Aspen Technology Inc (AZPN) 2002 Q4 法說會逐字稿

Please stand by. We are about to begin. Good day, everyone. Welcome to the Aspen Technology fourth quarter earnings announcement conference call. 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 at Aspen Technology. Please go ahead, sir.

Thank you and good afternoon. Welcome to Aspen Tech's conference call regarding our results for the fourth quarter of fiscal 2002. I'm Larry Evans. With me today is David McQuillin, our COO, who will succeed me as CEO on October first. Also on the call is Lisa Zappala, our CFO.

Before we begin, 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 forms 10-K and 10-Q.

Also, please note, compliance with regulation FD, the following information is related to current business conditions and our outlook as of the time the information was provided. Consistent with our prior practice, we are under no obligation to update this information and guidance until our conference call to discuss the first quarter results, which typically occurs in late October.

Today I will discuss Q4 results and of the highlights of the quarter and then David McQuillin will talk about the actions we are taking to restore the company to profitability. Lisa will follow next with a detailed review of the financials and our guidance for fiscal 2003. Then we will be pleased to take your questions.

Total revenues for Q4 totaled $84 million, within the range of our preliminary announcement. Revenues were $37 million, slightly below preliminary estimates. Services revenue were $47 million, slightly above preliminary estimates, as a result of higher than anticipated reimbursable expenses.

Operating expenses before the charges for restructuring and in process R and D were $93 million, which was $4 million more than we had discussed in our preliminary announcement. That resulted in operating loss before restructuring and one-time charges of $9 million, compared with the range of $4 to $6 million in the preliminary announcement. Of the $4 million in expenses above our estimates, approximately $1.2 million related to reimbursable expenses greater than we had estimated. Because these announcements are beyond our control and difficult to predict with accuracy we had excluded these amounts from revenue and expenses, but recent accounting rule changes we quire us to include them in services revenue and related expenses. About $1.8 million related to our decision to increase bad debt reserve as prudent measure in an economic environment that is difficult for customers. The remainder of the additional expense are primarily attributable to vacation accruals larger than anticipated as employees deferred to later in the area in response to the mandatory furlough we implemented this summer. Operating expenses included restructuring and in process R and D that Lisa will talk about in a few minutes.

As a management team, we are not satisfied with this performance. We are determined to restore Aspen Tech to comfortable operation as quickly as possible. To that end, we have made a number of business model and personnel changes to address the shortfall and others are in the process. David McQuillin will discuss some of these in detail in a few moments. First, I want to report some of the highlights of the quarter and give you a flavor for some of the positive things that are happening at Aspen Tech and in the market place.

First, let me begin by giving you a view of the license revenue. We continue to see the strongest demand this quarter from core verticals of chemicals and petroleum. Chemicals led the way. This industry continues to rebound. These company customers are seeing increased demand for the product and capacity utilization is improving. For product perspective, the engineering solutions were the strongest contributors in Q4, particularly with addition of Hyprotech for the quarter. We closed important transactions for solutions in the supply chain manufacturing area.

From a geographic perspective, we were encouraged with the strength we saw this quarter from business in Europe, an area that has been a challenge for most other software companies. The Americas was, as always, an important contributor. Our performance in the Asia pacific region did not meet expectations. David will discuss the actions we are taking to address the situation. We closed 11 deals, approximately a million dollars or greater in license revenue. This means over the past three quarters we closed 28 deals, of approximately a million dollars or greater in the most challenging environment the software industry has seen in quite sometime.

As I stated in the preannouncement, all the deals slipped from the third quarter, did close in Q4. In addition, we have already closed one of the fourth quarter transactions that slipped. Despite the challenge of predicting timing with accuracy, we are getting these large deals done, which distinguishes Aspen Tech among other software vendors in this difficult climate. We did 156 total deals, greater than $25,000, compare wide 120 and 106 in Q3 and Q2. Clearly, large deals are still getting done in this environment. This is reassuring both in terms of value proposition and our ability to close business with senior decision makers.

It is apparent that the large transactions, those in excess of several million are most difficult to predict in this environment. That has implications for the fiscal 2003 planning, that Lisa will detail shortly. Now, let me talk about a few of the most important transactions in Q4 to give you a feeling for how we are delivering value to our customers. I will start by describing transaction we did with Muller, the European market leader in dairy products. Four major production facilities are in Germany. The solution involved demand forecasting, supply planning and production schedules. This is a competitive win against SAP in their own background. The multi-step production process can be carried out at four different sites. This was a difficult optimization problem. We had to integration with the (inaudible) execution system, at the plant level, and with the SAP R-3 software at the business level.

In the end, Muller selected Aspen Tech because they felt we could best integrate the solution with the manufacturing processes, as well as SAP, and because they knew we had experience in implementing similar process-related applications. In the manufacturing area, we signed major agreement for a plan implementation at PPG Industries facility in Lake Charles, Louisiana, where they produce chlorine. The solution will enable plant manage to monitor on real-time basis to reduce operating fluctuations throughout the plant and avoid shut-down due to lack of storage space for the product. The customer will save several million per year and the solution will pay for itself in half a year.

This is an example of a deal that had been delayed from last December, the capital was released this quarter, as cost of the chlorine business is starting to recover from severe downturn. We signed license and services agreement with leading building products company, to implement manufacturing information and advanced process control software. They will be using the solution to monitor operations and record statistics for use by ERP system to provide visibility on status of their manufacturing operation. The advanced process control solution will increase three-put and allow them to get more production from existing facilities. This customer applied technology already in dozens of their plants and this purchase enables them to extend the use into the company. This shows the value of our solutions outside core verticals.

Now, let me talk about the deals we closed in the engineering area. We signed another major license agreement for the aspen engineering sweet with Degussa, a large chemical manufacturer. They have a corporate engineering organization that creates models of manufacturing process for use by the operating business unit. Degussa was the first customer to implement the aspen web model capability that enabled the company to provide access to critical simulation models via a standard Internet browser. By allowing their financial and operations decision makers to exploit the knowledge captured in the models, they received improved performance. In the pharmaceutical area, Merck renewed and expanded aspen engineering suite contract, to use batch plus to optimize and enhance new and existing processes. Merck identified 20 successful projects using these tools in the last three years, yielding millions of dollars in savings in a wide range of applications.

The benefits included reduced raw material cost, reduced use of solvent utilities reduced cost and better environmental compliance. We had a number of other large license agreements for the aspen engineering tool at companies including BASF, dsm, Shell Chemicals and Jacobs Engineering. We were very pleased with Hyprotech's numbers in Q4. We closed the acquisition on May 31st. Genesis oil and gas is engineering and construction company based in the U.K., focused on delivering services for the oil and gas sector. They were licensing the Hyprotech software for a few projects. This new contract, they committed to substantial long-term relationship with Aspen Tech. A similar situation occurred with Howle Baker, another company that specializes in providing engineering solutions for the oil and gas of hydrocarbon industry. Philips Petroleum has been a long-time Aspen Tech customer. They use the software in all areas of the company. After their merger they signed a new agreement to provide them with access to Hyprotech tool.

The common denominator in these three major deals with Hyprotech was for customers to make a long-term commitment to software based on their confidence that Aspen Tech will continue to develop support and enhance the software. Now, let me talk about some of the other operational highlights for the quarter. We completed the acquisition of Hyprotech on May 31st, so we just had one month as combined company in the quarter.

During that time, we accomplished a great deal. The two sales organizations worked effectively together to respond quickly to customer questions. In June we held a combined meeting of Aspen Tech and Hyprotech technical advisory committee to solicit their recommendation on the best way to develop the next generation of integrated product and provide a migration path for customers. This included nine of Aspen Tech's best customers and 6 from Hyprotech.

Customers have generally reacted positively to the merger because they see a larger, more effective investment in research and development from the combined company than we focus on the capabilities they need. Under revenue side, we beat the plan for combined Aspen Tech and Hyprotech revenues in the engineering sector. We were also able to utilize the Hyprotech customer relationships to cross-sell Aspen Tech products into these accounts. There is not much new news. It continues to have the status of preliminary investigation and we are complying with requests for information. We did advise we were unlikely to have a conclusion for 6 to 9 months since the FTC's formal product for conducting this type of investigation follows a deliberate time schedule.

Our attorneys are confident that we were not required to make a (inaudible) filing for the transaction and we have heard nothing on the contrary from the ftc. Some of you ask why we were not required to file. That decision depends upon a set of criteria from the ftc based on the amount of revenues and assets in the United States. The limits were raised significantly at the beginning of this year. We simply didn't meet the criteria.

Customers are very excited about the combination. Our employees are melding nicely. The (inaudible) lessens our dependence on petroleum refining by opening up oil and gas market. We are in a better position to deliver on vision of providing integrated solutions that enable companies to use the best and most accurate models to make business decisions over the life cycle of the manufacturing process.

We continue to make solid progress this quarter in the work we are doing under the alliance with Accenture. We agreed to work with Accenture to develop and market the next generation of integrated supply chain manufacturing solutions for the chemical and petroleum industry. These solutions will enable customers to automate and optimize business processes in core operations and will become the next generation of PlanTeligence offering. Accenture is interested in the alliance with Aspen Tech for the process industry because now that companies have their erp systems in place to auto mate the back office operations, the next challenge is to automate core operations. They know that Aspen Tech has the leading software in the process industry and we provide the infrastructure on which these next generation business process solutions will be built.

They see a large system integration services opportunity over the next 3 to 5 years. We are excited about the alliance because we believe we will be able to penetrate the market more rapidly than we could on our own. Accenture brings their expertise in business processes and enterprise software and there are still people to help us develop solutions scalable and accepted by the IT organizations of customers. Accenture's high level contacts in the industry provide strong credibility to our solution approach.

We are paying Accenture $36 million for intellectual property and development services. Of this amount, $18 million was paid in stock to Accenture in June. Another 11 million is due at the end of the month. The final $7 million is due in August of 2003 and contingent on certain milestones being delivered. Accenture is contributing 20,000 mandates of development effort over a two to three-year period. We will own the resulting products outright. We expect the first business process application to be available to demonstrate at Aspen world. With commercial release scheduled for first quarter of calendar 2003.

In fiscal 2004, and 2005, we are expecting the cumulative incremental license revenue from these new products to total $100 million. This would be in addition to our core foundation product that we will continue to sell. One of the first business process applications will be production and execution. This is next generation version of PlanTeligence to integrate supply chain planning with manufacturing execution processes. It will capture and enable industry best practices through a standard work flow definition. The solution will integrate business processes to single roll-based portal with consistent user interfaces for all users. The decision support tools are based on Aspen Tech industry standard software and upon the use of consistent model. The software will be enterprise enabled to provide a solution scalable and can be implemented and maintained easily.

It is our practice - now changing gears, to give a more detailed breakdown of revenues on fiscal year basis. I would like to summarize our performance overall in fiscal 2002, total revenue for the year $320.6 million, compared to (inaudible) in 2001. License revenues in 2002 of 134 million were down 9% from fiscal 2001, but partially offset by services revenues that were up 4%.

Petroleum and petra chemicals represented 52% of license revenue in fiscal 2002, up from 45% in fiscal 2001, but petroleum representing larger portion in petra chemicals. Polymers were the next largest at 15%, compared with 7% the year before. Encouraging sign we did see modest rebound in the market. Specialty chemicals and pharma were 14%, the same as last year. Consulting segment represented 10% of license revenues, down from 16% a year ago, and closer to historical percentage. Variety of other growth markets totaled 9%, compared with 17% last year. From a geographic perspective, Americas represented 60%, (inaudible) 30% and Asia pacific 10%. This represented larger share for the Americas and smaller share for Asia Pacific with Amia being about the same as fiscal 2001. Distribution of license revenue by product was similar to 2001. Engineering made up about half of the total license revenue. Engineering solutions revenues, which tend to be somewhat easier to predict, came in closer to plan than fiscal 2002 than did the supply chain manufacturing business.

Supply chain solutions were 20% and manufacturing 30%, whereas last year, the reverse, with supply chain 30% and manufacturing at 20%. In the year ahead, we anticipate the portion of revenue attributable to engineering will move from about half toward two-thirds. The shift will be driven by relative strength in engineering business, inclusion of Hyprotech results for a full year and weaker supply chain manufacturing environment. Partner influence license revenue increased to approximately 16% this year, from 10% in fiscal 2001. This success is evidenced in strategy to work more closely with limited group of influential groups working. This progress is underway. We remain on track with stated goal to reach 20% in fiscal 2003 and see that percent move toward 30% in the year or two thereafter.

As we look ahead, momentum is continuing to build for Aspen World 2002, the conference to be held at the end of October in Washington, D.C.. We are expecting 2000 attendees from the leading companies. We are holding the conference every two to three years and it always provides strong shot in the arm to our business. The timing this year, as the industry is emerging from turmoil and recession of the past two years, couldn't be better. Companies are asking themselves what they should be doing to be successful in the new environment. Aspen World has been a forum to set the thought leadership for the industry. This year there will be 80 sessions with five parallel tracks to address challenges and opportunities and management issues for the process industry. The aspen World solution showcase will feature 160 hands on demonstration of products and integrated solutions by Aspen Tech and our partners. It is this showcase we plan to demonstrate the first release of the business process products from the Accenture line.

Now, I would like to ask David McQuillin to update the actions we are taking to return our company to profitability and to offer some insight into the year ahead.

Thanks, Larry. Good afternoon to all. Over the last several months I have established three key objectives as my highest priorities for the year ahead. These are the things I believe we must achieve to improve financial performance, extend market leadership and build shareholders value. First and foremost, we must do whatever it takes to make money. We have cut our cost to break even at quarterly revenue of $88 million. Second, we must improve execution across the organization. Do more with rapidly and exceptionally well. Third, we must reenergize the top line to get Aspen Tech back to historical levels of growth and profitability.

Let me discuss the aggressive steps we have taken to return Aspen Tech to profitable operations and positive cash flow by December quarter. As you may recall, early in the fourth quarter, we announced significant headcount reductions, mandatory furlough program and spending constraints. These cuts have successfully been implemented. Full effect of these actions will be felt in entirety in the September quarter. In July, we implemented a number of additional initiatives to reduce spending, including temporary employee pay-cut, extension of the hiring freeze, elimination of nonessential contract positions, acceleration of cost synergies with the Hyprotech acquisition and tighter restriction on travel. We believe these aggressive actions will reduce spending in the September quarter by approximately $14 million or 14% compared with where it would have been in Q4, had Hyprotech been owned for a full quarter.

We believe the operating loss in our weakest quarter will be modest and strict spending control will enable us to achieve profit in the December quarter. To help you calibrate the impact of cuts on spending, which is driven by headcount in the business, total employees at march 31 numbered approximately 1970. At June 30, Aspen Tech employed approximately 2235 people, including 415 personnel who joined the company with Hyprotech. At September 30th, our target is approximately 2150 employees. At this level, we will have achieved both 10% headcount reduction we committed to in April, as well as 8% reduction of engineering group, which we described in connection with the Hyprotech acquisition.

Our second objective, improved execution across the organization, is key to our future success. To that end, we announced several months ago and have implemented streamlined dual product line organization structure with engineering and supply chain manufacturing business units. This design better aligns our sharpened external focus with internal resources necessary to deliver results. We believe this more transparent structure will eliminate functions, bring greater accountability and increase the efficiency of our operations, both in customer facing activities, as well as product development.

In recent weeks we announced appointment of two executives to the management team, each of whom has begun to make meaningful contributions. Wayne Simm, president of Hyprotech, replaced Diane (Obano) as svp for sales. Wayne delivered 25% top-line growth at Hyprotech. He has identified a number of opportunities to improve sales effectiveness and increased revenue visibility. Replacing sales leadership in Asia pacific region, strengthening the pipeline and concentrating sales resources on highest probability opportunities are among the changes he is implementing. His relationships with senior decision makers, his ability to articulate (inaudible) and his action combine to make him a great candidate (inaudible) sales organization. His ownership position in Aspen Tech is a powerful motivator.

Cecil (Suchuck) joined (inaudible) process industry expands more than 30 years, including role as vp product development at Honeywell Solutions, during which time I had the opportunity to work with Cece. His leadership and vision is important asset as we implement our strategy to become a enterprise solution company. Cese will play a role to evolve product roadmap, with keen focus on bringing scalable solutions to market more rapidly, profitably and in a compliant manner. These were two critical positions. I couldn't be more delighted with the caliber of the talent we have attracted. In significant change in Aspen Tech corporate culture, broad range of managers across the company will for the first time have profit and loss accountability, which I believe will increase our ability to achieve growth objective and improve margins. This company wide ability to manage is important toward increasing organizational effectiveness.

Our staff is now fully transitions and are productive. We are enthusiastic about the positive impact. These changes will have on productivity in the coming months and the year ahead. Our third major goal, revitalizing top line growth involves near term and longer term strategy. In the short term, we will focus on replicating recent successes in selling, bundled foundation of products for specific targeted vertical applications that solve media problems for customers. In addition, we will continue our successful focus that we saw in Q4 on cross-selling proven Aspen Tech solutions to Hyprotech customers and vice versa. As well as articulating the value our solutions deliver at large for the process industries, leveraging their investment in erp and our clear market leadership. Longer term, Larry said, we will derive additional growth from the products we are developing with Accenture, that deliver customer returns inside and outside the core markets and from increasingly integrated supply chain manufacturing solutions across the enterprise.

Larry, Wayne, and I, along with senior managers from the product divisions, have just completed detailed review of the organization, our people, technology, the competition, opportunities and resources required to exploit openings and our market position. I have been and will be spending a great deal of time meeting with executives and listening and strengthening relationships with major customers, both existing and perspective. The same holds true for business partners, especially Accenture and IBM Global Solutions.

In terms of governance I am honored to replace Joe Boston. Joe joined Aspen Tech board 21 years ago and he made contributions both in management and as a director. He will continue to work part-time at Aspen Tech providing advice and guidance, technical advice. We are grateful to him for many years of valuable service.

As I prepare to take the reigns from Larry, I am preparing to take on interactions with the investment community. Some of you I know and look forward to meeting more of you and spending time articulating our strategy and the action plans in the weeks and months to come. I will ask Lisa to cover the financials in greater detail for Q4 and forward-looking year.

Thanks. Revenue in the fourth quarter were $84 million, within the range of what we estimated just a few days two the quarter in July. License revenue totaled $37.4 million, $600,000 below preliminary estimates. Service revenues were 46.6 million, approximately including $5 million of reimbursable expenses, compared with original estimate of $3.8 million of reimbursables. Services bookings in Q4 - services revenue for Q4 totaled $46.4 million and the backlog totaled 119 million at the end of June, down from the March level of $125 million. Gross margins on licenses remained approximately 92%. Services gross margins totaled 36 and a half percent, up from 35% last quarter, including reimbursable expenses. Sales and marketing expenses in fourth quarter were 30.6 million, compare wide 29.5 million in Q3, as planned with Hyprotech.

Fourth quarter R and D spending of 19 million was down $600,000 from Q3 levels. (inaudible) result of our decision to add 1.8 million to our reserve for bad debt. Total expenses excluding special charges in the fourth quarter were 93 million, including approximately 5 million expenses from the one month we owned Hyprotech. We successfully delivered all of the operating expense reductions we had promised in the quarter from headcount reduction and other discretionary cuts. The aggregate level of spending in the quarter was $4 million higher than the target we set on last conference call for the following reasons. Past reimbursable expenses related to service business were $1.2 million higher than forecasted. We increased bad debt expense by 1.8 million to be more conservative in the environment. Third, remainder is attributable to vacation accruals as employees deferred vacations using furlough days, instead. The impact of these items I mentioned brought our operating loss to $9.1 million for Q4, excluding charge and R and D write-offs. Restructuring charge of 13.9 million included provisions for severance, outplacement cost, provisions for consolidating facilities and write-down of assets. R and D write-off taken in connection with acquisition of Hyprotech, was in line with previous estimates at 14.9 million.

As for below the line items we reported equity impairment charge of 8.9 million in connection with optimal logistics. We reported 8.3 million reduction in the value of our deferred tax asset reversing benefit we had taken in the first three quarters, along with approximately 2.4 million of foreign tax provisions related to foreign operations and that of Hyprotech. The reversal of the benefit booked during the year was made based on conservative assessment of combined NOL and tax credit position in the U.S. and the current losses incurred. When we are profitable, we will reassess the assets and our ability to use them at that time. With the addition to bad debt reserve and conservative approach we have taken to asset valuations, we believe we will emerge from the difficult period in the strongest position possible.

Weighted average shares outstanding totaled 34.8 million for Q4, which are basic because of our loss. On fully diluted basis, we ended Q4 with 36 million shares outstanding, slightly less than we anticipated due to lower levels of common stock equivalent. The pro forma net loss in Q4 was 11.7 million or 34 cents per share. This excludes restructuring charge, write-down of R and D, write-down of equity investment, reduction in value of deferred tax asset and dilutive impact from preferred stock dividend, discount and dividend. GAAP net loss for fourth quarter was 59.6 million or $1.71 per basic share. In terms of the balance sheet, cash totaled $52.1 million at end of June quarter. Up to 66 million used in Q4, 14 million used was related to operating loss and costs related to restructuring and the balance attributable to nonfinance portion of acquisition of Hyprotech.

Receivables increased to 108.7 million, up the end of march. This increase is due to installments from Hyprotech, which were roughly 41 million, as well as 12 million of installments we held from core engineering business at the end of June.

Since then, we sold some contracts and expect to sell 15 to 20 million in the September quarter. As always, we will leverage these installments in cash for working capital needs and to manage balances over the next few quarters. As we described on the last call, our balance sheet reflects certain contractual obligations to Accenture with the joint development relationship. Current portion of the obligation decreased approximately 18 million with stock issuance to them in June. Total 11.1 million at the end of June. We are now in advanced discussions with Accenture to defer the bulk of the payment due at the end of the month. We expect we will make modest cash payments at the end of the first and second fiscal quarter and remaining amounts deferred and due throughout part of calendar 2003.

Dso for billed receivables were 95 days in the quarter, excluding impact of Hyprotech opening receivables we purchased on may 31st. You include unbilled with billed receivables dso were 128 days in Q4. If you (inaudible) impact both purchased receivables dso's calculate to 102 for billed and 135 including unbilled receivables at the end of the quarter, this compares to 90 and 120 days in last year's Q4.

Consistent with our expectations we capitalized 2.3 million of R and D cost related to intern labor of projects other than the work with Accenture, approximately 10% of R and D expenses. In addition to this amount, 2 and a half million related to development project was capitalized, primarily of nonaspen labor or Accenture personnel. Amortization of previously capitalized cost was expensed in Q4, additionally 2 million of amortization charges were expense related to IP purchased from Accenture and are included in Q4 cost.

There has been confusion regarding whether there is possible future dilution from the $60 million deferred stock financing we completed in February and March, other than what has been contemplated by Wall Street. I will spend a few minutes reclarifying the structure of the agreement. We received $60 million from issuing preferred stock in February and March. Holders of the preferred have the right to redeem 50% or $30 million of holdings in August of 2003. At that time, Aspen Tech has the right to repay the convertibles in cash, stock or new nonredeemable convertible with higher coupon rate. There are no mandatory requirements for Aspen Tech to redeem preferred stock and cash or common stock. In terms of remaining $30 million issued, holders have the right to redeem those shares in February of 2004. Aspen Tech would have the exact same payment options I outlined. Outside our 1% quarterly dividend payment, our fully dilutive weighted shares reflect all shares associated with financing and there are no additional cash requirements.

In addition, you will note in our press release, we modified 12-month figures to add conversion dividend, considered earned for accounting purposes by the preferred holders at the date of issuance in the amount of 3.2 million. This represents adjustment to items in the equity section and earnings for common holders taking into effect this dividend and other preferred dividend or accretion amounts. This effects march 31st financial statements and we will effect this adjustment in year-end filings in September.

I would like to elaborate on the financial (inaudible) given continued weak demand for IP solutions recent shortfalls and our commitment to return to operating profitability, we are approaching the new fiscal year with a healthy dose of conservatism. David, Larry and Wayne, just completed thorough review of the pipeline, that I sat in on. Sales organization and product portfolio, along with senior executives in the product divisions. To summarize the results of the planning effort, we are reducing anticipated revenues, cutting expenses to levels we can reliably make money and generate cash beginning in Q2 and managing cash in the interim.

At present, we expect to see more substantial revenue growth and improving profit margins in second half of this fiscal year as actions we have taken begin to impact operations. Please bear in mind, we will have full revenue and expense impact from Hyprotech, for the first time in September quarter, so historical trends will not be meaningful. For first fiscal quarter ending in September, we expect revenues will total approximately 84 million. License revenue between 35 and 36 million. September has historically been our weakest quarter, offsetting the trend is the fact September has been a less seasonal quarter for Hyprotech than Aspen Tech.

We believe the impact of the actions David outlined earlier will reduce total expenses in Q1 to approximately $88 million. Reductions reflect first full quarter impact of the significant headcount reductions announced in fourth quarter, employee salary cuts and mandatory furlough, tighter constraints and accelerated cost savings in connection with our acquisition of Hyprotech.

They will result in lowering run rate by 14% from Q4, if you consider Hyprotech was there for a full quarter worth of expenses. We therefore, anticipate we will incur operating loss of approximately $4 million in the quarter. We estimate this will translate to net loss of 2 and a half million and net loss per share of 7 to 8 cents excluding preferred stock dividend and after the accretion and assuming basic weighted average share count of 38 million. We expect cash flow levels to bottom just above $40 million at end of September as result of seasonal factors and expect to be cash flow positive in December quarter with cash levels ending short of the June 30 balance. For December, we anticipate sequential top-line increase with revenue of approximately $92 million and license revenue growing to approximately $41 to $42 million of the total. With strict cost control in place, we expect to hold spending relatively flat with Q1.

We expect to return to profitability and generate operating income of $3 million, net income of 2 and a half and earnings per share diluted share of approximately 5 to 6 cents and cash increase of approximately 5 to 10 million.

For the full fiscal year 2003, we expect modest sequential growth throughout the year and total revenue of between $380 and $385 million with license revenue of $178 million. This represents approximately 19% total revenue growth over fiscal year 2002 and 17% license revenue growth, each of which is distorted by inclusion of full year of Hyprotech contribution. We expect engineering to comprise 2-thirds of total license revenue in fiscal 2003, with supply chain manufacturing revenues representing a third. This is a fact of strong organic engineering performance in recent periods and the contribution of Hyprotech, coupled with planning assumptions particularly with respect to the very large deal.

This planning contemplates operating expense of $361 million and net income of 14 to 17 million, earnings per share for fiscal 2003 of between 35 and 42 cents. The fourth quarter was a challenging one for Aspen Tech to be sure. We are unhappy with our financial performance as a whole, but committed to delivering steady, proving results from here. We are pleased our new independent auditors, Deloitte and Touche completed their work smoothly without surprises. We established a good working relationship and their team of both attentive and expert. Many shared your concern in recent months about the transition and we are pleased to put the issue behind us. We look forward to bringing you evidence we have turned the tide to profitable operation and return to attractive top-line growth. Now, we would be pleased to take your questions.

00:55:43

Thank you. Today's question-and -answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the *, followed by 1 on your touchtone telephone. We ask that you limit yourself to one question per queue today and also one question if you have a follow-up. We will take as many questions as time permits. Once again, * 1 on your touchtone telephone to ask a question. We will pause for just a moment to give everyone a opportunity to signal for questions.

We go first to David Farina with William Blair and Company.

In your forecast, give me an assessment - obviously the Hyprotech stuff is in there. If you didn't have Hyprotech in there, what would you be looking at for aspen on Aspen, flat projections? It is hard to figure out?

We would have probably seen on comparable basis from Q4, you know, less revenue from Aspen, but since we only had Hyprotech for one month, more revenue for Hyprotech. That is why license revenue is declining by roughly a million from performance in my estimates. On the other hand, services revenue, which usually sees slight decline at Aspen services implementation group will see a full quarter of their maintenance revenues, so service revenue goes up slightly. That is why revenues are coming out roughly flat in terms of quarter on quarter comparison from Q4 to Q1. So, it does reflect the fact we expect the Aspen business to see seasonal decline, but the Hyprotech business to off thereto set that because they were there for one month and now for a full quarter.

Let me ask differently. What are you looking for in terms of Hyprotech revenue next year? I am trying to get at what you think is happening in the core Aspen business ex-Hyprotech?

David, looking at Hyprotech, combined with the engineering group, we see Hyprotech and the Aspen engineering team showing on combined basis, organically roughly single digits license revenue improvements or total revenue increases. This is mostly all license.

On the other hand, we expect 178 in total revenue. And two-thirds will be in engineering. I would say just under half or somewhere below that is where Hyprotech is versus aspen Tech. Those will merge together and you will not be able to distinguish which is Hyprotech and which is Aspen. We are combining sales team. We would say we are being relatively conservative and not expecting much from manufacturing side.

I guess my concern is I look at the numbers and guidance. Even with Hyprotech in there, it is a big jump up in software licenses in a dismal environment. It seems like given the profitability of that, seems like a big jump in the environment that is so bad.

Well, David, I guess everything is relative. A lot of companies have struggled extremely in terms of what vertical markets they serve and the types of solutions if you look at just the supply chain only vendors. Engineering business has done very well. We are not forecasting the 13% number, but we are saying in total we originally expected for Hyprotech revenue basically saying Hyprotech and Aspen Tech engineering solutions are going to grow on single-digit space. We have modified dramatically our expectations. If you actually look at where Aspen Tech and Hyprotech would be in total for last year, if we took 12 months of them, plus 12 months of us and estimated, we are looking at basically total revenue as flat.

Services is going to up and license is down. That is not far off from where we have seen the current environment. So, it is really the side of our business suffering is the larger implementations or solutions in the manufacturing supply chain area and not in the engineering side.

Fair enough. One last question for you. Can you give me color on - in your cash projections you gave us up - down 10 million. What types of receivable sales you are looking at there or cash from operations?

I said in the script and you may have missed it. I apologize. It was assuming 15 to 20 million in receivable sales. Last quarter we had hoped to do something along that line in sales, opening receivables or contracts that we bought from Hyprotech and we were just combination of being very business and things not getting done at the end of the quarter, only able to sell 8 million in total receivables. We sold some since the end of the year. We expect by the end of the quarter to come in with roughly 15 to 20. In that case, we may even show slightly less than a $10 million decline in cash.

I heard 15 or 20 million, for the quarter?

Yeap.

For the year, too far out to predict?

I would say the next quartery we would expect to come back to like typical 10 to 15 million dollar sale per quarter. Depending on how cash flow grows and mix of business, we may be able to cut it back.

Thank you.

Question from Bob Austrian from Banc of America Securities.

Hi, this is (inaudible). David, congratulations on your appointment to the board. The question that I have for you is you said you had done a recent survey of the comparable landscape, could you update us on what you found?

I would be happy to. Despite the tough environment, we feel we are in the best competitive position we have been in for quite sometime, certainly a couple of years. In engineering we continue to see a market leadership position in the core markets. We have been able to add oil and gas as a new vertical. We continue to see the same set of competitors in that business, the biggest challenge really remains capital spending environment, more so than competition.

In supply chain manufacturing, our competitive position has actually improved over the past 12 months because competitors have cut back investments in our markets. I-2 dropped off the scene. We rarely see Mangestics who has retrenched back to core markets. SAP remains a factor in terms of market confusion. They have gotten customers to wait and see about their own supply chain offering. For customers who have gotten tired of waiting and want to move forward, we are selling head-to-head and winning, as evidence of this in Q4, we won two key supply chain pilots. One with world leading cpg company and another with world leading specialty chem company in Germany. Both are major SAP customers. We continue to believe SAP and Aspen Tech are more complementary than competitive in supply chain case. If you look at their offering and capability in the process industries.

When it comes to dcs companies or automation companies, in the core markets, they are less competitive during this economic period. They have had to retrench back to their core business of automation platform hardware and services. We have actually seen several of them reaching out more to us to talk about partnering than to be competitive. That is kind of a broad brush view of the competitive landscape as we see it at this point.

Another follow-up, if I may. You had mentioned your last earnings call that you were reviewing your overall product portfolio and trying to rationalize the family, so to speak. Could you update us on where you stand in that regard?

I would be happy to. We went through a process as part of restructuring the company. We back-casted revenue over the past two or three years and looked at what we were investing in each product. We looked in a very realistic way, the forward-looking forecast and pipeline for each of the products. Based on that and based on a view of where we could combine and integrate products, we rationalized them into a number of product families and we overall, grouped them into two product lines, engineering and supply chain manufacturing. As a result of that, we were able to reduce development spending, particularly in supply chain manufacturing, getting it more in line with current revenues and current outlook.

As part of that PetroVantage, which is a sell-standing business, and our market place or procurement platform, both of those projects were integrated into the supply chain manufacturing business unit, which afforded us a opportunity to reduce spending. So, basically today, we are going to market with two product lines, engineering into which Hyprotech folds and supply chain manufacturing. With a more streamlined set of product families in each area.

Our next question from Catherine Moore of UnderBerg.

I want to clarify. I am not sure if I heard clearly. On 11 million reserved to pay Accenture, you clearly stated you are going to try to defer payments. I think you said something about moderate cash payments. Do you think you might pay in cash or stock?

Right now, our intention is to not pay it in stock. Okay. To pay minimal amounts in the near term and defer most of the cash into calendar 2003.

Those conversations are ongoing presently? And the company is will tog work with you because of difficult times?

Yes. They are an alliance partner. They see the benefits both to them in terms of not taking on excessive dilution or having a problem if they were to receive stock and our need to conserve cash right now. We would expect they - those discussions will conclude in the next several days.

Okay. Obviously they have been doing integration work and process work on your products. Can you give us a feel for where they are? Are you halfway done with the integration work they are try tog accomplish?

The development plan with Accenture is and was contemplated to go on for a fairly extensive period of time. The original outlook when we began the program in March was it would go out 18 to 21 months. We are probably 20 to 25% through that. We are rethinking about the timeline under which we can achieve realistic results with them. We are very impressed with where we are today with release one and expect to get it out on time. We are actually talking about stretching it out longer for release 2, based on the market acceptance and what it will be. We need to focus more now on what the customers are buying and the softness in the supply chain market. I would expect it will extend from here out more like 24 months from today.

Okay. Then, on PetronVantage. We knew there were interested parties looking at pet PetroVantage, are those deals still out there? Obviously what you are guiding to is more strength on the engineering side, I am trying to understand if the supply chain deals have gone away or taking longer to close?

This is David. The supply chain deals of which PetroVantage is certainly a part, our pipeline has improved quarter over quarter and we are cautiously optimist being there are signs it is improving. That being said, the predictability of closing business in that sector, particularly larger deals, still is tough to gauge and so we are being more conservative as Lisa mentioned with respect to our fiscal year '03 forecast for the business. But, the business continues to be a good business. We do see it coming back at our end-user business starts to improve. We will be announcing a nice Q4 win for PetroVantage in the coming days with major petroleum company.

We are encouraged by their continued interest we are getting, particularly from larger petroleum customers.

Great.

Next to Kash Rangan from Wachovia Securities.

Hi. Thank you very much. Quick questions. Could you give us an update on how the sales force reorganization is panning out effective this quarter? Some sense as to what percentage of them, based on your final results which you tallied for Q4, are going to be allocated toward the general corporate accounts versus the ones that are going to be focused on selling engineering solutions versus manufacturing supply chain solutions? I have a follow-up, thanks.

I will take that question. The implementation of the new organization with respect to sales is progressing. We will be completely implemented with it by the end of August. It calls for increased alignment down the two major product lines: engineering and supply chain manufacturing. The deployment of the resources is generally in line with the revenue plan that Lisa articulated that calls for a roughly third of the business to come from supply chain manufacturing and two-thirds from engineering. We will retain three major regions, Amia, Anala and Apac region. As I mentioned, we are installing new leadership with Apac. We feel we can improve performance. I would say we are from a sales standpoint in the model, strengthening our alignment in that area around the products, as we have rerationalized them. That is progressing well.

Okay. Just given you are sort of maintaining flattish headcount in sales and you have perhaps many instances two sales people calling on the same account with regard to the two different product lines, how do you feel given the two month transition period in the quarter about sales having to understand more number of accounts or covering the same number of accounts but trying to sell one product line as opposed to multiple product lines in

Through the transition, we are being very careful to not change account reps on accounts where they have longstanding relationships. So, that is being kept to a minimum. So, in some cases, account reps who have been covering an account are picking up one or two additional accounts. So, there is not a lot of account assignment changing going on. Secondly, where we do have two sales reps covering an account, we have designated a lead account rep to provide overall leadership and coordination of the account. Again, with an eye toward not creating disruption of our current deals. We also came into the quarter with a lot of enthusiasm and a lot of work actually having been thought through and completed since we started the integration process with Hyprotech about 90 days in from the end of the June quarter.

David, also, if you don't mind, an additional question. The Accenture application and business process applications they are generally available Q1 of '03 calendar year, have you decided which sales force will sell those applications to manufacturing supply chains sales force or a separate quota assignment for that?

The supply chain manufacturing sales organization will sell the release 1 products because the products are integrated plant and performance management which are plant applications and we will have specific quotas assigned in a very focused fashion, since as we roll out the products we have very specific targeted customers we are working with now. We will have a targeted set of quotas that will be carried by the sales reps covering the accounts we are focusing on in the initial roll-out.

Thanks.

If you would like to ask a question today, depress * 1 on your touchtone phone. Our next question is from Camare Seca from Chest Company and West.

David, the first question is the review process that you just went through for the sales process, resulted in a lower outlook going forward. Can you explain what were the soft spots in the sales projection and sales? And what changes have you made to that process starting from Q1?

Okay. Sure. As we went through the process and we looked at how we are deploying and executing in the overall pipeline, what we saw was I think it is articulated earlier on the call, the engineering business continues to be strong. It is the most predictable with the greatest top-line predictability because of the renewal nature of the business. The supply chain manufacturing business particularly the larger transactions over several multimillion dollars are - continue to be difficult to predict the closure rate. So, as we look to the coming year, we set up our revenue plan with high single digit revenue growth for engineering business and I am talking about year over year comparison with Hyprotech on a restated basis for last year.

Essentially no growth for the supply chain manufacturing business for '03. Again, that was driven just based on the continued difficulty in predicting the sales cycle in the business. In terms of changes, I would say that number one, we are aligning more along product lines because we think we can achieve higher degrees of productivity asking sales reps to sell the engineering set and separate to sell the supply chain manufacturing. Within supply chain manufacturing we will have individuals who carry supply chain quota and that gives us more focus. In general, we are going to be much more selective in how many sales resources we put on the very large deals. Focusing more on sweet spot of anywhere from 500 to several million dollars.

We think again in the current economic environment, that will yield greater success.

At this point, you don't have any of the larger deals you closed in the pipeline in your outlook?

We do have them in the pipeline. We continue to work on them. I am just saying we will be more selective in how many of our sales resources we deploy on those kinds of opportunities. We will be looking to actually chunk them up to increase the probability of closure in the near-term, where we deem it appropriate. They are still in the pipeline. We want to be less dependent on the number of those we need to close to hit our numbers.

Right. You assign low probability in your outlook for those deals?

It is a question of probability and predictability. I guess they go hand in hand. But, we just don't want to be that dependent upon having to close the same number of deals as we have in the past. That is again, why we brought the numbers down in the scm area. We want those deals to be positive upside surprises.

Sure. Thanks. Lisa, if you could just go over some of the cash numbers you have talked about for Q1. Can you give me some breakdown of how much of the restructuring cost the cash charge will be hit in Q1 and Q2? How much is sort of the cash burn from operations?

On the operating level we actually, as I said, would expect the loss to be - we pegged single number versus range. Our plan is 3 to 4 million. We are hoping to see if we can do better than that. Most of that, we have noncash items anyways, we are not burning any at all from operating spaces. Most of the burn is basically the restructuring accruals, of which we provided for $14 million. We paid a few million of those in Q4 and we expect about 4 million of that to pay out - 3 million in this next quarter, 3 to 4 in another very little in Q2 and then the balance is related to the actual facilities and that goes out over several year period. There is significant component in this quarter that is related to restructuring. Also, the accruals we set up related to acquisitions. There are continued pay-outs related to those. They are related to cost that we accrued for that in the first month of ownership we didn't pay out. Also, just higher level of year-end accruals for things like commission.

So, most of the $10 million shortfall or reduction in cash will come out of working capital, just paying out year-end accrual related to restructuring operations and more on the acquisition side.

I saw the amount on the accounts payable, where do you see that end of Q1 roughly?

Payables and accruals, we said in total at end of June, more like $90 million. I would expect those to come down most of that relative amount of cash coming out. That is paying off. They will be down 10 or 12 million.

Okay. Thanks.

Our next question is from (inaudible) from McDonald Investments.

Congratulations on successful completion of the audits. Two related questions. First of all, in your guidance, Lisa, what are your assumptions about the selling environment and the closure rates? Do you expect those to improve, stabilize or worsen going forward?

Well, thanks. Going through a new audit with a new firm takes a bit more time. That is why we are here on the 15th versus last week. We appreciate your patience because it just takes additional time. On the outlook, you know, I would say really not anticipating much improvement in the next two quarters in terms of the outlook. You know, assuming it will be reasonably benign for the next year as to where it is right now. David, do you want to add to that?

I would agree.

Okay. Also, I was wondering what (inaudible) are being taken to improve the timing of closure going forward?

David, that is a good one in terms for you in terms of the sales force improving.

Number one, by virtue of Hyprotech now full in for the numbers, the mix of business weighs in favor two-third engineering, one-third supply chain manufacturing. We have had the greatest predictability on the engineering business. We benefit from that as we move forward into this year. In addition, other actions that are being taken, is focusing down the two product lines. Again, we believe will allow us to develop improved efficiency in each area, leading to higher closure rates. We are also in terms of the portfolio of deals, pursuing as I mentioned, reducing dependence on closing some of the very large transactions which have been the most difficult to predict, closure rates on.

So, we will see benefit from that. I would say also the implementation of product management in the new organization provides more of a push in the model from product development organization. So, we will get more focus on the products in terms of support for the sales organization. So, combination of the factors we think will improve our closure rates and the predictability of our revenue.

Okay. Great. One more question, Lisa. Could you speak to renewal rates? They were light. Do you expect those to continue to be light or expect improvement there?

We actually - reasonable across the board maintenance renewal rates this year. You know, the amount of revenue in maintenance is coming from renewals is significant considering that license revenue has been down year on year. We did see one or two customer that is made decisions to delay renewals, which hurt us. Across the board, for the small to medium sized line, we are actually seeing renewal rates being predictable. We are just seeing what I would call our own processing delays with systems and I would say and expect the amount of maintenance revenue can still grow this year year on year based on renewals in tomorrows of the broad look at where the sweet spot is in the small to medium size deal and continuing to renew those.

Thank you very much.

Next to Steven Rosten from glen capital management.

Couple of questions. First of all, following up on the last question. What do you expect maintenance base level to be for the year?

I am sorry. -

What do you expect maintenance revenue to be for the coming year?

The services revenue you know is roughly I guess 178 of the 380 is license, the balance is services and where we used to say more of that came from services project revenue because Hyprotech has more maintenance revenue of services. Services is just over 200 million in total. We will see maintenance be closer. Instead of being a third of where it was, it is going to be moving more toward a half, not all the way there. But, the project services we are expecting to be flat to slightly down in the maintenance services year on year will show growth, but mostly because we are picking up Hyprotech piece, which we didn't have last year.

So, is maintenance services mostly maintenance on the licenses that you sold? Is that close to $100 million?

Approaching that, yes.

That is helpful. What proportion of the business in fiscal year '03 do you consider to be recurring revenue in nature versus one-time license revenues?

Well, I think to repeat what we have said, 178 million is total license revenue. Two-thirds of that is from engineering, which is renewable licenses. It is not to say we are not increasing existing modules with customers and bringing on new customers. Significant portion of that is renewing. And your maintenance revenue is significantly related to renewals. You know, you basically would be saying between maintenance and the license piece, you know, you would be well over 200 or roughly 200 million of the 380 is renewable if you add those two up.

Recurring?

Yeah.

Then, maybe to David, shifting to the second half of the fiscal 2003, if I do my math correctly. You are expecting about $50 million a quarter on average between Q3 and Q4 up from 41 to 42 in Q2, could you tell us what gives you the confidence you will see that bump in the second half of the year?

Yeah, I would be happy to. Number one, from - if you look at the past historical trends from Q1 through Q4, the ramp that we have in the plan is not inconsistent with that. Number two, we have a number of initiatives that we are working on that we think will build the pipeline and allow us to hit these numbers. Some of the things include cross-selling initiative. We are working to leverage products across the two previous Hyprotech and Aspen Tech customer bases. We have six to eight sales programs we are launching now where we are bundling combination of Hyprotech and Aspen Tech products around specific application modules that we know we have been able to successfully deliver to clients with high value. We think that will pay off.

Then, we see improvement in our customer end user markets. One of the things we track is basically the down stream chemical companies that are the first to see the benefit of recovery. Just recently, DuPont, Roman Haas, Monsanta Solutions have reported positive earnings surprises. We believe that signals improvement in our customer base and generally spending improvements trailed by 6 to 9 months. We think we will be benefiting from some of the improvements there. The combination of those things gives us confidence the numbers can be attained.

Thank you.

That concludes the question-and- answer session today. At this time, I would like to turn the conference back to you for additional or closing remarks.

Thank you. By the time of the next earnings call, David McQuillin will have succeeded me as CEO and take over the spot I have occupied at the end of the phone line for the past 8 years. I would like to take this opportunity to thank all of you for the interest and support you provided to me over this time. I am sure David and Lisa will carry on the tradition of open communication with investors they have come to expect from us. I hope you will afford David the same support you have given to me. I look forward to seeing many of you at aspen World. Thank you.

That concludes today's conference. Thank you for your participation. You may disconnect at this time.