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Aspen Technology Inc (NASDAQ:AZPN)
Q3 2020 Earnings Call
May 6, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Aspen Technology Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your host, Mr. Karl Johnsen, CFO. Please go ahead.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Thank you. Good afternoon, everyone and thank you for joining us to review our third quarter fiscal 2020 results for the period ending March 31st, 2020. I'm Karl Johnsen, CFO of AspenTech. And with me on the call 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 third quarter of fiscal 2020, which is now on file with the SEC.

Also, please note that the following information relates to our current business conditions and our outlook as of today, May 6th, 2020. 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 third quarter, and then I'll review our financial results and discuss our guidance for fiscal year 2020.

With that, let me turn the call over to Antonio. Antonio?

Antonio Pietri -- President and Chief Executive Officer

Thank you, Karl, and thank you all for joining us today. We hope all of you and your families are staying healthy. The world and macro-environment have changed dramatically since our last earnings call, as a result of the global COVID-19 pandemic and the disruption in the oil market. On today's call, I will primarily focus my remarks on how we have responded to recent events and provide an update on our expectations for demand in our core markets.

AspenTech's number 1 priority has been and continues to be the safety, health and well-being of our employees and customers. We have all been affected by the COVID-19 pandemic, and we reacted quickly to protect our employees and customers around the world and have adhered to the various work-from-home and travel restrictions.

The digital readiness plan put in place by our IT team over the past few years allowed for a seamless transition to remote working. We also observed that beginning in the second week in March, many of our customers moved aggressively to shift their employees to work-from-home arrangements, while maintaining adequate staffing to operate their complex assets safely and reliably. We're encouraged by what we have heard from our customers about their safety and health during this time, and our thoughts are with them during this trying period.

The COVID-19 pandemic has been exacerbated for our customers in the oil and gas industry by the precipitous drop in the price of oil that began in early March after the breakdown in negotiations between the OPEC plus group members. The combination of these two disruptions has forced customers in our end markets to deal with an extraordinarily rapidly changing macro-environment while working from home. I'm very proud to say that the AspenTech organization has stepped up in a big way to support our customers and help them sustain their operations during this difficult time.

The AspenTech customer support, customer care and customer success management organizations have increased their digital efforts to continue to deliver world-class services to our customers. Our professional services team has deployed digital processes to implement our mission-critical software remotely so that customers can begin realizing value on time as expected. We have also made our key learning courses available for free to customers through the end of May. This will enable our customers to continue to learn and develop their skills in the use of AspenTech's products. We are also waiving the fee for customers to earn their certification in the use of the different products of AspenTech. This has been well received, as seen in social media postings where customers explain their certificates. We are proud of these actions, and customers are recognizing these efforts through very positive feedback.

Before I begin my remarks on the business environment, I want to remind investors that AspenTech has been through multiple business cycles in its 38-year history and demonstrated our resiliency during these times. While this current situation is not that unique, we believe we're well positioned to navigate the current market conditions based on the mission-critical nature of our products and solutions, the value they create in our customers' operations, our durable business model and strong balance sheet.

I'm also very proud of how the organization has rallied to people [Phonetic] around this new set of economic circumstances and applied what we learned from the 2015-2016 period to quickly adapt our operations. This means, continue to provide a growth environment for our employees, attract best-in-class talent, increased focus on expenses and productivity, continue to drive market growth, maintain a strong cash position and reassess our capital allocation for liquidity reasons and to take advantage of potential opportunities in the market.

In summary, we have assumed both a defensive and an offensive stand in the face of this downturn. AspenTech had one of the strongest operational and financial profiles of publicly traded software companies before the COVID crisis, and I have no doubt that AspenTech will sustain this profile on the other side of this current downturn.

Now let me turn our attention to the recently completed quarter. Looking at our financial results for the quarter, revenue was $132 million, GAAP EPS was $0.64, and non-GAAP EPS was $0.74. Annual spend was $575 million, up 9.3% year-over-year. Free cash flow was $81.2 million, and we returned $50 million to shareholders by repurchasing approximately 452,000 shares.

With respect to our growth performance through early March, we were on track to deliver our strongest quarterly growth performance since fiscal year 2014 and to meet our full year guidance target. We were seeing solid demand across all three product suites and our three core verticals before the precipitous drop in oil prices, the spread of the COVID-19 virus and call for shelter-in-place orders around the world.

The speed of the economic deterioration in the final three weeks of the quarter created so much immediate uncertainty and loss of business visibility that it led customers to postpone signing certain contracts, including some of the largest ones in the quarter. These customers told us that they will reevaluate these contracts once they have better business visibility.

Despite these challenges, we had some notable highlights in the quarter, including, one, our field sales team closing a number of significant transactions for all of our product suites and in all of our primary verticals, while the team and our customers work remotely in the midst of so much uncertainty. Our long-standing relationship with customers and their familiarity with our solutions enabled us to complete transactions over the phone or video conference.

Two, a strong sales performance above plan [Phonetic] in the Asia-Pacific region and solid performances in Europe and the Middle East, with every major sales really delivering growth, including our SMB team. Three, closing multiple transactions in China. In fact, we received a special dispensation from the Chinese government to visit the headquarter offices of a national oil company to conduct face-to-face meetings in mid-March for an important contract renewal. This is a powerful example of how mission-critical AspenTech is for customers' operations.

Fourth, signing the first APM enterprise transaction with a global pharmaceutical company. And five, our professional service limitation [Phonetic] progressing and, in a few cases, completing the implementation of our solutions for several customers doing so remotely after transitioning to 100% remote in communications and training.

I would now like to reference three transactions that were in the quarter. First, a global pharmaceutical company that is a long-term customer and user of our three product suites signed the first enterprise license for our Aspen Mtell product as well as enterprise access for our manufacturing execution systems platform. The customer had started evaluation and deployment of Aspen Mtell over 18 months ago and had deployed it to a number of sites. Based on the result and value capture, the customer decided to roll out the technology across all manufacturing sites as one of the key building blocks of its digitalization strategy.

Second, a top five global chemical company, headquartered in the Middle East extended the use of the Aspen Mtell product to one of its mega facilities in the region. This is the same customer we mentioned several quarters ago that initially evaluated technology from 26 companies in the selection phase of the process. After winnowing that field to two, we were chosen following a successful pilot-site deployment over the last nine months that demonstrated superior performance compared to a competitor doing a parallel pilot-site implementation.

And third and final late in the quarter and despite all the macro uncertainty in its operations, we renewed and increased the contract for our MSC solutions with one of the largest independent refiners in the United States. This customer did so, actually remade one of its key requirements by demonstrating the deployment of our Aspen PIMS-AO refinery planning solution in the cloud to leverage high-performance computing. The contract was signed despite this customer delaying the restart of a refinery after its maintenance turnaround and reducing production rates significantly in other refineries due to deteriorating demand for fuels reproduced as a result of the countrywide lockdowns.

Our recent performance demonstrates that we can successfully support and sell to our customers remotely for as long as it is required to do so. We will continue to evaluate our operations and adjust as necessary to meet our customers' needs. With regards to the current market environment, we view it as a combination of an exogenous shock creating a severe short-term economic impact followed by an uncertain demand recovery similar to the global financial crisis of 2008, 2009, and the fiscal year 2015-2016 cycle, which was a supply driven downturn, with additional complexity of operating assets remotely due to COVID-19 lockdowns.

This current environment is resulting in different headwinds with different time lines for each of our core markets. I would like to highlight how we see this impact. One, there have been capex reductions announced by a number of oil companies as a result of the collapse in oil prices, resulting from the combined effect of oversupply and COVID-19 demand destruction. This, in turn, is needing oil producers to cut back production by reducing production rates or shortening production as a result of the steep drop in oil demand and field storage capacity.

Two, the severity of the downturn has also caused some oil refining and chemical businesses to adjust their opex projects. Refiners have also enacted production rate reductions due to lower demand and storage facilities reaching full capacity. Three, chemical customers have also announced capex costs, and some are facing declining demand in certain segments, although relatively less to what has been seen in the energy segment.

Fourth, capex investment for some new LNG facilities is likely to be deferred to account for a short-term decrease in global economic activity. And finally, five, E&C customers will see pressure on their backlog due to the lower capex outlook across the different industries. The net result is a challenging near-term business environment for AspenTech.

As economies begin to reopen and activity rebounds, we expect that, first, there will be more demand for fuels, gas and petrochemicals, supporting the recovery of owner operators in refining and chemical, followed by E&C and upstream customers as capex spend begins to recover. While there's no doubt that our customers are facing a difficult immediate and short-term outlook, the fundamental business value AspenTech delivers to them has not changed and will likely become even more important.

I would like to highlight the following, one, we expect that the long-term secular trend toward digitalization and automation in the process industries will likely become even more pronounced as customers will need to redouble efforts to improve efficiency and do more with less by digitalizing existing processes and finding new ways to create value.

For example, we foresee greater focus on predictive maintenance and process analytics tools to increase safety and reliability with particular focus on AI capabilities, such as those found in Aspen Mtell and Aspen [Indecipherable]. And we foresee owner-operator customers, including upstream operators, will continue to focus on improving the profitability of their assets and, therefore, will invest in engineering and MSC solutions.

For example, our Aspen GDOT dynamic of little optimization solution that can optimize fuel production envelopes in refineries can potentially create an additional $30 million to $50 million in benefits for a typical 200,000-barrel refinement. Two, we expect E&C customers will continue to reimagine their engineering design processes to improve their workforce productivity and cost definition accuracy to sustain their already challenged operating margins. They will do this by relying on the digital integration found across our engineering product suite and also on the future deliverables from our partnership with Hexagon PPM that will produce fully digital data and workflows across the full design life cycle of these assets.

Three, we expect E&C customers to look for new sources of revenue by selling operations and maintenance services to our common end-user customers, in many cases, leveraging AspenTech solutions. And finally, four, we expect growth opportunities in certain global economy industries for GEI markets. For example, we believe the mining industry will provide added growth as companies in this sector, accelerate their digitalization efforts to improve their operations.

So what does all this mean for AspenTech? In view of the current highly uncertain environment, we're adjusting our annual spend growth rate -- our annual spend growth target to 7% to 9% for fiscal 2020 compared to our original expectation of 10% to 12%. We now expect our engineering and MSC suites will contribute 5.5% to 7% of that growth and APM, the remaining 1.5 points to 2 points of growth. The impact to growth expectations in our APM business has been proportionately greater since, as we had stated before, we expected the majority of our APM growth to come in the second half of fiscal year 2020. We expect the attrition rate for the year to still be in the range of 3.5% to 4.5%.

This all means that again, we're expecting to deliver solid double-digit gross growth this fiscal year. We're also adjusting our free cash flow guidance to $230 million to $260 million from $260 million to $270 million, which reflects the impact of lower annual spend growth and conservatism around the timing of collections as we have a significant portion of our quarterly invoices due on June 30. We will continue to closely evaluate our cost structure as we always have and remain focused on delivering a strong free cash flow margin.

We have also taken steps to increase our cash position out of an abundance of caution and due to the high level of uncertainty in the market. This includes drawing down $100 million from our revolving credit facility and pausing [Phonetic] our share repurchase program at the end of the third quarter. We will continue to evaluate the economic situation. And as conditions normalize, we will evaluate resuming our repurchase program.

While it is too early to provide specific insights into our expectations for fiscal 2021, I want to share our current point of view. One, AspenTech has a seasoned management team that successfully navigated the last major oil industry downturn and used the levers in our business to continue to create value for our customers and investors. An important added difference this time around is the creation of our customer success management group two years ago and the material impact that it has had on sustaining usage and value for our customers. This group played a material role in the outcome achieved with US independent refiner ordered in the customer demands.

Two, with respect to gross growth and attrition. First, we're cautiously optimistic about the demand environment for our products going forward based on our current quarter pipeline of business, which is being validated by ongoing customer engaging. Second, AspenTech is better positioned for this current downturn than in 2015-2016, since we are not coming out of an upstream capex investment supercycle, as was the case in calendar 2014, when oil prices started to decline.

This means, first, the entitlement in our E&C customer contracts is much more closely in line with the capex reality of the last four years, which experienced flat to mid-single-digit growth after a 40% decline from 2014 to 2017, presenting better alignment between usage and entitlement. Second, the Latin American business with national oil companies, which represented nearly 25% of the total increase in attrition between 2016 and 2018 has not recovered and, therefore, being reset. As a result, there cannot be a similar negative impact from this customer segment.

Third, our business with upstream owner-operators was also reset between 2015 and 2017, and an important aspect of this slow recovery was through growth in our MSC and APM businesses from installation and operating assets as opposed to our engineering products for which an entitlement is mostly headcount related. Four, we have made significant inroads with our MSC innovation delivered over the last five years or more, which is supporting sustained demand by owner operators in refining and chemicals as part of their growing automation and digitalization initiatives.

Fifth, the APM business that we launched in 2017 has proven itself as a market leader and is contributing growth even in the most uncertain of environments, such as the one we just saw at the end of March. And sixth and final, we understand how we need to adjust the total market tactics for our engineering business using the learnings from the 2015-2016 downturn. All the factors just mentioned gives us the confidence in predicting that our attrition rate is unlikely to return to the highs we saw during the last cycle, even as we have a larger portion of our contract portfolio up for renewal.

Three, we also plan to continue making incremental investments in our product road map and artificial intelligence and analytics in new growth areas like ATM and in our long-term strategic vision. We expect our next major product release to include innovation that will create significantly more value and kick off a second transformation of the process industries comparable to the late '70s after the introduction of the first generation of advanced software solutions.

The near-term challenges in the economy do not change the exciting long-term opportunities we see in the business. We believe making these investments will further strengthen our market leadership and value proposition as conditions improve over time. We will fund investments in the areas mentioned about by first, reallocating existing spend from areas where the return on that spend is now unattractive.

Cost discipline has been a core focus and competency of our management team, and we're confident we will be able to maintain our target margins while making strategic investments in the business. While we expect our growth profile will be lower in the near-term than our most recent growth rate, it is important to take a step back and look at AspenTech's performance relative to the macro-environment. Generating positive growth in the midst of the most challenging economic environment anyone has faced speaks to the strategic importance of our products to improve the efficiency, profitability, safety and reliability of our customer operations, the resiliency of our business model and the strength of our long-term contract strategy.

To summarize, AspenTech has faced challenging markets before. We have successfully navigated through each of them and provided a stronger position on the other side. I'm confident we will do so again. We're quickly adapting to respond to unprecedented changes in the market in recent weeks. We are focused on supporting our customers and ensuring we deliver as much value as we can, to that.

Now 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 third quarter fiscal 2020. As a reminder, these results are being reported under topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts. Our license revenue is heavily impacted by the timing of bookings and more specifically, renewal bookings. A decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license 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 this non-linearity will have a significant impact on the timing of our revenue. As a result, we believe our income statement will provide an inconsistent view into our financial performance, especially when comparing between fiscal periods. In our view, annual spend will continue to be the most important metric in assessing the growth of our business, the annual free cash flow, the most important metric for assessing the overall value our business generates.

Annual spend, which represents the accumulated value of all the current invoices for our term license agreement at the end of each period, was approximately $575 million at the end of the third quarter. This represented an increase of approximately 9.3% on a year-over-year basis and 1.9% sequentially. As Antonio mentioned, we had a number of transactions that were postponed at the end of the quarter due to customer uncertainty regarding the economy.

Total bookings, which we define as the total value of customer term license contracts signed in the current period, less the value of term license contracts signed in the current period but where the initial licenses are not yet deemed delivered under topic 606, plus term license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period, was $126.7 million, a 21% decrease year-over-year. The decrease in bookings reflects a combination of less renewal bookings compared to the year-ago quarter as well as the pushing out of transactions described above. The attrition rate was consistent with our guidance range for the year. The lower bookings performance resulted in total revenue of $132 million for the third quarter, an 11% decrease from the prior-year period.

Turning to profitability, beginning on a GAAP basis. Operating expenses for the quarter were $70.1 million compared to $62.8 million in the year-ago period. Total expenses, including cost of revenue were $85.9 million, which was up from $77.2 million in the year-ago period and $83.1 million last quarter. The year-over-year expense increase reflects the impact of the organic investments we have been making in the business and the impact of the Mnubo and Sabisu acquisitions. Operating income was $46.2 million, and net income for the quarter was $43.5 million or $0.64 per share.

Turning to non-GAAP results. Excluding the impact of stock-based compensation expense, amortization of intangibles associated with acquisitions and acquisition-related fees, we reported non-GAAP operating income for the third quarter of $55.3 million, representing a 41.9% non-GAAP operating margin compared to non-GAAP operating income and margin of $78.3 million and 52.9%, respectively, in the year-ago period. Non-GAAP net income was $50.8 million or $0.74 per share based on 68.5 million shares outstanding.

Turning to the balance sheet and cash flow. We ended the quarter with $192.2 million of cash and cash equivalents. We ended the quarter with $435.2 million outstanding under our term loan and revolving credit facility, which reflects the $100 million that we drew down in March. As Antonio mentioned, we repurchased $50 million of stock during the third quarter and have decided to pause our buyback program for the time being. We have more than $270 million of liquidity, which we believe provides us with ample financial flexibility.

We generated $81.4 million of cash from operations and $81.2 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software and acquisition-related payments. We experienced some delays in collections as certain customers were more closely managing -- managed their cash flow at the end of the quarter. We collected the majority of these receivables in April. A collection -- 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. We are updating the guidance we provided on our fiscal second quarter earnings call. We now expect bookings in the range of $540 million to $590 million, which includes the $317 million of contracts that are up for renewal in fiscal 2020. This is a decrease from our original guidance of $600 million to $650 million.

With respect to annual spend growth, as Antonio mentioned, we're now forecasting 7% to 9% annual spend growth. We now expect revenue in the range of $550 million to $582 million. We expect license revenue in the range of $335 million to $367 million, and maintenance revenue and service and other revenue of approximately $180 million and $35 million, respectively.

From an expense perspective, we expect total GAAP expenses of $338 million to $343 million. The decrease in GAAP expenses largely reflects lower stock-based compensation expense as well as savings from lower T&E. Taken together, we expect GAAP operating income in a range of $211 million to $239 million for fiscal 2020, with GAAP net income of approximately $187 million to $209 million. We expect GAAP net income per share to be in the range of $2.72 to $3.05.

From a non-GAAP perspective, we now expect non-GAAP operating income of $249 million to $277 million, and non-GAAP income per share in the range of $3.16 to $3.48. From a free cash flow perspective, we now expect $230 million to $260 million. This compares to $260 million to $270 million previously. Our fiscal 2020 free cash flow guidance assumes cash tax payments in the range of $40 million to $45 million.

To wrap up, our business continues to generate solid growth and profitability in an unprecedented situation. Our strong financial profile and the substantial value our mission-critical software provides to customers gives us confidence we are well positioned for the long term.

With that, we would now like to begin the Q&A. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Rob Oliver from Baird.

Antonio Pietri -- President and Chief Executive Officer

[Indecipherable].

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

Hi Antonio, hi Karl. Nice to hear you guys sounding healthy. Thanks very much for taking my question. Antonio, one for you, and then I had a follow-up for you, Karl. So I know you mentioned you've had some initial conversations with customers that sounded a bit optimistic as you look out this quarter. As you think about this next kind of 12 months for you guys, the renewal profile for you is pretty sizable. And I was just curious for any color you could provide, obviously, in light of all that you said to caution us about that optimism and maybe any pockets of strength or relative weakness within those areas. And then I had a quick follow-up.

Antonio Pietri -- President and Chief Executive Officer

Okay. Well, I mean, look, certainly, the commentary on the cautious as it relates to our current quarter and engagement that we have going on with customers, their intent to do business, in the context of an overall pipeline that we brought into the quarter. With regards to FY '21, I tried to highlight in the script and my commentary why we believe that while we have large renewals coming up in fiscal year '21, we also believe that we're better positioned this time around with regards to attrition for the different reasons that I enumerated in my comments, and you can go back and read them in the transcript.

But look, overall, I think we are better prepared for this downturn, in general. We feel confident. The fact is that our planning process for FY '21 was pretty much completed as the downturn hit us, and we've now gone back and relooked at the assumptions that we had. That's almost completed now as well. And I would say that we have a lot of visibility to the extent that we can have in this uncertain environment, what's coming to us in FY '21.

I think our E&Cs were reset in the last four years, and there isn't as much overhang or a misalignment between usage and entitlement as there was in 2015, '16. I believe our owner operators are driving much greater value from our solutions. The upstream sector is being reset as '15, '16, and it's only recovered slightly and a lot of that to our MSC and APM suite.

So overall, look, I mean, I think it will still be a difficult environment going forward, uncertain in a matter of really what's been eight weeks. Oil prices have gone from $50 to minus $37, and they're trading somewhere around $25 above [Phonetic].

But the conversations we're having with customers are positive, and I also believe that digitalization, automation will continue to be top of mind for these customers, especially now with this very challenging environment.

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

That's helpful. Thanks Antonio. And then Karl, just quickly for you. You mentioned toward the end of your prepared remarks some collections delays among some customers. And just was curious, if customers are asking for payment terms, extensions. What you're seeing there early on? And how you guys are accommodating them and how it might compare to previous cycles? Thanks gentlemen.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Yes. No. That's the -- kind of like the delay at the end of Q3, I think, was two things. One was a little bit of people being nervous about what was going on in the macro environment. Then we got paid the majority of that in the next couple of weeks, over the next three weeks or so. The other part was them doing business.

[Technical Issues]

There's a few that, more in the SMB organization that you would hear from. But these are the smaller customers. And it's only been maybe a handful that we've heard from.

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

Thanks guys.

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Yes.

Operator

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

Antonio Pietri -- President and Chief Executive Officer

Hi Matt.

Matthew Pfau -- William Blair & Company LLC -- Analyst

Hey guys. Thanks for taking my questions. First wanted to talk about the difference in the reductions between APM and then the manufacturing and engineering contribution. So obviously, APM came down much more on a percentage basis. Is that just because those were more weighted toward the back half of the year? Or is there something with the products reason why those are -- APM seeing a greater impact in MSC and engineering?

Antonio Pietri -- President and Chief Executive Officer

No. I mean, look, the timing of the negotiations breaking down between the OPEC+ group and then the spread of COVID-19, I mean was -- couldn't have been worse than it was. It was three, four weeks before the end of the quarter as business was lining up very nicely for a very strong quarter. Some of those end in deals as we have communicated to investors, were going to be large deals. And of course, some of them with upstream operators, some in...

[Technical Issues]

Operator

Ladies and gentlemen, this is the operator. We are experiencing technical difficulties with Mr. Pietri line. Please continue to hold. The call will resume momentarily.

[Operator Instructions] Antonio your line is open.

Antonio Pietri -- President and Chief Executive Officer

Okay. Thank you. Sorry, something went wrong. Is there a question that I should be answering? Or...

Operator

Yes. We do have a question from the line of Steve Koenig.

Antonio Pietri -- President and Chief Executive Officer

Okay. Hi Steve.

Steven Koenig -- Wedbush Securities Inc. -- Analyst

Hi there. Hi Antonio. Hi Karl. Yes. So I'm interested in maybe getting some color on attrition. And Antonio, you had made some helpful remarks about how you're better aligned in terms of your usage, not as much overhang as, say, in 2015 time period in those years. Can you tell me -- maybe a little bit more color on -- it's curious and encouraging that attrition -- that you're not expecting it to increase. And I'm just -- I'm curious as customers renew and particularly in oil and gas and upstream oil and gas, what is it that keeps you from having them reduce their token value? And is this kind of because that's more of a longer-term impact that might happen in subsequent years, like it happened in the 2015 to 2018 period? Or is there just a different dynamic that they're already going into this without a lot of spare token? So just any help you can give me on that would be appreciated.

Antonio Pietri -- President and Chief Executive Officer

Okay. Yes. So specifically to upstream operators. So one, we have long-term contracts in place with them, and that's always protected us from sort of a rapid decline in annual spend. But having said that, the upstream market was also reset for us in 2015, '16. And that market also recovered with the capex spend recovery, which was sort of flat to mid-single digit over four years. And what we saw during that period of recovery was greater focus by upstream operators on our manufacturing and supply chain solutions and the APM solutions.

As the culture of optimization has started to sort of grow inside upstream operators, a lot of refining people, a lot of refining best practices were started [Phonetic] to migrate into upstream and, therefore, the use of MSC and eventually APM. We saw some growth in engineering -- in our engineering business, which is related to headcount because engineers use our engineering solutions to do modeling and other work.

So we believe that in this downturn, our upstream business is less exposed to the significant drop in capex spend. Because, one, it was reset four, five years ago and -- in gross margin. And the growth that we experienced was coming from, a lot of it from the MSC and APM side of the business, which are technologies that are put online to -- when these assets are operating and they tend not to sort of shut it off.

So we think we're better protected in that regard, like with -- similar dynamic with our E&C customers. Look, we're not saying we're not going to experience some attrition, but I don't -- we don't believe it would be of the magnitude that we saw in the 2015-2016 period.

Steven Koenig -- Wedbush Securities Inc. -- Analyst

Great. Okay. That's helpful. If I can ask one follow-up, that would be great. And it's somewhat related. So attrition didn't increase in the quarter, but annual spend obviously got impacted somewhat, as Karl talked about. And so that was kind of predominantly in new business, and you said that was a little bit more weighted to APM just because of the seasonality you were expecting in APM.

Can you maybe tell us -- give us some color or some help on -- in terms of those numbers that we're seeing in the print, they're well below analyst expectations. But how much of that was simply kind of seasonality of the renewals that maybe analysts hadn't really embedded in our estimates correctly versus a shortfall against your expectations on annual spend and maybe revenue -- and/or revenue, whatever is most informative to talk about?

Antonio Pietri -- President and Chief Executive Officer

Look, I think, first of all, we lowered our guidance for the year, but attrition is staying at the same level. So in a way, I'll lead you to an obvious completion, which is attrition may be more or less at the same level that we've seen, but it's less about new growth, sort of gross growth, which delivers then a lower growth rate outcome but sort of in a different way. It isn't that attrition is jumping; in that because of the environment, customers are going to be spending less, which is exactly what we saw at the end of March. Everything was lined up for a great quarter.

Customers -- I mean, look, there was no visibility at the end of March, and everyone pulled back. We took our own actions with respect to liquidity and other things. So that's the outcome that you see. It was just the contracts didn't get signed.

Attrition was in line with what we expected. We believe attrition will be in line in Q4 with what we've always expected, which -- and therefore, be in line with the guidance we gave at the beginning of the year. It's really about new growth or gross growth as we refer to.

Steven Koenig -- Wedbush Securities Inc. -- Analyst

Got it. Very helpful. Thanks Antonio.

Antonio Pietri -- President and Chief Executive Officer

Yes. Yes, no problem.

Operator

Your next question comes from Andrew DeGasperi from Berenberg.

Antonio Pietri -- President and Chief Executive Officer

Hi, Andrew.

Andrew DeGasperi -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Hi. Thanks for taking my questions. I guess just one quick one. On the -- last quarter, you mentioned that several of those APM customers had delayed their decisions, but you were very confident they were going to sign in Q3. I know, obviously, the obvious happened in March. But I wasn't sure if you mentioned this already. But did any of those customers -- you don't have to be specific, actually signed the APM product in, call it, January, February time frame?

Antonio Pietri -- President and Chief Executive Officer

Well, I mean, look, I'll be specific because I was specific with all of you that these customers were in the upstream sector, and the fact is that those two deals were in the works to get signed. And unfortunately, one of those operators is in the oil sands in Canada, some of the most expensive oil you can find from a cost of production. And that customer took very immediate action, not only to pull back on signing the deal, but also they implemented. It was just incredible how quickly they took action on shutting down operations and laying people off. So that deal didn't get signed nor the other one that I talked about. Those were two important deals that were impacted.

But we signed other deals. And the guidance that we're providing for APM is also in the context of a highly uncertain environment, but we're working some important deals for APM, and we'll see how Q4 comes out. But no, they didn't get signed.

Andrew DeGasperi -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Right. And then I guess maybe on the end markets you currently serve, do you expect the chemical side to recover first? I mean, how should we sort of think about the global recovery from your perspective?

Antonio Pietri -- President and Chief Executive Officer

Yes. Well, I mean, look, I think it's in a way, the first thing people will do is getting their cars and drive out, take it out of their garages. I think I've driven my car once or twice in the last five weeks. So OK, what happened there, you start consuming fuel, and eventually, there's gas, and eventually you start buying stuff and that hits [Phonetic] petrochemicals. So I think refiners will start benefiting the earliest.

You're already hearing from refiners that they see the demand stabilizing and starting to pick up in some of the states that are opening up. And that's great. I think eventually, that sort of flows down into chemical manufacturers. And look, then over time, it will be a matter of supply demand balance for oil, and then as oil companies feel more comfortable with the macro and their profitability or cash generation, then capex should start to recover. So we see capex sort of at the back end of the recovery, refiners benefiting the soonest and then chemical producers.

Andrew DeGasperi -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Great. Thank you.

Antonio Pietri -- President and Chief Executive Officer

Yes.

Operator

[Operator Instructions] Your next question comes from Jackson Ader from JPMorgan.

Antonio Pietri -- President and Chief Executive Officer

Hi Jackson.

Jackson Ader -- JP Morgan Chase & Co. -- Analyst

Hi guys. Thanks for taking my question.

Antonio Pietri -- President and Chief Executive Officer

Yes.

Jackson Ader -- JP Morgan Chase & Co. -- Analyst

Could we just -- maybe without giving specific numbers, but could we maybe just talk about what you can see in token usage today versus maybe six months ago or a year ago? And how that relates to the core annual spend growth?

Antonio Pietri -- President and Chief Executive Officer

Well, look, we get usage data from customers. That's part of our -- as part of our agreement. Now, that data shows a lag. Normally, most customers are on a quarterly basis where they have to send the data. There's a few that, because of their stature, it's only once a year they do it. But -- so there's always a lag to the data.

But look, we were seeing some growth in users, but a lot more -- but better growth in usage. So difference between users and usage, usage is about intensity of use, users is number of people using the products. So users were growing sort of in low single-digit fashion. Usage was supporting the double-digit growth trajectory that we were having. And so we were very pleased. And that's the -- I mean, we've been tracking this data, I mean, since 2005, 2006. So we have very good visibility into these dimensions. There is a lag to it.

Jackson Ader -- JP Morgan Chase & Co. -- Analyst

Sure. Yes. That makes sense. I don't think that we would have expected it to be real-time. Then just a quick follow-up. Antonio, in your prepared remarks, you talked about shifting some investments into more attractive areas away from some areas that maybe are now not as attractive or less attractive. Can you just give us a couple of examples of maybe areas that aren't as attractive today as they were before, and what areas are more attractive today than they were before all this happened?

Antonio Pietri -- President and Chief Executive Officer

Well, look, I mean, certainly, short-term attractiveness marketing, for example, I mean, you can -- in my opinion, at this moment, you can do some -- there's a type of marketing that you can do and no one will listen because people are very busy with other issues. So certainly, areas such as that.

Look, I mean, there were ongoing investments with regards to staffing up in certain regions, where maybe as a result of the downturn, that does -- it doesn't make sense to follow through with that and sort of pull back and wait a little bit until we see how this plays out.

Also, it's a combination of headcount growth in some regions, some marketing spend, maybe some systems that -- or things [Phonetic] maybe can wait a little longer. So it's just a multitude of things. And it's amazing that once you start looking for stocks, how much you can find in the context of this environment.

Jackson Ader -- JP Morgan Chase & Co. -- Analyst

Okay. Thank you.

Antonio Pietri -- President and Chief Executive Officer

Yes. No problem.

Operator

And I show no further questions at this time. I will now turn the call back over to Mr. Pietri for any closing remarks.

Antonio Pietri -- President and Chief Executive Officer

Okay. Well, look, thank you, everyone, for joining, and apologies for the issues that we had. And nonetheless, we certainly have a busy schedule participating in investor conferences and some callbacks with some of you. So look forward to that. And I hope everyone is healthy and keeping -- maintaining a good well-being. Okay. Thank you, everyone. Bye.

Operator

[Operating Closing Remarks]

Duration: 62 minutes

Call participants:

Karl Johnsen -- Senior Vice President and Chief Financial Officer

Antonio Pietri -- President and Chief Executive Officer

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

Matthew Pfau -- William Blair & Company LLC -- Analyst

Steven Koenig -- Wedbush Securities Inc. -- Analyst

Andrew DeGasperi -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Jackson Ader -- JP Morgan Chase & Co. -- Analyst

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