Mark Sullivan – Chief Financial Officer & Executive Vice President Antonio Pietri – President, Chief Executive Officer & Director

Monika Garg – Pacific Crest Securities Mark Schappel – The Benchmark Co Matthew Pfau – William Blair & Co

Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Fiscal 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd now like to turn the call over to Mark Sullivan, CFO of Aspen Technology, Inc. Please go ahead, sir.

Okay. Thank you, operator. Good afternoon, everyone, and thank you for joining us to review our fourth quarter and full year fiscal 2015 results for the period ended June 30, 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-K for the 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, August 13, 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 the business highlights from the quarter, and then, I will review our financial results for the fourth quarter and fiscal year, and our guidance for the first quarter and fiscal year 2016, before we open up the call for Q&A. With that, let me turn the call over to Antonio. Antonio?

Thanks, Mark, and thanks to everyone for joining us today. We delivered a solid fourth quarter performance particularly in light of the impact that macro challenges are having on certain key markets and customers that we target, with each of our key metrics exceeding guidance. Looking at our financial highlights for the quarter, TLCV grew 11.8% year-over-year. Total revenue was $114.2 million, $1.2 million above the high-end of our guidance range. Non-GAAP EPS was $0.39, which was $0.04 above the high-end of our guidance range. Non-GAAP operating margin was 44.2% and we returned $73.6 million to shareholders by repurchasing 1.8 million shares. The fourth quarter marked the end of another strong fiscal year for AspenTech, including a fifth consecutive year of double-digit TLCV growth. For the full-year FY 2015, we delivered total revenue of $440.4 million, non-GAAP EPS of $1.46, non-GAAP operating margin of 45.1% up 690 basis points year-over-year, free cash flow of $223.6 million and we returned $298.3 million to shareholders by repurchasing 7.7 million shares. Our performance in the fourth quarter was driven by good activity in energy and chemicals and a strong performance in Europe and Asia Pacific. While our results exceeded the financial targets we set for the quarter, the demand environment became more uncertain in several areas as a result of the challenges facing the energy and the E&C industries. There are several attributes of the AspenTech model that enabled us to deliver solid growth in a more pressured demand environment and which we believe positioned the company well moving into the future. First, two-thirds of our business is focused in the owner/operators segment in the energy and chemicals verticals. These users have to keep operating and optimizing their plans on a day-to-day basis irrespective of the volatility in oil prices. Global GDP growth remains positive, which is the biggest driver for the health of these customers. Second, the breadth and depth of AspenTech solutions deliver significant value to customers by optimizing its assets for higher throughput and lower costs, which are essential in a more challenging operating environment. Third, AspenTech has meaningful business activities in every region of the world, which provides a natural hedge against national or regional issues that can impact demand in a specific region at any point in time. Lastly, we have long-standing customer relationships, as well as contracts that are typically five years to six years in duration, which provide us with a high level of visibility. These positive attributes were important as the demand environment became more challenging during the quarter and we believe that it will continue to be very important as we move forward. The volatility in oil prices experienced in the last 12 months is pressuring engineering and construction companies as their owner/operator customers continue to reduce their CapEx budget and have gotten more aggressive in demanding commercial concessions from their E&C partners. As a result, we saw a slower growth in our business with E&C customers, particularly in North America, and we do not expect this dynamic to change in the near-term based on macro factors. It's important to note, however that we expect the agency vertical will continue to be a positive contributor to growth in FY 2016. As I mentioned in the last earnings call, we also continued to see issues in many of our smaller, but higher growth regions, such as sanctions and the volatility of the oil price leading to greater caution in our Russian customers, and the governance and macro issues facing our biggest customers in Latin America and also China. These issues do not seem to be impacting demand or the pipeline of opportunities in these regions, but rather are lengthening the sales cycles in some cases. Taken into consideration, the macro environment and other factors impacting certain regions and customers, we now expect to generate annual spend growth of roughly 9% to 10% in fiscal 2016, which compares to a preliminary estimate of 11% plus that we shared at our Analyst Day. Please note that 9% to 10% annual spend growth equates to 10% to 11.5% TLCV growth, which was a non-GAAP growth metric we gave guidance on in previous years. Our pipeline of opportunities has continued to expand since our Analyst Day, but we believe it is now prudent to take a more cautious view on our close rate and velocity assumptions for the reasons outlined above. We believe the key attributes of AspenTech's business and financial model just discussed combined with our strong market position and broad suite of solutions, will position us to deliver another year of solid growth this year. Our 2016 outlook comes on the heels of a very strong performance in fiscal 2015. We delivered TLCV growth of 11.8%, exceeding our full year guidance of greater than 11% growth. The performance in the year was anchored by solid performances in our Asia-Pacific, Europe and North America regions and in the global accounts organization. Our high growth regions were positive contributors to growth for the year, but did experience significant headwinds in the second half of the year as I just discussed. From a product perspective, we're pleased with the performance of our engineering business in the year. In addition, we are seeing the positive impact from the innovation introduced in the last two, three years on the growth rate of our MSC business. For the year, our engineering business represented 56% of our overall TLCV growth, with the MSC business representing the other 44%. Our installed base of business at the end of the year is split 69% engineering and 31% MSC. Our three core verticals of energy, chemicals and E&C contributed 45%, 28% and 24% of our growth in TLCV during the year respectively. Turning to the fourth quarter, energy, engineering and construction, and chemicals once again represented greater than 90% of our business. Chemicals were the largest vertical contributor followed by energy and engineering and construction. Looking at our 10 largest transactions in the quarter, there was again a mix of engineering and manufacturing supply chain deals, and both product suites generated positive performance. All were over $1 million in TLCV, with the majority being multimillion dollar transactions. I would like to provide some color on this quarter with the following five multimillion dollar transactions. First, one of the largest chemical companies in the world, headquartered in Africa, expanded its engineering products agreement with AspenTech after reorganizing to focus on increasing productivity and profitability through integration and optimization of operations. Second, a South Korean-based refining company expanded and standardized the use of AspenTech's planning solutions into a newly built joint venture chemical plant to optimize the increasingly complex refining and chemicals operations. Third, a Thailand-based energy and chemicals companies embarked on a supply chain improvement initiative to drive additional profitability by focusing on optimizing decision-making in the primary distribution area. This company already used our planning and scheduling supply chain solutions and after a rigorous selection process, its use was expanded for this application. Fourth, a Canadian-based integrated energy company signed an agreement to deploy our advanced process control solution in its upstream operations and, I emphasize upstream, in order to improve efficiency and maintain low-cost and resulting profitability. This customer is a long-term user of our advanced control solutions and refining operations. And, finally, a global chemical company expanded token entitlement for our advanced control and IP21 products to focus on improving their profitability through access to AspenTech's latest technology innovation in these areas. These transactions which are a small subset of our overall activity in the quarter demonstrate a resilience of our business model. A key point of our growth strategy is to drive greater token usage by continuing to expand our product portfolio, whether through incremental capabilities or an enhanced user experience. During the quarter, we released aspenONE Version 8.8 which included a number of new enhancements such as an updated capital and energy cost optimization workflow and new suite of refinery reactor models, and a new campaign management and visualization product that makes it easier and faster to create and optimize production sequence or product will especially for our polymers customers. We will continue to invest meaningfully in our product portfolio and have a significant deployment development roadmap that can deliver greater efficiency and value to our customers. During the quarter, we also held our OPTIMIZE 2015 Global User Conference where both E&C and owner/operator customers showcased their experiences in creating value from the use of our solutions. AspenTech enters FY 2016 with a fully transitioned revenue model and a P&L that reflects best-in-class levels of profitability even as we make appropriate investments in our products and distribution efforts to drive long-term growth. Our attractive and highly scalable business model generates substantial free cash flow that we plan to continue to use to enhance shareholder value. To summarize, AspenTech delivered a solid fourth quarter that capped another strong year of growth, profitability and cash flow generation. Customers continue to expand the level of usage of the aspenONE platform to drive additional efficiency in their asset base. We continue to be positive about our ability to drive growth across our business and believe the annual spend growth guidance we're providing is prudent based on the current environment. With that, let me turn the call over to Mark. Mark?

Thanks, Antonio. I'll begin by reviewing the supplemental metrics that we provide starting with our term contract value or TCV metric, which measures the renewal value of our multiyear term contracts. Our license-only TCV was $2.07 billion at the end of the quarter, which was up 11.8% compared to the end of fiscal 2014 and up 2.2% on a sequential basis. Including bundled maintenance, total term contract value was $2.46 billion at the end of the quarter, which was up 12.3% compared to the end of fiscal 2014 and up 2.2% sequentially. Annual spend, 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 term maintenance revenue was approximately $419 million at the end of the quarter. This represented an increase of approximately 10.5% on a year-over-year basis and 1.9% sequentially. As a reminder, now that our revenue model transition is complete, we'll no longer be providing TCV or license-only TCV metrics on a quarterly basis. We plan to update these metrics only on a milestone basis. We will however continue to provide annual spend guidance and quarterly results as we believe annual spend is the more relevant indicator of our business performance now that the revenue model transition is complete. Now, let me turn to our financial results on a GAAP basis. Total revenue of $114.2 million for the fourth quarter was up 12.5% from $101.5 million in the prior-year period and exceeded the high end of our guidance range. Looking at revenue by line item, subscription and software revenue was $105.6 million for the fourth quarter, an increase from $91.6 million in the prior year and $102.5 million last quarter. Services and other revenue was $8.5 million compared to $10 million in the year-ago period and $8.8 million last quarter. Turning to profitability, gross profit was $101.6 million in the quarter with a gross margin of 88.9% which compares to $88.7 million and a gross margin of 87.3% in the prior-year period. Operating expenses for the quarter were $54.7 million compared with $51.3 million in the year-ago period. Total GAAP expenses, including cost of revenue were $67.3 million, which was up from $64.2 million in the year-ago period and down from $69.6 million last quarter. For the full year, total expenses were $260.6 million, which was just below the low end of our guidance range of $261 million to $264 million. We're continuing to demonstrate strong expense management and it's something that we will remain focused on moving forward. Operating income was $46.9 million for the fourth quarter of fiscal 2015, an improvement from $37.4 million in the year-ago period. Net income for the quarter was $30.8 million or $0.36 per share compared to net income of $26.7 million or $0.29 per share in the fourth quarter of fiscal 2014. Turning to 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 fourth quarter of $50.5 million and a non-GAAP net income of $33.1 million. This represents an improvement from a non-GAAP operating and net income of $40.5 million and $28.7 million respectively in the year-ago period. Our non-GAAP income per share was $0.39 in the fourth quarter of fiscal 2015 based on 85.6 million shares outstanding compared to non-GAAP income per share of $0.31 based on 92.7 million shares outstanding in the fourth quarter of fiscal 2014. For the full fiscal year, our revenue of $440.4 million was up 12.5% year-over-year. GAAP operating income of a $179.8 million was a significant improvement from $129.7 million in fiscal 2014 while non-GAAP operating income of $198.4 million improved from $149.5 million in fiscal 2014. Turning to the balance sheet and cash flow. The company ended the year with $218.5 million in cash and marketable securities, a decrease of $6.5 million from last quarter. During the fourth quarter, we repurchased approximately 1.8 million shares of our stock for $73.6 million bringing us to a total of $298.3 million in buybacks for fiscal 2015. Our pace of stock repurchase activity in fiscal 2015 was somewhat elevated as we took advantage of some share price volatility. Going forward you should expect that our buyback rate will be at level supported by our free cash flow, taking into account other cash needs, including the ability to fund acquisitions. It's important to remember that we have now exhausted our NOLs and other tax assets, and in fiscal 2016, we will become a U.S. cash taxpayer which will have an unfavorable impact on our free cash flow. Looking at our deferred revenue balance, it was $288.9 million at the end of the fourth quarter, representing a 5.1% increase compared to the end of a year ago period. On a sequential basis, deferred revenue increased $50 million. From a cash flow perspective, the company generated $53.6 million of cash from operations during the fourth quarter and $192 million for the full year. On a non-GAAP basis, operating cash flow was $68.7 million and free cash flow was $67 million during the fourth quarter. For the full fiscal year 2015, non-GAAP cash flow from operations was $231.6 million and free cash flow was $223.6 million. This year's free cash flow was up from the $200 million generated in fiscal 2014 and above our most recent guidance of $220 million. 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 like to close with an update to our financial outlook for fiscal 2016, which we initially provided at our Analyst Day this past May. We're updating our full fiscal year revenue guidance to $465 million to $473 million compared to our prior guidance of $470 million to $478 million. From a mix perspective, we continue to expect subscription and software to comprise greater than 90% of our revenue, with our services and other revenue representing the remainder. From an expense perspective, we now expect total GAAP expenses of $272 million to $277 million for the full year, which is lower than our prior guidance of $275 million to $280 million. Taking together, we continue to target GAAP operating income in the range of $192 million to $200 million for fiscal 2016, with GAAP net income of approximately $122 million to $127 million. We now expect GAAP net income per share of $1.45 to $1.51 per share, which compares to our prior guidance of $1.40 to $1.46 per share. From a non-GAAP perspective, we are reiterating our non-GAAP operating income guidance $207 million to $215 million. We expect non-GAAP income per share in the range of $1.56 to $1.62 for fiscal year 2016. This is up from our prior non-GAAP income per share guidance of $1.51 to $1.57. The increase to our GAAP and non-GAAP income per share guidance reflects the impact of share repurchases we did in the fourth quarter of fiscal 2015. With respect to annual spend growth in fiscal 2016, as Antonio previously indicated we are now targeting 9% to 10% annual spend growth in fiscal 2016. From a free cash flow perspective, we are updating our fiscal year guidance to $170 million to $175 million versus the $175 million to $180 million that was initially provided at our Analyst Day. The change from our initial guidance takes into consideration our updated outlook for annual spend growth in fiscal 2016. Our fiscal 2016 free cash flow guidance assumes cash tax payments of approximately $65 million to $70 million. As it relates to the first quarter, we expect revenue in the range of $118 million to $120 million non-GAAP operating income of $53 million to $55 million and non-GAAP earnings per share of $0.40 to $0.42. On a GAAP basis, we expect operating income of $49 million to $51 million and income per share $0.36 to $0.38. Included in our first quarter revenue guidance is approximately $5 million of revenue that is not being recognized on a purely ratable basis and we'll not roll forward to subsequent quarters. This revenue is related to the timing associated with receiving payments on cash basis arrangements and the timing of revenue recognized on a completed contract basis. As we discussed on prior calls, the timing of revenue recognition in particular on large cash basis contracts may cause quarter-to-quarter variability in our revenue results. In summary, we are pleased to have delivered a solid finish to fiscal 2015 with results that exceeded our expectations. We believe our increased scale and geographic and product diversification are positioning us for another year of solid growth despite the uncertain macroeconomic and oil price environment. With that, we're now happy to take your questions. Operator, let's begin the Q&A. [Operator Instructions]

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

Hi. Thanks for taking my question. Antonio could we – maybe you can provide more details regarding the E&C slowdown commentary you provided?

Well, let me look at – as we all know, certainly the volatility in oil prices is leading to a significant amount of CapEx cuts. This is clearly having an impact on our E&C customers and their projections for their business. In turn, what we saw in Q4, well the volume of business that we had coming into the quarter was in line with expectations to deliver against the guidance that we had established, we also saw a significant slowdown in the velocity of the deals with E&C customers and what we're finding is that they are being much more measured in their spend and while the deals are not disappearing, they are just moving to later as per the conversations that we're having with them. So, in Q3 we talked about our small customers being impacted and seeing the impact from the volatility in oil prices, thus now showing up in our bigger E&C customers, especially in North America.

Got it. Thanks. Then, are you seeing an impact on your business due to strength of U.S. dollar which is impacting profitability of some of U.S. export-oriented companies?

Are we seeing impact on the business in terms of strength in the U.S. dollar?

Yeah. [indiscernible]. Yes. Yes.

I don't think – not too much. I think in some pockets you're not – first of all not that much of our business is denominated outside the U.S., but clearly if it's in the U.S., it's in U.S. dollars, in sort of a standard scenario, you think that products get more expensive in the other countries, but lot of our customers we've talked about are multinationals that do business in dollars and I can't really say that I felt that a big impact has been felt yet in terms of the impact of a dollar, in terms of bookings with maybe the exception of Russia which has had a really significant devaluation in their currency relative to the dollar.

Okay. Thanks. That's all from me.

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

Hi, good evening. Thank you for taking my call. Antonio, not too much discussion about your supply chain business in your prepared remarks, I was just wondering if there is any interesting movement in that business this quarter?

Well, I mean look, certainly one of the deals that we've referenced with one of our customers in Korea was around – in Thailand was around supply chain and we're seeing materially more activity with our chemicals customers around supply chain, especially around plant scheduling and planning and that's the area that where we're really focused on the supply chain at the moment.

Okay. Great. And then your R&D spending, Mark was down much more than I expected here. Is this the new baseline or was there any significant changes there in your development department?

Are you looking at quarter-over-quarter, sequential? Remember...

Yeah. There's a little bit of a spike in the March quarter, but...

Yeah. I mean, remember we have these unusual circumstances where we buy these small companies' technologies and we don't get to capitalize and we end up expensing them. So I think if you're looking sequentially, you probably saw a blip in the March quarter because we bought the BLOWDOWN assets and we didn't have a similar type of transaction here in the fourth quarter. But I think if you look at the overall R&D spend in the context of our operating model, we've sort of targeted R&D, it's kind of in line with where we thought it would be.

Okay. Great. And then one final question on some color on the E&C business, [indiscernible] seeing, is that principally related to projects in the energy area or are you also seeing that in chemicals and petrochemicals as well?

No. Well, I mean, look, a lot of these owner/operators understand is -they have refining operations, they have chemical operations, and they have their upstream operations. My expectation is that a lot of that CapEx costs are going into upstream and cutbacks in that area. But at the same time, some announcements have been made about projects both in refining and chemical that are now going forward. But I'd tell you though that we're seeing significant strength in our chemicals business. We've seen an acceleration of that business in the year and especially Q3, Q4 I think that the benefit from the drop in oil prices. And as you probably read as well, when you look at the earnings announcements from some of these oil companies, their refining business, they are doing very well. So we're also seeing good strength in that area. So overall, I think the mix of our business and as we talked about over the last two quarters has proven to be very resilient against this volatile environment that we're seeing.

Okay. Great. Thank you very much. [Operator Instructions]

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

Hey, guys. Thanks for taking my questions. First one, I wanted to drill into your guidance a little bit and what the underlying assumptions are there. So if you could talk about those a little bit, maybe are you assuming that the current economic environment stays as is or a potential worsening with your clients? Just more details there would be great.

I'll talk about our annual spend growth guidance and then, of course, Mark can address the rest, if you're interested in that part. But look, yeah, as we came out of our Q4 quarter, clearly the business for our E&C customers and the willingness to pull the trigger on deals has changed. The interesting thing about that piece is that since we get usage reports of our software from these customers, some of these customers are maxing out in their usage, they're hitting denials of access to our software. But at the same time, they're holding back on adding incremental token, so that's why we believe that this is a timing issue and it may take shorter or longer for them to pull the trigger in that area. Nonetheless, we have assumed that from an E&C standpoint, we'll continue to see a lot of moderation in their spend going forward for all of FY 2016. On the other hand, we saw an acceleration of our MSE business that really means that owner/operators are buying and are spending money to optimize their assets both on the energy side and on the chemical side. And based on that mix of business, we've taken to put forward guidance of 9% to 10% on annual spend growth, which we believe is prudent and, well, we'll execute to it to make sure we can meet it.

Yeah. So, I mean, what I would add to that, as you move into the P&L is obviously the impact of guiding down a little bit on annual spend flows through into the revenue line and our guidance is essentially down $5 million for both ends from a revenue standpoint. We're focused on profitability, we've made some adjustments to the expense numbers, and we're maintaining all the profitability metrics that we put forward at the Investor Day back in May and that most of the per share numbers are improving because of the impact of the buyback since – reflected now in the numbers since we had the Investor Day back in May. And lastly, on cash flow, again that's down about $5 million kind of consistently with the impact on revenue.

Got it. And then, can you talk about with E&C, you said it was primarily in North America that you've been seeing the resistance or I guess the delay in deals or longer sales cycles. Is there something specific to that geography that's not impacting other geographies, or is it something you think could potentially spread to other geographies as well?

Well, look, especially we saw a significant slowdown in North America, but from an E&C standpoint, we also saw moderation in the other regions in Europe and Asia. Those two regions, Europe and Asia showed particular strength in the quarter because of our owner/operator business. But look, the combination of now a slowdown in the SMB business, a significant slowdown in North America and moderation [indiscernible] that E&Cs are now managing their business in a much tighter manner and we just have to be prudent in our views of that business going forward.

Got it. Thanks for taking my question, guys.

No. Thank you.

Your next question is a follow-up from Monika Garg with Pacific Crest.

Hi. Thanks for the follow-up question. I have a question on the operating margins 2015, you did 45.1%, you're talking about expense control and managing that line. So why should margins be down year-over-year because your guidance is 44% to 45% for 2016?

Yeah. The numbers I have don't suggest that income margins are down. They actually suggest they go up a little bit or certainly are in the same range as they were in fiscal 2015. So I think we're maintaining the margins from Investor Day and again I think they're actually up a little bit if you go to that – in the right – in the guidance range.

Okay. Then the question, Aveva was recently bought – merged with Schneider Software business. Do you see that company giving more competition to you now?

I'll answer that question. But let me look at certainly we do not compete with Aveva. With regards to Schneider and their Invensys business, the fact that we compete against them very well, we have differentiated technology and we're confident of the lead that we have in our technology vis-à-vis theirs. And I think the market has spoken as far as their preference for our platform. Our long-term R&D roadmap also remains very compelling relative to our competitors. So overall I do not expect any impact on our customers' preference for our products. When you get into market share, there's just a significant lead over them as well. So we're still very confident of our business going forward.

Thanks, Antonio.

At this time, there are no additional questions in the queue. I would like to turn it back over to management for closing remarks.

All right. Well, I want to thank everyone for joining the call today, especially in the middle of this August month in the summer and we certainly look forward to seeing at least some of you on some of the [ph] NDR that we'll be doing in early September. Thank you.

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