Aspen Technology Inc (AZPN) 2019 Q2 法說會逐字稿

Good afternoon, my name is Francis, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Aspen Technology Q2 2019 Earnings Call. (Operator Instructions) Thank you. Mr. Karl Johnsen, our CFO, you may now begin your conference.

Thank you. Good afternoon, everyone, and thank you for joining us to review our second quarter fiscal 2019 results for the period ending December 31, 2018.

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 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 2019, 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 23, 2019.

Consistent with our prior practice, we expressly disclaim any obligation to update this information. The structure of today's call will be as follows: Antonio will discuss business highlights from the second quarter, and then I will review our financial results and discuss our guidance for fiscal 2019. With that, let me turn the call over to Antonio. Antonio?

Thanks, Carl, and thanks to everyone for joining us today. We're pleased with our second quarter performance, which demonstrates continuous strong execution by the AspenTech team and positive end market demand.

Looking at the financial highlights for the quarter, revenue was $140.4 million. GAAP EPS was $0.83 and non-GAAP EPS was $0.92. Annual spend was $513 million, up 9.4% year-over-year. Free cash flow was $57.3 million, and we returned $100 million to shareholders by repurchasing approximately 1.2 million shares.

During the quarter, we accelerated our share repurchase program to capitalize on the opportunity we saw in our share price. The AspenTech Board of Directors recently approved an expansion of our share repurchase authorization from $200 million to up to $300 million for fiscal 2019. We intend to repurchase $75 million of stock in both the third and fourth fiscal quarters, subject to business and market conditions. We believe this expanded repurchase program is an attractive use of capital and highlights the benefit of having a strong, flexible balance sheet.

Before I review the second quarter in more detail, I would like to spend a moment reiterating how we measure and evaluate the performance of the business now that we'll report our financial results under Topic 606. We believe the following metrics provide a consistent view into the performance of the business and are not skewed by the timing of renewal bookings as our income statement is under Topic 606.

Annual spend is a metric I am most focused on day in and day out to evaluate how well we're executing against our strategic initiatives and the growth of the business. This metric provides the best insight into our success in expanding usage within the installed base of our engineering, MSC and APM suites, signing new customers and minimizing attrition.

The second metric we're most focused on is free cash flow. This is how we track the efficiency with which we run the business and evaluate capital allocation opportunities, including our disciplined approach around expense management.

Our performance on these 2 metrics is the basis for our corporate and executive bonus plans, and we believe it will provide investors with the best insight into our business performance.

Turning to the second quarter in more detail, we delivered a solid performance across the entire business with broad-based strength in all 3 product suites and in each major geography. We had the strongest APM quarter to date that reflects the success we're having turning our pipeline into customer wins.

Following are some statistics about our APM business. During the second quarter, we closed APM transactions in 8 different countries in the refining, chemicals, pharmaceuticals, mining, engineering, construction and air separation industries. APM is a global business with 53 customers in 19 countries across a variety of industries. 6 of the APM transactions closed in the quarter were in the 6-figure range, 3 of which were in the mid-6-figure range. Aspen Enfield contributed more annual spend growth in Q2 than in the previous 5 quarters combined. APM, which has contributed 0.7 points of growth toward our year-to-date annual spend growth rate, grew 190% in the first half compared to the same period last year.

In addition, the APM business contributed 1.25 points of growth in the last 12 months. This performance keeps us on track for the full year guidance of 1.5 to 2.5 points of growth. The success we're having with APM is driven by customers increasingly recognizing the cost savings and reliability improvement benefit that APM solutions can deliver across their asset base. We believe APM represents the largest greenfield opportunity for most customers to reduce operating costs. Competitively, we're quickly establishing the APM suite as the most differentiated in the market. We're generating a strong win rate in competitive situations, and we're also seeing a growing number of wins that are also sole sourced because of our strong customer references. We believe this reflects our growing mindshare and the positive impact of our efforts to identify and cultivate executive sponsors within customers.

In the second quarter, our engineering business built on the progress we made in the first quarter and is tracking ahead of our expectations so far in fiscal 2019. The growth generated in the first half of fiscal year '19 already exceeds the growth achieved in fiscal year '18 for that business. We're seeing positive trends throughout the engineering business, including better-than-expected outcomes on E&C renewals, including lower attrition than expected in some deals, and addition of entitlement to existing contracts. A second straight positive growth quarter for North American E&C customers is providing greater confidence about the outlook for the business, and increasing investment by owner-operators in engineering, modeling and simulation capabilities to drive operational performance improvement through better analysis and online predictive capabilities.

Our owner-operator customers continue to benefit from a positive macro environment. They're investing to drive efficiencies across their operations and showing a greater commitment to operational excellence and digitalization than ever before. We expect that this environment will also contribute to double-digit growth for our MSC business in 2019.

Looking at our 10 largest annual spend growth transactions in the quarter, we had a healthy mix of engineering, manufacturing, supply chain and APM transactions. Once again, the APM suite was represented among the largest transactions in the quarter. While there will be variability quarter-to-quarter, we anticipate that all 3 product suites will be represented in our largest quarterly growth transactions going forward.

Following is a representative sample of transactions closed in the quarter: First, an Eastern European integrated oil company selected Aspen Mtell for its sixth year digital transformation roadmap to support its digital refinery vision to improve operational efficiency and reduce margin leakage. Aspen Mtell will allow the customer to detect upcoming failures and avoid unplanned downtime. The customer will also deploy an Aspen Fidelis reliability model to perform availability and throughput analysis for the site to optimize spare parts to reduce costs.

Second, a North American refiner selected Aspen Mtell after a competitive process and despite a lower price offering from the competition due to Mtell's superior return on investment. The selection of Aspen Mtell is part of its customers' digitalization initiative with the objective to create additional value through optimization and predictive analytics.

Third, a top 10 global pharmaceutical company expanded its relationship with AspenTech by selecting Aspen Mtell to support its Industry 4.0 and digitalization initiatives. Aspen Mtell will be implemented in one of the company's most advanced site, where the variety of equipment complexity is well-suited to realize significant return on investment. This was a competitive win where we satisfied all the customer's objectives in a 3-week pilot, a marked contrast to the pilot conducted by a major software company that delivered no meaningful results in over 4 months.

Fourth, a multinational mining company selected Aspen Mtell as part of its smart mining and digitalization initiatives. The customer has stated publicly that it is selecting technology that will transform how it mines, processes and market its products. Aspen Mtell will be implemented in one of the company's larger mines in Africa to improve asset availability and increase production.

Fifth, a North American headquartered engineering and construction firm increased entitlement for our engineering software after previously considering a reduction in spend. We engaged with the customers to determine how increasing the spend with AspenTech will support its future business outlook. The customer cited several key factors in expanding its usage of AspenTech software, including the flexibility and value delivered by our engineering suite, and the innovation that is continually added into our products.

Six, a state-owned company, one of the largest oil and gas producers in Africa and user of AspenTech's engineering solutions, replaced a competitive solution with our MSC suite as part of the company's 2030 digitalization and modernization initiatives. The company decided to adopt and implement our Aspen PIMS and Aspen DMC3 technologies after estimating it would realize tens of millions of dollars in annual benefits.

And last, as you can see from our press release we issued earlier today, IRPC, an integrated petrochemical company in Thailand selected Aspen Mtell prescriptive maintenance software in support of the company's Industry 4.0 strategy. IRPC will deploy Aspen Mtell for its refinery and petrochemical plants to improve the equipment reliability, mitigate unplanned downtime, achieve operational excellence and increase profitability.

These handful of references are just a few of the transactions signed in the quarter, which support the strong results delivered, even as macro headlines created uncertainty with investors during the quarter. To be clear, we have not seen any changes in the business environment or any impact from the recent fluctuations in oil prices. In this regard, there are several key points we believe investors should keep in mind. There continues to be a positive outlook for technology spending overall, and we believe capital-intensive industries are in the midst of a secular technology adoption cycle. Two, regarding oil prices, the fluctuation in the price of this commodity in the past 12 months between $40 and $75 for the WTI benchmark has not been a relevant factor in the performance of our business.

Three, the primary driver of E&C and upstream spend for our engineering suite is CapEx spend from oil and gas companies, which modestly increased in the mid-single digits over the last 12 months. CapEx spend is the metric that we most focus on from a macro-outlook standpoint.

Four, it is also important to remember that less than 40% of our business is driven by CapEx spend in oil and gas, which generates investment in new projects and existing operations that benefit E&C and upstream businesses and drives more use of our software.

Five, the improvement in performance of our engineering business in the last 12 months has occurred in the context of the modestly improved CapEx environment I just mentioned.

Six, E&C and upstream customers are approaching the end of their rightsizing of their AspenTech entitlement capacity in their renewal cycle that followed the drastic decline of approximately 40% in global oil and gas CapEx spend in 2015, 2016.

Although CapEx spend has grown modestly each year since 2016, it remains near the trough levels. As a result, we believe it is unlikely there will be a further decline in CapEx spend that will lead to further material entitlement reductions as the customers approach a renewal cycle.

Seven, and finally, it is important to remember that the majority of our overall business is driven by owner-operators' OpEx spend, which supports the consistently strong performance in our MSC suite, and helped to accelerate our engineering business.

Looking ahead, we feel good about the business. This reflects a strong execution and the positive impact of the growth investments we have made over the past 18 to 24 months. Based on our first half performance and our outlook for the second half of the year, we are increasing our annual spend growth forecast to 8.5% to 9.5%, which compares to our previous guidance of 7% to 9%. At the midpoint, this would represent a 250 basis point increase in growth year-over-year. The updated guidance anticipates better-than-expected performance in our engineering suite based on the trends I discussed earlier and a continuation of the double-digit growth performance from the MSC business.

We continue to expect APM will contribute 1.5 to 2.5 points of annual spend growth for the year. APM had a strong first half of the year and has a strong pipeline of opportunities in the second half. As a reminder, we have forecasted APM growth to be more back-end loaded due to customer budget cycles.

To summarize, AspenTech delivered a strong second quarter performance that demonstrates we're executing well and benefiting of our disciplined approach and investments to support the acceleration of our growth. We have multiple levers for growth and a scalable business model that generates significant free cash flow. Our updated guidance reflects our confidence in the business, and we remain focused on executing on our strategy to deliver value for shareholders. With that, let me turn the call over to Karl. Karl?

Thanks, Antonio. I will now review our financial results for the second quarter of fiscal 2019. As a reminder, these results are being reported under Topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts. Our license revenue is heavily impacted by the timing of bookings, and more specifically, renewal bookings. A decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license contract up for renewal is not an indicator of the health or growth of our business. The timing of renewals is not linear between quarters or fiscal years, and its nonlinearity will have a significant impact on the timing of our revenue. As a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods. In our view, annual spend will continue to be the most important metric in assessing the growth of our business; annual free cash flow, the most important metric for assessing the overall value our business generates.

Annual spend, which represents the accumulated value of all the current invoices for our term license agreements at the end of each period was approximately $513 million at the end of the second quarter. This represented an increase of approximately 9.4% on a year-over-year basis, and 3% sequentially.

Total bookings, which we define as the total value of customer term license contracts signed in the current period less the value of term license contracts signed in the current period but where the initial licenses are not yet deemed delivered under Topic 606, plus term license contracts signed in the previous period for which the initial licenses are deemed delivered in the current period, was $154.8 million, an 80% increase year-over-year. The increase in bookings year-over-year is the result of a significant increase in the amount of term license contracts up for renewal as compared to the year-ago period.

As I mentioned earlier, bookings can fluctuate significantly between periods since it is driven in large part by the timing of when customer contracts are up for renewal. Year-to-date bookings were $250.9 million, a 19% increase year-over-year.

Total revenue was $140.4 million for the second quarter, a 33% increase from the prior year period. The year-over-year increase in revenue was the result of the increase in total bookings discussed above.

Breaking revenue down by line item. License revenue, which represents a portion of a term license agreement allocated to the initial licenses, was $93.4 million, a 64% increase year-over-year. As mentioned earlier, the increase is the result of the higher amount of term license agreements coming up for renewal in the quarter as compared to the year-ago period. Maintenance revenue, which represents the portion of the term license agreement related to ongoing support and the right to future product enhancements, was $41 million, a 1% increase from the prior year period. Maintenance revenue in the second quarter was reduced by a nonrecurring accounting adjustment, and we would expect it to grow sequentially in the third quarter.

Maintenance revenue is recognized on a daily ratable basis over the life of the term license contract and will grow more in line with our annual spend. Services and other revenue was $6 million, a 23% decline from the year-ago period. The decline in service revenue is largely driven by the timing of projects.

Turning to profitability, beginning on a GAAP basis. Gross profit was $125.7 million in the quarter, with a gross margin of 89.5%, which compares to $93.4 million and a gross margin of 88.5% in the prior year period. Operating expenses for the quarter were $61.9 million compared to $63.3 million in the year-ago period. Total expenses including cost of revenue were $76.7 million, which was up from $75.4 million in the year-ago period, and down from $77.2 million last quarter.

Operating income was $63.8 million for the second quarter of fiscal 2019 compared to $30.1 million in the year-ago period. Net income for the quarter was $59.2 million or $0.83 per share compared to net income of $132 million or $1.81 per share in the second quarter of fiscal 2018.

Net income in the year-ago period had a noncash $97 million tax benefit from our adoption of Topic 606 and the implementation of the Tax Cuts and Jobs Act of 2017. Interest income in the second quarter was $7.5 million, up from $6.2 million in the year-ago period. Recall that under Topic 606, there is an implied financing component to our term license contracts. The imputed value of this financing component is taken from the license fees and recognized as interest income over the payment term.

Turning to non-GAAP results. Excluding the impact of stock-based compensation expense, amortization of intangibles associated with acquisitions and acquisition-related fees, we reported non-GAAP operating income for the second quarter of $71.2 million, representing a 50.7% non-GAAP operating margin compared to non-GAAP operating income and margin of $37.8 million and 35.8%, respectively, in the year-ago period. Non-GAAP net income was $65.1 million or $0.92 per share in the second quarter of fiscal 2019, based on 71.1 million shares outstanding. This compares to non-GAAP net income of $137 million, or $1.88 per share in the second quarter of fiscal 2018, based on 73 million shares outstanding.

Turning to the balance sheet and cash flow. The company ended the quarter with $54.4 million in cash and marketable securities compared to $52 million at the end of last quarter. As Antonio mentioned, during the second quarter, we repurchased 1.2 million shares of our stock for $100 million.

Contract assets at the end of the second quarter were $687.7 million. This is a new line item on the balance sheet under Topic 606 that represents the portion of the initial license performance obligation that has been recognized as revenue but not invoiced. This is sometimes referred to as unbilled accounts receivable.

From a cash flow perspective, we generated $57.5 million of cash from operations during the second quarter, and $57.3 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software, litigation and acquisition-related payments. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.

I would now like to close with guidance. Remember, that we will now only be providing guidance on an annual basis, and providing directional commentary on the timing of annual spend and bookings during the year. We are increasing the guidance we provided at the beginning of the year. We now expect bookings in the range of $565 million to $590 million, which includes $398 million of contracts that are up for renewal in fiscal 2019. This is an increase from our original guidance of $555 million to $585 million. From a timing perspective, we expect bookings, and therefore, revenue will be more heavily weighted to the second half of the year with the fourth quarter being the largest bookings quarter.

With respect to annual spend growth, we are now forecasting 8.5% to 9.5% annual spend growth. Breaking this down further, we expect 7 to 8 points of growth will come from our core engineering and MSC suites, and 1.5 to 2.5 points of growth from the APM suite. Similar to fiscal 2018, we expect growth to be weighted through the back half of the year due to the timing of customer budget cycles.

We now expect revenue in the range of $545 million to $567 million. We expect license revenue in the range of $351 million to $368 million. Maintenance revenue in the range of $166 million to $169 million and service and other revenue in the range of $28 million to $30 million.

From an expense perspective, we expect total GAAP expenses of $309 million to $312 million. Taken together, we expect GAAP operating income in the range of $236 million to $255 million for fiscal 2019, with GAAP net income of approximately $216 million to $232 million. We expect GAAP net income per share to be in the range of $3.02 to $3.24.

From a non-GAAP perspective, we now expect non-GAAP operating income of $268 million to $287 million and non-GAAP income per share in the range of $3.37 to $3.60. This compares to $257 million to $283 million and $3.19 and $3.48 previously.

From a free cash flow perspective, we now expect $223 million to $228 million, up from our prior guidance of $220 million to $225 million. Our fiscal 2019 free cash flow guidance assumes cash tax payments of approximately $45 million to $50 million, up from our prior expectations of $40 million to $45 million.

In summary, we delivered a strong financial and operational performance in the second quarter. We are seeing positive trends across our business and are executing well on our strategic priorities. We believe we are well positioned to continue delivering an attractive combination of growth and profitability that can generate value for shareholders. With that, we would now like to begin the Q&A. Operator?

(Operator Instructions) We have a question from the line of Shankar Subramanian from Bank of America Merrill Lynch.

So just on the APM opportunity, you mentioned a lot of use cases that's coming to fruition. Maybe help us understand some -- on the pipeline basis, maybe some more color on your core market and your GEIC (sic) [GEI] market. What does -- what do we expect to kind of come to fruition? What are the most important use cases that you're seeing in the pipeline that could grant total revenue increase in this coming year?

Yes. So our APM pipeline has grown over the last number of quarters, and I said a couple of quarters ago, I believe, or last quarter, that it was about 40% of our total pipeline. Of that, I've also told investors that about 10% of that pipeline, APM pipeline is from the GEIs. The strongest use cases that we're seeing at the moment in the GEIs are in the mining sector where we're seeing a lot of interest not only from customers that we have signed up, but also potential customers. While we've never classified pharmaceuticals as a GEI, but it is in really our core, but we're also seeing a lot of traction in -- a lot of interest in pharmaceuticals. And then, there is the different other industries. Last quarter, we talked about a cardboard box manufacturing facility in Thailand and other -- we had a air separation company and so on. So -- but to answer specifically to your question, mining, pharmaceuticals and then a mix of other industries.

Got it. So on the -- just have a follow-up on the Beacon license revenue. Related to what you had in mind getting into the quarter, what was the surprising factor? Was it kind of you expected this kind of term license mix to come in stronger? Or was it a surprise factor that kind of happened towards the end of the quarter?

Well, let me be clear, we've given investors the profile of renewals that we have in the fiscal year in each quarter -- for each quarter. And Q2 -- in that profile, Q2 had a larger number of renewals and for revenue. And that's part of the performance that we delivered from a revenue standpoint. We did outperform on an annual spend growth basis, which does turn into incremental bookings as well. But fundamentally, the core of the Q2 quarter was on the basis of the amount of renewals that we had in that quarter.

We have a question from the line of David Hynes from Canaccord.

Antonio, thank you for the helpful macro comments, I think that heads off a lot of the investor questions that I've been getting. Maybe one on APM. Last time we talked, I think, pilot capacity was a bit of a choke point. Obviously, you're seeing nice results, but it speaks to the demand you're seeing. I mean, can you talk about any initiatives you have underway, I guess, to kind of improve bandwidth for delivering these pilots and pushing folks through the pipeline faster?

Yes, so certainly, we felt a couple of quarters ago that this was going to be a potential issue for us, our ability to handle all the demand we're getting for pilots. And we're taking steps to set up an organization. We're centralized in the analysis of the data that we get when we're going to do pilots as to develop the best practices, be able to have a team that is scalable in one location, and therefore, as they develop best practices and they increase their productivity, we'll be able to increase our pilot execution engine. And we're already set up with that team, we're now ramping it up from a standpoint of capabilities and systems, and we expect that, that team will start having an impact on our capacity to do pilots here in this current quarter.

Got it. That's helpful. And then maybe one for Karl. Karl, so maybe a bit in the weeds, but license revenue as a percent of bookings, right? I think we talked about it falling in a certain range, in the 60s. It kind of came in towards the low end of the range, I think my math, it's like 60%. Can you just remind us what are the swing factors that determine when license is recognized in terms of -- in the quarter versus in future periods? And how we should think about that going forward?

Sure. There's a -- DJ, there's a couple of pieces that move it. First one is what you talked about, what could move -- what could cause some of our licenses to be ratable. Because if there's a booking in the period, that means I've delivered it, and it's converting to revenue as opposed to supersede where the booking gets moved out. So sometimes the performance obligations will be related to a license, and that could be a disaster recovery site. And that's something that we deliver over time, so that'd be more ratable. So those have a bit of an impact, and they can play with a percentage of that booking that turns to license revenue in the period. The other piece, it probably plays a little bit bigger of a role, is, if you remember, we have a certain percentage of the license revenue might -- is going to be recognized as interest income because we're getting paid over time. So if I have deals that are getting done in an area of the world where there's is a higher imputed interest rate, so a higher risk, more of that license fee will be recognized as interest income as opposed to purely license so that you can see both of those things drive that.

Got it. And is it fair to assume that we should see -- assuming the business kind of trend line grows as it is, that we should see interest income continue to kind of sequentially tick up in future periods? Is that the right way to think about it?

Yes, it's going to be a waterfall, and what you'll -- it depends because you may have had some large ones that are, at the time, they had a higher interest rate and are coming off and then going down and vice versa. But in general, you should see it directionally go up as we grow. As the base of business grows, you would expect that to go up. The only caveat to that is you could get some anomalies in there for people's interest rates changing up or down.

We have a question from the line of Monika Garg from KeyBanc.

Antonio, great results. So just a couple of questions. Maybe could you talk about how is the Emerson relationship going? Maybe talk about the pipeline with Emerson, any deals you have closed.

Look, our relationship with Emerson is good. As far as the pipeline and our go-to-market activities, they are focused primarily around our engineering suite, on operator training simulators and Advanced Process Control where we're working with them to build capabilities and capacity. They -- they're in the process of -- they have a solid pipeline, especially on the operator training simulator area where our engineering suite is used. And they're also beginning to contribute in the APC area. But we have our 1-year anniversary since we announced the relationship coming up, and at that point, we'll -- we're going to sit down and do a second review of the progress we are making. But we're happy with where things are going, and I would like to think that they would also express a similar sentiment.

Then on the E&C customers' side, could you spare details upon like how is the pickup in demand you are seeing in the E&C side?

Yes, so the -- I think this has been one of the sort of upside surprises we saw in the quarter and in Q1, in that we're seeing the better demand from E&Cs. That means, really, 2 things: one, less attrition, less reduction in spend as agreements have come up for renewal. And we're also seeing some customers add entitlement to their existing agreements, which, we felt, would be what would start to happen as the macro outlook -- as time pass and as the macro outlook improved but also as we got through the -- we get through renewing the base of contracts that we've had and as customers see an uptick in business, they would have to come back for new entitlements. So it's 2 quarters of positive performance, 2 points of data start making a line, but we'd like to see a few more points, but so far so good.

We have a question from the line of Sterling Auty from JPMorgan.

I want to go back to the macro. So if I look at Wall Street forecasts for CapEx for a number of your customers, it actually seems like the CapEx forecasts are a little bit more cautious at this point than they were this time a year ago. Do you think there is a disconnect between what Wall Street is kind of factoring in and thinking about in terms of what's happening in the macro versus what you're hearing directly from customers?

Well, let me -- look, so we really haven't -- one of the things we focused on, of course, as we're going to turn the page on last year and as we came into this year was trying to understand customer sentiment around budgets and spending. And the fact is that we haven't detected any change in sentiment. Now we do pay careful attention to CapEx budget announcements. And I think, for the most part, what we've seen is flat to increase in CapEx. Again, sort of mid-single-digit increases. What I would point out though, of those increases, is that most of that -- of those increases are going into shale oil and shale gas spending, and it's something that we talked about in the past, and that wouldn't benefit as much from it. So I think it's perhaps too early to be -- to say what's going to be the outcome of CapEx budgets for 2019. But if anything, I would project it to be flat to sort of low- to mid-single digits, again, which is what we've had for the past 3 years. And the improvement in our business is in the context of that macro environment.

All right. Great. Then one just clarifying question. The positive comments that you made about owner-operators, was that E&C, MSC, both? And what end markets were you specifically referring to, energy, chemical, or was it across the board?

Yes, no. So when we talk about owner-operators, we refer specifically to sort of refiners and chemical producers, spec chem, if you will. And then owner-operators, in a way, are users of our 3 suites. Certainly, the MSC suite and the double-digit growth that we've experienced in the MSC Suite is purely out of owner-operators. Our engineering business grows in 2 ways: one is E&Cs or, in the last few years, is contracted as a result of E&Cs, but owner-operators are also users of our engineering software, and they've been a positive driver of our engineering business growth. And also remember now that the owner-operators are the buyers of the APM suite and the OpEx budget that they are using for APM. So that's sort of an important group of customers for our business.

We have a question from the line of Matt Lemenager from Baird.

It's Matt Lemenager on for Rob Oliver this afternoon. Antonio, I had a question on the six-figure APM transactions you mentioned. And I guess, just curious how those expansions came about in terms of sales cycle, what that might look like. And I guess, is that the first expansion post pilot? Or have there been multiple expansions before getting to that level or size?

Well, I mean, look, some of them are first contracts with these customers, and others is the outcome of perhaps an initial license for 6 months or a year that has turned into now a broader deal. But look, the fact is that in the deals that we signed in Q2, we had a transaction that, basically, from the first executive-level meeting to signature of the contract took about 3 months. We've also been -- we've been working on some of them for 9 to 12 months. Some of them were purely on a sole-source basis. Others were competitive as some of -- as the number of references I talked about in my prepared remarks described. So it's a complete mix of pathways to the outcomes that we're achieving. But we are now starting to get to the sort of the gate of potential enterprise deals as a result of the work we've been doing over the last 18 months. And hopefully, that will drive part of our second half performance.

We have a question from the line of Matt Pfau from William Blair.

First one, to hit on the increase in guidance and, specifically, around annual spend. So that outperformance or that increased outlook has been driven by the engineering and MSC suite. And so maybe is that coming from some of the commentary that you made, Antonio, around E&C is perhaps performing a bit better than expected? Or are there other contributing factors in there as well?

Yes, for engineering, it's both E&Cs, better outcomes on renewals, the new entitlement. But also, the owner-operators, we're also seeing better demand for our engineering suite in our owner-operators. And let me tell you, I continue to be amazed about our MSC business. Just customers continue to adopt our technologies. We're seeing -- I think we're seeing -- well, not I think. I know we're seeing tremendous demand for our DMC3 product. Advanced Process Control and optimization have been categorized as foundational digital technologies, and we believe that is driving a lot of focus on those product areas. And then APM, I think the traction we're seeing with APM, of course, is in the context of digitalization initiatives.

Got it. And then you mentioned with E&Cs, some of the upside that you're seeing there is just some loss, attrition. So I guess, where are we at with churn relative to historical levels? Are we back to where you were? Or is there still a ways to go before you get back to some of the levels that you were at pre-oil crisis?

Well, let me -- look, remember that when we gave guidance for fiscal year '19, we guided attrition to be in the 4% to 5% range. That is from a 5.2% attrition outcome in fiscal year '18. Our historical rate is in the range of 3%. We believe we're trending towards the low end of the range that we gave for guidance, sort of the 4% area. And I think that's getting reflected into the result that you are seeing.

We have a question from the line of Steve Koenig from Wedbush Securities.

Maybe a quick housekeeping and then my more [specific] question. Karl, can you just give us a little bit more color on that accounting adjustment in maintenance? And then I've got one follow-up, if you don't mind.

Yes, no, it was just a timing thing that we had in the period where it was a kind of a catch-up on it. It's a onetime. It's nonrecurring. I would say it depressed the revenue in the period maybe about $1.4 million, $1.5 million, to kind of help you with your run rate.

Okay, cool. I wanted to ask about APM. So Antonio, you talked about seeing success there where competitors are failing. Can you talk a little bit about where in particular in the broad range of claims that vendors are making in predictive analytics [and involves other] use cases, where are you most differentiated? And what's likely to drive your success going forward? And maybe if you could relate that to -- you're actually doing a bunch of different things and you had several acquisitions that helped boost your APM strategy, so maybe you could relate it to granular products as well, it would be really helpful.

Yes, so -- I mean, look, there's multiple products in the APM suite. But certainly, the workhorse at the moment is our Mtell product. And look, the most differentiating factor about Mtell right now is its ability to accurately predict failures. When -- in the customer reference that I -- where I talked about this customer spending 4 months working with a major software company around predictive analytics for failure and not achieving any results and then we come in. And in 3 weeks, we demonstrated capabilities of Mtell and the customer [then tell us] is that ability to quickly get to customers, get to their data, process the data in a pilot environment, demonstrate our ability to predict historical failures against historical data but then using what is a blind test, just data, not understanding the failures, and based on the data, again, accurately predicting the failures. For customers that have already implemented the technology, the pleasing and rewarding fact that we're seeing is that these customers are actually catching failure. The technology now that is online and implemented is predicting failures in equipment, and customers are evaluating the performance of the technology. So I would say that is the most important factor. Certainly, ease of use, ease of deployment vis-à-vis other companies, we have a product that is specific to predictive analytics. I believe, in some cases, the competitors that these companies are working with are really companies that have built an IoT platform and now are interested in analytics and are using some algorithms to portray themselves as an analytics company. So that is the case. Look, the Fidelis product, we also had a nice win on that sort of product and our ability to do a reliability analysis around entire sites. And soon, we'll be releasing other capabilities for -- in the suite, online capabilities for our ProMV product that, we believe, will start creating material pipeline in the APM suite from that product. So I don't know if I have addressed all the points that you wanted me to discuss, or is there something more you'd like me to address.

No, that's great, Antonio. If I had one follow-up question, it would be about where are you in terms of your desire to price those deals based on the system as opposed to the equipment? Is that still the strategy that you're pursuing? And where are you with making that work when it comes to signing the deals?

Yes. No, I mean, we continue to price based on site, more -- you can call it a system or enterprise site, an enterprise as opposed to by equipment. Customers are adopting or accepting of that licensing model. At the same time, not every customer wants to license the technology that way and there is customers that are very specific on a certain type of equipment, but -- for which they have a very large number of that type of equipment so they're interested in an enterprise license around very large numbers of a specific type of equipment. So we're working with those customers to understand how -- what is the right value proposition for them and for Aspen Tech. And so look, it's all indications of the early days of a new market. But the size of transactions that we're doing, I think, is an indication of the value that is created by the APM suite.

We have a question from the line of Mark Schappel from Benchmark.

Most of my questions have been answered though. Just one question on your Latin American business. Antonio, last quarter, you noted a return of some of your Latin American customers. I was just wondering if this trend continues.

Actually, it wasn't in the reference, but we did have a nice transaction in Latin America, not in one of my favorite countries, but it was a very nice growth transaction for engineering software from an owner-operator in -- from one of the old companies down there. So that was very nice. No, I do think that, overall, sort of Latin America is coming back from a spend standpoint. We're pursuing other opportunities in the region. We have a team in Latin America that is local to the business down there. They're very hungry and excited about making a difference in Aspen Tech, and I expect them to do so going forward, so.

We have a question from the line of Joshua Tilton from Berenberg.

Can you provide the breakdown of annual spend in terms of gross growth and churn? And then also, what's the percentage of annual spend that APM contributes? I think you mentioned 0.7 points of contribution.

Yes. So we've never given you the sort of the breakdown on the -- on gross growth versus net. But we have given you an attrition number. Our guidance for attrition for the year, 4% to 5%. I just stated that we're trending toward the lower end of that range -- sort of the 4% range. In the context -- look, we had a strong quarter. We've had a strong first half. That means that we're also creating a lot of gross growth. And again, like I told investors in the past, if you think about our trailing growth rate, our new guidance and attrition rate and what I just told you towards what number we are trending for that attrition rate, well, if you add those 2 numbers, that means that we'd be delivering gross growth well north of 10% in the company. So this is -- look, the company continues to generate double-digit gross growth. One difference now is that our attrition certainly is coming down. The team is doing a very good job of focusing on attrition and mitigating the reductions in spend. But also, I think that, as I said it in my remarks, we're approaching the end of the renewal cycle, and things are tailing down.

Okay. And then maybe just a follow-up. Being that APM is a new market, how far along are we in terms of customers understanding the value of the product? Is education still a big hurdle?

I think so. Certainly, with the customers that we've engaged, I think they understand it now. But in my opinion, we've only touched a fraction of the customers, and frankly, this feels like very early stages of a baseball game.

There are no further questions at this time. Mr. Pietri, you may continue.

Well, I want to thank everyone for joining the call today. Look forward to talking to you as we get on the road here. Thank you, all.

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