Karl Johnsen – Chief Financial Officer Antonio Pietri – President and Chief Executive Officer

Matt Pfau – William Blair Monika Garg – Pacific Crest Sterling Auty – JPMorgan D.J. Hynes – Canaccord Mark Schappel – Benchmark Company

Ladies and gentlemen, thank you for standing by. And welcome to the Aspen Technology First-Quarter 2016 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 would now like to turn today's conference over to Karl Johnsen, CFO. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us to review our first-quarter fiscal 2016 for the period ending September 30, 2015. I'm Karl Johnsen, CFO of AspenTech. And with me on the call today is Antonio Pietri, President and CEO. Before we begin, I will make the usual Safe Harbor statement that, during the course of this call, we may make projections or other forward-looking statements about the financial performance of the Company that involve risks and uncertainties. The Company's actual results may differ materially from such projections or statements. Factors that might cause such differences include, but are not limited to, those discussed in today's call and in our Form 10-Q for the first quarter of fiscal year 2016, which is now on file with the SEC. Also, please note that the following information is related to our current business conditions and our outlook as of today, October 29, 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 in the quarter, and then I will review our financial results for the first quarter, and our guidance for the second quarter and fiscal year 2016 before we open up the call for Q&A. Antonio?

Thanks Karl. And thanks to everyone for joining us this evening. First of all, let me say that I'm excited to have Karl Johnsen as our CFO going forward. Karl not only has significant and relevant experience in finance, but also the institutional knowledge about AspenTech that will serve us well going forward. Additionally, he also has significant M&A and Investor Relations experience from his previous companies that will be beneficial to AspenTech as we look ahead. Great job, Karl. Now let me turn my attention to our results. Overall, we delivered a solid first-quarter performance with results that exceeded our guidance across all metrics. Looking at our financial results for the quarter, annual spend was $423.4 million, up 10% year-over-year. Total revenue of $120.3 million was above the high-end of our guidance range. Non-GAAP operating income was $60.2 million, which represents a non-GAAP operating margin of 50%. Non-GAAP EPS was $0.47, which was $0.05 above the high-end of our guidance range and grew 37% on a year-over-year basis, due to the combination of our top-line growth, operating margin expansion, and reduction in share count, as we executed our share repurchase program. And free cash flow was $20.2 million. From a sales perspective, we saw a strong performance among our owner operator customers and good activity in Asia-Pacific, the Middle East, and Latin America. These customers are benefiting from a macro environment supportive of positive GDP growth and low oil prices that reduce the largest cost to run their facilities. We are seeing usage growth among these customers as they look for additional ways to enhance the efficiency and profitability of their operations. The demand environment among E&C's remained challenging in the first quarter. This was largely consistent with what we experienced in the fourth quarter and was in line with our expectations. E&Cs continue to deal with lower CapEx spending and their customers pushing for greater pricing concessions, due to lower oil prices. The challenging environment for E&Cs is influencing some of our customers to renew at flat or lower entitlement levels or not to renew their agreements, as they adjust to reduced demand from their customers. As a result, while AspenTech still has best-in-class renewal rates in the 95% to 96% range, it is below our more normal average of 98% to 99%. We expect the dynamics impacting this vertical will continue for the balance of FY16. We are pleased to have delivered 10% year-over-year annual spend growth in the first quarter despite the challenging spending environment, and believe we remain on track to achieve 9% to 10% annual spend growth for fiscal 2016. This growth rate, coupled with a modest increase in attrition that I referenced earlier, by definition, implies that the level of gross new sales growth remains very comparable to what we have delivered in recent years. Our continued growth reflects the resilience of our owner operator business, which represents two-thirds of the business and the significant value our solutions are generating for customers every single day. During the first quarter, energy, engineering, and construction and chemicals once again represented greater than 90% of our business. Chemicals were the largest vertical contributor, followed by engineering and construction, and energy. Looking at the 10 largest transactions in the quarter, it was again a mix of engineering and manufacturing supply chain deals. The headwinds among E&C customers have had a greater impact in demand for our engineering solutions, which we expect to continue going forward. I would like to reference a few key deals that closed in the quarter to provide insight on how we continue to generate growth. The first deal is for an integrated oil and gas owner operator customer in our Latin American region. This customer renewed early their MSC contract with AspenTech and increased entitlement of our planning solution to improve their crude purchasing decisions. This agreement extends our relationship with this customer after they signed an engineering software agreement in fiscal 2015. Second, a Middle East joint venture is doing a multi-billion dollars expansion of their integrated refining and petrochemical site, and decided that their existing planning and scheduling solution from a competitor was not delivering the expected results. They signed an MSC agreement to get access to our planning and scheduling solution with the objective to develop a single model for the integrated site as part of their expansion. Our competition was displaced. Third, one of the largest refineries in Russia expanded the use of our engineering software with the objective to develop models for more of the process units and integrate them to our existing planning solution. This customer is focused on improving the efficiency of their refinery operations by expanding the use of AspenTech's engineering solutions to more refining processes and integrating them to the planning solution that will improve the accuracy and efficiency of their refinery plan. Fourth and last, a large state-owned enterprise in China, with a long-term relationship with AspenTech, expanded the use of our supply chain solutions to optimize their feedstock and products logistics across China, further cementing our relationship. We continue to make meaningful investments in R&D in order to bring additional functionality to market that will drive future usage growth. Customers continue to upgrade to Version 8 and it now represents 55% of current usage hours. In August, we released Version 8.8.1, which included powerful visualization and analytics functionality in our aspenONE process Explorer product. Upgrades to aspenONE process Explorer are taking place at an accelerated rate with over 30% adoption growth month-to-month. And since August, the growth rate has further accelerated. AspenTech is uniquely positioned to take advantage of our installed platform of products and solutions to provide greater insights to our customers via analytics that combine models and data, powered by deep insight into chemical engineering and process knowledge. We plan continued R&D investments in these and other areas going forward. The first-quarter represented our first full quarter with a fully transitioned revenue model. We, once again, generated meaningful year-over-year leverage that increased our best-in-class operating margins. In the first quarter, we were prudent about the pace of investment in some areas of the business due to the macro environment. But we expect to continue our investment plans in the back half of the fiscal year. We are focusing our investments in underpenetrated regions like China, Russia, the Middle East, in new product capabilities, and in back-office infrastructure that will drive incremental growth and profitability over time. We continue to use our strong balance sheet and cash flow to drive incremental shareholder value via share buybacks, which totaled $55 million in the first quarter. Since the inception of our share repurchase program in fiscal 2011, we have returned more than $600 million of cash to shareholders and reduced our diluted shares outstanding by 12%. In summary, we posted solid first-quarter results in a challenging macro environment, and during what is normally our most challenging growth quarter, due to the combination of summer vacations across many regions and into the start to a new fiscal year. Our continued success reflects the mission-critical nature of our products and the tremendous value we generate for customers across all phases of the business cycle. We remain focused on driving operational excellence across the organization, and I remain confident in our ability to achieve our full-year financial objectives. With that, let me turn the call over to AspenTech's new Chief Financial Officer, Karl Johnsen.

Thank you, Antonio. I'm excited about my new role here at AspenTech, and looking forward to meeting and working with our investors and analysts in the coming months. I'd now like to review our financial results for the first quarter of fiscal 2016, beginning with annual spend. As a reminder we no longer – we are no longer providing TCB and TLCV metrics on a quarterly basis, but rather on an annual or milestone basis. 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 $423 million at the end of the quarter, which is an increase of approximately 10% on a year-over-year basis and 1% sequentially. Let me now turn to our quarterly financial results. Beginning on a GAAP basis, total revenue was $120.3 million, was up 12% from $107.1 million in the prior-year period and was above the high-end of our guidance range. Breaking this down further, subscription software revenue was $111.9 million for the first quarter, which is an increase of 13% from $98.7 million in the prior-year period, and $105.6 million last quarter. Services and other revenue was $8.4 million, consistent with the year-ago period and with last quarter. Included in our first quarter revenue was approximately $5 million of revenue that was not recognized on a purely ratable basis will not extend to subsequent quarters. This revenue is related to the timing of revenue recognized on a completed contract basis and the timing associated with receiving payments on cash basis arrangements. As we have 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. Turning to profitability, gross profit was $107.3 million in the quarter with a gross margin of 89%, which compares to $94.7 million and a gross margin of 88% in the year-ago period. Operating expenses for the quarter were $51.9 million compared to $50.1 million in the prior-year period. Total GAAP expenses, including cost of revenue, were $64.9 million, up from $62.5 million in the year-ago period, and down from $67.3 million last quarter. Expenses were somewhat behind – below plan in the first quarter, due to the timing of investments and hiring. Operating income was $55.4 million for the first quarter of fiscal 2016, an increase compared to $44.6 million in the year-ago period. Operating margin was 46% for the first quarter of fiscal 2016 as it compared to 42% in the year-ago period. Net income for the quarter was $36.8 million or $0.44 per share compared to net income of $29 million or $0.32 per share in the first quarter of fiscal 2015. Turning 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 first quarter of $60.2 million, representing a 50% margin and a non-GAAP net income of $39.8 million. This compares to non-GAAP operating income in margin of $49.1 million and 46%, respectively, and non-GAAP net income of $31.8 million in the year-ago period. Our non-GAAP EPS was $0.47 in the quarter of fiscal 2016, based on 84.3 million shares outstanding. This is up 37% compared to 35% based on 91.9 million shares outstanding in the first quarter of fiscal 2015. Turning to the balance sheet and cash flow, we ended the first quarter with $181.5 million in cash and marketable securities, a decreased of $37 million from the end of last quarter. During the quarter, we repurchased 1.3 million shares of our stock for $55 million. Our deferred revenue balance was $253.5 million at the end of the first quarter, representing a 1% decrease compared to the end of the year-ago period. The year-over-year decrease reflected the impact of recognizing some contracts under completed contract accounting. On a sequential basis, deferred revenue decreased $35.4 million. As a reminder, the deferred revenue balance is heavily influenced by the timing of invoices, and the first quarter is typically our lowest invoicing quarter. I remind you that the best indicator of the underlying growth in our subscription business is our annual spend growth metric. That said, over the course of the year, we would expect deferred revenue growth to generally be in line with the underlying growth in the business, with some quarter-to-quarter variability. From a cash flow perspective, we generated $18.4 million of cash from operations during the first quarter and $20.2 million of free cash flow, after taking into consideration the net impact of $1.1 million in capital expenditures and capitalized software, $1.6 million in excess tax benefits from stock-based compensation, and $1.3 million in non-capitalized acquired technology, inclusive of a $1 million final payment related to our acquisition of Sulsim in fiscal 2014. Please note that we have now fully utilized our historical NOL balance. We have become a U.S. cash taxpayer. In our first quarter operating cash flow, we had approximately $2.9 million of cash taxes paid. 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'd now like to close with thoughts regarding our financial outlook for fiscal 2016 as well as guidance for the second quarter. For the second quarter, we expect revenue in the range of $111 million to $113 million; non-GAAP operating income of $50 million to $52 million; non-GAAP EPS of $0.38 to $0.40. On a GAAP basis, we expect second quarter operating income of $46 million to $48 million, and EPS of $0.35 to $0.37. From a revenue perspective, we have a large cash basis customer that is up for renewal during the second quarter that we have excluded from our guidance outlook, due to the uncertainty of when this customer will pay its invoice. Although the vast majority of our business is not recognized on a cash basis, the timing of when cash basis customers pay can impact sequential revenue trends. This variability becomes less significant when comparing annual time frames. Turning to the full-year, we are reiterating our previous revenue guidance of $465 million to $473 million. From a mix perspective, we continue to expect subscription and software to comprise greater than 90% of revenue, with our services and other revenue representing the remainder. From an expense perspective, we are adding – we are adjusting our assumption for total GAAP cost and expenses to $268 million to $270 million, which compares to our previous guidance of approximately $272 million to $277 million for the full year. Taken together, we expect GAAP operating income in the range of $195 million to $203 million, net income in the range of $125 million to $130 million, and GAAP EPS of $1.49 to $1.55 per share. This is up from our previous guidance of GAAP operating income of $192 million to $200 million, net income of $122 million to $127 million, and GAAP EPS of $1.45 to $1.51 per share. From a non-GAAP perspective, we now expect non-GAAP operating income in the range of $211 million to $219 million, which is up from our previous guidance of $207 million to $215 million for the full year of fiscal 2016. This would leave non-GAAP earnings per-share in the range of $1.61 to $1.67 per share, which is an increase in our initial guidance of $1.56 to $1.62 per share for the fiscal year. With respect to annual spend, we are reiterating our guidance of 9% to 10% growth in fiscal 2016. Fiscal 2016 has a higher than normal number of large contracts with national oil companies up for renewal. We're confident in our annual growth objectives and that we will renew these large contracts. However, there may be some quarter-to-quarter variability in our annual spend metrics, depending on the timing of when these renewals occur. Our history with national oil company’s shows that they consistently renew, but that – but the renewal date can extend beyond the initial term of the contract. Looking at cash flow, we are reiterating our fiscal 2016 guidance of approximately $170 million to $175 million of free cash flow. To summarize, we delivered solid first quarter results despite a challenging macro environment. We remain dedicated to delivering best-in-class profitability and cash flow generation, and believe we are well-positioned to create significant shareholder value over time. With that, we are now happy to take your questions. Operator, let's begin the Q&A.

[Operator Instructions] Your first question comes from the line of Matt Pfau of William Blair.

Hi, guys. Thanks for taking my questions. First, Antonio, I wanted to talk about the E&C segment. And it sounds like things are still challenging there. But is there any change from last quarter? Is it still primarily based in North America as far as the weakness? And then what have you been seeing in terms of size and customer, if there's any difference in – by customer size?

Okay. Before I answer your question, I'm going to let Karl address a range on our guidance for Q2 that he misstated. So, Karl?

Yes, so earlier I misstated – from an expense perspective, we are adjusting our assumption for total GAAP cost and expenses to $268 million to $273 million. I previously said $270 million. So, it's $268 million to $273 million.

For fiscal 2016?

Okay, thank you. Thank you, Karl, so going back to your question. Look, E&C is certainly I guess unfortunately behaved according to expectations in that there is no doubt that there is a significant impact in this segment of our market. We started to notice that impact in Q4, especially around our SMB business. And based on the notices that we did for the fiscal year, the quarter came in according to expectations on non-renewals. We took a look at the full year, and as we said in our notes, we expect that trend to continue for the full fiscal year, but it's something that we have taken into account in our guidance for the year.

Got it. And I think you had mentioned last quarter that you still expected the E&C segment to grow. Is that still the case?

Yes, that is still the case.

Great. And then the other thing I wanted to follow-up on was the lower expense expectations and where those are sort of coming out of, and what those are related to?

Well, I mean, look, as the fiscal year started, we certainly understood that we were going to be facing a more challenging macro environment. So we were cautious about the timing of when we started our hiring and some of the investments in infrastructure that we have planned for the year. We delayed some of those investments and we are now in full recruiting mode. But we started them late, and I think that's what's reflected in the lower expenses in our first fiscal quarter.

Got it. Thanks, guys.

And your next question comes from the line of Monika Garg at Pacific Crest.

Hi, Thanks for taking my question and welcome aboard, Karl. First one on the China, we keep hearing some kind of weakness in Chinese market, but you have talked about investing in that region. So could you maybe add a big contract with state-owned enterprise? Maybe could you talk about are you seeing any weakness? Or you expect anything over the next 6, 12 months? And kind of where are you seeing the strength in that business?

Look, in a way, we have high expectations about our China business. The fact is that a significant investment in relation to the size of our headcount in China is going into place. We are putting in place at the moment, because we believe the dynamics around the macro environment in China will be favorable to driving efficiencies with our owner-operator customers in China, refiners and chemical producers. We saw good business activity in Q1 out of China, and our expectation is that we will continue to see it going forward. And actually, the investment is to drive higher growth out of China. So, if you understand the dynamics around our business, which is during difficult times, owner-operators to focus on efficiency and optimization, I think our Chinese customers, and those that are not customers yet, are going to start focusing on that other macro environment changes.

Got it. Thanks. Then, Antonio, previously you have provided the backlog on E&C main top five or six customers. Could you update us where do you see that backlog trending?

Yes, I mean, the last sort of set of data that I had was the one that I shared during our investor Roadshows and – In September. Because it's only now that some of these E&Cs are announcing their results. It will probably be another four to six weeks before we can pull that data together and have an updated set of backlog data or information. And at that point, I'll be able to share a new set of data. But, as I said back in September, these E&Cs had the data that we were seeing for – I think it was the top seven or eight E&Cs that we deal with, they had about two years of revenue backlog and about $95 billion of backlog, which is a healthy figure for them to maintain their execution.

Then, maybe could you update us on your M&A strategy? Kind of, in the past, you have looked for more tuck-in acquisitions, but recently you kind of talked about you might – you may be interested to do big deals. So may be any kind of your thoughts on that?

Look, we've always looked at acquisitions of all sizes. Certainly, tuck-ins will be something that we are always driving. In this environment, of course, things get interesting. More people are willing to talk. But time will tell whether the – we find an acquisition of size that is a fit for us both from our strategic standpoint but also culture and location. So we are very disciplined in that area as well, as we are with our expenses and other aspects of the Company.

Okay. That's all for me. Thank you.

Your next question comes from the line of Sterling Auty of JP Morgan.

Hi, guys. Antonio, you mentioned, I think, a disproportionate amount of large contracts that are up for renewal. Can you just give us a little bit more color, what you guys typically see in a year? And what – maybe quantify how much you are seeing this year?

Yes. I'm not going to quantify, but we certainly have a fiscal year where there's a relatively high number of sizable contracts with national oil companies around the world that are coming up for renewal. You know, they always renew. The timing of the renewal is really what we focus on to make sure they renew at the same – at time of expiration, so that there isn't a disruption in the annual spend metric or the revenue contribution to our annual spend growth. You know, it's similar to what a little bit of along the lines of what happened in Q3 of FY13 when we didn't have the renewal in Venezuela, and it came back in the subsequent quarters. Similar scenario within we've known about this. The good thing about our business is that we have total visibility into when these renewals are coming, and we've been working them for a few quarters already. But we're also working against the system in some of these companies and that's why we're a little bit cautious about our guidance on revenue.

Any sense on the discussions with them? Traditionally, I would imagine they would probably buy a little bit more capacity to grow into, any thoughts on what their intentions or their thoughts around purchase? Would they buy a little bit when they renew kind of just what they need, and then for any growth, come back and do additional purchases between contract expiration, rather than buying extra capacity? Or do you think they would buy the extra capacity like normal?

Are you talking about these contrasts with the national oil companies?

Exactly.

Yes. Yes, look, certainly our objective is to grow those contracts at time of renewal, but it's not necessarily the event that drives growth. A lot of these NOCs have been making amendments to their contracts through the life of their contract. The focus at renewal time is to make sure that the renewal happens, because the size of the underlying revenue in the contract vis-a-vis the potential growth of renewal time is disproportionate. So, the goal is to renew them on time. And we've been growing those contracts throughout the life of the contract.

Great. Thank you, guys.

Yes.

Your next question comes from the line of D.J. Hynes of Canaccord. D.J. Hynes: Hi, thanks. Maybe one for Karl. So I heard your disclaimer around the timing of deferred revenues and how that can be hard to predict. I guess with all the macro concerns out there, can you be a little bit more specific about why we shouldn't be concerned about deferred revenues down year-over-year and the cash flow miss in the quarter?

Sure. So I'll to start with the deferred revenue. So as I mentioned earlier, it's really driven by invoicing. And with invoicing being very light in Q1, and Q3 is more of a heavier one, you are going to see a natural downturn. Year-over-year, the real difference and the real change was taking off a completed contract, or a couple of completed contracts, accounting arrangements. That's really what drove it down. But you know again, the variability you are going to have quarter to quarter is going to be there through the invoicing. And that’s why we really look toward annual spending as the indicator of the health of the growth of our Company. On the cash flow, you get somewhat the same phenomena, because you're really driven by the working capital changes. And Q1 is one of our lower collection periods of the year. And if we look at Q1, and you kind of take – add back the almost $3 million of cash we paid for taxes, plus the $1 million for the earn out, the last payment of the fiscal 2014 acquisition, you get much more in line with your typical Q1 run rate. D.J. Hynes: Yes. Okay. And then, Antonio, I think last quarter on the fiscal 2015 call, you gave some color around how growth – annual spend growth kind of broke out among your three big buckets. Right? I think it was – energy was like 45% of growth; chemicals, 28%; E&C, 24%. As you look at kind of that 10% target for this year, how are you thinking about that growth falling into each of those buckets?

Well, I mean, look, certainly in this macro environment and what we are seeing from E&C's, most of that growth will come from energy and chemicals. As you saw or heard, chemicals was our largest contributor in Q1. We are seeing good business out of, I guess, the chemicals industry. That business has accelerated over the last 12 months. And as I suspected, as their feedstock costs go down, their business improves. Energy continues to do well. And our expectation is that we're going to continue to drive good business out of energy. And then E&C is where our focus is, to try to drive as much business as we can out of a segment that is struggling at the moment with the macro environment. D.J. Hynes: Yes. Okay. And then may be one last house-keeping, if I can. The cash-based renewal that comes up in Q2, can you remind us how big that is?

Yes. No, normally we don't disclose that – the amount of those, of the deferred revenue. It's a few-million dollars, if that's what you wanted to hear. Yes. D.J. Hynes: It's how much?

A few-million dollars. D.J. Hynes: Got it. Okay. Thanks very much.

Yes.

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

Hi, good evening. Thanks for taking my question. Antonio, in your prepared remarks, I believe you noted an increase in usage from your owner operator customers in the quarter. I was wondering if you could just kind of break that down a little bit more for us, and tell us if you are seeing that increased usage because customers are just using existing modules more? Or are you noticing customers just kind of broadening themselves out in what they are using in your suite and using different modules?

No. I think, look, it's always a combination. It's a combination of customers using more of the same modules. Some of the references that I gave are customers expanding usage of existing modules. And in other cases, it's just adopting new products that they haven't been using. We talk about the health of the owner operator business, because if you look at the renewal rate or the retention rate that we quoted of 95% to 96% versus our historical rate of 98% to 99%, in order for us to deliver the growth that we did in Q1, that owner operator business did very well and in line with past quarters. It's just that we have the headwind of the E&C business, which is costing the smaller growth rate in Q1. But as we look through to the rest of FY16, we remain confident in our ability to deliver against the 9% to 10% growth in our annual spend guidance.

Okay, great, thanks, and just one final question on your sales force, with respect to your sales resources for the balance of the fiscal year here. What are you thinking about as far as increasing the number of sales reps out in the field? You know, decreasing, holding them steady? And maybe you have a little sense on if you aren't increasing them, where you plan to put additional resources?

Yes. No, look, we are increasing our sales headcount. We were measured in Q1 about when we started the process of recruiting. But we're putting more headcount really in regions where we see under penetration for our business China, Russia, the Middle East. I believe we have adequate staffing with adequate productivity in our more mature regions in North America and Europe. So, we continue to invest to grow the business.

Great. Thank you.

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

All right, well, I want to thank everyone for attending the call. And we look forward to seeing you again at some point in the future, somewhere in this world. Thanks.

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