Aspen Technology Inc (AZPN) 2017 Q2 法說會逐字稿

Good afternoon. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the AspenTech second-quarter 2017 earnings conference call. (Operator Instructions).

Thank you. I would now like to turn the call over to Karl Johnsen. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us to review our second-quarter fiscal 2017 for the period ending December 31, 2016. I'm 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 that during the course of this call, we may make projections or other forward-looking statements about the financial performance of the Company that involve risks and uncertainties. The Company's actual results may differ materially from such projections or statements.

Factors that might cause such differences, include but are not limited to, those discussed in today's call; and in our Form 10-Q for the second-quarter fiscal year 2017, 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, January 26, 2017. 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'll review our financial results for the second quarter and our guidance for the third quarter, as well as our updated outlook for fiscal year 2017 before we open the call up for Q&A.

Antonio?

Thanks, Karl. And thanks to everyone for joining us this afternoon. We delivered a solid second-quarter performance with results that exceeded our guidance across all metrics. Looking at our financial results for the quarter, annual spend was $450.1 million, up 4.6% year-over-year. Total revenue of $119.9 million was above the high end of our guidance range.

GAAP operating income was $56.1 million, and non-GAAP operating income was $60.9 million, which represents a non-GAAP operating margin of 50.8%. GAAP EPS was $0.48, and non-GAAP EPS was $0.52, both of which exceeded the high end of our guidance ranges.

Free cash flow was $27.5 million. And we repurchased 1.3 million shares for $70 million, which included the remaining $20 million from the ASR program we announced in August.

We are pleased with our performance in the second quarter and through the first half of fiscal 2017, especially in the context of the difficult macro environment and challenging spending environment in the E&C and upstream market segments. In the quarter, Europe, Russia, the Middle East, and our SMB businesses delivered solid performances. This performance reflects the continued opportunity for AspenTech in enabling owner/operators to operate their assets more efficiently and profitably.

The second quarter was highlighted by a significant milestone for AspenTech with introduction of a new product suite, aspenONE Asset Performance Management, or APM. Early customer response has increased our belief that there will be strong interest in reliability and analytics software that helps customers reduce their operational risk, increase production, and improve profitability.

As we announced in November, the initial version of the APM suite includes the Aspen Fidelis Reliability product and the Aspen Asset Analytics product. The Aspen Fidelis reliability product, which we acquired last June, enables customers to leverage the design and process knowledge that resides in aspenONE products to analyze process reliability, quantify improvements opportunities, and optimize the availability of assets.

The Aspen Asset Analytics product combines our modern simulation capabilities with a robust set of analytics that can predict the specific process problem events and prescribe actions to prevent their occurrence.

Early feedback from the initial customers who were targeted in the first phase of the APM release has been positive. For example, during the quarter a large international chemical company expanded its use of Fidelis products with the purchase of additional Aspen Fidelis Reliability software. We believe this will help to pave the way for a long-term, multi-region contract with this customer, as is indicative of the sizable opportunity for this product.

In the analytics area, customers participating in the lighthouse program continue to be enthusiastic about the benefits that can be derived from using our Aspen Asset Analytics product. Several chemical companies in the US and Europe are participating in the lighthouse program, and are using Aspen Asset Analytics to gain valuable insight on the process conditions that contribute to undesirable process events, allowing the operators to act before adverse events occur.

Use cases include predicting environmental emissions spikes, off-quality production, and abnormal reactor conditions. LyondellBasell, a global top 10 chemical company, recently called Aspen Analytics a unique and promising new software solution that brings with it the potential to create significant value and generate a quick payback.

In Q2, we also saw solid early interest and demand for our recently acquired Mtell products. The Mtell products utilize machine learning capabilities to deliver predictive and prescriptive maintenance solutions in a wide variety of global industries. Mtell products are not included in the current version of the APM suite, but they are available as stand-alone products. In the quarter, a large US-based pulp and paper company added to its existing Mtell implementation.

The Company has had significant success using Mtell to monitor [dryers] and other equipment for failure, targeting annual savings in the tens of millions of dollars. With this new transaction, the Company will be using Mtell products in the paper part of their business.

Additionally, and oil exploration and production company in the United States licensed the base Mtell product for condition monitoring to monitor approximately 30,000 sensors across their pipeline's network, with expectation to save $5 million to $10 million in environmental mitigation costs. We expect this customer to begin utilizing the advanced machine learning capabilities of the Mtell product over time.

Furthermore, shortly after the acquisition, the Mtell team was recognized by CSX Corporation, a premier transportation services provider, as a select supplier' and awarded its their 2016 Supplier Innovation Award for, and I quote, delivering extraordinary value and productivity, saving the Company millions of dollars in costly downtime; end quote.

Our Asset Performance Management solutions represent a major step forward in our asset optimization strategy, and expands AspenTech's product portfolio from our traditional strength in engineering and manufacturing and supply chain to include maintenance of the physical asset. They also expand our core capabilities in modeling and simulation into analytics and machine earning.

The extension into the maintenance phase, combined with analytics and machine learning, will also open up whole new areas of value creation for AspenTech and our customers as we leverage the synergies from the combination of these new technical capabilities across all three areas of the asset lifecycle.

We can now enable companies to optimize their assets throughout their entire plant lifecycle by addressing key business challenges like process disruptions, low asset availability, and unplanned downtime, early in the design of these assets.

We believe the unique capabilities of our Asset Performance Management solutions provide customers with a better understanding of how their assets are impacted by operational conditions over the long term, and can generate significant cost savings per asset.

We also believe that there is a large opportunity for Asset Performance Management solutions outside of our existing customer base. It is clear that these solutions, and specifically functionality in the areas of reliability modeling, statistical analysis, and machine learning can generate significant value for customers in industries where maintaining equipment reliability and avoiding equipment breakdowns are critical business issues; for example, transportation, wastewater treatment, consumer packaged goods, and more.

We have developed a meaningful pipeline of transactions for our Asset Performance Management solutions in a few short months, which is a testament to the interest that I just referred to. We're excited at the new opportunities APM represents for AspenTech, and believe it will be a key driver of our long-term growth.

We intend to provide greater commentary on this opportunity during our Investor Day in June.

We are committed to accelerate in the product roadmap for our Asset Performance Management solutions through investments in our R&D organization. The validation of the market opportunity, both in and outside of the process industries, has also convinced us to accelerate investment in our field operations and marketing organizations to fully capitalize on this opportunity.

We will make these incremental investments by redeploying some of the earnings outperformance we have achieved year to date. Our focused execution discipline and the scalability of our business allows the reallocation of resources in our go-to-market and R&D organizations to support our growth strategy. This reflects one of the most attractive aspects of AspenTech's operating model.

We are introducing products into the aspenONE APM suite in stages, and plan to expand its capabilities with additional functionality from internal R&D efforts and through additional acquisitions. We will make further announcements about the aspenONE APM suite at our OPTIMIZE 2017 user conference in late April.

Before I review our second-quarter performance in more detail, let me first start on our view of the macro environment in the oil and gas industry. As expected, spending continues to reflect a level of caution among customers. The breadth of sales activity in Q2, while encouraging, was mitigated by headwinds from reductions in spend in E&C and upstream as we have seen in the last 12 months. In general, from direct interaction with our customers that we are happy to see calendar 2016 in the rearview mirror and are focusing on 2017.

The stability of oil prices in the high 40s, low 50s is encouraging. And the longer oil stays at this or higher levels, the better it will be for confidence and customer demand over time.

It is too soon for us to have a definitive read on 2017 budgets. But we continue to expect that customers will likely remain cautious, and that any budget increases will be marginal.

Looking at our second-quarter performance, energy, engineering, and construction and chemicals once again represented greater than 90% of our business. Chemicals was the largest vertical contributor, followed by energy and engineering and construction.

Let me now provide some color on the few other deals in our engineering, and I'm going to factor in supply chain areas. First a joint venture refiner in the Middle East that has started operations in 2013 and signed an agreement for access to the MSC suite acquired additional token entitlement to expand its use of our refinery planning optimization software, PIMS-AO. We expect further expansion into other product areas of our petroleum supply chain solution in the coming quarters.

Second, as part of the divestiture process of a joint venture refining company in the US, the new independent company agreed to continue its use of our planning and scheduling products while expanding its token entitlement and also standardizing on our adaptive control technology, Aspen DMC3, after careful evaluation of our competitor's product.

Third, a European chemicals company expanded use of our MSC suite and specifically our MES solutions, to a new business unit joint venture focused on improving product quality and reducing off-spec production. The new agreement also adds incremental entitlement to expand use of the MES solutions at the parent company level.

Fourth, an engineering company based in northern Europe expanded its entitlement for the use of Aspen HYSYS and other products to execute a front-end engineering design [feed] project for one of the largest oil companies in the world, based in Scandinavia.

And, finally, a Central European oil and gas company with operations in Poland, Germany, the Czech Republic, and Baltic States, renewed its MSC suite agreement and expanded entitlement to PIMS-AO on petroleum supply chain products.

During the quarter we also continued to use our strong balance sheet and cash flow to fund our share repurchase program. In the second quarter we repurchased another 1.3 million shares for $70 million, which included the remaining $20 million from the accelerated share repurchase program we announced in August. We have the bought back $200 million of our shares in the first half of the fiscal year. And we intend to execute on the remaining $200 million of our $400 million fiscal 2017 buyback program over the next two quarters, assuming market and business conditions remain favorable.

To summarize, AspenTech continued to perform well across all areas of the Company. We're producing good growth in a challenging spending environment, and are on track to achieve our fiscal 2017 annual spend guidance of 3% to 6%.

At the same time, we took a measured step forward in our strategy, positioning the Company for improved long-term growth performance with the introduction of the aspenONE Asset Performance Management suite. Our expanded portfolio further extends AspenTech's market leadership in the process industries, enhances our ability to benefit from any improvements in customer demand, and will open opportunities in new industries as well. We are confident in our strategy and its ability to generate meaningful value for shareholders over time.

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

Thanks, Antonio. I will now review our financial results for the second quarter of fiscal 2017, beginning with annual spend. Annual spend, which is a proxy for the value of our recurring term license business at the end of each period, specifically the analyzed value of our term license and maintenance revenue, was $450 million at the end of the quarter, which is an increase of 4.6% on a year-over-year basis and 0.9% sequentially.

Let me now turn to our quarterly financial results, beginning on a GAAP basis. Total revenue of $119.9 million was up 1% from $119.2 million in the prior-year period, and was above the high end of our guidance range of $117 million to $119 million.

It's worth noting that revenue in the second fiscal quarter of 2016 includes several cash basis customers paying us earlier than expected, and we didn't have similar record revenue in the second fiscal quarter of 2017.

As a reminder, although the vast majority of our business is not recognized on a cash basis, the timing of when cash basis customers pay can impact revenue trends.

Breaking this down further, subscription and software revenue was $112.9 million in the second quarter which is an increase of 3% from $110.1 million in the prior-year period, and compares to $113.4 million last quarter. Services and other revenue was $7 million compared to $9 million in the year-ago period, and $6.6 million last quarter. This is in line with our expectations set at the beginning of the year.

Due to the macro environment, customers are reducing their training and professional services projects.

Turning to profitability: gross profit was $108.4 million in the quarter, with a gross margin of 90%, which compares to $107.3 million and a gross margin of 90% in the year-ago period. Operating expenses for the quarter were $52.3 million compared to $51 million in the prior-year period. Total GAAP expenses, including cost of revenue, were $63.9 million, up from $62.9 million in the year-ago period, and down from $65.3 million last quarter.

Expenses in the quarter were somewhat below plan due to the timing of certain investments and hiring.

Operating income was $56.1 million for the second quarter of fiscal 2017, representing an operating margin of 47%, consistent with an operating income and margin of $56.3 million and 47%, respectively, in the prior-year period. Net income for the quarter was $37 million, or $0.48 per share compared to net income of $36.7 million or $0.44 per share in the second quarter of fiscal 2016.

Turning to our non-GAAP results -- excluding the impact of stock-based compensation expense, amortization of intangibles associated with acquisitions, acquisition-related expenses and non-capitalized acquired technology -- we reported non-GAAP operating income for the second quarter of $60.9 million, representing a 51% non-GAAP operating margin, consistent with a non-GAAP operating income and margin of $60.9 million and 51%, respectively, in the year-ago period.

Non-GAAP net income was $40.2 million or $0.52 of non-GAAP EPS in the second quarter of fiscal 2017, based on 77.3 million shares outstanding compared to non-GAAP net income of $39.6 million, or $0.47 of non-GAAP EPS in the second quarter of fiscal 2016, based on 83.7 million shares outstanding.

Turning to the balance sheet and cash flow, we ended the second quarter with $140 million in cash and marketable securities, a decrease of $51.6 million from the end of last quarter. During the second quarter we repurchased 1.3 million shares for $70 million under our stock repurchase program. Through the first half of fiscal 2017 we've repurchased 4.2 million shares, returning $20 million to shareholders, demonstrating our commitment to enhancing shareholder value through our capital allocation strategy.

Our deferred revenue balance was $241.3 million at the end of the second quarter, representing a 5% increase compared to the end of the year-ago period, and a 5% decrease on a sequential basis.

As a reminder, our deferred revenue balance is heavily influenced by the timing of invoices. And over the course of the year, we expect deferred revenue growth to be generally in line with the underlying growth in the business; however, there can be some quarter-to-quarter variability.

From a cash flow perspective, we generated $27.2 million from cash from operations during the second quarter and $27.5 million of free cash flow, after taking into consideration the net impact of capital expenditures, capitalized software, and excess tax benefits from stock-based compensation, and acquisition-related expenses.

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 thoughts regarding our updated financial outlook for fiscal 2017, as well as guidance for the third quarter. For the third quarter, we expect revenue to range from $116 million to $118 million. It's important to note that we recognize subscription revenue ratably on a daily basis, which equates to approximately $1.2 million of subscription revenue per day on our current subscription base.

Our third fiscal quarter has two less days than the second fiscal quarter, so guidance reflects an approximate $2.5 million sequential reduction in subscription revenue before taking into account the impact of annual spend growth.

Overall, there are three less days and the second half of our fiscal year, which results in approximately $4 million less in subscription revenue before taking into account the impact of annual spend growth. This is a normal aspect of our revenue model that was not readily apparent in the past, due to the revenue model transition and the impact of one-time revenue items last year.

In terms of profitability, for the third quarter we expect non-GAAP operating income of $49 million to $51 million, and non-GAAP EPS of $0.40 to $0.42 per share. On a GAAP basis, we expect third-quarter operating income of $45 million to $47 million, and EPS of $0.36 to $0.38 per share.

Turning to the full year, we are updating our revenue guidance to $473 million to $477 million which compared to our previous guidance of $470 million to $477 million.

From a mix perspective, we continue to expect subscription and software to comprise greater than 90% of revenue, with our services and other revenue representing the remainder.

From an expense perspective, we are adjusting our assumption for total GAAP cost expenses to $270 million to $273 million, which compares to our previous guidance of approximately $268 million to $273 million. The adjustment to our expense guidance takes into account our first-half performance as well as the incremental investments Antonio referenced earlier.

We expect GAAP operating income in the range of $201 million to $206 million, net income in the range of $127 million to $131 million, and GAAP EPS of $1.63 to $1.67 per share. This compares to our previous guidance of GAAP operating income of $199 million to $206 million, net income of $126 million to $131 million, and GAAP EPS of $1.58 to $1.64 per share.

From a non-GAAP perspective, we now expect non-GAAP operating income in the range of $218 million to $224 million, which is up from our previous guidance of $217 million to $224 million for the full-year fiscal 2017. This would lead to non-GAAP earnings per share in the range of $1.79 to $1.83, which is an increase from our previous guidance of $1.73 to $1.78 per share for the fiscal year.

With respect to annual spend, we are maintaining our guidance of 3% to 6% annual spend growth in fiscal 2017.

Looking at cash flow, we are increasing our free cash flow guidance to $165 million to $170 million for the year, from our previous guidance of $160 million to $165 million.

From a timing perspective, we continue to expect to pay the remaining 50% of our cash taxes equally in the third and fourth quarters.

Finally, I wanted to quickly discuss the upcoming implementation of FASB's Topic 606 relating to revenue recognition. We are currently in the process of evaluating Topic 606 and the impact it will have on our reported revenue. We've run a number of scenarios. At this point we do not believe it to have a material impact to reported revenue on an annual basis. However, we do anticipate it to have some impact on the timing of revenue recognition on a quarterly basis, which is related to the timing of when annual spend is contracted.

In summary, we are pleased with our second-quarter performance from both a financial and operational perspective. We're delivering solid financial results in a difficult environment, while making significant progress on our strategic priorities that will deliver long-term growth.

With that, we are now happy to take your questions.

Operator, let's begin Q&A.

(Operator instructions). Monika Garg, Pacific Crest.

Antonio, first on the annual spend, it's right in the range of your guidance, 3% to 6%, but just modestly lower than what we saw last quarter which was 5.3% and [4.7]%. So maybe kind of any color you can add there.

I think it's what I said in my comments. Certainly from a generation of new business cross-growth, it was a solid quarter. But we had the headwind of reductions in spend, and some losses that mitigated that growth. And it reflected on our rate of growth for the quarter. But overall, it was indicative of the environment that we saw in all of calendar 2016.

Then you kind of commented, on the APM, that you will provide more detail on the analyst event. But maybe qualitatively, and you can talk more about it on the Mtell side. And also when can we start seeing revenue from APM?

Well, we've said before that we really don't expect any revenue from -- or material revenue from the APM suite, and especially Mtell in fiscal 2017. And we are certainly targeting for contribution from that suite in fiscal 2018, and we'll talk about that at Investor Day. But we do expect the APM suite and the Mtell products to start contributing to our growth in the future.

Just a last one. You also commented we are seeing the oil prices have recovered a lot from recent lows. If you talk about if you have seen any changes in tone -- any tone changes with your customer, and discussions -- how they are going on with the customer? Thank you.

Turning to 2017, I had a number of customer interactions in November and December. And like I said in my comments, most customers -- certainly E&Cs, upstream, even the oil companies -- they were just happy to see calendar 2016 behind them. Chemicals companies had a good year, solid year in 2016, and that wasn't the case with those customers.

But it's too early. I haven't been out there yet with customers, even though we've hosted a couple of them already this year here in our headquarters. But it's too early to tell what their decisions are going to be with regards to spending and the associated budget. But I detect there's still a note of caution in the two meetings that we had; and especially waiting to see if this planned cut by OPEC will really materialize.

Sterling Auty, JPM.

Let's actually just continue that train of thought. If the OPEC cuts do materialize, what do you think that does to your business in that region of the world? And is APM and some of the other things enough to offset any impacts?

I don't think the impact of the OPEC cut, if it's positive, will be localized to a specific region because I think everyone will benefit. You are already seeing US oil producers ramping up their activities. Really, the best way I can answer that is: time will tell. I really think that it will probably be sometime in the second calendar quarter when we really start getting a clearer view or understanding of how oil companies are thinking.

But having said that, I do think 2017 feels better than 2016, in at least the customers I've talked to.

With regard to APM, look, we believe that APM presents a unique opportunity, and especially the Mtell products. It's an area where we haven't been selling into before -- and in the process industries, and we have the channel -- is an area that is very fragmented, and where the use of technology is not as prevalent as in operations and the design. So we believe the opportunity will be important there in the future.

And the other side, to Mtell, is outside of the process industries -- the machine learning technology products from Mtell are very relevant. And certainly their most successful references to date are in transportation, consumer packaged goods, water treatment plants. So there's also an opportunity there that we understand a lot better now. And we'll be positioning ourselves as well to capture growth out of those markets, going forward.

Okay. Great. And looking at the renewals that you did during the quarter, any commentary -- qualitative commentary you can give us around what you experienced in terms of churn? Did churn get better, stay the same, as what you have been seeing?

It was very consistent with 2016, the calendar year 2016. Some in the small customer segment; certainly nonrenewals with our bigger customers that came up for renewal; reductions in spend. And that's what we're focusing on is putting in place and executing on the strategies already that try to mitigate some of these reductions. And we believe, over time, those strategies will pay off. But I think that as we got to the end of the calendar year, customers were also looking forward to closing out the year and moving to 2017.

And last question is on the expense investment. You talked about full-year GAAP expenses actually going up. But the non-GAAP operating income is actually -- the high end is the same, and you are raising the lower end. The delta between those, I would think, is stock-based compensation. Is that the only meaningful change? Or is there more moving parts underneath that you are increasing the non-GAAP investment just within that threshold that you already had for the operating income forecast?

We've got a little bit of -- Mtell is adding a little bit of amortization expense. I think that's the only other item that's in there.

Got it. All right. Thank you, guys.

David Hynes, Canaccord.

Wondering if you can help us just think about or quantify the APM opportunity a bit more. How material of an upsell is this? Or I guess another way I could ask it -- if a major customer were to adopt APM in its entirety, what would that do to that customer's ACV? Is it a 5% lift? Is it a 10% lift? Just help us frame how material this could be to growth.

We will frame it for you at Investor Day in early June, David. It is material; with our process industry customers, we've estimated the potential TAM creation from these solutions. So we already know that that number -- we're certainly going to fine-tune it as we get closer to Investor Day. But it is a material contribution to expansion of our TAM in the process industries with our existing customers.

But equally important, we believe, is the potential TAM expansion outside of our traditional core industries, the process industries. And that's a more difficult TAM to estimate, just because we have less knowledge of customers and the potential size of the opportunity across so many industries in the global economy. But it is also a material TAM expansion as we focus on it in the future. We'll talk about that, as well, at Investor Day.

Sure. And maybe just one follow-up to that. So as you think about growth outside of your core markets, does that mean hiring sales folks with expertise in those verticals? Or is that something you think about via acquisition? How do you reach those new markets where you traditionally haven't had a presence?

I think our initial instinct there will be to leverage an ecosystem of third parties, resellers, implementation service partners, OEMs as well. Mtell had signed an OEM relationship with one of the industrial automation companies. And that company -- a competitor of ours in other areas of our products in the process industry -- is now an OEM for Mtell products into those markets. And we hope to sign more of those relationships in the future, as well as set up a significant network of resellers and implementation service partners.

Yes. Makes sense. And then two quick ones, maybe on the financial side. Access to capital -- I guess in terms as you're thinking about executing against the buyback in the back half of the year, I know you guys have access to a lot of credit. And I think the plan implies kind of you are halfway through your buyback activity for the year. Just what are your intentions there?

Yes. So I think there's two questions there. So the intent right now is to continue the buyback for the full 400, based on the current business market conditions. And then as far as access to capital, I think if you take the high end of the new guidance of the free cash flow we talked about, you kind of end up with about a -- kind of somewhere in that $50 million, $60 million cash range. So we wouldn't need to draw down on the line of credit to execute against the buyback. But we more than likely would, just to get the cash balance in that $80 million to $100 million range that we target.

Okay. And then one more, if I may. So just Karl, help me understand, what drives the delta between the subscription growth we're seeing showing up on the P&L, which is kind of flat to 3%, the last -- for the four quarters here that you guys did include, and the one you just guided for? And then the annual spend growth, which has been kind of 4%, 5% -- why does subscription growth not match up with annual spend?

It does. So it depends on what pair you are looking at. So again we talked about if you go from Q2 to Q3, or to the second half of this year, you are losing days. So when you take -- you factor out those days at about $1.25 million a day of revenue, you then add in your annual spend growth converting to revenue, it flows just like you think it would.

In Q1 of this year you saw a little bit of -- what did we have --about $1.5 million of kind of accelerated cash basis. If you take that out of Q1 and roll forward, based on the annual spend growth converting to revenue, again it tracks just like you think it would.

If you are comparing to last year, you have to pull out all the one-time items we talked about in Qs 1, 2, and 3. And then pull those out; and then when you again roll annual spend and convert it into revenue, you get the growth rate you would expect. But you need to do it kind of on a line-by-line. If you look at the subscription software line, you can do it that way and look at professional services separately.

Okay. Thanks.

(Operator Instructions). Matthew Pfau, William Blair.

First, when you talked about budgets in the energy industry for 2017, it seemed like expectations aren't very high there in terms of a potential increase. Yet it seems like you are fairly positive on the APM suite, and getting some traction there. So I guess just help me bridge that. Is that the APM suite, the money for that, coming from other areas that are new areas of budgets for your customers? Or is that because you are expecting to have some success with the APM suite outside of your traditional industries, and ones that are potentially doing better than energy?

I think it's a combination of both. Certainly, the APM suite is targeted at the maintenance space. With machine learning, we are targeting predicting the breakdown of equipment which is in the maintenance space. So it's really budgets in that area, and all these assets have maintenance budgets.

It's an area that is attracting a lot of attention as we talk to customers in the process industries. And at the same time, we see opportunities outside of the process industries for APM. As I stated in my comments, some of the existing customers of Mtell, when we acquired them, are coming back to increase their entitlement based on the success they are having.

So in a matter of really 3 to 6 months, we've created a pipeline of business that is material to the overall pipeline of the Company. And that's what really gives us hope that this will be an important contributor to growth, going forward.

Got it. And then one last one for me, just on the specialty chemical space. Last quarter you talked about potentially moving a bit more into that space with the acquisition of ProMV, and then potentially retooling a few of your other products to target that space. Any update there?

No. Look, we are working on that. And in the next release of our suite, you'll see some of that R&D work show up. So it's a work in progress. But again the customers that are doing beta testing for all this functionality are very excited about what we're doing. Some of the batch control technology that we acquired from ProSensus -- that will take a little longer to deliver to the market, just because we want to make sure that it is well tested and productized, considering that it's going to be controlling the process directly.

But, overall, I think eventually we will have a very solid offering for spec chem, and some of that functionality actually can bleed over into pharmaceuticals.

Got it. Thanks for taking my questions, guys.

Mark Schappel, Benchmark.

Antonio, with respect to operating expenses, it appears that you didn't hire up or spend as much as maybe initially anticipated. And I was wondering if you could just address the hiring environment. Are you finding it difficult to find the people you are looking for, quality-wise? Or are there just maybe some things or distractions in the Company the last quarter or two that have slowed that hiring process down?

No; I think the hiring environment is fine, and we're finding no trouble identifying the right talent to hire into the Company. As always, we're always cautious on getting ahead of our skis here. We have already very carefully throughout the quarter -- what should be investments that we make with regard to our APM suite, both in R&D, field operations and marketing. And some of that will start showing up in the P&L in Q3 and Q4. That's our expectation.

But as far as hiring and staffing, the environment -- we are well staffed for the macro environment that we see in the marketplace.

Okay. Great. Thank you. And then finally here in your prepared remarks, you noted that you had a large chemical company come in and expand its use of Fidelis. That was nice to see. I was wondering if you could just give us a few more details on how this particular company is using the product and hopes to expand the use of the product.

This was an existing customer of Fidelis when we acquired them. The way these companies are using the technology is really -- as they do designs for new plants, they also take into account their reliability of those assets from the standpoint of their availability, and historical performance of assets of the same kind. And the real goal being to optimize the design of those assets, not only for capacity throughput and the type of products you are going to produce, but also the availability of the equipment and the reliability of that equipment when you build that asset so as not to overdesign.

Because traditionally what a lot of companies do is they overdesign on some of the equipment, or have many more of the same equipment -- for example, compressors or pumps -- to account for failures. But if you take into account the reliability and availability of equipment based on historical performance, then you can optimize the design of those assets.

And the big savings then really comes into play by reducing the CapEx. And we have some customers that -- I talked about this, I believe, in my Q1 earnings call -- that claim savings from $300 million to $600 million in CapEx savings during the construction of their assets. So that's how they do it. The savings are not always of that magnitude. Sometimes they are just designing a new process unit and it's a much smaller spend.

But, nonetheless, the goal here is that instead of designing, assuming that equipment is going to be available 100% of the time, the design takes into account the reliability and availability of that equipment; and, therefore, is optimized for that. And it could be size. The equipment -- it could be numbers of pieces of equipment. And it's an area that is attracting more and more interest, as well.

Great. Thank you.

Michael Morosi, Avondale.

I was wondering if you could update me on the mix of downward -- downstream leverage spend versus upstream, as a percentage of total.

Downstream, if you -- if I understood your question correctly, downstream -- if we refer to downstream as just refining or refining and chemicals. If we say refining and chemicals, refining and chemicals is out 54% of our business. While upstream, we've said, is about 12% of our business; E&C is about 30%.

And within that E&C, how does that break down with respect to upstream versus downstream, broadly speaking?

We are not able to tell -- we get usage logs from our customers where we understand the products that they are using, the frequency of usage. But we're not able to understand for what purpose they are using them.

Okay. And then with respect to APM, I wondered if you could just speak a little bit about the competitive landscape and what products and solutions you see in the marketplace that you go head-to-head with. Or what are some existing solutions that you might be replacing? Just any dynamics around where the spend is coming from.

You have to break it down, because some of these products have very different functionality. So Fidelis has its own set of competitors. There's a company -- a very big company called [DNB] that has similar capabilities in their products. And that's who they compete with head-to-head.

On the analytics, in Aspen Asset Analytics we believe we have a unique solution that we've developed. And we don't know of any other company that is able to deliver that type of solution where you are combining engineering models with real-time data search, and pattern recognition, root cause analysis to do analytics in a tower. So we think that's pretty unique, and something that we don't believe has any competition at the moment.

And then you have Mtell and machine learning, and that space is very fragmented as we look more and more into it. Of course [G] has a big horn and big marketing organization, and they are out there. They've made some acquisitions in the space. At the same time, we believe that they are focusing on enterprise asset management maintenance strategy.

At AspenTech, where our focusing is on the engineering, the technology of equipment with machine learning; and I think, in a way, we may have tangential solutions, G and ourselves. But time will tell how they evolve their strategy in the space, and how we evolve ours. But it's also -- there's many, many little companies out there.

Very good. Thanks for that color.

I'll now turn the conference back over to Antonio for closing remarks.

All right. Well, thank you Stephanie. I want to thank everyone for joining us this evening on our second-quarter fiscal 2017 earnings call, and look forward to seeing some of you on the road in the next few weeks. Thank you.

Thank you. This concludes today's conference. You may now disconnect.