Aspen Technology Inc (AZPN) 2018 Q1 法說會逐字稿

Good afternoon. My name is Jacob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Technology First Quarter 2018 Earnings Call. (Operator Instructions)

I would now like to turn the conference over to Karl Johnsen, CEO (sic) [CFO]. Please go ahead.

Thank you, good afternoon, everyone, and thank you for joining us to review our first quarter of fiscal 2018 results for the period ending September 30, 2017. 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 may cause such differences include, but are not limited to, those discussed in today's call and in our Form 10-Q for the first quarter of fiscal year 2018, 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, October 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 first quarter; and then, I'll review our financial results and our guidance for the second quarter and fiscal year 2018, before we open up the call for Q&A.

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

Thanks, Karl, and thanks to everyone for joining us today. AspenTech began fiscal 2018 with solid financial results that demonstrated good customer demand and execution across the company.

Looking at our financial highlights for the quarter, annual spend was $461 million, up 3.3% year-over-year. Total revenue was $122.8 million, above the high end of our guidance range of $120 million to $122 million. GAAP operating income was $53.3 million, and non-GAAP operating income was $60.4 million, which represents a non-GAAP operating margin of 49.2%.

GAAP EPS was $0.47, and non-GAAP EPS was $0.53, both of which outperformed our guidance. Free cash flow was $12.2 million, and we returned $50 million to shareholders by repurchasing 839,000 shares.

Demand from owner-operator customers remained strong throughout the world for both our MSC and engineering suites. These customers are focused on driving greater efficiencies throughout their operations, and they recognize the strong returns they've received from greater investments in AspenTech solutions.

We had our strongest first quarter in 3 years with owner-operators, which reflects well on our execution and the underlying strength and investment capacity of these customers. At the same time, E&C and upstream energy customers have adjusted to the prevailing macro environment characterized by lower CapEx spending and fewer upstream projects, resulting in lower end market demand for their products and services. At our Investor Day in June, we indicated that there was a higher-than-usual amount of E&C renewals during the first quarter. Each of these transactions closed during the quarter and were in line with our expectations.

On our last call, I referred to this market conditions as the new normal and that customers have incorporated the status quo into their investment methodologies and decision-making processes. I felt that we had adapted our go-to-market efforts to reflect this new reality, and I believe our first quarter results are an early indication of this. An area of emphasis in 2018 for AspenTech is the continued adoption by customers of their existing token entitlements across our entire product portfolio. Ensuring that owner-operator customers are achieving the most possible value from their entitlement or that customers who are in challenging end markets are focusing on expanding usage of all of our products to drive their strategic business initiatives will result in outcomes for customers and AspenTech that drive longer-term value creation for both parties.

Executing on adoption will unlock greater value for our customers by optimizing on accelerating the use of their entitlement. For example, we are engaging customers far earlier in the renewal process and ensuring customers are upgraded to the latest versions of aspenONE, which unlocks access to new products or new functionality in existing products like column analytics in HYSYS that drive higher productivity and value creation for our customers.

In our consulting group, our professional services consultants are engaging with customers to proactively sustain and enhance the value from the existing use of our products in their assets. This can serve as opportunities for improvement, including additional training and knowledge transfer to our customers that lead to greater value creation. The latter would be further enhanced in the near future as we realize the full impact of our digital knowledge delivery initiatives, which is focused on providing self-service educational and training services through digital channels.

Digital knowledge delivery was highlighted as one of our execution pillars during Investor Day this past June. And from a software development standpoint, we believe that our focus on automation of knowledge work will lead to and sustain greater adoption as the use of our products becomes easier and democratized across our user base especially as a new generation of engineers is entering the workforce.

Turning to our APM business. Artificial intelligence, machine learning and analytics represent some of the most significant technology introductions in the process industries in decades. Deploying technology that can improve their reliability and increase the productive life of the physical components of a plant represents the largest greenfield opportunity for customers to increase the value of their assets. This context is one reason we're optimistic about the progress we continue to make generating interest with customers on our APM suite and converting it into a growing sales pipeline. The APM sales cycle is similar to our MSC sales cycle, and products like Mtell share some of the characteristics of our most successful products to date, when introduced to the process industries 25 years ago, such as Advanced Process Control.

For example, early engagements with Mtell have been focused on demonstrating the efficacy of the technology and value-creation potential through pilots, just like what we saw with APC in its early days.

Customer reaction to the Mtell pilots has been positive, and we believe that Mtell and the APM suite would be part of the discussion as customers finalize their 2018 budgets. We also believe that APM will be a vehicle for some of our E&C customers to create a new revenue stream by providing implementation and monitoring services for our common customers which deploy their products in the APM suite. During the first quarter, the APM business continued to build momentum with customers, and we remain optimistic about the opportunity in this business. We signed several small transactions during the quarter across our refining, chemicals and E&C customer base demonstrating the appeal of the APM suite across the cross-section of our customers. During the quarter, we also continued to expand our ecosystem of resellers and implementation partners that we're working with to sell into global economy industry or GEI customers.

We're currently in the process of enabling these partners to drive engagements in these industries. We're also engaged in negotiations to establish OEM agreements to embed our APM solutions particularly Mtell in the solutions offered by third parties. We are reaffirming our guidance for fiscal year '18 annual spend growth of 5% to 7% with APM contributing 1 to 2 points of growth with a weighting to the second half of the year, which is in line with our original expectations.

Looking at our first quarter performance in more detail, energy, engineering and construction and chemicals once again represented greater than 90% of our business. Energy was the largest vertical contributor, followed by chemicals. Looking at our 10 largest transactions in the quarter. There was again a mix of engineering and manufacturing supply chain transactions. Following is a representative sample of transactions closed in the quarter. First, one of the largest pharmaceutical companies in the world and long-term customer reaffirmed its commitment to our Manufacturing Execution System products by naming AspenTech a strategic supplier in 2016.

This past quarter, this customer kicked off a global rollout of the products across the manufacturing and supply network. This customer is deploying these products to improve its regulatory compliance, reviews errors in documentation and shorten the order of preparation and review cycle. Our engineering suite is also used extensively in this customer's R&D organization, which is also evaluating the use of our ProMV and Mtell products in the APM suite. Second, one of North America's fastest-growing independent marketers of fuel and petroleum products acquired the Canadian assets of an oil company and reaffirmed its commitment to our MSC suite by signing a new aspenONE agreement to roll out the products in its terminals and refinery. Third, a medium-sized South American oil company expanded use of our MSC suite and planning optimization product, PIMS-AO, after estimating incremental benefit of over $10 million per year.

The MSC suite is now the standard across the company, and selected products from the suite are being evaluated for the EMP area. Fourth, a long-term European customer of AspenTech, and one of the largest specialty chemicals producers in the world, evaluated and made an initial purchase of ProMV product. Specialty chemical processes are more difficult to monitor and control due to their highly dynamic behavior. As a result, it can be difficult to consistently achieve high yield and quality. As a reminder, ProMV, which we purchased last year, is an advanced batch control technology that solves this problem by monitoring the batch process in real-time, predicting end of batch outcomes, alerting operations staff early if the batch is drifting off-course and providing diagnostic information to correct batch anomalies. And last, the largest conglomerate in West Africa and one of the largest of the African continent became a new AspenTech customer by purchasing our MSC suite, particularly our PIMS-AO product, after a competitive evaluation of products from 2 other suppliers. This customer, which is building up a petrochemical complex that will include the largest single trend refinery in the world, the largest urea plant ever built, a polyethylene plant and gas processing facilities, believes the optimization engine in PIMS-AO will result in greater value capture across the complex.

From a profitability perspective, we generated better-than-expected results with a 49% non-GAAP operating margin in the quarter, while continuing to make investments to support our asset optimization strategy and the APM suite. We think a comprehensive approach to investing that includes reviewing current spend to determine if there are areas where capital can be redeployed before investing net new resources. We believe this discipline keeps us focused and ensures that incremental investments are likelier to generate attractive returns. We also continue to utilize our balance sheet and cash flow to generate shareholder value to our share repurchases. In the first quarter, we repurchased 839,000 shares for $50 million. It is our current intention to continue our buyback at the $50 million per quarter level for the remainder of fiscal 2018.

To summarize, AspenTech got off to a solid start to fiscal 2018, and we believe we're positioned to achieve our full year financial objectives. Our team continues to execute well against our asset optimization strategy, demonstrating the incremental value that asset optimization represents for customers in the process industries and GEIs. We're confident in our strategy and execution and how AspenTech is positioned to consolidate and extend our global leadership in capital-intensive industries.

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

Thanks, Antonio. I will now review our financial results for the first quarter of fiscal year 2018 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 approximately $461 million at the end of the first quarter. This represented an increase of approximately 3.3% on a year-over-year basis and 0.3% sequentially.

Now let me turn to additional financial results. Total revenue was $122.8 million for the first quarter, above the high end of our guidance range, an increase of 2.3% compared to prior year period. Looking at revenue by line item, subscription software revenue was $115.8 million for the first quarter, an increase from $113.4 million in the prior year period and $115.4 million last quarter. Services and other revenue was $7 million compared to $6.6 million in the year-ago period and $8.2 million last quarter.

Turning to profitability, beginning on a GAAP basis. Gross profit was $110 million in the quarter with a gross margin of 89.6%, which compares to $108.5 million and a gross margin of 90.4% in the prior year period. Operating expenses for the quarter were $56.7 million compared to $53.8 million in the year-ago period. Total expenses, including cost of revenue, were $69.5 million, which was up from $65.3 million in the year-ago period and down from $74.7 million last quarter.

The year-over-year increase in operating expenses primarily reflects the investments we are making in the APM suite. Operating income was $53.3 million for the first quarter of fiscal 2018 compared to $54.7 million in the year-ago period. Net income for the quarter was $34.8 million or $0.47 per share compared to net income of $35 million or $0.44 per share in the first quarter of fiscal 2017.

Turning to non-GAAP results. Excluding the impact of stock-based compensation expense, restructuring charges, amortization of intangibles associated with acquisition, acquisition-related expenses and noncapitalized acquired technology, we reported non-GAAP operating income for the first quarter of $60.4 million, representing a 49.2% non-GAAP operating margin compared to non-GAAP operating income and margin of $60.5 million or 50.4%, respectively from the year-ago period. Non-GAAP net income of $39.3 million or $0.53 per share in the first quarter of fiscal 2018 based on 73.6 million shares outstanding and was above the high end of our guidance range of $0.48. This compares to non-GAAP net income of $38.7 million or $0.49 per share in the first quarter of fiscal 2017 based on 79.4 million shares outstanding.

Turning to the balance sheet and cash flow. The company ended the quarter with $59 million in cash and marketable securities compared to $102 million at the end of last quarter. During the first quarter, we repurchased approximately 839,000 shares of our stock for $50 million. We remain on track to repurchase $200 million of stock in fiscal 2018.

Looking at our deferred revenue balance. It was $260.2 million at the end of the first quarter, representing a 2.4% increase compared to the end of the year-ago period. On a sequential basis, deferred revenue decreased $40.1 million. This is in line with our typical seasonality. As a reminder, our deferred revenue balance is heavily influenced by the timing of invoices, and the first quarter is typically our lowest invoicing quarter.

From a cash flow perspective, we generated $12.4 million of cash from operations during the first quarter and $12.2 million of free cash flow, after taking into consideration the net impact of capital expenditures, capitalized software and noncapitalized acquired technology. A reconciliation of our GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.

I'd now like to close with our second quarter guidance and updated outlook for the full year fiscal 2018.

For the second quarter, we expect revenue in the range of $120 million to $122 million, non-GAAP operating income of $57 million to $59 million and non-GAAP EPS of $0.48 to $0.50 per share. On a GAAP basis, we expect operating income of $51 million to $53 million, income per share of $0.43 to $0.45 per share.

Turning to the full year. We are reiterating our revenue guidance in the range of $487 million to $494 million and continue to expect subscription software to comprise greater than 90% of revenue with our services and other revenue representing the remainder.

From an expense perspective, we continue to expect total GAAP expenses of $282 million to $287 million. Taken together, we continue to target GAAP operating income in the range of $202 million to $209 million for fiscal 2018 with GAAP net income of approximately $127 million to $131 million. We now expect GAAP net income per share to be in the range of $1.71 to $1.76 compared to our previous guidance of $1.67 to $1.72.

From a non-GAAP perspective, we are reiterating our non-GAAP operating income guidance of $226 million to $233 million, and now expect non-GAAP income per share to be in the range of $1.92 to $1.97, which compares to our previous guidance of $1.88 to $1.93. With respect to annual spend growth in fiscal 2018, we are maintaining our guidance of 5% to 7% annual spend growth. From a free cash flow perspective, we are reiterating our fiscal year guidance of $180 million to $185 million that was initially provided at our Investor Day.

Our fiscal 2018 free cash flow guidance assumes cash tax payments of approximately $65 million to $70 million. From a timing perspective, we would expect to pay 50% our cash taxes in the second quarter with the remaining 30% paid equally in the third and fourth quarters.

In summary, we are pleased with our first quarter results from both the financial and operational perspective. We believe our performance in the quarter shows that our strategy and execution are having positive results and will deliver long-term growth and shareholder value.

With that, we are now happy to take your questions. Operator, let's begin the Q&A.

(Operator Instructions) And your first question comes from the line of Monika Garg with KeyBanc.

Antonio, first question on the annual spend. You had already guided that annual spend will be back-end weighted, but does that mean that we need to see a good drop in annual spend in the back half? Maybe kind of talk to your confidence level in achieving it.

Monika, we reaffirmed our annual spend guidance for the year of 5% to 7%. We also reaffirmed our guidance of the APM suite contributing 1 to 2 points of growth from that 5% to 7%. So that should answer your question.

Okay. I mean, we had unfortunate kind of severe flooding in the Houston area. Could you talk about if you expect to see any impact on your business especially if there are any renewals from these customers over the next 2, 3 quarters?

Yes. Of course, what happened to Houston -- not only Houston, but Florida, Puerto Rico, the Caribbean, the Virgin Islands, was unfortunate. Houston, specifically, of course, the city itself was impacted. Our customers were impacted. Of course, the headquarters of many companies are in Houston. Their facilities -- many of their facilities were flooded. But at the end of the day, from an impact on our first quarter results, the impact was immaterial. We did see a few things that got delayed but immaterial to the results and fundamentally, wouldn't see any further impact the rest of this fiscal year. From what we understand and I understand, more or less, most facilities are back to normal. There are still a few chemical plants that will take a little longer to bring back online, probably, as I understand it, early next year. But we don't see an impact on our results for fiscal '18.

Got it. Just the last one. Karl, the gross margin, it's just modestly lower, like 56 basis points year-over-year, Q-over-Q. Anything going on?

No, there's nothing really going on. What you're seeing is a little bit of the amortization going in from some of the acquired technology we had. You'll see a modest increase for that, but it should be pretty run rate, but nothing else really going on in there.

And your next question comes from the line of Matt Pfau with William Blair.

Antonio, last quarter on the earnings call, you talked about how the sales execution had improved. How did that trend this quarter? Did you continue to see improvement there?

Yes. Look, I was, we were very satisfied with our sales performance in Q1, as I mentioned in my comments, the first quarter of fiscal '18 is the strongest quarter in 3 years. It's the strongest Q1 quarter in 3 years. And that's an outcome of, I think, multiple variables, and one of them is our sales execution. We also saw a stronger demand from our owner-operator customers in the quarter, which helped overcome some of the renewals with E&C that we had in the quarter.

Okay. Got it. And then on APM, I think last quarter that you commented, it was about 19% of the pipeline. So maybe if you don't want to give us an exact percentage, at least sort of comment on the direction of that as a percentage of the overall pipeline and where it's been trending.

Yes. Look, the pipelines continue to grow. Our overall pipeline is exceeding the pace of growth of our APM pipeline. Our APM pipeline is now in the range of 21%, 22% of the total pipeline. So we continue to see it trending up, and we're getting good feedback from customers. So we're hopeful.

Got it. And then just last one from me, wanted to dig into the commentary around the OEM relationships that you're working on building. How should we think about these in terms of, I guess, how do you envision them working? Is it more of a -- from the respect that once it gets embedded in equipment, it sort of expands the functionality of your solutions? Or is there a revenue opportunity there as well from either the OEM or the customer purchasing the hardware?

I think it's both. Certainly, we have some companies interested in OEM in our products, and that will be a revenue stream. We have also some companies, especially some of the E&Cs, that want to take the APM solution and especially the Mtell product and setting it up as a services opportunity or for monitoring services, where they're thinking of setting up global monitoring centers. As customers deploy APM, I would assume that they would like to be the ones doing the implementations, which is fine with us. But -- so we see multiple revenue streams for especially Mtell directly with customers through OEMs or companies like E&Cs setting up their own services businesses implementing Mtell or setting up remote monitoring centers to monitor these applications, including equipment fabricators, which are also interested -- would be interested in monitoring the performance of their equipment and doing that from a global center.

And your next question comes from the line of David Hynes with Canaccord.

Antonio, I know it's still early days with the APM suite, but wondering if you could give us a little color on kind of how you expect customers to adopt the technology. Is it -- is this a scenario where they'll buy for a portion of their equipment or for a certain geography as a pilot? Or is the decision kind of made to standardize the initial purchase? And I guess, how does that impact how you're thinking about contracting these deals with the customers? Are you still shooting for 5-year deals? Is it shorter, so you have more touch points for upsell? Just help us think about kind of land and expand versus large slogs upfront model.

Yes, sure. Well, I mean, first of all, one, we want to make sure these are multiyear agreements, and ideally 5 to 6 years. So that's our goal, number one. Number 2, look at -- what we're certainly seeing is customers are interested in understanding what it would be -- what it would cost them to deploy Mtell on a site, be it a refinery or a chemical plant, as opposed to a single piece of equipment. And we're interested in that model as well. And at least the engagements that we have going on right now certainly is a phased approach. They're talking about initially a handful of sites and then a more aggressive roll out of the technology. So that's one way that the customers are approaching this. Of course, part of the engagement at the moment is around pricing. There's really no market pricing established for these products, and therefore, we see, certainly, competitive situations and that customers are testing different suppliers for pricing. And so it's all part of sort of adoption of a new technology that has to be proven and has to demonstrate the value. We're doing and we have completed a lot of pilots for these customers because they want to -- not only do they want to see the technology working, but they want to see proof that it's able to predict when equipment is going to break down, and we've now demonstrated that in every one of these pilots. We're getting very good feedback about Mtell and its ability to discern through noise in the data to identify precursors to breakdowns and not generate false-positives, which is an issue with other competitors. So overall, look, we believe that we are negotiating some agreements. We've also had customers ask us for budgetary proposals as to include this or hopefully, have it included as part of their budgets for 2018. So in general, the signal that we get from the market are positive, and so we're cautiously optimistic, and we believe that 1% to 2% or 1 to 2 points of growth from APM is realistic in fiscal '18.

Yes, okay. That's helpful. Two more quick ones. They might be Karl questions. Any way to quantify how much of a headwind the E&C renewals were on annual spend in the quarter? Just I think it would help us kind of frame what Q2 in the balance of the year could look like?

Well, let me look at -- this is Antonio. But the headwind of E&C renewals, we said that we had a larger-than-usual number of renewals in Q1. And it was the case, we renewed all of them. Of course, we experienced reductions as we expected. That's all part of the overall attrition that we would expect, in the year, we guided to 5% to 6% attrition for the year, and we're still tracking to that. So Q1, from an attrition standpoint, was in line with what we expected. It's in line with that 5% to 6% attrition that we reported. The one difference about Q1 is we had a strong owner-operator demand for our products, and that allowed us to deliver the performance that we did.

Okay. And then last one, share repurchases. Certainly, in the back half of the year, you're going to be able to fund those out of the free cash flow you're generating, maybe not in Q2. Just wondering, are you kind of comfortable with current balance sheet, cash levels? Or how are you thinking about funding that $150 million over the balance of the year?

Yes, so DJ, it's Karl. Yes, I think for the full year, spreading out the free cash flow, if there's any kind of a blip in a quarter that's why we've got the line. We've track down and then put it back, but the intention is to buy back shares out of free cash flow and then fund acquisitions, delevering up the balance sheet. But very comfortable with the cash. We've talked about anywhere from $50 million to $80 million, $90 million of cash in the balance sheet is optimal for us, very comfortable in that 40 to 50 range as well as in the 80 to 90.

Your next question comes from the line of Rob Oliver with Baird.

Just a follow-up to DJ's question on some of the headwinds to renewals and the token overhang. You guys -- Antonio, you mentioned some of the e-learnings as one of -- and outreach to get people to optimize their existing token usage. And that being one of the pillars that you guys focused on at the Analyst Day, where are we with that right now? And can you just give us an update on kind of when we can expect that to be in effect and what sort of impact you think that will have on our renewals this year?

Yes, no problem. Look, certainly, we expect that by the end of this quarter, we will already have a material that our customers would be able to access digitally, whether that's a training material that's been digitized or training material that has been turned into videos. And instead of a customer having to sit through half a day, or 3 days of training for a product, they're going to be able to consume information or watch videos that are 5 minutes to 10 minutes in length that allow them to activate a specific functionality they might be interested about our products. So the rollout of that will start happening this quarter, and by the end of Q2, we'll already have some of that material. An important data point that we have is that we're seeing an uptick in first-time users of our engineering software especially. And that means that these customers -- these users are looking for ways to learn about the product and the functionality to accelerate their learning. We assume and we have the insight that these are new engineers that are joining this company that want to be able to access knowledge and training in the way millennials consume information today, which is through video, digitally, mobile apps. So we think this initiative is down the middle for this user base, and we're confident that it would help drive more usage of our products.

(Operator Instructions) And your next question comes from the line of Mark Schappel with Benchmark.

Antonio, at the beginning of the year, there was a change in leadership in the sales group. And I was wondering if you could just discuss some of the changes that Michelle has implemented or put in place since she took over the sales force.

Well, let me look, in reality, her focus has really been on execution. It's -- I said that one of the qualifiers for her to take that job was her experience, her knowledge of the company, our products, our customers. But also, an innate ability to focus on the blocking and tackling on the details, grinding out outcomes. And that's really been the case since -- in Q1. She partnered with me in Q4 '17, but she drove the outcome of Q1. The other piece, she's very customer-focused as well, so she's a strong believer on our adoption initiative as well, and she's building out an organization that will work with our professional services team, our customer support team, our business consultants, focus on customers' success. And so it's additive, so her focus on execution in the sales channel and then enhancing that with a focus on adoption from our consulting organizations. Look, from the standpoint of the sales team, any -- you're always looking to fine-tune and have the best staff possible, the best leadership possible in any sales organization. And there hasn't really been anything there of material consequence. It's just been about grinding out outcomes, and that's what we need as we get through this transition.

Okay. And then as a follow-up question, selling your APM suite into the GEI industries is really new territory for us. And I was wondering if you could just discuss in a little detail maybe some of the initiatives or successes you had in the quarter with respect to your GEIs?

Well, let me look at -- we do expect that most of the growth that will generate from APM will be from the process industries because we had a ready-to-go sales organization selling into our customer base. At the same time, I'm excited about the interest that we're seeing from third parties, resellers, ISPs, some of these OEMs and now E&Cs, that are interested in signing up with AspenTech to take our APM suite, to take Mtell to market in the GEIs specifically. So the goal there is to build out a channel, which is happening, and we have a team focused on that. We enhanced the capacity of our partners' organization, and they're driving the identification and sign up for partners. At the same time, we're going to put a senior VP type level person to run our global sales for the GEIs, someone that has experience in this industry and knows the dynamics in this industry but also knows about the analytics and machine learning as to combine those 2 areas of knowledge to take our APM suite to market. We'll have a small team of direct salespeople there, helping understand how these customers behave so that we can bring that back as intelligence to adjust our go-to-market. But that's how we're going to do it. And we're building that, building a channel of third parties takes time. That's why we believe that in '18 and '19, most of the growth in APM will come from our process industries, but we're committed to the GEIs, and we're in the process of recruiting for that area.

And your next question comes from the line of Steve Koenig with Wedbush Securities.

I got 2 for you. On the first one, it would be great to get some color on the strength you saw in Q1 in the owner-operators. Was that a continuation of the improvement in manufacturing that you saw in Q4? Is it the demand environment, better execution? What's the most important or the most important factors here?

Yes. Look, certainly, if you look at Q4 and Q1 from an owner-operator standpoint and gross sort of new sales, new business, there's 2 very strong quarters from owner-operators. And I think it just validates the trend that we talked about for many quarters and perhaps even years, in that the focus on operational excellence, margin improvement, profitability continues to be there for these customers. It only gets harder as time goes on for them. And we're in the sweet spot for value creation and productivity creation. So I think it's that. I was very pleased with our outcome in Q1, very broad-based, very strong out of Asia Pacific. And in general, I sensed that there was solid demand across every one of our regions. So it was a good outcome.

Good. Great. And then if I may ask one follow-up. I'm curious, as you're working through the renewals of your 5-year contracts, and your -- and customers, particularly on the engineering side, are readjusting their needs, are you finding that they're getting the contracts pretty much completely realigned with what their new level of needs are? Or is there any sort of like still hoarding of budgets going on, where maybe they don't want to cut quite as much, and they're hopeful stuff will come back a bit more? Or are they really getting it cleaned up in one fell swoop as they renew their contracts?

Yes, I would argue -- no, yes, I would take that -- I believe that in fiscal '16 and '17, that was the case. We -- you had customers that no matter what they were seeing, the goal was to cut costs and that was their priority. Now we are seeing bigger projects being awarded to E&Cs. And we're also seeing that the impact from some of our adoption initiatives with some of the E&Cs are having an impact. So the fact that the reductions in Q1 were in line with expectations, also in there that we've had an impact on some of these -- omnification on some of these reductions. What we are seeing also is that some of these E&Cs for which we have reset their spend in the last 2 years, a few of them are now coming back inquiring about more tokens. So we're starting to see the green shoots of perhaps a change in the environment. Nonetheless, it's still a significant downturn. But I would say that there are some green shoots out there, and hopefully in '18, things improve as well.

We have a follow-up question from the line of Monika Garg with KeyBanc.

Karl, just a follow-up of why is the revenue down Q-over-Q, the guidance for Q2?

Yes. So in fact, as we talked about in the past, there's a little bit of variability related to cash basis and when customers renew, it can push revenue out of the quarter. And when you look at the Q1 results, it came in a little bit higher than we thought mainly related to that, so we probably came in by 500,000 to 600,000 high. When we look to Q2, when we look at that guidance, basically keeping it flat to where we were and then adjusting for our vision on where that -- or our view on what the risk is related to how the customers renew during the quarter in Q2 and, to a lesser extent, where we see cash basis customers in a little bit of professional services.

Got it. Then Antonio, I just wanted to delve deeper into the comment you just made on last question that you are seeing some customers who are coming back to buy more tokens? Is there any way of quantifying that, very few of the customers, some of the customers' initial stages, any more color around that?

No. Yes, the word I used was few. And you can imagine that it's also not -- it's something not as dramatic as far as inquiring about more tokens. But it is good to see that some customers that we have reset in the past 2 years in their spend and entitlement are now starting to talk about acquiring tokens and tokens related to new projects. So it's positive, but I want to be cautious about this because I think it's early, and you never know what will happen.

And ladies and gentlemen, that does conclude our question-and-answer session for today. I would now like to turn the call back over to Mr. Antonio Pietri for any final statements or closing remarks.

Great. Thank you. Well, thank you, everyone, for joining tonight. I look forward to seeing or meeting you on the road over the next few weeks. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.