Aspen Technology Inc (AZPN) 2002 Q3 法說會逐字稿

Please standby, we are about to begin. Good day everyone and welcome to the Aspen Technology 3Q 2002 Earnings Announcement Conference Call. Just a reminder, today's conference is being recorded. For opening remarks and introduction, I would like to turn the conference over to Mr Larry Evans, Chairman and Chief Executive Officer, Aspen Technology. Please go ahead, sir.

Good afternoon and welcome to Aspen Technology's conference call regarding our results for the third quarter of fiscal 2002. I am Larry Evans, CEO and with me today are Lisa Zappala, our CFO. David McQuillin our COO is on the call from Europe. I would like to make the usual safe harbor statement that during the course of the conference call, we may make projections or other forward-looking statements regarding future events or financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the results described in such statements. Factors that might cause such differences include but are not limited to those discussed in the risk factor section of the company's annual report on form 10-K and in our 10-Q. Also please note that in compliance with regulation FD the following information is related to current business conditions and our outlook as of the time the information

is provided. Consistent with our prior practice, we are under no obligations to update this information and guidance until our conference call to discuss the fourth quarter results which typically occurs in August. Earlier this month, we announced our revenue and earnings for Q3. We were going to be somewhat below our previous guidance. During the past three weeks, we reviewed in detail what happened and are taking aggressive actions to address these challenges. Today I would like to review the results of the third fiscal quarter, discuss what we believe are the causes of the shortfall in revenue in earnings and what we are doing about it to ensure both our continued long-term market leadership and better financial performance in the short-term.

Lisa will then review the third quarter and our restructuring efforts from the financial point of view as well as provide an outlook for the fourth quarter and next fiscal year. Then Lisa, David, and I will be glad to answer your questions.

Revenues for Q3 totaled 83.5 million in line with our preliminary announcement and about 5 percent below our guidance in January. License revenue were 37.4 million, services revenue was 46.1 million, and our operating loss was 6.9 million - all in line with the preannouncement. As a reminder, these numbers have been adjusted in accordance with the FASB accounting announcement EITF 103, that requires us to gross up above services revenue and expenses by amounts for reimbursed costs that we historically had netted out. These costs for the March quarter totaled 4 million dollars. Although our spending was a bit higher than we had guided, in many ways we had a record quarter. We continued to gain strength competitively and to gain market share. We saw a lot of strength this quarter from our core verticals petroleum and chemicals. Petroleum was especially strong which is evidenced with the continued health of this industry. Chemicals continued to rebound as customers are seeing increased demand for their products and capacity utilization is improving. From a product perspective, the engineering solutions continued strong, as companies want to improve the performance of their existing planned assets. We also saw steady performance from our supply chain and manufacturing solutions.

Now let me talk about some of those specific deals and I will start with the largest transaction of the quarter, which was an agreement with Exxon-Mobil to license some components of our manufacturing and supply chain solutions. This software will be used as part of the program to optimize the operations of most of their refineries and major petro-chemical facilities in an integrated way. Exxon-Mobil is one of Aspen Tech's major strategic accounts. Over the past two years we have been working on a new relationship model for Aspen Tech would provide technology licenses, support updates, and maintenance and project services. In addition to the software license agreement Exxon-Mobil has also made a large commitment to Aspen Tech services over the next two to three years. Exxon-Mobil selected us after evaluating all of the commercial competitors and other internal solutions. We also find a large software license agreement with BP Oil for our supply chain software for global refinery production planning for use of more sites within the organization. Our production planning software is a virtual standard in the petroleum industry with about a 70% market share, so this was an easy decision for BP Oil.

In chemicals, we licensed software to Sunoco Chemical for a supply chain project to implement demand management and planning in their polypropylene business. In addition to the software license, we are also providing the services to implement these solutions. This is a new supply chain customer for AspenTech, although Sunoco has been a long time user of our engineering and manufacturing software. We closed our largest transaction in the pharmaceutical industry this quarter with , which is the second largest French pharmaceutical company and a new customer of us. They licensed our global manufacturing execution solution including one of the largest installations of the electric batch record system in the pharmaceutical industry. This will help this product to continue to gain traction as pharmaceutical companies work to comply with new FDA regulations. Optimizing primary manufacturing facilities in the pharmaceutical industry continues to be an untapped and attractive market opportunity for Aspen Tech.

Now let me talk about our engineering software. Throughout the economic downturn over the past 12 to 18 months, our engineering software business has been a consistent and solid performer. It was strong again for us this quarter. We find major license renewal agreements for the Aspen Engineering Suite with operating companies that include general electric, chemicals, Sunoco, Cargo, and Pecky in Venezuela. In Japan we signed agreements with the chemical with bisale of (indiscernible) and JGC, the large Japanese engineering firm. We also licensed our accurate fastest cost estimation software to and (indiscernible) Mount . The agreement with General Electric is particularly noteworthy because this is the first time we closed business for GE that also included GE power systems. They are using a modeling software as part of the fuel cell research. We are seeing a number of applications of the Aspen engineering Suite in fuel cell research as this becomes more important to company's advanced energy strategies. Many investors have asked why we have seen such strength in engineering recently. The engineering business is then particularly strong this year because the process industries have such a heavy investment in large fixed capital assets, and they want to optimize the return on these assets, especially when there are other increased financial pressure because of the economy. They use our tools mostly for existing plans as companies revamp them to increase capacity and adjust their operations to meet new environment or regulations and new requirements for product quality.

To summarize, as I indicated overall the strongest areas for us from the productive respective are the engineering software and the supply chain software. Petroleum was our strongest vertical with chemical also a major contributor. The Americas was a strongest region with the Mayor, and Asia-Pacific region making less than their usual percentage contribution. We signed 9 agreements that were approximately 1 million dollar or above, and we signed a total of 120 transactions that were 25,000 or above and that was 20% more than the quarter before. The shortfall in license revenues resulted from about a dozen license deals that slipped from 3Q.

The slippage was not concentrated in any particular product area or geography, although a couple of deals were slipped over a million dollars most were in the 300,000 to 900,00 dollar range. None of the deals were lost to the competition. About half of them have since closed or our own track to close for the end of April. As I said three weeks ago, what we saw was a lot of caution as people wanted to take more time getting comfortable with the decision, yet more people involved in a consensus process and generally take more steps. This was especially prevalent when we were closing deals lower in the organization at the BP or plant manager level, which is why the deals were concentrated in that mid-size license range. The fact assessed was the first calendar quarter and people had new budgets and felt they have plenty of time to spend their capital dollars was also a factor. Unfortunately, our timetable appeared to be less a motivator than we might have hoped. As a result of this slippage, we entered Q4 with some humility but also a strong pipeline and focus.

Now let me talk about what caused the mess. I know that you were very disappointed as we were at our revenue shortfall, needless to say we were very sorry to have to deliver this news. But we have done some careful analysis in the last three weeks and have determined that not surprisingly the primary cause of the delay was the global economic conditions have raised the bar on decision-making. Customers were reluctant to commit given the uncertainties. We have also accurately examined our own sales execution and sound areas where we can improve. Deals in this environment take more management time and attention. We have several sales executives who have not yet completed a full year in Aspen Tech who may have been a little overconfident. Our sales productivity is lumpy as we have a few sales rep having outstanding years but others who have just not performed in this environment.

To paraphrase the baseball terminology, we need more players on base not just someone who could head home runs or in our case hope to big deals. I will say more about what we are doing about this in a minute. The decision to commit to some extra expenses that we made in January after closing deals such as and Exxon-Mobil required us to overperform in the top line in Q3. However again during the quarter our sales force faced unexpected challenges at the end

of March. In high and site, although the expenses were good investments for the future we would not have made them had we anticipated a revenue shortfall. Lisa will give you the details on these expenses in a few minutes, but in this environment it is clear that we need a bigger cushion than normal to manage the financial performance. Less pressure to outperform at the top line and lower expenses until things improved for a sustained period.

Now let me talk about the immediate actions we are taking to restore profitability. First we have revisited our revenue growth plans for the current quarter and next year in light of the realities we are seeing. Unlike some in the software space, we have seen very good growth in our pipeline and many large deals were closed in each of the last several quarters. However until the environment improves, we will build an additional cushion to allow for the pipe of uncontrollable delays that seem to accompany difficult economic condition. Lisa will describe these refinements in a few minutes. Second we need to make meaningful cuts to our overall spending to return to profitability immediately and sustainably and with economic growth as (indiscernible) we will invest as appropriate.

Until then as part of the restructuring that I will detail in a minute we are reducing our expense run rate including our cost of revenues by at least 10 percent for the next fiscal year. Since people are our largest component of expense, this will mean a 10 percent headcount reduction. Some of the cuts will come from eliminating redundancies and achieving greater efficiency in the new organization I am about to describe. We expect to achieve greater productivity from the sales organization, which is overstaffed now for the current level of revenue. As our business grows, we can have sales people back. I want to stress that we will cut selectively and that in a manner that will not jeopardize our ability to execute on the solid pipeline opportunities for the next two quarters.

We also have room for these cuts because we did not cut as much as other software companies had earlier in the year. In research and development, we want to reduce expenses by carefully prioritizing the strategic initiatives we are investing in, and overall we feel we must operate leaner and get more done with less. Most of these expense reductions will be affected for only part of the quarter but will be fully implemented by the beginning of the fiscal year. Third, we are taking some immediate actions to reduce our expenses in Q4. As recommended to doing all we can to return to profitability immediately. These include a mandatory eight-day furlough for all employees in North America, 13% salary cut for all senior managers for six months, a hiring pause until the restructuring is completed. Curtailment of overtime and strict control of noncustomer-related travel. These actions will have a one-time immediate impact this quarter until the longer term actions take effect.

The impact of the cuts should result in an annual expense target for fiscal 2003 in the 335 to 340 million dollar range and for Q4 of this fiscal year in a range of around 83-85 million. We are determined to restore our profitability so that as we grow at the top line, we should see very nice earnings expansion. Fourth, if I eluded to a moment ago, in the next few weeks we will restructure the operations of Aspen Tech consistent with a recently completed update of our corporate strategy. With the new organization, Aspen Tech will be organized along two major lines of business. The first is our engineering software products that are used by customers to simulate design and optimize their physical planned assets and to manage their engineering work flow. Our products in this area include Aspenplus, Aspen custom marveler, Aspen and the accurate software for cost estimation. The second is our operation software product that enables customers to optimize their production process from raw materials procurement through manufacturing in the plant and all the way through logistics to delivery to their end customers.

Our products in this area include our manufacturing and supply chain software. The new business process applications that we were developing jointly with (indiscernible) fit in this area. We will also be integrating our e-business groups into this operations, business unit where they naturally align with supply chain and manufacturing applications. The two lines of business are highly synergistic because they deal with common customers in the process industries, because they utilize the same kind of domain expertise, because they are based on common model-centric deal with the enterprise, and because they use models for optimization, but the two lines of business have very different value propositions for the customer. Engineering software is concerned with designing and optimizing the physical planned assets and maximizing the return on investment from these assets over their life cycle. The operation software is concerned with optimizing the operations in the enterprise in a real-time to maximize margins and improve efficiency. The engineering software is much more of a tools business with most of the revenue in the form of software licenses and maintenance.

The operation software requires a significant component of project services to implement solutions at each company and each site. The new organization will have strong line of business orientation, which we believe will provide a greater focus and accountability for driving revenue in specific areas. You will have a strong product management function. We are also re-engineering our internal business processes to reduce duplication of effort and improve efficiency. The new organization will continue to have a global sales organization. David McQuillin is taking the lead role and implementing the new organization. We had a series of employer meetings this week, and he is in Europe now working with the sales organization.

Finally, our change is an addition to cutting expenses. We are also focusing on how to generate revenue more reliably. The sales organization has laid out an action plan that will involve the senior sales management having a more hands-on involvement with the top 30 accounts.

David McQuillin is working personally with the sales manager. They set targets with a strong focus on closing business earlier in the quarter wherever possible. We have a strong pipeline and not withstanding the difficult external environment, we need to be doing all we can to increase the predictability of our opportunities. For the near-term, we got to focus on three key areas for generating revenue, the first is our engineering products business, this has had good growth over the past three years, 50 percent of license revenue over the last fiscal year came form the engineering products close to the business in this area comes from existing customers as they renew their term licenses, add additional users, and add additional products. We are particularly strong in the chemical segment of the market, but we have an excellent opportunity to leverage our strength and manufacturing and supply chain in petroleum to grow our business there in engineering. The second area focus will be on the petroleum sector. There are plenty of healthy dynamics in this area. We have a strong position in this industry as you can see from the deals we did with Exxon-Mobil and BP Oil at this quarter.

Our software for refining planning and scheduling was a virtual standard in the industry. Some of you might have noticed the earnings announced by Exxon-Mobil a couple of days ago where they reported a decline in earnings. To put their earnings shortfall and perspective the drop was from 5 billion dollars a year ago to 2.1 billion this year. But more importantly, they attributed to the shortfall, the problems in margin, and refining and marketing which were exactly the problem our solutions addressed.

They also reported they are not cutting back on capital spending and certainly we are seeing that they are moving ahead full stream on the project with us. The third area of focus, where we are building interest and excitement on AspenWorld, the major industry conference we host every two years. It will be held in Washington DC in October. The last time we held it in February of 2000, we got a tremendous boost to our business, and we expect the same effect this year. Key executives in the industry attend the conference, and we will be showcasing our new solutions developed with (indiscernible) at AspenWorld, and this should be a real eye opener for senior executive. It is a great environment to cultivate relationships and to get big deals into the pipeline.

Now let me talk about our new corporate strategy. This is the first major update since we completed the study with Mcckenzie back in 1999. The four major elements of that strategy were in focus on integrated solutions for manufacturing and supply chain of the engines of future growth. To expand our network partners, to develop vertically focused solutions, and to leverage the internet. Although there is no lot of economic disruptions and turmoil in the industry over the 3-year ( or so that strategy has provisioned us well competitively then set the stage for the next phase of growth. Our new strategy also has four major points. The first is to organize the company as I described earlier around two major lines of business: Engineering and operation software. The second is to rationalize our product offerings and to transform AspenTech into an enterprise software company. The third is to focus our partnering on a small number of highly strategic partners like (indiscernible) IBM, PWC, and .

Fourth, to pursue some of the adjacent vertical markets of the process industries beyond petroleum and chemicals in a very directed way. The high priority adjacent verticals include pharmaceuticals, metals, utilities, and the process-related CPG. One of the things we have recognized that in order to deliver integrated solutions, we need a stronger focus on enterprise software. Our new products offerings will be organized according to platform products like the Aspen Enterprise platform, foundation products, and business process applications. The foundation products are basic technical products like Aspenplus, AspenPIMS, AspenMIMI, and InfoPlus 21. These are standards in the industry and the crown jewels of our company. They are key components of service engines in any enterprise solutions. But on top of the foundation products our specific business process products, we are working with the (indiscernible) alliance to further develop our suite of business process products. The PetroVantage solution is a good example of a business process product that we have developed ourselves and that will be an important part of the overall suite of applications for petroleum.

Now let me conclude with a few words on the long-term outlook. Despite the cloudy near-term horizon, AspenTech remains a dominant force in the industry. We have an exceptional franchise built on years of delivering successful results to customers. We have a strong global reputation and presence. We have an incredible talent pool. Our technology as represented recognized as best in class in every major area. We are the largest in solid base, and we have substantial financial resources. We see some of the short-term setbacks we have had over the past year as an opportunity to streamline Aspen Tech and improve our own efficiency. We have taken this opportunity to examine our own strategy. We are confident that we are on right course for the future and we will be successful.

Now let me turn this over to Lisa and then we will take your questions.

Thank you Larry. As Larry has indicated, we are taking several decisive actions, which we believe will help us improve our performance over the near-term while still preserving our long-term growth opportunity. Before reviewing some of the financial implications of these decisions, I will cover some of the key numbers we have reported in the quarter and then provide more specific guidance for our business outlook.

Total Revenues in the third quarter were 83.5 million, with license revenues of 37.4 million. As we previously explained services revenue of 46.1million includes approximately 4 million of customer-related reimbursements that have historically been netted out of gross revenues and expenses. This change was made to comply with the new FASB accounting rule that took effect in the quarter. Last year's third quarter and nine months results have been appropriately re-stated to present the information on a comparable basis. Our services backlog declined slightly to 125 million from 137 million at the end last quarter. Gross margins on licenses remained at targeted range of 91.5 percent, excluding impact of reimbursable expenses. Services gross margins of 38.2 percent declined slightly, impacted modestly by some lower utilization rates and lesser extent costs reinvested in knowledge management system put in place to improve future implementation of efficiency. Including reimbursable expenses, service gross margins was 35 percent that compares to 35.8 percent in last years' Q3 in and 36.4 percent in Q2.

With reimbursable expenses included we believe it can achieve future services gross margins in the range of 38 to 39 percent. Sales and marketing expenses in the third quarter were 29.5 million, up from Q2 and a bit above guidance. Third quarter R&D spending of 19.6 million rose 10 percent from Q2. G&A costs were 8.7 million, higher than previous quarters due to certain non-reoccurring professional service fees and cost related to a small litigation settlement. Third quarter spending across the board was 2.5 to 3 million above guidance given last January. As we previously indicated we had spending for specific programs that were planned for the quarter that we continued based our strong Q2 license performance and confidence in our sales pipeline and our belief our longer-term growth prospect. These costs include activity (indiscernible), programs that strengthen sales including specific training and incentive. Strengthening our knowledge management system to improve the efficiency our services personal, standing marketing campaigns and preparation for our customer conference at 2002. It was our expectation at the time that we would cover this incremental with additional license revenue in the quarter. These additional expenses coupled shortfall in an anticipated revenue caused an operating loss 6.9 million in-line with April 4 revised estimate. Interest income was 103,000, relatively flat to Q2 level as a result rate and lower level of installment receivable. The third quarter effective tax rate was 30% resulting a

Pro forma 3Q net loss was 4.9 million. Weighted average share outstanding totaled 31.9 million for Q3; with shares underlying recently issued equity excluded due to annihilative effect caused by loss. Pro forma net loss per share for Q3 was 15 cents, excluding preferred stock dividend. The 60 million dollar equity finance announced in February / March, will significantly improve the strength of balance sheet. We ended Q3 with cash and equivalents of $118m, up from $66 million in Q2. Net proceeds from financing were 56 million, 4 million in cash used due to operating loss. We expect to use modest levels of cash during the June quarter. Appearing on the balance sheet is obligation subject to common stock settlement is 29.6 million, related to shares to be issued in June and August to Accenture. AspenTech has the right to pay cash if the stock price were to decline to specific levels. Due to accounting change, services revenue in 10Q. This will affect the DSO calculations for both billed and unbilled receivables. With this change DSOs for billed receivables for 88 days remains targeted range as a point of comparison DSOs for bills receivable 88 for Q2, 98 for Q1, and 90 for Q4 of last fiscal year.

But if you include unbilled with the bills receivables, the, DSO were 122 days for Q3. The accounting change DSOs for billed and unbilled receivables were 119 for Q2, 142 for Q1, and 120 for 4Q for last fiscal year covering the past three comparable quarters. Consistent with our expectation we capitalized 1.9 million of R&D costs, or 8.8 percent of R&D expenses net of amortization of 1.2 million in Q3.

Now I would like to turn to financial outlook for the next two quarters and provide guidance into our expectations for fiscal 2003. For June quarter, we expect total revenues to sequentially increase from Q3 levels with licenses revenue at 40 to 41 million, the services revenue at 46 to 47 million. We believe this would enable to achieve net income of about 2- 2.5 million or EPS range of 6 to 8 cents in fourth quarter. The EPS estimate assumed a weighted average share count increase by about 3.5 million shares to Accenture and common stock. We have put several programs in place this quarter both in terms of providing near term cuts and longer term cuts for Q1. We all nearing this specific program in our normal forecasting process and expense management with more routine reviews and detailed expense control.

We expect more detailed oversight and timely review we would expect to maintain our costs within guidance we gave to 83 to 85 million or slightly below that. For the September quarter, we expect a modest sequential decline in license revenue. Licenses revenue will be the range 34 to 35 million with services revenue flat at 46 to 47 million. With full quarter benefit of staff cuts and expense reductions, we believe we will achieve break-even results or better with EPS at flat or a penny. For full fiscal year, we expect total revenues to be between 355 to 365 million range, and operating margins in the mid-single digits. We will be holding an analyst Day for investors on May 23 at our offices in Houston. Also, upcoming Bear Stearns, Wachovia Securities, and William Blair investor conferences will be held in May/June of this quarter. And now we would be pleased to take your questions.

Thank you. At this time our question and answer session will be conducted electronically. If you have a question please press the star key followed by the digit one on your touch-tone telephone. At this time we will take as many questions as time permits and we will proceed in order that you (indiscernible). Again that star one to ask question and we will pause for just one moment to assemble to after.

And our first question today will come from Chris DeBiase with Goldman Sachs. Please go ahead sir.

Thanks. The guidance for June, you originally hinted in the early April pre-announcement, that it would be up about 10% sequentially. It's about little bit half of that. Is that a function of what you're seeing already in April or are you just being a little cautious?

I think it's not as much a function of April. We actually expressed and reminded people that we had roughly a dozen or so deals without a supporter. We've seen about half of those close, roughly comparable amounts of revenue, and we would expect to see that the remaining deals are on track for closure in the upcoming weeks and months. So we don't see any of the revenues that flipped out of the quarter going away, and we see a strong pipeline. In fact as never been stronger. However we are mindful of the fact that you know in an uncertain economic environment, deals can flip out at the end of the quarter and we also as I stated want to ensure that we maintain a reasonable level of pipeline for Q1 so that we can maintain ongoing profitability. So it's lesser than issue of our confidence in the overall outlook and pipeline, and more you know where I said we're humbled and want to make sure that we actually maintain solid profitability and have a balanced pipeline not only for this quarter but also for Q1.

We just wanted to be a little more conservative.

And a follow-up to that, as you're going through the restructuring, are there any concerns about execution around account controls and those types of things?

David would you like to take this.

Yeah I would be happy to Larry, thanks. I would say no, we are being very careful in the way that we're going about the restructuring as opposed to across-the-board cuts. We're being strategic and selective and you know in accounts, and active sales programs, and services engagements, we are being very careful not to impact the organization in those areas. So I don't have any explicit concerns. Most people that will be impacted by the restructuring are people were not performing or contributing to our ability to close revenue or deliver services.

Okay. Thanks.

And moving we will next go to Catherine Moore with C.E. Unterberg Towbin.

I wanted to you just draw a little more into that pipeline for Q4. Obviously sounding strong pipeline. Wanted to know if you are dependent on very large deals, kind of like Exxon deals, for Q4?

A good question to ask me. I say no any we're not dependent on any mega-deals for this quarter. Its very much bread and butter kinds of deals. You know there's a certainly a good mix of large, medium-sized deals and moderate-size deals. But there is nothing you know huge that we're dependent on.

Okay and that you said that you had six of these moderate-sized deals flipped that already closed within the June cycle. Do you expect to be back-ended again?

Well we're doing everything possible. But one of the important actions that David has taken, maybe I will let him comment on

It in just a minute or two is to get more revenue in earlier and focus on closing deals earlier in the quarter. Having said that, you know there's always a tendency for the things to be towards the end. But I think if anything, it would be not as back-ended loaded, as it would be if we weren't taking any of those actions.

And did you sell off any receivables during the quarter?

Yes Catharine, we sold you know a typical amount of receivables. You know we've always said that we range somewhere between 10-15 in a quarter and I think we sold around 13 this quarter.

Okay great. Thanks very much.

Thanks.

And just as a reminder today. If you have question please press star one at this time and we do ask you limit yourself to one question to begin with. Next we will go to Patrick snell with Robert W. Baird.

Yeah little bit more in terms of rationalizing the product offerings, specifically, are there any solutions that will be discontinued or just not sold any more and also, what are that latest plans with PetroVantage? Have you folded that organization into the entire organization or what are the plans there, if you could answer that?

PetroVantage, you know that they have addressed the product rationalization or architecture. As far as PetroVantage is concerned what we have decided is it should be to you know for reorganizing the company into two lines of business: the engineering software, and the operations software. PetroVantage is part of the operations software. So, we're folding it into that part of the organization. PetroVantage has been a big contributor of pull-through revenue for the other solutions, so it can serve that role much better as part of that line of business. We'll be able to utilize people more efficiently as we restructure. There are some very good people associated with PetroVantage that can provide leverage to our overall petroleum business. We see lots of opportunities for cost efficiency, synergy and revenue. We're not going to report its business separately from AspenTech. It's going to be just part of the overall business going forward. And I wanted to know if you wanted say anything about the rationalization of product structure and that sort of thing.

Yeah thanks Larry, okay. Pat to the first part of question discontinued products as Larry mentioned through the earlier part of the call, we are rationalizing our products into a three-tier structure which basically the Aspen Enterprise Platform, the Aspen Foundation products, and the Aspen Business Process products. The decisions around what products will be combined into new, integrated, or single products, and which ones might be discontinued, will be taken coincident with the restructuring of the organization is underway and those final decisions will be taken in the mid-May timeframe. It's premature for me to comment on that until we get through that process.

Okay. And then just as a follow on the adjacent verticals, it seems like you may be a little more focused on now. Is there any sort of sales strategies or restructuring that will take place to try to drive above-average growth in pharmaceuticals and other types of adjacent verticals?

David can you comment on that.

Yeah I will be happy to and the answer is yes. Part of the focus of the new organizational model is to bring greater focus to the strategy to diversify and build businesses in Pharma, Metals, Utilities and selected segments of CPG. We intend to bring that greater focus through a dedicated product management organization tasked with owning the product we're developing and selling it to the market. Also, through a dedicated sales and marketing team that will be aligned with the Product Management team in the sales or field organization. So this is certainly a deliberate part of the restructuring, and we see opportunities out there to leverage many of the foundation products we've been selling successfully in the chemicals and petroleum businesses.

Will Accenture or IBM be involved in that at all? Or, are they primarily focused on chemical and petroleum verticals?

Accenture primarily focused on being our go-to-market and co-development partner for Petroleum in the Chemicals, in our supply chain manufacturing business where we were and IBM is primarily focused outside of those markets, as well as on second-tier partners in those markets as well. That also would be a good example of doing an excellent example for doing an excellent business with IBM. Currently we'll continue to build that relationship.

Okay. thanks a lot.

And moving on we will go to with Banc of America Securities.

Hi this Hari Srinivasan for . Larry the question I had for you is you mentioned that sales of production if you want to call it that way, was not very well distributed. Like some people really hitting home runs and other were not really batting well. What kind of steps are you taking to improve execution of sales?

, David would you like to comment.

Yeah I would be happy to. The answer is as follows I mean first of all, we are cutting people who are not being productive to the levels that we feel are adequate to remain at AspenTech. So that is an obvious action as a part of our restructuring program and consistent with bringing expenses in line with current and expected revenue levels. Second action we are taking is to bring more of a focus through targeting and through intense management follow-up on getting more of the revenue closed earlier in the quarter with all of our sales reps. We're conducting training on the new and existing products that are going to market so that each sales rep will be more comfortable with the product slates that they're selling. The new organizational model will also allow the sales reps to be more focused in a particular vertical and product line and therefore give them more confidence and capabilities to be successful with a limited slate of products.

Larry also, could you talk a little bit about the closure rate. I know that they kind of fell off toward the end. Do you see anything improving on that end as far as the pipeline?

Well yes I think what we saw at the end of the last quarter was a bit abnormal from what we normally see. We closed the big deals. What we saw was a bit more of moderate-sized deals, the bread-and-butter that we usually close. Every quarter is a little different. In this case, it was basically caution as people wanted to put more steps into the process and what we realize was that we needed be much more active in making sure that things are closed earlier. Were setting much earlier targets and pushing sales force to get those steps down earlier in the quarter. I feel confident that those measures will be effective. From what I can see, the accounts that I've been talking to directly are moving along well.

Moving into these adjacent verticals, obviously that increases your market scope. Does that involve any additional to your product?

The key to being successful is to prioritize development so you don't require a lot of excess of development. For example, in Metals, where we had a lot of traction in Asia initially. This was built on the company we acquired a year ago, a couple of years ago, Systems. They have an outstanding Metals solution. Instead of trying to cross the board with our full suite of products, we're focusing on areas where we have some strength. Another example is Utilities. We did a big deal in the September quarter with Southern Companies and license our Information Management product for all their power plants. So What are doing is being having a very focused strategy where we basically sell what we've got, do a minimum of development, gain a foothold in the industry, and then grow our business from there. It will require some development, but we are going to be very selective and prioritized in doing it. These vertical markets can be self-funding, and those in which we have an early start can generate the funding for the next phase.

And moving on we will go to Naveen Chaudhary with McDonald Investments.

There were seven paying PetroVantage customers at end of Dec. Are they happy with the product? Also, what type of contribution shall we expect from PetroVantage?

Ok Naveen. Let me try to help with some of that. We have explicitly given a fair amount of detailed guidance around not only the number of customers but also pull-through business. I will follow up with some this quarter. But I think what you will hear, longer-term, how that fits into the overall end-to-end Petroleum Solution vs. just the specific PetroVantage application. We signed an additional customer this quarter. We saw some deals slip for PetroVantage, much like we had seen with the rest of our business and have subsequently, signed two additional deals to the end of the quarter that had slipped beyond quarter-end. The product is doing very well; the acceptance and use by the existing users is building.

One of the deals that slipped was an expansion of an early customer that was expanding its usage. So clearly, the adoption may be a little slower than we anticipated, but it's moving along nicely and the product is performing very well. It's also doing beyond our expectation by pulling through additional supply chain solutions in a non-traditional way to customers we wouldn't have typically gone after. In that way, we've actually decided we would be more effective in our development and cost structure to integrate it more tightly with the overall petroleum solutions were offering. What you'll see in the future is the highlights on where it's a leading product category, but we'll blend it with the rest of the solutions and not speaking about it so specifically.

Also had a question on the competitive front just you had I2 has made some announcements process where it go. Is there any project which sale and then get some announcements. Having deals in the quarter, will you see more or less of them or they really not a factor?

I mean specifically the case of I2 We have seen a major retrenchment as a result of their expense reduction programs out of the process industry. So we're not seeing them in competitive situations. They did announce a deal with Halliburton, but it's further evidence that they don't understand our industry because Halliburton is really not in the process manufacturing industries. They're an oil exploration services company. So, whatever deal they did with them certainly is not a deal to be viewed is being as part of the process industries. I would say the reality the situation is our retrenchment in the form of laying off salespeople that had been called into the process industries is much lesser the presence across the board.

And moving on to Stephen Katznelson with Glen Capital .

Yes please, I am not sure who will address this question to maybe to David. But as you have taken the time to both scrub the pipeline and also look at the sales reps' expected productivity, could you go into more detail in terms of what you found that was different at the end of the last quarter and what surprised you in terms of both the pipeline and your expected sales force productivity. And then also, as part of those restructuring how many sales reps are you letting go?

In terms of the pipeline, as Lisa mentioned the aggregate size and distribution of the pipeline is as good or better as it was in third quarter. I think what we saw in third quarter is that we got down to the reds around a kind of refer to as the last couple weeks of the quarter we saw customers who had committed to get deals done for us not in the large deal size but more in the medium-sized category. They wanted to take more time, involved more people in the decision-making process. And that was different from then what we typically had seen and being able to achieve in the previous quarters. So wasn't so much that we had sales reps that you know had suddenly mis-forecasted deals as it was that. They had generally gotten used to be and able get deals done in the last couple weeks of the quarter when the customers committed to them. What we are doing in this more uncertain environment is really changing the behavior of our reps so that they are working to do trial closes and actual closes in advance of that last couple of weeks of the quarter. So that when we run into situations again potentially where customers want to take more time. We have more time to take and still get the deal closed within the quarter. Second part of your question regarding the number of sales reps Lisa help me out here in terms of what generally is being our practice in disclosing the information.

Steve you know we are re talk about total sales and marketing professionals as end of the quarter we were reasonably being flat from where they were last quarter. We went from 367, which includes sales management, account managers, technical sales support, and the professionals in the marketing and partner organizations. If you look at that total at the end of March, it dropped by two or three. But we have taken appropriate actions early in the quarter to reduce that headcount in line with you know our revised targets and roughly cut, as we said, about 10 percent from the organization.

So, you'll cut 10 percent from that number as well as across the whole organization?

I just don't know about the different percentage.

Thank you.

And next we will go to John Ederer with Pacific Growth Equities.

Hi, thank you. Just a couple of quick questions first, there is restructuring in the headcount reductions, can you talk about where you are in terms of those timing standpoint and have those being completed yet? And then secondly with regards to your relationship with Accenture, you mentioned the product is due out this fall. Are they already contributing to your sales process? Can you talk in terms of joint selling efforts or maybe more generally how are the SIs contributing to your business as a percentage of sales?

Really start with the I will take the first part and part of the second one and then David wants to assist me what we can. In terms of where we are, first of all we're not doing an across-the-board reduction in force where we give all the managers a target to out and find 10 percent. We're doing this as part of our reorganization, our restructuring where we think we can actually achieve some efficiencies and get some redundant people out of the organization in a much more planned way. So taking a little longer than if we did just on an across-the-board cut. Our target is by mid-May to have completed that process. This would be fully effective maybe in the last month of the quarter. That's where we are in the process. As far as the Accenture partnering alliance, the system integrators or partners we have stated that last fiscal year that 10 percent of our revenues were partner-related and over the next two to three years we'd like to see that number grow to 20-30 percent. In this particular quarter we definitely made a good contribution, we actually break those numbers out on an annual basis. And I know David, could you comment on you want to comment on how are we doing in terms of any specific accounts or with Accenture how the process is going?

I just say we in a case of Accenture specifically, I will comment on other partners as well but since the question was about Accenture I will answer that one. In the case of Accenture, the other formal agreement was announced back in the June /July timeframe. We're getting serious traction with the number of accounts around the world. But our a quarter or two quarters away from any meaningful contribution to our license revenues in the form of the partner-influenced revenue number which was about 10 percent last year. I wouldn't look for anything meaningful until 2003. While we'll close some deals in Q4 quarter, they won't be a significant percentage of total revenues yet. I would say we're very pleased with the reception in the marketplace and the progress were getting between our sales organization and Accenture's 800 plus partners that are out calling on a daily basis into the same industries were very pleased with the progress.

Okay, thank you.

And moving on to now go to Rob with Bear Stearns.

Hi everyone. Just a couple of quick questions. You mentioned one of the areas of higher cost was the announced Knowledge Management Program. Could you just make me a little bit more familiar with exactly what that mean and then the other question I had was on cash flow, wondering if you could just give sort of a basic breakdown of the operating cash flow in the quarter?

Follow me to our Knowledge Management , and then Lisa will deal with the cash flow. You know we have almost 800 service professionals and they are doing projects. And the way they implemented the project and what they have learned there is lot of knowledge there that we can capture that, and then reuse of our another similar project or use in our sales process, we can capture that knowledge. We can significantly improve our productivity. It's a real corporate asset and the brainpower behind the process industries generally that knowledge. So we have a team that's working to capture that knowledge in both in terms of software systems and understanding how it should be structured what should we done. If obviously something that is important corporate asset and will be beneficial in the long run. However, if we had known it was going to be as tight a quarter, we probably would have delayed that activity. It's something that I think it's very beneficial in the long-term, but in the short term, it could have been deferred. And in total cash flow maybe Lisa takes part.

We started the quarter as said with roughly 66 million in cash. We increased cash from the equity transaction on a net basis by about 56 and a half million and we used about 4 to 5 million in cash during the quarter, predominantly from operating losses. So that will give you a rough order of magnitude. There were other couple of other minor things like you know where we typically withstand on capital, which is really in the facilities in IT areas. We saw a little bit of cash coming in from our traditional employee stock purchase program, but nothing significant.

Okay. Just another quick question. I was little surprised, I think you mentioned that services utilization was down. It seems like some of those big deals you signed in the last couple of quarters, particularly on the chemical side, had large services components to it. I am just over curious why was utilization down with such big projects in the last couple of quarters?

Sure. We were clearly, you know the programs that we signed with Dow were two parts. We announced those one in the Fall time frame. We announced a large services contract with them to work on the program of advanced control optimization in their Ethylene area. We did begin utilization or implementation rather of that project. The new licenses that we signed with them in the December quarter to implement a broad-scale manufacturing integrated system for production scheduling, production management and production controls. It's probably just now beginning to scale up because we're combining resources both from our side and their side and that wasn't going scale up over night. So it didn't have much of a contribution at all this quarter. And the Exxon project is also still in its scale-up mode and, although it did have some minor impact, it will have more impact on the next several quarters. It's really modest, you know but what percentage point in utilization can impact the cost structure or the margins. It was more because there were spotty areas where we might have had people not fully chargeable, and also, we had some people in the services area helping to ramp up the Accenture alliance, in terms of bringing together focus on design for the new products that were putting together. So I say that was the combination wasn't major but it was had a minor impact.

Okay, thank you.

And next we will go to Lee with Elm Ridge Capital .

Hi, just a bit big picture question. Looking at fiscal '03 and beyond, fiscal '03 I think will be orders will be in magnitude of 15 percent revenue growth. So what's on the ramp side on the revenue side and you are guiding to sort of single digit margins. I just wondering what do you see as a normalized operating margin for Aspen?

I will answer that. We have said longer-term, that we would see you know our total revenue growth with a more normalized economic environment that would be expected to range in that kind of 25 percent level. Plus or minus a little bit. Based on where the market opportunities are and the penetration to day, which is still light in our overall solutions set. We would then expect with some improvements to see operating margins come into the mid to high teens. Anywhere I said from like 13 -16 percent. So we almost be doubling the operating margins of the high single digits so we are expecting for next year. And, if the growth rates were to get there in a two-year time frame, we would hope to get there also. And then you'd see pretty significant earnings growth, relatively speaking, off of where will end up next year, which is a lower base.

Did you see in mid-single digits for next year or high-single digits?

I think we said mid to high. So I think it's quite going to 6-7 percentage range.

Right and what going to 13-16 percent range, what line items do you think, where would get the main leverage?

Well I think it would on across-the-board. We would like to see you know some improvements in the gross margin area, both in terms of slightly you know better gross margins in services and an overall combined better gross margin with licenses growing nicely. Then I think you have see a more productive use and a balance of efficiencies that would help both the level of sales and marketing expenses, where they would come down a bit from where they've been in the mid-30s down to the low-30s. And R&D spending, which has been you know abnormally high for us in the couple of years in the is being in the low-20s would move down into the . GNA, a few percentage points. It's kind of across-the-board.

The last question, what sort of share count should we use for fiscal '03?

For '03 the share count will predominantly up by as I said by the next quarter and then into next year by 3.5 million and maybe moving higher. The 3.5 million kind of estimates the impact of both the Accenture shares and typically normal common stock equivalent coming in as a result of options and warrants. Then we have the impact also of the preferred shares, which are not unlike convertible debenture, coming in once its dilutive. It has a balance of measuring the level of earnings that will bring on dilution, which you know obviously we expect next year to hit. That brings in another 3 million shares. So we should see weighted average share count going from about 35.5 million up to 38 million throughout the year.

Right. Okay thanks a lot.

And just as one final reminder today if you do have a question please press star one at this time and moving, I will go to Joe Bishop with Intrepid Capital Management.

Yeah, thanks. As I wondering if you could talk a little bit about the restructuring in terms of the sales force and if there be any major changes in sort of how the sales force goes about you know selling to the customers, any major changes there as far as the the different geographies or different customers assignments?

Again I would say the final decisions on the restructuring both for sales and the overall company will not be made final until mid-May. That being said, I cam make some comments and I would say this that the primary change will be in increased focus within the regions and verticals along line of business. Engineering and Operations, as Larry said where we will retain common account management in what we called our global accounts the large global accounts where the common account manager for our total offering is justified based on the potential on the customers' buying behaviors. But in accounts below that level, within region, within the vertical, there will be more of a focus by line of business. We think that will give us increased productivity that it will be easier for the sales reps to sell because they will have a smaller portfolio to sell. From a pre-sale support standpoint, we can also find increased efficiencies. I'll have more details to report on this and the overall restructuring as we move past mid-May.

Thanks.

And Mr. Evans there appear to be no further questions at this time. So I would like to turn the conference back you for new additional or closing comment, which you may have.

I want to just I would like to thank everybody for participating on the call and for your support and throwing some excellent questions that were asked here. Aspen Tech is very much committed to returning this company to profitability and we have the course of action that might got happened. I think with our new strategy or new organization going forward. We are going to be in a strong position to significantly improve our productivity. So I am really excited about the opportunities that ahead and are very confident that will be successful. Thank you very much.

And that will conclude today's Aspen Technology conference call. Thank you all for joining us and have a good day.