see a more positive spend environment in 2017. I think in 2016, look, I assume everyone is very cautious. And regardless of what happens to oil, people will continue to be cautious in 2016.

Thank you so much.

Mark Schappel, Benchmark.

Nice job on the margin front. So Antonio, regarding the outstanding NOC contract renewals, is it fair to assume that these contracts fall into your downstream owner-operator bucket rather than your upstream bucket?

Well, look, these are integrated oil companies. So, yes, a lot of -- you can assume a lot of the software we see is downstream. But at the same time, they are integrated oil companies and some of that usage might be upstream as well. But the organizations that we deal with tend to be downstream.

Okay, great. And Antonio, did I hear you correctly that the outstanding contracts -- there is actually three of them? The large contracts?

Yes. Three of them have not renewed. We have two this quarter that were more confident that they will renew outside of Latin America.

And the three with less confidence are in Latin America?

Correct.

Okay. Great. And then Karl, with respect to the fourth-quarter revenue guidance, do you expect any nonrecurring revenue in that number?

No.

Great. Thanks. That's all from me.

Michael Morosi, Avondale Partners.

Looking at the raised operating profit guidance, but the unchanged free cash flow guidance, maybe Karl, I wondered if you could just talk a little bit about that and how we should expect free cash flow to track operating profit over time.

Sure. The big piece of this -- the reduction of the expenses in Q4 -- so that naturally would have hit my free cash flow more in the subsequent year. But, in general, it trails it a little bit. The metric I use to kind of track against free cash flow is the EBITDA, and that is somewhere in that low to middle 70% range.

Okay, that's helpful. And then Antonio, just kind of looking across cycles, is there -- what precedent is there for annual spend to go flat or negative? You might have to go back a number of years to look at that example, you know. But what -- just in terms of the overall demand environment, has that happened before? And what does either renewals or just customer behavior look like in that type of environment?

Michael, I will talk about the years that I've been involved with the executive team in AspenTech, because before that, I had no visibility to ins and outs of the finances of the Company.

But, look, back to 2007 really, the 2008, 2009 period was a difficult period because of the globalization. The Company at the time, at the end report annual spend and we were tracking revenue in a different way because we were recognizing revenue on an upfront basis, and there was a lot of potential licenses there as well.

But bookings, which is a number that I was dealing with in charge of the sales organization -- our bookings number has slowed down to sort of the mid-single digits. A little bit of what we're seeing right now with annual spend. That is the one data point that I can give you.

After 2009, in a way, the macro environment was very positive around the oil, as we all know. And it's only in the last 18 months where we've been facing these headwinds.

Okay. And then -- so in light of that, where do you feel like there are the most opportunities to manage cash flow and manage earnings from an OpEx standpoint? What do you view as the right level of ongoing spend to support the current business?

Well, look, you are seeing our expenses continually fall within a range. I think we've been plus or minus [$10 million] -- around $260 million over the last few years. That's not sustainable. But at the same time, we are being very careful at this time with our expenditures because we are facing a slower growth.

What I would say, though, is I think AspenTech is uniquely positioned to really put the foot to the pedal in an environment like this one to create more distance between ourselves and competitors by investing more in R&D and marketing and other areas in a judicious manner. We're not going to go crazy here. As we have demonstrated, we are very judicious in our behavior.

But at the same time, I think this is an opportunity. And part of my talk in the script around our investments in analytics and other things reflect that, that we really can continue to create distance between ourselves and the competition in this environment because we are a standalone sort of Company. We have the margins that we have. Most of our competitors are tied to bigger businesses that don't have the margins that we have, and they are being managed in a very different way than we manage Aspen Technology.

And then just finally, looking at the pace of buybacks over the next few quarters relative to cash flow generation and existing cash on the balance sheet, it seems like there might be an indication that the Company would be willing to take on a little more leverage. What are the longer-term leverage metrics in terms of where you guys are comfortable operating the business?

I will let Karl answer that question.

Sure. When we think of leverage right now, we are thinking about a half turn to two turns is probably a comfortable level. Probably want to make sure that -- but when we put that on, we want to make sure that it's thoughtful. This is the reason we are putting it on. The right opportunity, whatever that opportunity investment might be, we can take that up to three turns and be very comfortable. That is probably the higher end of the range right now.

All right. Very good. Thanks a lot for taking the questions, guys.

I would like to thank everyone for joining the call. We look forward to talking to you on callbacks, one-on-one or when we attend some of the investor conferences that we are going to be attending in the next couple of months. Thank you, everyone.

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