Mark Sullivan - CFO Antonio Pietri - CEO

Bhavan Suri - William Blair Matt Williams - Evercore Mark Schappel - Benchmark Monika Garg - Pacific Crest Richard Williams - Summit Research

Ladies and gentlemen, thank you for standing by and welcome to the Aspen Technology's Third Quarter Fiscal 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn today's call over to Mark Sullivan, Chief Financial Officer. Please go ahead.

Okay. Thank you, operator. Good afternoon, everyone and thank you for joining us to review our third quarter fiscal 2015 results for the period ended March 31, 2015. I'm Mark Sullivan, 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 third quarter of fiscal year 2015, which is now on file with the SEC. Also, please note that the following information is related to our current business conditions and our outlook as of today, April 28, 2015. Consistent with our prior practice, we expressly disclaim any obligation to update this information. The structure of today's call will be as follows: Antonio will discuss business highlights from the quarter and then I'll review our financial results for the third quarter and our guidance for the fourth quarter and fiscal year before we open up the call for Q&A. With that, I'd like to turn it over to Antonio. Antonio?

All right. Thanks, Mark and thanks to everyone for joining us today. We delivered a strong third quarter performance with each of our key metrics exceeding guidance. We're pleased with our results year to date and believe we're well positioned to cap another strong year of financial and operational performance in fiscal 2015. Looking at our financial highlights for the quarter, this included TLCV growth of 13.2%, year-over-year. Total revenue of $111.3 million, $2.3 million above the high end of our guidance range. Non-GAAP EPS of $0.37, which was $0.06 above the high end of our guidance range. A non-GAAP operating margin of 44% and returning $107.7 million to shareholders by repurchasing $2.9 million shares. We delivered a strong sales performance in the quarter that was highlighted by TLCV growth of 13.2% year-on-year, which is slightly above our historical trailing 12-month growth rate and puts us on track to achieve our full year objective for double-digit TLCV growth. Our performance in the quarter reflected a strong activity across each of our major verticals; energy, chemicals and engineering and construction. From a geographic perspective, each of our main regions delivered solid quarter with notable strength in North America and Asia Pacific. Our third quarter results reflect a significant efficiency improvement and cost savings our products can generate for customers across a number of operating scenarios; including periods of oil price volatility. For many owner operators in the energy and chemical verticals which represent nearly two thirds of our business, Aspen Tech's products and solutions can help them quickly react to a changing macro and commodity price environment to produce more profitable operating performance. In the engineering and construction vertical, we saw solid demand during the third quarter and closed several meaningful transactions. It's important to recognize that the bulk of the work that E&C companies use Aspen Tech for is to design and retrofit facilities for our downstream energy and chemical owner operator customers, which generally benefit from a lower oil price environment. We also recognize that this portion of our business can be more sensitive to changes in economic outlook and oil price volatility, but at this point, we have not seen a material change in demand. Of our top 10 transactions by TLCV in the quarter, three were with E&C companies and the remaining seven were with the owner-operator customers in the energy and chemical verticals. All were over a $1 million in TLCV with a majority being multimillion dollar transactions. While we're pleased with our overall performance in the quarter, there were certain areas worth mentioning. The deterioration of the Russian Ruble has led to some longer closing cycles in Russia and increased difficulty getting final customer approvals for transactions dominated in U.S. dollar, though we did sign some notable transactions during the quarter. Similarly, there continue to be political corporate governance and strategic issues affecting several major state-owned energy companies in Latin America that are impacting their decision making timelines. The strength of the U.S. dollar also played a role in a few transactions at the lower end of the customer spectrum, which demonstrated a degree of uncertainty about the microenvironment and the existing volatility in the price of oil. It's important to note that despite this pockets of weakness, we delivered our strongest TLCV growth in four quarters. I would like to provide some color on this quarter with the following five transactions. The first highlighted transaction was closed with a refining joint venture company in the United States interested in expanding its footprint of advanced process control applications using our latest advanced control software, DMC3 to improve operational margins. Despite reductions in its personnel this customer decided to upgrade to our DMC3 solution including adapted process control, which facilitated the upgrade/implementation of eight applications in a four week timeframe. Second a large E&C customer in Asia that faced a financial deficit in 2013 due to cost overruns in projects decided to expand the use of our products by implementing our capital cost estimation software to improve its cost estimation accuracy. Third a large Russian oil company decided to implement our petroleum scheduler solutions at one of its large refineries to improve operational execution by bridging the gap between actual and planned performance with the ultimate goal of increasing operating cash flow. Fourth, another large E&C company in Asia, which has seen its backlog increase 35% in the last 12 months to over $10 billion is expanding the use of our engineering software in the design of recently awarded LNG projects in the United States. This customer is also considering expanding the use of our products by implementing our capital cost estimation software. The fifth and final transaction and perhaps one of the most exciting deals of oil in the quarter, was with a very large U.S. industrial conglomerate that increased use of our engineering software by more than 50% in both current and new products such as Aspen basic engineering, Aspen Plus, Aspen Plus Dynamics and Aspen Capital Cost Estimation in their power and water division and their oil and gas division. Equally important, the opportunity for growth still remains in other business units. I want to highlight an important business trend in the E&C industry that we have identified in the last six to nine months. The volatility in oil prices has created uncertainty in the business of E&C companies with owner operators demanding more aggressive pricing from these companies. We believe that this in turn is driving a notable pickup in interest and demand for our Aspen Capital Cost Estimation product by E&C companies. As I mentioned, this product was at the center of two of the transactions closed during the quarter. We believe AspenTech is the only company in the world to provide such product functionality in the process industries. Aspen Capital Cost Estimation improves their reliability estimates as quoted by our customers from plus or minus 30% to plus or minus 10%. In the current climate of uncertainty this is a significant benefit for better use of capital. This trend also validates that the breadth of functionality in our products and solutions is also a positive in the current environment. During the third quarter, engineering and construction and chemical verticals once again represented greater than 90% of our business, energy was the largest vertical contributor followed by chemicals and engineering and construction. Looking at our ten largest transactions in the quarter, there was again a mix of engineering and manufacturing supply chain deals and both product suites generated positive performance. We’re benefiting from the round world opportunity to grow the total number of aspenONE users as well as the number of products per user across both our engineering and manufacturing and supply chain platforms. The significant investment we make each gear in research and development continues to enhance the product capabilities and user experience of the aspenONE platform. Next week we will be hosting our By-Annual User Conference Optimized 2015 in Boston, where we will demonstrate our latest innovations for more than 500 customers and prospects. We also expand our product capabilities with M&A and during the third quarter, we acquired the Blowdown software technology, which enables oil and gas and chemical customers to model the safest way to depressurize a process plant by releasing fluid flow from process equipment in a controlled and operationally safe manner. This is a critical safety issue in plant design and will enhance the capabilities of our engineering suite. We’re seeing great interest in this acquisition from our base of engineering and software users. While we continue to make meaningful investments in our products to drive future growth, we’re also maintaining tight expense management that enables AspenTech to generate substantial free cash flow. During the third quarter, we were able to utilize our strong cash flow and balance sheet to increase our stock buyback activity taking advantage of near term opportunity in our stock price. We repurchased nearly 3 million shares for approximately $108 million in the quarter and now have returned $225 million to shareholders so far in fiscal 2015. We plan to continue use of our strong financial position to enhance shareholder value through share repurchases. In summary, AspenTech delivered a strong third quarter results that reflect good execution and a healthy demand environment. Our solutions are delivering value to customers every day as they use the aspenONE platform to increase the efficiency of the complex processes running inside their facilities. We believe there is a substantial opportunity to continue generating growth in our core verticals though we’re mindful of the fluid macro environment and other factors mentioned. However, despite the macro environment, we believe in our ability to continue generating high levels of profitability and cash flow going forward. With that let me turn the call over to Mark. Mark?

Thanks Antonio. Let me begin by reviewing our supplemental metrics, starting with our term contract value or TCV metric, which measures the renewal value of our multiyear term contracts. Growing TCV continues to be a key focus for us and we increased the value of this metric by adding new customers, expanding product usage, and increasing prices across our customer base. At the end of the third quarter, our license-only TCV or TLCV was $2.03 billion, which was up 13.2% compared to the third quarter of fiscal 2014 and up 3.1% on a sequential basis. Including the value of bundled maintenance, our total term contract value was $2.41 billion at the end of the quarter, which was up 14.1% compared to the third quarter of fiscal 2014 and up 3.2% sequentially. Our annual spend which is a proxy for the value of our recurring term license business at the end of each period specifically the annualized value of our term license and maintenance revenue was approximately $412 million at the end of the third quarter representing an increase of 11.9% on a year-over-year basis and 2.9% sequentially. As we complete our revenue model transition this fiscal year, annual spend will become increasingly important metric as it is a leading indicator for growth in subscription revenue which represents more than 90% of our total revenue. License TCV is calculated using each contract’s terminal year annual payment and therefore takes into consideration the total price escalation over the course of the multiyear time period whereas annual spend takes into consideration only the current year’s level of spend. The growth of our annual spend metric should be slightly lower than the growth in our license TCV metrics so there can be some quarter-to-quarter variability. As a reminder beginning in fiscal 2016, we will be providing annual spend growth guidance in quarterly annual spend results while updating TCV and TLCV on a milestone or year-end basis. Now let me turn to our financial results on a GAAP basis, total revenue in the third quarter of fiscal 2015 was $111.3 million, up 7.4% from $103.6 million in the prior year period and $2.3 million above the high end of our guidance range. Approximately half of the outperformance in the quarter was due to cash basis revenue that we had expected to recognize in the fourth quarter. We faced a difficult year-over-year comparison in the third quarter due to approximately $7.6 million of revenue recognized in the year ago period related to a significant supply chain management arrangement that was accounted for on a completed contract basis. Adjusting for that revenue, which was one time in nature total revenue growth in the third quarter would have been approximately 16%. Looking at revenue by line item, subscription and software revenue was $102.5 million for the third quarter, which is an increase from $91.3 million in the prior year period and $98.7 million last quarter. Services and other revenue was $8.8 million, compared to $12.3 million in the year ago period and $9.1 million last quarter. Moving down the P&L, gross profit was $99 million in the quarter with a gross margin of 88.9%, which compares to $88.3 million and a gross margin of 85.2% in the prior year period. The year-over-year improvement is largely the result of higher subscription revenue as well as the $2.3 million of incremental expense recognized during Q3 of the prior year related to the same supply chain management arrangement that I just discussed. Operating expenses for the quarter were $57.3 million slightly up from $56.9 million in the year ago period. Total GAAP expenses including cost of revenue were $69.6 million down from $72.2 million in the year ago period. Our third quarter GAAP total expenses include approximately $3.3 million of incremental expense related to the purchase price of the Blowdown software. Accounting for this acquisition is the same as the SolidSim acid acquisition that we made in Q3 of fiscal 2014 for $4.9 million Blowdown was an asset acquisition and since we intend to modify and enhance the software prior to making it commercially available to our customers. The accounting rules related to capitalize software require us to expense the entire purchase price in the period. The $3.3 million dollar Blowdown expense is reflected in R&D on our GAAP income statement. It excluded it from our non-GAAP results to be consistent with how we’d reflect a capitalized asset purchase as we don’t believe expensing the acquired assets definitely reflects the economics of transaction. Operating income in the third quarter was $41.7 million an improvement compared to operating income of $31.4 million in the year ago period. Net income for the quarter was $28.2 million or $0.32 per share, compared to net income of $20.8 million or $0.22 per share in the third quarter of fiscal 2014. Now let me turn to our non-GAAP results, excluding the impact of stock based compensation expense restructuring charges, amortization of intangibles associated with acquisitions and non-capitalized acquired technology. We reported non-GAAP operating income for the third quarter of $48.7 million, which was significantly above the high end of our guidance of $42 million to $44 million. This result was due to the revenue our performance in the quarter combined with our strong history of expense management. Our non-GAAP operating margin in the quarter was 43.7% representing a 510 basis point improvement over the year ago period and is in line with our long-term margin target. Non-GAAP operating income and margin was $40 million and 38.6% respectively in the third quarter of fiscal 2014. Moving down the P&L non-GAAP net income in the third quarter was $32.6 million, which compares to $26.4 million in the year ago period. Our non-GAAP income per share was $0.37 in the third quarter of fiscal 2015 based on $87.9 million diluted shares outstanding, compared to non-GAAP earnings per share of $0.28 based on $93.4 million diluted shares outstanding in the third quarter of fiscal 2014. We’re now in the fourth quarter of fiscal 2015, which means that in this quarter we will complete the revenue model transition that began in fiscal 2010. Our profit margins which weren’t meaningful while we were moving through the revenue transition are now reflective of the true earning power of the business. Turning to the balance sheet and cash flow, the company ended the third quarter with $225 million of cash and marketable securities, a $31.5 million decrease from the end of last quarter after using $107 million of cash to repurchase shares of common stock. As Antonio discussed, we increased the pace of our buyback activity in the third quarter in part to take advantage of some near term weakness on our share price, in addition to the fact that it is our highest free cash generation period. We intend to remain a buyer of our stock going forward and at $375 million remaining under our current buyback authorization. This should expect us to set our buyback rate and levels supported by our free cash flow taking into account other cash needs including the ability to fund acquisitions. Also remember that free cash flow will be unfavorably impacted next fiscal year as we become a U.S. cash taxpayer. From a cash flow perspective, the company generated $64.6 million of cash from operations during the third quarter. On a non-GAAP basis, operating cash flow was $81.4 million and free cash flow was $79.7 million. Capital expenditures totaled approximately $1.8 million in the third quarter of which $1.4 million was related to the build out of our new headquarters. We currently expect to spend an additional $2 million on our headquarters in the fourth quarter and continue to expect to spend a total of approximately $8 million for the year of which approximately $7 million will be capital expense. As a reminder, we are reporting a non-GAAP cash flow from operations metric throughout 2015, in addition to free cash flow. It treats all tax expense and benefits irrespective of source as part of cash flow from operations in order to show cash flow on a historically comparable basis. In the third quarter of fiscal quarter 2015, we utilized $14.2 million of APIC NOLs. We did not make any U.S. federal tax cash payments in the quarter and our best estimate is that we will not pay any federal cash tax in the fourth quarter. We now expect to become a U.S. corporate cash tax payer early in the first quarter of fiscal 2016. Reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website. Our deferred revenue balance was $273.8 million at the end of the third quarter, representing a 9.7% increase compared to the end of the year ago period. On a sequential basis, deferred revenue increased $35.4 million. As we've discussed in the past, the second half of the year is a stronger period for our deferred revenue due to the same factor that drives the timing of our cash flow, namely the timing of when we bill our customers. With the revenue model transition coming to completion, we anticipate that our deferred revenue will generally exhibit a trend pattern similar to our cash flow, driven by higher customer invoice value in the second half of the fiscal year. Turning to guidance, I’d now like to close with some thoughts regarding our updated financial outlook for fiscal 2015 as well as guidance for the fourth quarter. As a reminder, fiscal 2015 represents the final year of our revenue model transition as GAAP subscription revenue normalizes as annual growth should more closely approximate the growth rate of our annual spend metrics. That said we are tightening our fiscal 2015 revenue guidance to $437 million to $439 million, which increases the mid-point of our range by $1 million. This compares to our prior guidance of $434 million to $440 million. As you’re aware over the course of the last year, the U.S. dollar has appreciated materially against a number of foreign currencies. While only above 15% of our revenue was denominated in currencies other than the dollar, we estimate we have incurred over $1 million of revenue headwind from changes in foreign exchange rates year-to-date. From an expense perspective, we now expect total GAAP expenses of $261 million to $264 million, which compares to our prior guidance of $265 million to $270 million. We now expect GAAP operating income of approximately $175 million to $177 million, net income of $113 million to $115 million and GAAP EPS of $1.27 to a $1.29. This compares to our prior guidance of GAAP operating income of $167 million to $173 million, net income in the range of $107 million to $111 million and GAAP EPS of $1.18 to $1.23. From a non-GAAP perspective, we now expect non-GAAP operating income in the range of $193 million to $195 million, which is up from our prior guidance of $182 million to $188 million for the fiscal year 2015. This could lead to non-GAAP earnings per share in the range of $1.41 to $1.43, which is an increase from our prior guidance of $1.29 to $1.33 for the fiscal year. The diluted share values that we're using to calculate EPS are $86.8 million for the fourth quarter and 89.3 million for the full-year. These dilutive share assumptions reflect the roll-forward impact of the shares we’ve already bought back as of December 31, 2015 and do not include any additional upside impact resulting from potential buybacks in the balance of the fiscal year. With respect to total license contract value growth, we’re now targeting fiscal 2015 growth to exceed 11% up from our prior guidance of double-digit annual growth. We’ve delivered strong growth through the first three quarters of fiscal 2015 and solid pipeline of opportunities for the fourth quarter as well. From a free cash flow perspective, we’re increasing our fiscal 2015 guidance to $220 million from our previous guidance of approximately $215 million. As we've noted in prior years our quarterly cash flow has a significant degree of variability due to the timing of cash collection and once again we will have a significant amount of customer payments that become due with the very end of our fiscal year, which increases the variability for the fourth quarter. Looking at the fourth quarter, we expect revenue in the range of $111 million to $113 million, non-GAAP operating income of $45 million to $47 million and non-GAAP EPS of $0.33 to $0.35. On a GAAP basis, we expect fourth quarter operating income of $42 million to $44 million and EPS of $0.30 to $0.32. In summary, we're pleased to report strong third quarter results that exceeded our expectations on both the top and bottom-line. We're executing well and believe we have a long runway of opportunities to generate continued revenue, profitability and cash flow growth that can deliver increasing shareholder value over the long term. Now with that, I would like to turn the call back over to Antonio.

Thanks Mark. Before we being the Q&A session, I want to make an announcement regarding the transition in our Executive Management Team. After serving as AspenTech’s CFO for six years, Mark Sullivan will be retiring from full time work effective September 30, 2015. Mark has been an integral part of AspenTech’s Senior Leadership Team and a driving force behind the revenue and cash flow model transition we have successfully completed over the past six years. Under Mark's leadership we have significantly strengthened the company’s balance sheet, generated consistent double digit growth and generated best-in-class levels of profitability. We will immediately begin an executive search process that will consider both internal and external candidate. Mark will continue to serve as the CFO during this transition process to ensure a smooth and orderly transition. I would like to thank Mark for his significant contributions and leadership in positioning AspenTech as a clear leader in the process optimization industry and wish him well in his retirement. Now we’re happy to take your questions. Operator, let’s begin the Q&A.

[Operator Instructions] Your first question comes from the line of Bhavan Suri with William Blair.

Hi guys, can you hear me okay?

Yep.

Good, good. Mark, I guess first you, congrats for running the business so far so many years, any quick comment sort of plans before I jump into other questions.

No, not really, just really what Antonio said can help through transition and then probably take some time to think about what I want to do next, but as Antonio said, I don't think that's going to be in the realm of quote unquote “full-time employment”. So you can imagine the range of things that, that might fall into that umbrella, but be doing some discovery and thinking about that through the summer and beyond.

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

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

Yeah, yeah, okay. very good, well turning to business, just as a couple questions as we look at it obviously great results but, one of the things that we're trying to understand is if E&C companies are working through the process of rationalizing laying some engineers off which you hear, how is the usage in that business increasing? Is it the, I guess is the usage for engineering increasing at a rate enough, a rate high enough to offset the headcount reductions or the lack of hiring there?

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

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

No, yes, certainly cost estimation is becoming a more popular product as per my comments on the call, but in order to deliver the performance that we did in Q3 and if you go back to Q2, all of our products have to be growing and doing well and certainly there is a group of products that deliver the bulk of the growth and those product continue to grow. Specifically with E&Cs on their own operator side, we continue to see very good uptick of adapted process control technology or planning technology or scheduling and also some of our newly released 1P21 process explorer software. So we’re seeing good demand.

That’s helpful, great. Thanks for taking my questions guys.

Thank you.

Your next question comes from the line of Matt Williams with Evercore ISI.

Hi guys congrats on the quarter and Mark congrats on the upcoming retirement. Just maybe want to touch on one area that we sort of picked up on in research and you guys have talked about in the past but with oil being -- its obviously settled a little bit, but much lower than it was a year ago. Theoretically that should be a positive for the chemical companies and we’re starting to see that a little bit show up in some of the survey work that the firm has done. So just wondering if you could comment on what you’re seeing in the chemical industry and if there has been any sort of benefit from the lower price of oil there.

Chemical customers are feeling good oil at these level is a tremendous benefit from them. Certainly, a lot of the new construction in the U.S. as a result of shale gas, ethane based ethylene crackers is still going and ramping up. So overall, we do see more activity with our chemical customers and more interest as well.

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

Well look it's interesting. If you read some of the commentary, CapEx by the oil companies is being cut back by 30%, 40%. At the same time and some of the area that are most impacted by the dropping oil prices, the power sands in Canada, Suncor has still decided to go ahead with a $1.4 billion investment and they were planning. The customer that I referenced in Asia Pacific over the last 12 months, their backlog has increased to over $10 billion on the back of some awards in the United States. So in the last two three weeks, I’ve been meeting with customers around the world and they look at business as a short-term event. What they tell us is that they’re focused in a horizon of 10 years and they’re going to continue to invest to make our business more productive and more efficient. So I think in general there is a sense that this is a short-term blip. In a way oil prices have stabilized and we’ll see whether they continue in the trend that they have over the next few months, but the key here is for stability. Once the volatility disappears then you can start planning against the target and I think perhaps the scenario is being created for that sort of planning. But in all my customer meeting and I’ve been very purposeful about these when talking to them and trying to detect any concerns, they just feel that their job is to really execute with excellence to make a profit and continue to generate business. So I would add with our -- within our top tuner and 50 customer base I haven't detected a lot of concern.

Great. That’s helpful color. I appreciate it. Thanks guys.

Yeah.

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

Hi good evening and Mark congratulation on your retirement. We’ll miss you out here.

Thank you, Mark.

Turning to the operations here, Antonio I was wondering if you just give some additional details or color around the Blowdown acquisition and maybe higher C2 customers using the product and I would assume that it’s a pre-revenue company for the most part?

Yeah look Blowdown is a leading technology in this space of the persuasion and safety. If technology that was developed by these two professors out of Imperial College. The fact is that it’s not commercially available software. What these professors have done other multiple decade is to actually be contracted. They're normally contracted for a consulting job and they use their technology that they developed as a tool in the [audio gap] The early feedback from our customers is a lot of excitement. It’s perhaps of the recent acquisitions we’ve made is the one that’s generated the most excitement in our customer base. This technology has its origins back in the 70s with the alpha piper explosion in the North Sea when these two professors were contracted to consult and the reasons for that accident and they began to develop this technology. So it goes back many years, but it was never productized and our job is to turn it into a product that we believe has the potential to be very successful.

Okay. Great, thank you. And then R&D spiked up Mark R&D spiked up this quarter sequentially from last quarter and just is that due to Blowdown or is there just some other reasons for that and it’s up in your baseline?

That’s right. It’s the fact that as I mentioned the Blowdown expenses were expensed in the period. The same somewhat unusual accounting treatment that we saw the same quarter a year ago but we had never similar event in the second quarter. So that's primarily what explains the spike up.

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

The number -- no the Blowdown was a onetime thing. So I would expect it to normalize back down next quarter.

Okay. Great. Thank you.

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

Thanks for taking my question.

Hi Monika.

Hi, thanks for your time. Mark, let me add my congratulations to our upcoming retirement as well. Antonio, I’m kind of want to dig little bit deeper on the point you were trying to make on the volatility on oil prices. If the prices is let’s say assume stabilize at these low levels for next six to 12 months, do you think we could see some more negative impact on your end customers or you think it could be actually positive and the overhang of low oil prices than we do not see on your business?

Well Monika, time will tell, but what I can tell you is that we certainly feel that it’s in a sense and what we hear from customers is that it’s been a positive for on owner operators for refiners, for chemical producers. E&C seem to be holding their own, their demand for ourselves too hasn’t changed. BP announced their results I believe it was yesterday and they attributed their performance to the excellent performance in their downstream business where their profits include from about $798 million a year ago to $2.1 billion this quarter and so no doubt that this is a positive for refiners and chemical producers. And if it is a positive for them and by the way back in February both Chevron and Exxon Mobile for the same thing they will invest. Most of -- a lot of the use and most of the use of our engineering software is to build plants, refineries chemical plants certainly is also used in upstream, but it’s 12% to 13% of the usage. So if the downstream sector is generating a lot more cash and profitability we would expect that they’re going to be investing. In addition, look I was also in China in the last three weeks and I’m very excited about the opportunity there. The install base of steel on the ground the opportunity there for us too big regardless of what’s happening with the Chinese economy, because it’s not about growth, it’s about what’s already in the ground that’s well over there. So I think perhaps that’s also something to pay attention to that there’s a lot of refiners and chemical plants that have to be optimized that are that exist today and that are producing products that have to be produced at a more cost affected and that’s what we do.

Thank you, that’s helpful. A question on the operating margin, the operating margins came 44 points towards the high end of your long-term target. How to think about going forward on the operating margin side?

Yeah, so we obviously set these margin target ranges just about a year ago at Investor Day in '14. As we got into the target little faster than we indicated we would, so we’re certainly operating in a range that we’re comfortable with. We will probably talk about that in a little more detail at our Investor Day next week. But this is sort of the operating range that I think that we’re looking to sustain over the longer term.

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

Hi thanks. Just a last one for me, Antonio could you talk about the demand trends you’re seeing in different geographies especially given the current movement macro headwind?

Yes 85% of our revenue is dollar denominated contracts. So in an interesting way like we said it’s been in the smaller medium customer segment where perhaps there is more sensitivity to cash flow and revenue in other currencies. Russia has also been a little bit of a problem. We do our software license business in dollar denominated contracts. So that delay some deals. Latin America, I don’t think the issues in Latin America are macroeconomic issues, governance issues at Petrobras, political issues in Venezuela, Mexico is reorganizing their oil sector and that’s creating some delay on some things. So overall certainly there is a little bit of a headwind from the U.S. dollar but not in that cost is too much concern. The other thing that I want to highlight though is that most of our customers because they’re exporters, they generate cash flow in U.S. dollars okay. So they have the ability to take some of that. They generated revenues in U.S. dollars and take some of that money for their operating expenses or capital expenses. And it’s what we see in Russia, these oil companies in Russia, they’re exporting, they’re generating revenues in U.S. dollars and therefore they can buy in U.S. dollars. That is a common denominator across most of our customers as in a way we’re somewhat isolated or insulated from with our big customers on the strength of the dollar.

Thank you. That’s all I have.

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

This is [Jack] [ph] on for Sterling. Few questions from us, the first being looks like TLCV outgrew annual spend by little bit more than it usually does, was there any change in contract duration in the quarter?

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

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

Sorry did your question pertain to revenue guidance or TLCV growth?

Revenue guidance, I’m sorry.

Yes again we talked about quarter-to-quarter sequential changes in revenue are not going to be a like a perfect step function out there every quarter and you definitely referenced to some degree part of that is the fact that we million plus of revenue that we expected based on our forecast of getting Q4, we actually got in Q3. So that is part of what’s going on. I think if you back that out, you do see kind of bit of sequential growth quarter-to-quarter, but again I think it’s more valid to look at our revenue on again a 12 months trailing incentive basis you really see a more natural growth rate instead of trying to look at it sequentially.

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

Well, going forward they will start to be in line in '16. So now annual spend is a pure metric. It’s really -- you really invoice value going into deferred revenue. So it’s leading indicator a little bit in terms of actual revenue, which obviously amortizes out over a ratable 12-month basis and again it’s important to realize the annual spend metric pertains to the subscription portion of our revenue, not professional services or the other services revenue sources. But really they should be relatively similar not the other thing notwithstanding all that stuff that GAAP can do to your revenue from a deferral and timing standpoint, but certainly over the long haul those growth rates are approximately the same.

All right, thanks.

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

Mark I was just looking at the stock chart, when you joined it was between five and six bucks a share, what a remarkable transformation in the company and yes it also shows that Fresco is not the only one with great timing.

Since she has gone, I’ll take that credit.

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

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

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

No, look I believe I said it in previous calls. Fracking and the mid-stream segment is sort of the Shell mid-stream, it's a lot simpler than producing oil in the North Sea from oil platforms. So there is less intensity of use of our software. So I would say while that’s a segment that's grown for us it’s really '09, '08, the intensity of use of our software is less so than call it traditional production oilfield facilities, which are much more complex than the shale fields in the U.S.

All right. Well thanks very much guys.

Thank you.

Thank you.

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

Okay well I would like to thank everyone for joining the call today. I also want to extend a great word of recognition for the AspenTech team who continue to perform at a high level over the last few quarters and really over the last few years. It’s a team that I believe it's all in, it's always shaping the outcomes and forcing them and I would like to extend a word of recognition to them in this call, but thank you everyone and we’ll talk to you all on the road. Thanks.

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