Aspen Technology, Inc. (AZPN) Q1 2019 Earnings Conference Call Transcript

Aspen Technology, Inc. (AZPN)
Q1 2019 Earnings Conference Call
Oct. 24, 2018 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, my name is Rose, and I will be your conference operator today. At this time, I would like to welcome everyone to Aspen Technology Q1 2019 earnings call. [Operator instructions]

Thank you. Mr. Karl Johnsen, you may begin your conference.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Thank you. Good afternoon, everyone, and thank you for joining us to review our first quarter fiscal 2019 results for the period ended September 30, 2018. I'm Karl Johnsen, CFO of AspenTech; and with me on the call today is Antonio Pietri, president and CEO. Before we begin, I will make the safe harbor statement that during the course of this call, we may make projections or other forward-looking statements about the financial performance of the company that involve risks and uncertainties.

The company's actual results may differ materially from such projections or statements. Factors that might cause such differences include, but are not limited to, those discussed in today's call and in our Form 10-Q for the first fiscal quarter 2019, which is now on file with the SEC. Also, please note that the following information is related to our current business conditions and our outlook as of today, October 24, 2018. Consistent with our prior practice, we expressly disclaim any obligation to update this information.

The structure of today's call will be as follows: Antonio will discuss business highlights from the first quarter, and then I'll review our financial results and discuss our guidance for fiscal-year 2019. With that, let me turn the call over to Antonio. Antonio?

Antonio Pietri -- President and Chief Executive Officer

Thanks, Karl, and thanks to everyone for joining us today. AspenTech got off to a good start in fiscal 2019 that reflects solid performance across the company and keeps us on track to achieve our financial objectives for the year. Once again, I want to thank the AspenTech team for the strong performance achieved in Q1 in what is our most challenging growth quarter in any fiscal year and our customers for their continued support. Looking at our financial highlights for the quarter, which, as a reminder, are reported under ASC Topic 606, also referred to as Topic 606.

Annual spend was $498 million, up 8.1% year over year. Total revenue was $114.2 million; license revenue was $63.8 million; GAAP operating income was $37 million; and non-GAAP operating income was $46.9 million, which represents a non-GAAP operating margin of 41.1%. GAAP EPS was $0.53 and non-GAAP EPS was $0.64. Free cash flow was $5.4 million, and we returned $50 million to shareholders by repurchasing approximately 473,000 shares.

Overall, we are pleased with our performance in the quarter, which included positive results across all our product suites and geographies. The highlight of the quarter was our engineering suite, which delivered one of its strongest quarters in approximately three years. As we discussed last quarter, we had started to see improving trends from E&C customers. This strength continued in the first quarter and began to show signs of broadening.

For example, North American E&C customers, which has remained under pressure, delivered net growth for the first time in nearly three years. The improvement in E&C customers is a result of lower attrition from renewing customers relative to recent years, as well as some early examples of customers buying incremental tokens during their contract period. While the performance in E&C customers is not near its pre-fiscal 2015 levels, we are beginning to see improvement. Another area that showed signs of improvement was Latin America, which as we have discussed in the past, had several customers which did not renew their contracts with AspenTech due to challenging financial conditions.

In the first quarter, we saw several of these customers begin to redeploy our solutions in their environments, albeit at lower levels than the past. These new wins represent pure growth as this customer had no contracts in place for the last two to three years. From a macro perspective, the spending environment is tracking to our expectations. Oil has sustained itself in the $60 to $80 range, which is leading to some early evidence of backlog growth and hiring among some E&C customers.

As a reminder, customer budgets were generally set at the beginning of calendar 2018 and were based on lower oil prices. It is too early to tell how higher oil prices will impact customer budgets for next year, but we are cautiously optimistic it will lead to at least modestly improved spending levels. The global chemical industry also continues to experience positive tailwinds as demand for plastics and specialty chemicals remain strong. Turning to owner-operators.

These customers continued to do well. They remain disciplined in their asset operations and continue to look for ways to drive greater operational efficiencies across their business. Additionally, these customers are realizing that the utilization programs begin with a solid foundation of advanced solutions and AGP technologies. According to the results from the second digital refining survey conducted by Accenture, refiners rated themselves as most digitally advanced in multivariable process control, making AspenTech the original and leading digitalization company in the process industries.

The continued strength among owner operators provides stable base approach for AspenTech and supports the historical performance of the MSC suite. Our APM business made additional progress during the quarter. We signed a number of interesting transactions, including a mid-6-figure Aspen/Fidelis transaction with a large E&C customer in Europe. In addition, we saw good performance in the GEIs, including Aspen Mtell deals with a large pharmaceutical customer and a cardboard packaging company in Asia Pacific.

These transactions are indicative of the broad market opportunity in APM and the ability to drive growth outside of our three additional core verticals. We also continued to build out the APM organization and refine our go-to-market efforts based on our learnings in the market. We are pleased with the growing market recognition of the superiority of our product offering, which is driving high win rates in technical bake-offs. We continue to see pipeline expansion, demonstrating the positive impact of our increased focus on this opportunity and additional sales resources and coverage.

An important observation from our go-to-market activities with the APM suite is that the C-Suite has been an advocate and has been involved in the decision-making process around these technologies. We believe this is because reliability and protecting the health, safety and environment of the employees and communities where industrial assets are located is a responsibility owned at the highest levels of our customers' organizations. Therefore, making this the core value propositions from predictive and prescriptive capabilities in their operations. For this reason, we have focused on executive sponsorship inside our customers' organizations as an important success factor, as demonstrated by the APM transactions closed over the last 18 months as we convert pipeline into wins.

We're also making good progress expanding our go-to-market reach with partners. A great example is Emerson, where we recently had a large presence at their global user conference, where we jointly presented the value of APM and our product suites to several thousand Emerson customers. At the conference, Emerson announced the introduction of the first product offering from our alliance. The native integration of Emerson's Mimic Simulation Software with Aspen HYSYS will make it significantly easier for organizations to create real time digital twins for training operators and plant optimization, by lowering the total cost of ownership and maintainability of digital twins.

For the quarter, energy, engineering and construction and chemicals represented 90% of our business. Energy was the largest vertical contributor followed by chemicals and EMCs. Looking at our 10 largest transactions in the quarter. We had a healthy mix of engineering, manufacturing supply chain and APM transactions.

Once again, the APM suite was represented among the largest transactions in the quarter. While there will be variability quarter-to-quarter, we anticipate that all three product suites will be represented in our largest annual spend growth transactions going forward. Following is a representative sample of transactions closed in the quarter. First, one of the largest global pharmaceutical companies has in place a digitalization initiative to extract even greater value from its operating assets.

The company, through its partnership with AspenTech, has in place four specific initiatives to improve productivity and asset performance. As part of one of these initiatives, the company piloted Aspen Mtell to look at prediction of failures in one of its packaging lines. The pilot demonstrated Aspen Mtell's ability to predict a failure over 20 days in advance, which translates into a 1% operating equipment effectiveness improvement that is worth hundreds of thousands of dollars per year. The company is now deploying Aspen Mtell in this packaging plant.

The company is also a user of AspenTech's Manufacturing Execution Systems across all global manufacturing sites. Second, one of the largest paper companies in Southeast Asia and user of our engineering solutions selected Aspen Mtell over two other competitors after a competitive bake-off and offline pilot. A key contributing factor for the selection of Aspen Mtell was its ability to predict two failures in a turbo vacuum blower, demonstrating an ROI attractive enough for this customer to deploy the solution. The customer will be deploying Aspen Mtell in all its paper and box plants to improve overall reliability and save on maintenance cost and extend the length of time between plant shutdowns.

Third, an E&C company headquartered in Europe is a global leader in the delivery of project, engineering and technical services to energy and industrial markets. Last year, the company acquired another E&C firm to build-out its portfolio and footprint to provide end-to-end differentiated services and solutions for its customer base, making it one of the largest users of our engineering suite after the acquisition. The customer was looking for ways to differentiate its services and solutions in the market and it identified Aspen Fidelis as a solution that could best enable this. This customer has now extended its partnership with AspenTech into the APM area by purchasing enough licenses for a global deployment in North America, Asia Pacific and Europe.

Fourth, an international oil company headquartered in the United States and one of the largest customers of AspenTech continued its deployment of Aspen DMC3 across all plants throughout the world after deciding to operate their DMC plus controllers over four years ago. The customer has confirmed that it is on track to realize the intended benefits of the project, which included estimated financial benefits in the hundreds of millions of dollars per year after their full global deployment; reduction in efforts to revamp controllers; reduction in skill set requirements for effective controller maintenance; and the ability to work on multiple projects in parallel, among other specified benefits. This customer is now the largest user of our DMC3 technology. And finally, a national oil company in Latin America, and previously one of the largest customers in the region licensed our Aspen Capital Cost Estimation Solution to perform cost evaluations in the company's downstream projects after it found it was unable to perform them adequately without AspenTech software.

The company is also planning to begin expanding usage of other products in our engineering and MSC suites. This agreement reactivates the relationship with this customer after it did not renew its MSC and engineering agreements in the last two, three years. Our success in the quarter and in this highlighted transactions demonstrate our ability to execute on our strategic priorities while also continuing to deliver high levels of profitability and free cash flow on an annual basis. As a reminder, now that we have adopted Topic 606, we will experience significant variability on our income statement due to the timing of renewals and the fact that a significant amount of license revenue is now recognized upfront instead of ratably.

The fundamental business drivers and the value we provide customers has not changed under Topic 606. We continue to believe that annual spend is the most important metric in assessing the growth of our business and annual free cash flow is the best metric to assess the overall value of our business. To summarize. AspenTech started fiscal year '19 with a solid performance that reflects good execution across the company.

We are seeing broadening strength across our product suites and signs of improvement in the macro environment. We believe we are well positioned to achieve our financial objective this year, highlighted by increased growth and cash flow. With that, let me turn the call over to Karl. Karl?

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Thanks, Antonio. I will now review our financial results for the first quarter of fiscal 2019. As Antonio mentioned, our results are being reported according to Topic 606, which we adopted as of July 1, 2018. We've adopted Topic 606 using the full retrospective method, whereby we have recast our historical results under Topic 606.

We have posted a supplemental slide deck on the Investor Relations portion of our website that provides investors with our preliminary historical financials under Topic 606 for the fiscal years 2015 through 2018 and for the quarters of fiscal 2018, which represents our preliminary unaudited results based on current estimates. The actual results that we plan to present in our fiscal 2019 10-K may differ. Please note that all results discussed on this call reflect the adoption of Topic 606. For a more in-depth review of the impact of Topic 606 on our financial results, please refer to the Topic 606 webcast available on the Investor Relations portion of our website.

Before we review the results for the quarter, I want to remind everyone that our adoption of Topic 606 has had a material impact on both the timing and method of our revenue recognition for our term license contracts. Previously under Topic 605, we recognize revenue from our term license contracts on a daily ratable basis as a single unit of accounting. Under Topic 606, our term license agreements have multiple performance obligations that are recognized as revenue as they are delivered. Typically, initial licenses are delivered upon execution of the underlying contract, which would lead to upfront revenue recognition for the initial licenses, which represents approximately 62% to 67% of our term license agreement.

The other term license performance obligations are delivered and recognized in a more ratable pattern over the term of the agreement. As we've discussed previously at our investor day in August, our license revenue is heavily impacted by the timing of bookings and more specifically, renewal bookings. The decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license contracts up for renewal is not an indicator of the health or growth of our business. The timing of renewals is not linear between quarters or fiscal years and its nonlinearity will have a significant impact on the timing of our revenue.

As a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods. In our view, annual spend will continue to be the most important metric in accessing the growth of our business and annual free cash flow, the most important metric for assessing the overall value of our business. Annual spend, which represents the accumulated value of all the current invoices for our term license agreements at the end of each period, was approximately $498 million at the end of the first quarter. This represented an increase of approximately 8.1% on a year-over-year basis and 1.9% sequentially.

We believe annual spend is the most appropriate metric in judging the growth in our business. Total bookings, which we define as the total value of customer term license contracts signed in the current period, less the value of term license contracts signed in the current period of where the initial licenses, are not yet deemed delivered under Topic 606, plus term license contracts signed in a previous period, for which the initial licenses are deemed delivered in the current period, was $96 million, a 23% decrease year over year. The decrease in bookings year over year is the result of the first quarter having less term license contracts up for renewal as compared to the year-ago period. As I mentioned earlier, bookings can fluctuate significantly between periods since it is driven in large part by the timing of when customer contracts are up for renewal.

And because we are committed to maintaining pricing discipline, our approach has been to avoid artificially driving quarterly outcomes that undermine the overall quality of the business we generate. Total revenue was $114.2 million for the first quarter, a 10% decrease from the prior-year period. The year-over-year decrease in revenue in the first quarter was a result of lower total bookings resulting from a lower amount of term license contracts that were up for renewal in the quarter as compared to the year-ago period. Breaking revenue down by line item.

Please note that we will now be reporting revenue in three lines: License revenue, maintenance revenue and services revenue. License revenue, which represents the portion of the term license agreement allocated to the initial licenses, was $63.8 million, a 19% decrease year over year. As mentioned earlier, the decrease is the result of a lower amount of term license agreements coming up for renewal in the quarter as compared to the year-ago period. Maintenance revenue, which represents a portion of the term license agreement related to ongoing support and the right to future product enhancements, was $43 million, a 7% increase from the prior-year period.

Maintenance revenue is recognized ratably be over the life of the term of the license contract and will grow more in line with our annual spend. Services and other revenues, $7.4 million, consistent with the year-ago period. Turning to profitability, beginning on a GAAP basis. As a reminder, the supplemental slide deck posted on the Investor Relations section of our website that I referenced earlier contains our preliminary historical financials under Topic 606 for fiscal years 2015 through 2018, and for the quarters of fiscal 2018 and will allow for comparison of our current results for the prior periods on a Topic 606 basis.

Gross profit was $100.9 million in the quarter, with a gross margin of 88.4%, which compares to $113.8 million and a gross margin of 89.9% to the prior year period. Operating expenses for the quarter was $64 million compared to $58 million in the year-ago period. Total expenses, including cost of revenue, was $77.2 million, which was up from $70.8 million in the year-ago period and down from $79.3 million last quarter. Operating income was $37 million for the first quarter of fiscal 2019 compared to $55.7 million in the year-ago period.

Net income for the quarter was $38.1 million or $0.53 per share compared to net income of $40.5 million or $0.55 per share in the first quarter of fiscal 2018. Interest income in the first quarter was $7.1 million, up from $6.3 million in the year-ago period. Under Topic 606, there is an applied financing component to our term license contracts. The imputed value of this financing component is taken from the license fees and recognizes interest income over the payment term.

Turning to non-GAAP results. Excluding the impact of stock-based compensation expense, amortization of tangibles associated with acquisitions and acquisition-related fees, we reported non-GAAP operating income for the first quarter of $46.9 million, representing a 41.1% non-GAAP operating margin compared to non-GAAP operating income and margin of $62.8 million and 49.6%, respectively, in the year-ago period. Non-GAAP net income was $45.9 million or $0.64 per share in the first quarter of fiscal 2019 based on 72 million shares outstanding. This compares to non-GAAP net income of $45 million or $0.61 per share in the first quarter of fiscal 2018 based on 73.6 million shares outstanding.

Net income was positively impacted by a lower-than-expected tax rate, which was driven by discrete tax items in the quarter and a noncash benefit related to the impact of the implementation of Topic 606. Turning to the balance sheet and cash flow. The company ended the quarter with $52 million in cash and marketable securities compared to $96.2 million at the end of last quarter. The reduction in cash was driven by the typical seasonality in our cash flow and our stock buyback program.

During the first quarter, we repurchased approximately 473,000 shares of our stock for $50 million. Looking at our deferred revenue balance. It was $38.8 million at the end of the first quarter, representing a 41% increase compared to the end of the year-ago period. Recall that under Topic 606, deferred revenue now only represents the unrecognized portion of the annual revenue associated with our term license maintenance for term license contracts in the last year of the term, and is significantly less than our deferred revenue balance under Topic 605.

For balance sheet presentation, deferred revenue associated with a contract that also has unbilled accounts receivable, a contract asset, is netted against the contract asset. There's a new line on the balance sheet under Topic 606 called contract assets, which represents a portion of initial license performance obligation that has been recognized as revenue but not invoiced. This is sometimes referred to as unbilled accounts receivable. As noted above, deferred revenue associated with a contract that also has a contract asset balanced is netted against the contract asset for balance sheet presentation.

Contract assets at the end of the first quarter were $675.9 million, a 4.8% increase from the year-ago period. From a cash flow perspective, we generated $5.6 million of cash from operations during the first quarter and $5.4 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software, litigation and acquisition-related payments. Typically Q1 is our lowest quarter for free cash flow due to the seasonality of the business. The first quarter of 2019 was also impacted by the timing of working capital disbursements as well as approximately $1 million of disbursements in the quarter related to our adoption of Topic 606.

Our collections for the quarter were in line with our expectations and above the year-ago period. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website. I would now like to close with guidance. Remember that we will now only be providing guidance on an annual basis and providing directional commentary on the timing of annual spend and bookings during the year.

We are reiterating the guidance we provided at the beginning of the year. We expect bookings in the range of $555 million to $585 million, which includes $398 million of contracts that are up for renewal in fiscal 2019. From a timing perspective, we expect bookings, and therefore revenue, will be more heavily weighted to the second half of the year, with the fourth quarter being the largest bookings quarter and the first quarter just ended will be the smallest booking quarter. We anticipate bookings to increase throughout the year and that the third quarter will be larger than the second quarter.

With respect to annual spend growth, we are forecasting 7% to 9% annual spend growth. Breaking this down further, we expect 5.5 to 7 points of growth will come from our core engineering and MSC Suites and 1.5 to 2.5 points of growth from the EPM suite. Similar to fiscal 2018, we expect growth to be weighted to the back half of the year due to the timing of customer budget cycles. We expect revenue in the range of $540 million to $564 million.

We expect license revenue in the range of $345 million to $365 million; maintenance revenue in the range of $165 million to $169 million; and service and other revenue in the range of $28 million to $30 million. From an expense perspective, we expect total GAAP expenses of $307 million to $312 million. Taken together, we expect GAAP operating income in the range of $228 million to $255 million for fiscal 2019, with GAAP net income of approximately $200 million to $220 million. We expect GAAP net income per share to be in the range of $2.85 to $3.16.

From a non-GAAP perspective, we expect non-GAAP operating income of $257 million to $283 million, and non-GAAP income per share in the range of $3.19 to $3.48. From a free cash flow perspective, we expect $220 million to $225 million. Our fiscal 2019 free cash flow guidance assumes cash tax payments of approximately $40 million to $45 million. In summary, we began fiscal 2019 with a solid performance operationally and financially.

We are seeing positive results from the targeted investments we have made in the business and some benefit from improvements in the macro spending environment. We are focused on continuing to execute on our strategic priorities and deliver strong financial performance in the future. With that, we would now like to begin the Q&A. Operator? 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Matt Pfau from William Blair.

Antonio Pietri -- President and Chief Executive Officer

Hey, Matt.

Matt Pfau -- William Blair & Company -- Analyst

Hey, guys. Thanks for taking my questions. First, just wanted to clarify a bit. So if I look at the sequential increase in annual spend, it's -- was much better than the year-ago period.

So sort of implies that your new business was, that was booked was relatively healthy. But then corresponding to the year-over-year decline in terms of license growth, that, that is just purely a function of fewer renewals up there and so that offset the strong new businesses, is that correct?

Antonio Pietri -- President and Chief Executive Officer

Well, so yes, we had a strong quarter year on year on an annual spend basis, that's what drives our 8.1% growth rate on a trailing basis. And as Karl, in very detailed fashion, highlighted, the drop in license revenue only has to do with the amount of bookings renewals that were up in the quarter. Karl, I don't know if you want to elaborate more on that.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Yes, that's it. And so, Matt, what happened was, a year-ago Q and sequentially Q, we just had, we had more bookings that came up for renewal. So remember, bookings is disconnected from annual spend. So it's just really the amount of customers that were coming up for renewal was less in Q1 '19.

Matt Pfau -- William Blair & Company -- Analyst

Yes, OK. Great. And then, you wanted to hit on the traction that you're seeing in the GEI industries, is that all partner driven? Or is any of that internal sales force? And then what products are having the greatest traction, the GEI industries?

Antonio Pietri -- President and Chief Executive Officer

Yes, so the two, the deals that we talked about specifically and that we closed in the quarter were driven by our own sales organization and the interest in the GEI is at the moment specific to Aspen Mtell. We do believe in the GEIs, we'll also see interest build around pro and be it multigrade analytics. We -- they, our partner's organization is driving business, that pipeline is growing. And we expect to start seeing an impact from our partner's ecosystem later in the year.

Matt Pfau -- William Blair & Company -- Analyst

Got it. And last one for me, just on the E&C. Improvement is, you called out North America. So is the improvement just specific to North America? And then how is the improvement tracking with what you have incorporated into your guidance? Thanks.

Antonio Pietri -- President and Chief Executive Officer

Yes. Well, the improvement is not only specific to North America. The statement about North America is that it was the first net growth positive quarter in North America in almost three years from E&C. So it was sort of a material event.

We saw good growth in Asia from some of our customers there and also in Europe. And our engineering business in general did well in Q1 and supports the guidance that we've provided.

Matt Pfau -- William Blair & Company -- Analyst

Great. That's it for me guys. Thanks a lot.

Antonio Pietri -- President and Chief Executive Officer

Yes. You're welcome.

Operator

[Operator instructions] Our next question comes from the line of Monika Garg from KeyBanc.

Antonio Pietri -- President and Chief Executive Officer

Hi, Monica.

Monika Garg -- KeyBanc Capital Markets, Inc. -- Analyst

Hi, thanks. Hi, Antonio. Thanks for taking my question. I guess, I'm just still trying to understand what does bookings correlate with your underlying business performance? And the reason is when I look at the historical data you have provided, bookings in 2016 was $530 million but then 2017 and 2018, bookings was lower than 2016.

So if you would just look at that, it would feel like the business has been declining, though your annual spend grew during '17 and '18. So just kind of how should I understand this number?

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Hey, Monika, it's Karl. Yes, bookings, it's not an indicator of the health of the growth of the company at all. It's just the timing of renewals. The majority of our bookings is when customers are coming up for renewal.

So you'll get times where you have a heavy year, then a light year then a couple of heavy years. At Investor Day, we gave that outlook of how we saw renewals coming in for the next  five years, and that's the way to look at it. But when you see those renewals, it's purely just a function of when those contracts were usually signed, when they're coming up for renewal and if they were superseded during the term. The real way to think about the growth and health of the company is what we've always done, which is really just looking at annual spend.

Monika Garg -- KeyBanc Capital Markets, Inc. -- Analyst

Got it, helpful. Thank you. Then on the deferred revenue side, I mean you did talk about why it declines, right? Previously, under 605, you could kind of look at deferred revenue and new business to gauge the health of the business, cash coming in. Like could you expand how should we look at that line item now? Thank you.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Yes. So deferred revenue is going to be a complex one to forecast, and I don't believe it gives a lot of insight into the business. So remember that deferred revenue now is going to represent the last, the unrecognized portion of the last invoice of our term license agreements related to maintenance. And the reason being is, if it's one of the previous years, they'll be in unbilled, the contract asset unbilled revenue, you'll have to net the deferred revenue against that.

So if you take down the asset by the amount of the deferred revenue, if it's shown on a net basis on the contract level. So deferred revenue now is really just representing the last year of a contract, what's left to be recognized, and that can change quarter to quarter, year to year. So it really is not going to give you the insight that it used to give you.

Monika Garg -- KeyBanc Capital Markets, Inc. -- Analyst

Thank you. 

Operator

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

Antonio Pietri -- President and Chief Executive Officer

Hi, Sterling.

Jackson Ader -- J.P. Morgan -- Analyst

Thank you. This is actually Jackson Ader on for Sterling tonight. Antonio, you mentioned that the E&C business saw a pickup in kind of the intra-contract token buying, right? Where people kind of reup or increase the token within the renewal period. How that's been -- how has that been trending in the other verticals, in energy and chemicals through this cycle?

Antonio Pietri -- President and Chief Executive Officer

Look, certainly when we talk about energy, we're talking about owner-operators. Although in energy, we also have the upstream and down -- midstream customers. So upstream was impacted by the downturn and we had similar dynamics to what we had in E&Cs. Owner-operators and the use of our engineering software, it's continued to do well.

When we talk about the performance of owner-operators, we also, in that, we implied also performance of our engineering business and that's really why, through the three years of the downturn, call it '16, '17, '18 fiscal for us, our engineering business was positive in some small amounts in some quarters, but it was positive every quarter of those three years. And that was by the fact, driven by the fact that owner-operators were -- still buy more engineering tokens through the downturn, while the E&Cs and upstream customers were taking their spend down. So in a way, owner-operators were negating the negative impact from E&Cs and upstream customers.

Jackson Ader -- J.P. Morgan -- Analyst

Right. And then as a follow-up, just switching over to the APM suite. You guys have talked about the interoperability of Mtell and Fidelis and how they're kind of complementary products in the past. We're just curious what deals look like either on a stand-alone basis selling one or the other versus maybe deals that are joint Mtell and Fidelis sales, are you seeing many of those?

Antonio Pietri -- President and Chief Executive Officer

Well, I mean, look, if Fidelis, just to give context, Fidelis, think of it as a product that will allow you to develop a master plan to improve the reliability of a refinery or chemical plant, because it will highlight or pinpoint the reliability issues that you have in your plant and will rank them according to criticality and then you can target, addressing those reliabilities just with the use of Mtell or Pro MV. So today, it's early days in the sort of cross-functional use of those technologies, but we have certainly trained our sales organization around this use case, which is, develop a master plan, if you will, it can be of a refinery, it could be a simple asset or multiple assets using Fidelis and then, less target improving the reliability of that asset through technologies, like Mtell, Pro MV, and hopefully, others in the future as well. So that's how we think about it. But today, most of the transactions that are closed are stand-alone product transactions.

Jackson Ader -- J.P. Morgan -- Analyst

OK. All right. Thank you.

Antonio Pietri -- President and Chief Executive Officer

Yes.

Operator

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

Antonio Pietri -- President and Chief Executive Officer

Hi, Rob.

Rob Oliver -- Robert W. Baird & Co. -- Analyst

Hey, guys, thanks for taking my question. So Karl, feels like déjà vu all over again with back-end loaded bookings and maintenance and license. Just on that, I think you said it was 61% to 64%, is that based upon your historical analysis of the, of kind of the revenue trends of your obligation upfront under the contract? Is that how we understand that?

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Are you referring to that percentage of the book and it goes a lot...

Rob Oliver -- Robert W. Baird & Co. -- Analyst

Percentage of the bookings, yes.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Yes. So it's roughly like 62% to 67%. And when you look at what we posted up on the web, we gave you the bookings numbers too, so you can kind of see what the histories have been. What's going to drive that is, because the variability and the percentage that goes to license is driven by a couple of things.

The first is the imputed interest rate. So if you're selling to certain customers that might be in a more high-risk area, we'll have a higher interest rate, others will have lower. So is that portfolio mix in a period when you do the booking can drive that allocation differently? And then the other piece is sometimes, we'll sell a, we call them performance obligations or POBs, as part of the contract that will be license revenue, but we'll recognized it more ratably over time. So think of like a disaster recovery or a hot swathe.

Those of you recognize ratably over the period. They're much smaller in nature, but they'll be included in the upfront bookings. So you could throw a little bit of that, that off, the math off a little bit.

Rob Oliver -- Robert W. Baird & Co. -- Analyst

Got it. OK. Thanks. That's helpful color.

And then Antonio, just one for you. On just a follow-up on the APM side of the business. You guys talked at the Analyst Day about the impact or potential to kind of demand more of a sitewide implementation as opposed to a one-off. I know that in response to Jackson's question, you guys said it's still mostly kind of product-specific as opposed to general APM platform at this point.

But just wanted to get some more color on kind of how that's playing out, getting customers to obviously understand the value of APM by committing to a slightly broader implementation. And then any color around how pricing is evolving would be helpful. Thanks, gentlemen.

Antonio Pietri -- President and Chief Executive Officer

Yes, thank you. Well I mean, look, certainly in refining and chemicals, let's say, bulk chemicals, ethylene, polymers, most of those transactions that we've done are site-based licenses. And because of the value opportunity or the value-creation opportunity from the implementation of Mtell on those sites, the pricing is in line with our expectations. There, so there are industries and a little bit of legacy because of contracts that were signed under Mtell, before we acquired them, where there are still some smaller licenses being done as customers are deploying on a specific asset, and I'm talking about metals and mining, for example.

These two transactions that we closed in the GEIs and pharmaceuticals and paper or cardboard boxing, those were also site licenses. Now as you can imagine, when you talk about cardboard packaging and boxing plants, there's a lot less margin in those plants and therefore, opportunity to create value. So the pricing has to be adjusted accordingly to the value potential that is going to be created in those plants. And I don't necessarily think that's going to be different in other GEIs and depending on the number of sites.

But like we see with any of our technologies, the more value potential there is, the better value creation for AspenTech and in our cardboard packaging plants, while the margins are very thin, therefore the value creation is a lot less. So the pricing gets adjusted accordingly. But in our set of core refining and chemicals, we're meeting the expectations that we had at -- from the very beginning.

Rob Oliver -- Robert W. Baird & Co. -- Analyst

Great. Thanks, guys.

Operator

Your next question comes from the line of Shankar Subramanian from Bank of America Merrill Lynch.

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Hi, how are you guys.

Antonio Pietri -- President and Chief Executive Officer

Great.

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Thanks for taking the question. I have a question on the chemical industry demand. Given the level of macro tension and potential slow down and even the end-market consumer electronics and with size, basically a plastic production. How do you think about the incremental CAPEX that will come along, both from China and the rest of the world, in 2019 and then in 2020?

Antonio Pietri -- President and Chief Executive Officer

Well, I mean, look. So first of all, the fact is that CAPEX spend on any given year and the plant that get billed is small in proportion to the still on the ground, meaning the plants that are running and operating and the opportunity to optimize those plants. So when we think about growth, whether it's in refining or chemicals, a lot of the growth as you see from owner-operators is in existing plants, and the continuous drive that these owner-operators have to continuously drive better operating performance out of their existing assets. So certainly, in chemicals for now, five or six years, there's been a significant CAPEX investment.

There was a first wave of assets, about $120 billion in North America, and now there's talk of a second wave that is supposed to kickoff sort of next year, maybe a little bit smaller. Look, I was in China a month ago and I visited a petrochemical site that is under construction that eventually will become one of the five largest petrochemical sites in the world and it's a $33 billion investment. So I mean, the chemical demand trends have been positive for many years now. The one thing that happens when you are raising the standard of living across the world is that, that drives chemicals consumption, plastics consumption.

So I personally believe that, yes, and perhaps your point being that perhaps there's going to be a little bit of slowdown in the global economy. I think overall, over the long term, the trend will continue to be for more chemicals production and investment in that area.

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

OK. Thank you, guys.

Antonio Pietri -- President and Chief Executive Officer

Yes. You’re welcome.

Operator

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

Antonio Pietri -- President and Chief Executive Officer

Hi, Mark.

Mark Schappel -- The Benchmark Company -- Analyst

Hi. Hey, guys. Thanks for taking my question. And nice job on the annual spend growth.

Antonio, starting with you. Could you just go into a little bit more detail regarding the pickup you saw in your Latin American business? I mean, was it just one customer that came in for more tokens? Or you're seeing that a little bit more broader based?

Antonio Pietri -- President and Chief Executive Officer

No. It was more broader based. As a matter of fact, we had this one customer that was, used to be a very large customer of ours in Latin America. But it was multiple customers that were not doing business with us as a result of the downturn in the last two, three years and we signed deals in the quarter with them.

So it was more than just one data point.

Mark Schappel -- The Benchmark Company -- Analyst

OK, great. Thank you. And then Apex, haven't heard much of that lately. Just wondering if there's any update on Apex and specifically the GDOT product? Is the entire sales force out there selling that? Or maybe you just give us a little update.

Antonio Pietri -- President and Chief Executive Officer

Just to clarify for everyone. Apex Optimization, which is the acquisition that we made in January. Look, we are very optimistic about that product. It has unique capabilities in the marketplace.

It ties the planning and scheduling processes in a refinery with the multi-verbal control applications in order to coordinate optimization of not only one single unit, but multiple single units across production trains, whether it's a gasoline production train, a diesel production train. We are seeing a lot of interest in the market from major customers around the deployment of this technology. And we're submitting an important number of budgetary proposals that are being considered for next year.

Mark Schappel -- The Benchmark Company -- Analyst

OK, great Thank you. That’s all for me.

Operator

Your next question comes from the line of Steve Koenig from Wedbush Securities.

Antonio Pietri -- President and Chief Executive Officer

Hi, Steve.

Ahmad Khalil -- Wedbush Securities -- Analyst

Hey, guys. This is Ahmad Khalil on for Steve. Thank you for taking my question. First off, in regards to APM, can you update us on what you're seeing in terms of your customer's discovery process and sorting out pricing and kind of other vendor disclaims on APM?

Antonio Pietri -- President and Chief Executive Officer

Yes, yes, sure. But, I mean look, certainly, there's still a lot of -- the sales process begins with an engagement, they run a pilot and an offline pilot, if you will. We've managed to review those engagements to less than four weeks in general to prove out the technology, demonstrate the value, demonstrate the ability to predict when equipment is going to fail. Now over the last six months, we've also started to notice that as a result of the early adopters, we've had a number of customers either skip the pilot phase.

And one of the transactions, a couple of the transactions we've closed in Q4 where customers that move directly from, I guess, presentations to commercial deal without doing a pilot on the technology. We have customers that have decided not to do a competitive bake-off as a result of our reference from the early adopters, and they've gone directly with AspenTech to do a pilot. One of the things that we see is that a pilot will probably involve two or three companies and they are doing pilots with all two or three companies. We've had instances where they are skipping that process as a result of the reference, and they're only doing the pilot with AspenTech, identifying the assets that they want to target and then proving it out.

As part of the learnings of the last 18 months, we're being much more rigorous in qualifying the opportunities to make sure that customers understand price expectations from the very beginning. We're also being very rigorous around identifying executive sponsorship as I stated in my notes, that I read in my script, because we see that these customers engage in the implementation of new technology, on new value creation, especially around improving reliability of these assets. These decisions eventually get escalated to the executive suite, the C-level suite, and there, you have to make sure that you've been engaged from the very beginning, so. But look, certainly, the dynamics of the sales cycle are changing and ideally, we want to accelerate skipping pilots as we provide the technology.

But also we're learning about what's important, to make sure that we have predictability in closing these deals at the end of a quarter, such as the executive engagement, making sure that we set expectations on pricing from the very beginning of the sales process, qualifying very well those customers that we're going to do the pilots with, so that, so as to make sure that there's a real opportunity and commitment to sign an agreement if we provide the technology as opposed to it being just a science project that a customer is conducting, just because they want to learn. So there's been a lot of learnings. And I think we've been sharpening our sales execution as a result of all that.

Ahmad Khalil -- Wedbush Securities -- Analyst

Great. Thank you. That’s very helpful. And is there any way we can get a sense of maybe how much APM contributed to annual spend this quarter? Would you say it's kind of our around what you guys guided to the 1.5% to 2% rate?

Antonio Pietri -- President and Chief Executive Officer

Yes. Look, I think last year, we set the expectations because it's an early adoption segment and the dynamics around that, that we would do updates on the half year, on a half-year basis. So I preferred to stick to that discipline. And at the end of Q2, when we do our Q2 earnings call, we can talk about how we're doing against that target.

But look, we had a solid quarter in Q1 that has moved up our growth rate over the last 12 months to 8.1%. And as I stated in my script, in my notes, we saw good performance across all three product suites.

Ahmad Khalil -- Wedbush Securities -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of David Hynes from Canaccord.

David Hynes -- Canaccord Genuity Inc. -- Analyst

Hey, thanks, guys. Sorry, I dialed in the call a little bit late, so forgive me if we talk about some of the stuff. I want to follow-up a little bit, I guess on the last topic, which was APM, and you talked a little bit about referenceability. So Antonio, as the referenceability improves, do you think that has a bigger impact in the velocity of deals or the size of deals you're signing in APM? And as a follow-up, can you just remind me, kind of on what we should expect in terms of kind of the customer road map as they sign off for APM.

I mean, is this a land-and-expand play? I can't remember, I think you're signing shorter-term contracts in this. So if they're spending $100 with you on year one, in year two, does that go to $120? Or just remind me, kind of what that cadence looks like and vis-à-vis your kind of contract cycles in APM?

Antonio Pietri -- President and Chief Executive Officer

Yes. OK, look, no doubt, the references accelerate the sales cycle because it allows us to skip a pilot and proven other technology and actually we've had some accelerated sales cycles as a result of that. The other thing is that those early adopters are now also moving into expanding their footprint of the technology and now in our pipeline, we have some enterprise-size deals, meaning they are talking about basically an enterprise agreement for Mtell. One of the early adopters has also decided to expand Mtell into wind turbines.

This customer owns a wind farm of about 52 turbines, and they're going to deploy Mtell on that. So it's just an amendment to the Mtell agreement to extend into that wind farm, into that new site, if you will. As customers understand the technology and they do their references, it allows them to be much more targeted at how they want to license it and what our approach has been to go site. We also have a customer that is talking about enterprise agreement for all their compressors across all the refineries that they own, which is a significant number of compressors but it's about compressors.

But because of the size of the number of compressors, then they're just talking about meaningful numbers as well. So no doubt, references are important, and that's why, early in 2018, we're willing to take some deals for less money to establish those references, because we knew then the opportunity to sort of land-and-expand was going to be there, and we have now some of those opportunities in FY '19.

David Hynes -- Canaccord Genuity Inc. -- Analyst

So the contract, just remind me again on the contract cycles, are the contract cycles shorter on APM so that you have an opportunity to reengage in more regular cycles to drive that, same for sales lift?

Antonio Pietri -- President and Chief Executive Officer

Yes, no. And I apologize, I missed to answer that part of your question. Yes. Look, because of -- OK, these customers, they provide the technology, they're excited, they know it's going to work.

But still, in order to manage their own exposure, they do shorter-term contracts, maybe one, three years as to make them get comfortable with not signing very long-term contracts. But as we start talking about larger deals and enterprise-start agreements, our expectation is that we will be signing deals with the average length of our typical MSC and engineering contracts.

David Hynes -- Canaccord Genuity Inc. -- Analyst

OK. Got it. Helpful. OK, thanks, guys.

Antonio Pietri -- President and Chief Executive Officer

You’re welcome.

Operator

Our last question comes from the line of Alex Frankiewicz from Berenburg.

Antonio Pietri -- President and Chief Executive Officer

Hi, Alex.

Alex Frankiewicz -- Berenberg Capital Markets -- Analyst

Hi. Thanks for taking my question. I realize we're running short on time here, so I'll keep it brief. Just quickly on Q1 churn.

How does that compare to assumptions for FY '19? Is it towards the lower end? Or how should we think about that?

Antonio Pietri -- President and Chief Executive Officer

Well, I mean we guided for fiscal '19 at an attrition rate of 4% to 5%. And the churn that we saw in Q1 is in line with what we expected.

Alex Frankiewicz -- Berenberg Capital Markets -- Analyst

OK, perfect. Thank you. And then, just briefly on APM competitive environment. Following the Aviva Schneider merger, we’ve seen Aviva talking about some pretty aggressive features in Avantis PRiSM.

I just wondering if you could just, give a quick comment on what you're seeing in the market in terms of competitors and what they're putting out there?

Antonio Pietri -- President and Chief Executive Officer

Yes. Look, certainly we're seeing Aviva and their PRiSM product in the marketplace, and we're going head-to-head with them in some instances. We're seeing -- we continue to see GE, we're being very successful against GE, almost a perfect record, I'd say a perfect record against GE. With Schneider, we have very high win rate as well.

It's not a perfect record, but it is a strong win rate. I also think that we have strong relationships with owner-operators, which is something that Aviva didn't have because of their engineering design background. Certainly, the Schneider part of the business will spring better relationships in owner-operators. But historically, we've held our own against those two groups.

Alex Frankiewicz -- Berenberg Capital Markets -- Analyst

Perfect. Thank you so much.

Operator

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

Antonio Pietri -- President and Chief Executive Officer

Yes, no I just want to thank everyone for joining the call today. We are happy with the performance of -- that we delivered in Q1 and it's, like I said in my notes, it keeps us on track for the year. So thank you, everyone.

Operator

[Operator signoff]

Duration: 63 minutes

Call Participants:

Karl Johnsen -- Chief Operating Officer

Antonio Pietri -- President and Chief Executive Officer

Matt Pfau -- William Blair & Company -- Analyst

Monika Garg -- KeyBanc Capital Markets, Inc. -- Analyst

Antonio Pietri -- President and Chief Executive Officer

Jackson Ader -- J.P. Morgan -- Analyst

Rob Oliver -- Robert W. Baird & Co. -- Analyst

Shankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Mark Schappel -- The Benchmark Company -- Analyst

Ahmad Khalil -- Wedbush Securities -- Analyst

David Hynes -- Canaccord Genuity Inc. -- Analyst

Alex Frankiewicz -- Berenberg Capital Markets -- Analyst

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