Aspen Technology Inc (AZPN) 2004 Q4 法說會逐字稿

Good afternoon. My name is , and I will be your conference facilitator today. At this time, I would like to welcome everyone to the AspenTechnology Fourth Quarter and Full Fiscal Year '04 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Mr. Joshua Young. Sir, you may begin.

Thank you. Good afternoon everyone. I am Joshua Young, Director of Investor Relations for AspenTech. And with me today are David McQuillin, President and CEO; Chuck Kane, our Chief Financial Officer; and Stephen Doyle, our General Counsel. I'd like to welcome you to this conference call to discuss our financial results for the fourth quarter and fiscal year ended June 30, 2004.

Before we begin, I'll make the usual Safe Harbor statement that during the course of this conference call we may make projections on other forward-looking statements regarding future events or the financial performance of the company that involve risks and uncertainties. The Company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in the risk factor sections in our Form 10-K and Form 10-Q filed May 17, 2004 with the Securities and Exchange Commission.

Also please note that the following information is related to current business conditions and our outlook as of today, August 04, 2004. Consistent with our prior practice, we undertake no obligation to update this information prior to the release of our first quarter fiscal 2005 financial results, which is scheduled for late October.

During the course of this call today, we will reference non-GAAP information. In compliance with the SEC's Regulation G, we filed an 8-K this afternoon that includes our rationale for and why we believe non-GAAP information is important in describing our operating performance, as well as a full reconciliation with the corresponding GAAP numbers. The company expects to file its Form 10-K for fiscal 2004 on September 13, 2004.

In our recent discussions with investors, the following three issues have come up as the most commonly asked questions about AspenTech. They include additional clarity on the FTC settlement process insight into the IT spending trends from our chemicals and petroleum customers, and an update on the performance and growth prospects of our manufacturing/supply chain product line.

We will cover all three of these issues in depth today. We will begin by reviewing our operational performance in the fourth quarter and fiscal year 2004, followed by a discussion of our restructuring efforts to increase the company's profitability in fiscal 2005. We'll then cover additional details around our recently announced FTC settlement, and conclude our discussion by covering the financial details of the fourth quarter. Then we will be pleased to take your questions. Now I'd like to turn the call over the David McQuillin.

Thanks Joshua. I'd like to welcome everyone to the call today. From an operational perspective, the fourth quarter marked a major turning point for AspenTech. We significantly outperformed many of our peers in the software industry this quarter, and we showed a glimpse of the type of financial performance that is possible for our business to generate posting 13% software revenue growth and delivering pro forma operating margin in the double digits for the first time in 6 years. This outstanding fourth quarter performance capped off a solid fiscal year in which we grew software revenues by 9% and posted a dramatic year-over-year improvement in operating profitability, increasing our operating income by more than 10 fold from fiscal 2003. These results came in spite of significant distractions to the company during the past 12 months, which included balance sheet concerns and the FTC proceeding.

I am very proud of the fact that over the past 7 quarters, we have consistently delivered or outperformed the key operational and financial targets that we have set with Wall Street, even as these distractions consume significant company bandwidth. This speaks to what a dramatically improved company AspenTech is today than what it was 18 months ago. With these issues expected to be behind us in the near future, we are now focusing on increasing our levels of profitability over the next 12 months. This means that even in the midst of1of our strongest quarters since fiscal 1998, we are still looking to streamline the business and drive further efficiencies that will help us to generate higher operating margins. The restructuring we announced today will be an important driver of this operating margin expansion. We will not be satisfied until we are generating financial performance that puts us in the top cortile of our peer group. We believe that a more efficient expense base combined with a continuous focus on growth will help us to get there as quickly as possible.

Another very important development this quarter was the FTC settlement, which once approved will elevate a significant challenge to running our business. This settlement will enable us to continue to provide the efficiencies from the merger and grow our business, while adjusting the concerns expresses by the FTC. This is a very positive settlement for the company, since it preserves our ongoing development in sales efforts for the Hyprotech products. I'll tell you more about the settlement a little later in the call.

Finally, we closed 2 of our most significant manufacturing/supply chain transactions in several quarters with Shell Oil, which was a displacement of 2 competitors and with Procter & Gamble. This is a testament to the tremendous value AspenTech brings to the process industries and speaks to the significant value of our domain expertise. It also speaks to our ability to solve complicated problems that other solutions from horizontally focused software providers cannot address.

Let me move now to the financial summary, and I'd like to cover the quarter from a high level before Chuck goes into it in more detail later in the call. Total revenues for Q4 were $87.6m, above our guidance of $81m to $83m. This performance was primarily driven by higher than expected license revenues of $43.5m, which was above the range of $37m to $39m we set in the quarter. Our growth in software license revenues was driven by strong performance from our manufacturing/supply chain product line. Services revenues totaled $44m in the quarter.

From a geographic standpoint, our North and Latin American region was the strongest geographic contributor to our license revenues this quarter, and we were very pleased with its performance. The EMEA and Asia-Pacific regions performed as expected, but did not experience the same degree of seasonal strength as we saw in . This is consistent with the historical trends of our business where NOVA, has its strongest quarter in June; EMEA, its strongest quarter in December; and Asia-Pacific tends to be pretty steady throughout the course of the year.

In terms of revenue by product line, our manufacturing/supply chain product line had a great quarter driven by several large deals, which closed early in the quarter. It represented just under 40% software license revenues, and was a significant driver of our earnings upside. Our engineering product line continues to be very predictable component of our business model and performed to expectations. The steady quarterly performance of our engineering product tends to offset the manufacturing/supply chain product line, which tends to be more lumpy due to higher ASPs in that business.

In terms of end user market trends for the second straight quarter, the chemicals market was a significant percentage of our license revenues and was up year-over-year. This is a very positive sign as the uptick in our chemicals business that we saw last quarter carried over into Q4. The quarter was well balanced between chemicals, petroleum, and oil and gas markets and the engineering construction market also performed nicely. We closed 6 transactions of approximately $1m or more, up from 5 last quarters. For fiscal 2005, our goal is to close between 6 and 10 transactions over a $1m each quarter.

Our average deal size for deals over $100,000 was approximately $525,000 compared to $425,000 last quarter. We closed 39 license transactions between 250 K and 1m that was up from 32 last quarter. Services revenue totaled $44m. We expect that our services business should start to rebound as we begin to implement some of the large manufacturing/supply chain transactions that we recently closed, now netting down to the operating line. We reported a pro forma operating profit of $8.7m or approximately 10%, the first time we have delivered double digit operating margins in six years. This is a significant accomplishment for the company and a huge step forward towards our long-term goal of generating operating margins in the high teens. The operating performance resulted in pro forma earnings per share of $0.08.

Now let me segway and spend a few minutes talking in more detail about the transactions we closed this quarter. First, I'll start by detailing some of the largest transactions we closed for our MSC product lines. This quarter, it was characterized by great performance for our supply chain solutions with the greatest demand for these products coming from North and Latin America. As I mentioned earlier, our largest transaction in the quarter was a multi-million dollar agreement with Shell Oil, third largest integrated petroleum company in the world. This is especially significant agreement because we are replacing solutions from i2 and other software vendors who were unable to provide the functionality or capture the value that Shell needed.

As part of this agreement we are rolling out all of our petroleum supply chain planning solutions as part of Shell's global supply chain excellence initiative. This is the first phase of a multi-year project. We won this business for the following reasons, first, the clarity of our vision for the enterprise operations management market, number two, the improvement of our architecture and integration that we have as a result of our Operations Manager suite, and three, the breath of our solution. Shell expects to drive significant financial benefits from the deployment of this solution and we have the opportunity to close additional business for large license and services contracts over the next few quarters. This transaction is a validation to our integrated approach to the enterprise operations management market. Shell will be using our solutions to better plan and schedule production at multiple regional refineries and will be able to identify profit opportunities by taking a more holistic approach to supply chain planning. This is 1 of the most significant supply chain agreements that we've closed since our deal with BP Chemicals four years ago.

We also signed a very strategic supply chain transaction with Procter & Gamble, one of the world's leaders in using technology to solve complicated manufacturing and customer response issues, created by the emergence of the demand driven supply chain. As the leading consumer goods company, P&G is under increasing pressure from retailers such as Wal-Mart to mange inventory all the way to the store shelves. In order to meet these demands and maximize profitability they must have the right technology infrastructure to optimally match their plant production with fluctuating market demands. The process of managing inventory up to the store shelves demand the level of flexibility in the supply chain and the plant that is impossible to achieve without deploying advanced technology. P&G is a big believer in our vision for the enterprise operations management market and will be a feature to speak here at AspenWorld. This is a huge win for AspenTech, as they evaluated all of the supply chain vendors including SAP and concluded that we were the only company that had breath to our solution to solve their complicated supply chain problems. We signed a multi-million dollar supply chain planning and plant scheduling agreement with INVISTA, a joint venture between DuPont and Koch industries and the world's largest integrated fiber resident intermediate company. Our supply chains solutions are mission critical to INVISTA and are used to optimize the production of nylon in their plants on a daily basis. We have continued to see demand for our supply chain solutions grow in the chemicals market and this agreement is another positive sign that the chemicals industry is beginning to invest in corporate wide IT solutions again.

Now let me switch gears and talk a little bit about some of the transactions we closed for the engineering product line. We've talked before about the opportunity that exist for AspenTech to replace our customers' in-house technologies. This quarter, we saw several deals both in engineering and MSC, where we were chosen by a customer to replace an in-house software solution that was becoming difficult and expensive for them to mange internally. DuPont licensed our process modeling and cost estimating solutions to improve the efficiency of its manufacturing process. We are replacing in-house solutions that DuPont was using previously. The investment in our engineering tools was justified based on DuPont's belief that it could lower its engineering costs and reduce the cycle time of its capital projects with the use of the Aspen Engineering Suite.

Jacobs Engineering, a $4b engineering construction firm expanded its use of our engineering products on a corporate wide basis. Jacobs has been one of the fastest growing EMC firms in North America. Jacobs increasing number of projects in the process industry has created a greater need for expanded access to our engineering solutions, especially in the Asia-Pacific region. This level of activity among EMC firms should be a positive long-term trend for AspenTech and the chemical and petroleum companies that are creating these projects will need an improved IT infrastructure to manage their assets once the projects are complete. NOVA Chemicals signed a multi-million dollar agreement for our collaborative engineering suite to improve their front-end engineering design process. NOVA was previously using some of our engineering solutions along with some of its own in-house solutions to manage its engineering processes. It recognized the need to have a more integrated and collaborative engineering solution and believes our technology will help it to improve its front-end engineering efforts like 30% and improve overall productivity of its engineers by 5%.

Productivity improvements that can be made by enabling process engineers to work in a collaborative environment is pretty dramatic, while companies such as Agile Software and Matrix One provide these types of collaborative solutions in the discrete manufacturing industries. AspenTech is by far the market leader for collaborative engineering in the process industries and this agreement is a good proof point of that. BASF also licensed Aspen Zyqad, a key part of our collaborative engineering solution, which helps companies manage engineering work process and data for complex projects. Zyqad will be the standard platform for them to enable a collaborative engineering within BASF globally, and will help the company gain efficiencies by centralizing standardization and creating more transparent information flow and decision-making. Our relationship with two of our major partners, Microsoft and Intergraph, played an important role in helping us to win this business.

Now, let me turn to our expense reductions. In each of the past three quarters, we have lagged behind many of our other software peers in terms of revenue and operating profit per employee. On our past earnings calls, we have talked openly about our intent to reduce expenses driven by the synergies we have realized from consolidating product families, eliminating duplicative R&D, streamlining product management, and improving sales and marketing productivity. In addition, we have been successful in renegotiating our lease obligations in a number of our larger facilities. These actions will materially reduce our ongoing expense run rate, and Chuck will speak more about that later in the call. In order to capture these cost savings, but at the same time position the company for long-term sustainable growth, we concluded that we also needed to evolve our organizational model, this evolution requires a balanced focus on products, vertical solutions, and regions. Our fiscal 2004 organization model was heavily focused on our two main product lines, engineering and MSC. This model, which was put in place back in fiscal 2003 has been very effective in helping us to generate profitability, drive positive cash flow, and establish a strong product management function.

Over the past several quarters, we have delivered $0.35 in non-GAAP earnings per share, generated $61m in cash flow from operations, and turned $118m net debt position into a $51m net cash position as of this quarter. This was a critical step forward for the company, but this organizational model that we've been using will not enable us to drive top cortail performance over the long-term. Consequently, in Q4 we evolved our organizational model and streamlined our cost structure. For comparison purposes, our current organizational model will help us drive FY05 operational performance because, number one, the engineering and MSC product families has been brought together under one product's organization to support our strategy to deliver an integrated solution for the enterprise operations management market. And this will drive R&D efficiencies that were not previously possible under the old model. Number two, we have brought sales customer support and professional services together into one customer facing organization with a geographic focus.

This will result in improved sales productivity and services margins. Number three, we have strengthened our vertical sales marketing and delivery focus and this will help us to accelerate the traction of new offerings such as our Aspen oil and gas asset optimization solution. The net results of these actions that I've just outlined will reduce our quarterly expenses to approximately $69m in Q1, which assumes that we carry the costs associated with our operator training business for the entire quarter. These actions involve the reduction in headcount of approximately 200 employees and a significant reduction in our annual real estate cost. Although we are pleased with our Q4 results, which represented our best quarter in over six years, we realize that our job as a management team is to continue to increase profitability in order to become a tough quartile performing company. This has let us to take further action despite our strong financial performance. As we start a new fiscal year, we are focused on driving year-over-year improvements in operating income and earnings for our shareholders.

Now I would like to spend a few minutes talking about some of the changes we have made to the AspenTech's senior management team as part of our FY05 organizational model. Wayne Sim, who headed sales through fiscal year 2004 will be transitioning out of AspenTech during this quarter. Selva one of our assistants, was promoted earlier this year to lead sales on a permanent basis. Selva has worked as Wayne's right-hand man for the past six years, running sales at Hyprotech and working as the number two guys in AspenTech sales organization for the past 18 months. He is also a significant AspenTech shareholder. I am confident we will not . We appreciate the contributions Wayne has made over the past two years. Under his leadership, the global sales organization has played a key role in the company's successful return to profitability through its consistent quarterly execution. When Wayne originally took over ahead of sales we agreed that it would be a 12 to 18 month assignment, and I would like to thank Wayne personally and on behalf of all the employees at AspenTech and our shareholders for all of his efforts.

Let me turn to the FTC settlement now. When we announced our proposed consent degree with the FTC on July 15, there was some confusion regarding the terms of the agreement. We are very pleased to obtain this initial acceptance of a settlement agreement that would resolve the proceeding and eliminate the ongoing uncertainty and associated legal expenses of the case. It will also remove customer concern about the potential effect of the proceeding we would have on the company. The FTC proceeding has consumed a significant amount of our resources and we believe that some our customers has hesitated to invest in our products, given the over riding uncertainty. We believe that the greater uncertainty about our ability to execute our product roadmaps and provide customer support for those products, the more likely it is that customers will make purchasing decisions solely on the basis of the value that our products provide. The settlement deals with the heritage Hyprotech products through two transactions. The first transaction required us to sell our access product line to Bentley Systems. Access is an engineering work flow product that we acquired with Hyprotech, which provides engineering and work flow capabilities, similar to one of AspenTech's heritage engineering products Aspen Zyqad. The sale of Access was completed on July 21. The second transaction requires us to divest the source code to the heritage Hyprotech products together with our operator training business. We will receive a license back to the heritage Hyprotech products granting us unlimited rights to continue to develop, sell and market all of our products excluding Access.

In addition, the buyer will purchase our operator training business, which is predominantly consulting services and do not make a significant contribution to the overall profitability of the company. The combined revenues associated with Access and the operator training business were approximately $20m of which $2m were related to software licenses. The combined fiscal 2004 contribution to operating income was approximately $1.5m. With the exception of these divestments, we may retain key employees, customer contracts, and sales resources for our Hyprotech products. The settlement becomes final upon the approval by the FTC commissioners, which would occur sometime after the 30-day public comment period, which ends on August 13. A final approval is given for the consent degree then we would have either 60 or 90 days depending upon compliance with certain conditions to close the sale of the operator training business and the heritage Hyprotech products. If we fail to close and approve transaction within those time constraints then the FTC would appoint a trustee, who would have one year to implement the consent degree terms. The trustee could request up to two one-year extensions subject to the discretion of the FTC. I would like to remind everyone that the original strategy behind the Hyprotech acquisition was to capitalize on synergies that existed between our solutions in the chemicals and pharma markets and Hyprotech solutions in the petroleum, and oil and gas markets. We believe at that time that by having a broad integrated solution that could also integrate with our MSC solutions will enable us to capture more value for our customers and provide us with an advantage in the marketplace. With this settlement, this strategy remains in place. It enables us to deliver increased benefits to customers, while differentiating the companies to our compelling vision for the enterprise operations management market.

We believe that settlement is highly beneficial to AspenTech and our customers. The FTC proceeding could have resulted in the full divestiture of Hyprotech to the extent possible and with it the loss of the associated business and new products resulting from the efficiencies. The revenue associated with that business at the time of acquisition was approximately $70m, 70% of which was software license revenue. Our ability to retain the rights to the Hyprotech products will enable us to continue developments, sales and execution of our product road map. We have factored the settlement into our 2005 earnings guidance and expect to see significant year-over-year increases in operating margins and earnings growth.

Now before I turn the call over to Chuck, I want to spend a few minutes providing you with some qualitative color on the current environment. From a macro perspective, our customers continue to remain very healthy and have seen the underlying demand for their products and services continue to grow. I am particularly encouraged by the improvement we've seen from the chemical sector in the past two quarters, as our software license revenues drive from chemicals and refining oil and gas markets has become more balanced. Many analysts believe that crude oil prices will stay at this current levels for the foreseeable future, and as we target some of our newer solutions into this market, we expect that we will be investing more significantly into IT solutions that will drive economic performance. Our recently announced alliance with Schlumberger will be an important part of our effort to drive adoption in the upstream oil and gas sector, especially among new customers. A significant portion of our FY04 software revenue growth was driven by a recovery in the supply chain market. We had record supply chain revenues from the refining market. Over the past two quarters our larger petroleum and chemical customers have been increasingly more willing to make multi-million dollar commitments for enterprise wide supply chain implementation. The best evidence of this recovery has been transaction such as the agreements we saw in this quarter with Shell, Proctor & Gamble, and INVISTA. We expect that our supply chain solutions will continue to show growth FY05 and after a tough couple of years, we believe the supply chain market has finally started to rebound.

Finally, we are encouraged by the activity levels around Aspen Operations Manager, our cross vertical performance management platform for enterprise operations management, as well as our integrated oil and gas offering for asset optimization. Both of these solutions were recently launched, and we believe they have very promising growth potential. These offerings among others will be centerpiece at AspenWorld, 2004 in October in Orlando. As you may know, AspenWorld is one of the most well respected and highly attended international conferences for process industry leaders. We anticipate an audience of more than 2000 business and technology leaders. Over 40 of these attendees are senior executives, who also participate in our executive program, which focuses on the innovative business processes and technologies with effect to international commerce everyday. Our speaker line up already includes Lou Gerstner, former Chairman and CEO of IBM. Alan , Chairman and CEO of Rob Routz, Group Managing Director of Shell and Jeffrey Coldman, editorial director of Fortune magazine.

So, with that let me turn the call over to Chuck. Chuck?

Thanks David. I will begin by giving additional explanations on each of the principal line items in the P&L and balance sheet and then we will conclude the call with our guidance and future outlook before Q&A. Total revenues for the fourth quarter were $87.6m, with software license revenue of $43.6m and services revenue of $44m, exceeding the range of expectations of $37m and $39m. Software license revenues grew 13% year-over-year in Q4 and are up more than 21% sequentially. Looking at the full year, while total revenues were just slightly ahead of fiscal year '03, software license revenues were up 9%. Our services business was roughly flat for the quarter; this flat performance was due to lower consulting services from our manufacturing/supply chain product line. Our consulting services is an area that will be receiving management attention over the coming months as we seek to drive improvement in margins and bookings in our consulting business overall. Excluding restructuring and one-time charges, total expenses in the fourth quarter were $78.8m compared to $78.6m in last year's Q4. On a sequential basis, expenses increased by $3.5m due to increased sales and marketing efforts in variable sales cost. Our continued investment in sales and marketing helped to drive the solid software revenue performance in the quarter.

This quarter, we incurred restructuring and one-time charges that totaled $28.2m; these charges are broken down as follows. Approximately $15m relates to cost associated with exiting certain leased facilities that David referenced to earlier. We estimate that the actions we have taken by eliminating excess facility obligations will generate approximately $30m in expense and cash savings over the next eight years, that's $30m over and above any settlement cost. Approximately $1m of our restructure relates to severance, $4.2m relates to the impairment of technology-related assets and $8m relates to legal accruals. Of the $8m legal accrual, approximately $3m relates to the FTC settlement and included in this accrual our estimated incremental charges for the FTC settlement due to the need to provide additional data to the FTC for compliance and reporting purposes, as well as the disposition charges surrounding our sales of our operating training business and the Hyprotech source code. The other $5m relates to ongoing litigation charges primarily relating to our litigation with KBC Technology in the UK which we expect will go to trial or settle in the coming months.

Headcount at the end of the Q4 was 1,600, down from a headcount of 1,713 last quarter as we begin to streamline our organization in an effort to provide more of an integrated solution. Since the end of fiscal 2004, we have reduced our headcount of 1,500 which we are currently at, at this date. Headcount at the end of fiscal year '03 was 1,750. Gross margins on licenses was 91.3% which is up from 89.3% in Q3 and 89.2% year-over-year due primarily to the impact of higher software revenue spread across fixed cost of license cost. You will note that we have now broken out the amount of amortization of intangibles, which is a material non-cash charge in cost of revenues. This quarter amortization of intangibles was approximately $1.8m. This charge is excluded from our pro forma operating income for purposes of calculating our pro forma non-GAAP earnings. Services gross margins totaled 42.7%, slightly down from last year, but up year-over-year from a level of 40.5% in the fourth quarter of last year. Utilization rates have improved as we have made reductions to our services personnel. Our goal in fiscal '05 is to get services gross margin to a level of between 45% and 46%.

Sales and marketing expenses in the fourth quarter were $28.2m, up 12% from a year ago and up sequentially by $4.4m. This increase was due to variable sales expense related to year-end commissions, investments in AspenWorld activities, and the addition of new sales reps to focus on driving the adoption of our newer products lines. This represents 32.2% of total revenue for fiscal Q4 2004. As we had mentioned in the third quarter, we expected that our sales and marketing expenses would increase this quarter and we continue to believe that we will be in the range of between 30% and 33% of revenues on an ongoing basis for sales and marketing cost. Fourth quarter R&D spending was $14.6m, which is approximately $1m below last year's fourth quarter. On a sequential basis R&D spending increased slightly by about 300K. Our R&D cost represented 16.6% of revenues for the fiscal fourth quarter as compared to 18.9% last year. Our ongoing goal is to have R&D spending in a range of between 14% and 16% of revenues in our fiscal '05 time frame and thereafter. G&A costs were $7.1m or 8.1% of revenues in the quarter. This was flat from last year and up slightly from Q3, note that we used to include the amortization of intangible within this G&A line item that is now separated out as part of cost of revenue. As a result of our restructuring initiatives, we would expect the G&A spending would decline on a sequential basis in this year, fiscal year by approximately half a million dollars and be approximately 8% of total revenues on an ongoing basis. On a pro forma non-GAAP basis, which excludes restructuring and one-time charges, and intangible technology amortization, the income from operations totaled $8.7m, which is more than double the $4.2m we reported in last year's fourth quarter.

Regarding our tax rate for the quarter, you will note on our P&L that we have included a write-off of $14.6m for differed tax assets. Currently we hold approximately $42m of analogue carry-forwards and additional foreign tax credits. Since we did not report enough taxable income over the last three years, to justify carrying this asset on the book it was necessary to write down a substantial portion of the remaining taxed assets. Pro forma non-GAAP net income for the quarter was $6.6m compared to $4.5m last year. As a remainder, the 2004 pro forma non-GAAP earnings numbers are based on a fully diluted share count of 87m shares, which includes the impact of the Series B preferred stock. GAAP diluted per share figures are based on a fully diluted share count of 41.3m shares and excludes the preferred stock. On a GAAP basis, the net loss applicable to common shareholders totaled $41.4m with a diluted per share loss of $1.0 compared to a GAAP loss of $18.2m or $0.47 per share in last year's fourth quarter. The current quarter's GAAP results include 3.5m of preferred stock dividend and discount accretion related to the Series B preferred stock.

Turning to the balance sheet, we ended fiscal 2004 with $107.7m in cash and equivalents down $6.7m from $114.4m in Q3. This decrease was primarily attributable to the repurchase of 5m of the company's 5.25% convertible debt, which stands now at a balance of approximately $57m at the end of this past quarter. Our financial collections were excellent and I would like to credit our finance team at AspenTech for doing an outstanding job. Our DSOs for billed receivables declined for the fifth straight quarter, our DSOs for the fourth quarter were 54 days down 31 days from last year's fourth quarter and down 13 days sequentially. This is the lowest our DSOs for bill receivables have been in six years. If you include the unbilled receivables our DSOs were 70 days, which is down from the 102 days in last year's Q4. Net installment receivables on the balance sheet totaled just under $90m in Q4 roughly flat with last quarter.

Turning our attention to cash flow, we generated approximately $3m in cash flow from operations. Depreciations and amortization totaled $6.8m for the quarter and our capital expenditures in the quarter were approximately $1m. Now turning from the quarter and providing more color and statistics on the full year of fiscal 2004. In terms of a breakdown of vertical markets our software revenues were as follows. 30% of our license revenues came from the chemicals market, which was up from 25% a year ago. This year-over-year difference was heavily driven by the strength of chemicals business in the past two quarters, particularly in the last two quarters. 34% of our software revenues were from the petroleum, oil and gas market. This was down from 40% last fiscal year predominately due the improvement in the chemical sector, and in absolute dollars, the amounts were approximately the same as last year. 20% of our software revenues came from the engineering and construction market up from 16% last year as the engineering construction firms executed on far more projects and this growth is encouraging as this market is often a leading indicator for future growth in the process industries.

15% of our revenue came from what we term emerging vertical markets with consumer package goods and pharmaceuticals representing the largest percentage of this segment. In terms of geographic breakdown, our North America and Latin America areas represented 48% of our software sales which was down slightly 52% last year. Europe and Middle East represented 38%, which is up significantly from 29% last fiscal year, due to a number of large deals in particular the Shell transaction and some others that David mentioned earlier in the European region. Asia-Pac represented 14% of our software business, which is down from 19% last year, but 19 -- last year was a better year for the Asia-Pac region. In terms of breakdown by product line, 68% of our software revenues came from our engineering product lines, as compared to 75% last year. This change of percentage came as the manufacturing/supply chain product line showed significant strength in the second half of fiscal '04 and represented 32% of the fiscal year up from 25% in fiscal '03. Most of this growth came from year-over-year growth in our supply chain application.

Now I will turn the call back over to David, for more color on guidance and so on.

Thanks Chuck. As you have heard from both Chuck and myself this evening, our business is strong, driven primarily by the underlying strength of the end markets we serve. We just grew our software revenues approximately 9% in a year of significant distractions and challenges. We also know from our communications and guidance from prior quarters that we tend to provide conservative guidance. That being said, we believe that first quarter of 2005 is going to be a tough one for couple of reasons. First, the seasonality. September quarter is notoriously slow throughout the software industry and we have historically seen a 25% to 30% decline in our software revenues from Q4 to Q1. Secondly, and the least predictable is the timing of the completion of the FTC settlement. We are in the process of attempting to divest our operator training services business and wait to the Hyprotech product line. And although this is not expected to be finalized during the September quarter, this process may have some impact on revenues while it is pending.

I want to stress that this is the first time, we have provided financial guidance for the September quarter of fiscal 2005. With that as background for our first quarter ending September 30, we expect that software license revenues will be between $31m and $33m, with total revenues between $72m and $74m. We expect total expenses will be in the range of $69m to $70m, and we expect operating margins to be in the mid-single digits for the quarter. As a result of the restructuring we did this quarter, we expect to incur a restructuring charge that will range between $4m and $6m in the September quarter for additional real estate and severance adjustments. Excluding the preferred stock dividend and discount accretion, technology amortization and the aforementioned restructuring charge, we expect pro forma earnings per share to range between $0.02 and $0.04. Based on today's stock price, we anticipate the weighted average shares outstanding to be approximately 86m shares.

Because of the large number of variables that will impact revenues over the course of fiscal 2005, in particular, the timing of the FTC transaction and its corresponding impact on our business, we feel best positioned to drive earnings and operating margins in fiscal 2005 by managing our costs. We expect to deliver pro forma operating margins for fiscal 2005 in the double digits and deliver pro forma earnings per share between $0.31 and $0.40 per share. We recognize this is a wide range for earnings and I want to provide some context to what factors would cause us to be at the high end of our range and conversely what factors would cause us to be at the low end.

As we look at fiscal '05, there are a number of encouraging signs that may help us to be at the high end or slightly above our guidance. These include the following factors. Chemicals market continues to recover and petroleum and oil and gas remained solid, and this strength continued through fiscal '05. Our supply chain solutions could continue to perform well and show growth, and AspenWorld could be a catalyst for sales particular for newer products and the reduced uncertainty around our balance sheet and the FTC maybe a catalyst for additional investment from customers who would perhaps put projects on hold with us.

So, the following factors would cause us to be at the lower end or perform below the low end of our guidance. Customers could delay spending until an FTC transaction is complete. New product sales could take longer to gain traction. The growth of supply chain solutions could slow from their current rate in fiscal '05. Weaker sales close targeted amount of license transactions over $1m due to longer sales cycles. So, we are most confident about our ability to drive operating margin improvement in fiscal year '05. As a company, we are focused on continuing to deliver growth similar to what we just delivered fiscal 2004. But, we can see that the factors we listed above, and that I spoke about could either positively or negatively impact our growth assumptions. We expect to be in a much better position to update our earnings and revenue projections for fiscal year '05 after the FTC transaction is complete. So, with that I would like to turn the call over for Q&A.

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Our first question comes from Richard David with Needham.

A couple of hard questions. It was a tough quarter for a lot of guys to close large deals and you guys obviously did a much better than average job. Where there any deals that you closed that were greater than $5m in total, either one eventually or where they recognized the quarter where they are greater than $5m. Second question would be, P&G did you see any different competitors? And then, if you could just flush out very briefly what you are doing with MSC and engineering? Are you combining sales or you just more a kind of giving a single front to the customer, more of that? Those are the kind of three parts.

Ok Richard, and this is Dave. Let me answer each one. First of all, just as a matter of our practice. We only disclose deals at over a million dollars. So, I am really not able to respond to your question of how many of the deals, if any were over $5m. Regarding P&G, P&G went through a very exhaustive assessment of a number of different competitors, which included SAP, ourselves, and I believe several other best of breeds supply chain providers. And, as a result of that, went down the road of doing to pilot with us, which ultimately proved successful to couple of sights and which led to the deal that we reported this quarter. So we are very excited about that at a time when the market is moving more and more to this real-time consumer driven supply chain paradigm. Regarding MSC and engineering. This is what we've done. We basically taking the product families that we previously had grouped into two different business units, engineering and MSC and put them together under one integrated products organization, and driven efficiencies by doing that. The number of product families previously that we had grouped under the two categories, engineering and MSC were about 19. And as a result of this move, we've consolidated those down into five product families, and we are moving towards and increasing direction of integrated releases of all the products. From the customer facing side, we also have combined sales, customer support and services into one customer facing organization and we've done that to further improve our sales productivity and to improve services margins, but at the same time retaining the focus we have around engineering and MSC. So that largely stays intact like we had it last year, but we've introduced a bit of a vertical focus to support that sale of our new emerging EOM solutions like oil and gas upstream.

If I am a significant customer, will I get kind of a team of people to call on for customer support?

You mean, post implementation?

Yes.

Well that will work like it has, where we have a single 800 number and the customer calls in and depending upon the solution they want they are seamlessly transferred to the right expert.

Ok. Good, that is helpful, that clarifies that. Thank you.

Your next question comes from David Farina with William Blair

Hi, good afternoon. When you continue to cut cost, we like to see it obviously, but when you are on the risk of kind of too much cost where it effect sales and effects moral, those kinds of things.

Could you repeat the question.

When you guys run the risk of all the cost cutting you guys have been doing over the last 18 months or so, affecting sales, affecting moral, and creating more problems and better investigating from the increasing productivity of your workforce and so forth. There is a fine line; I am wondering when do you cross over it?

You are right. There is a fine line there, and obviously we don't feel like we've crossed over it. Cost savings can only be taken out when they are earned through improved synergies. We believe that we work through hard over the past fiscal year to get those synergies and efficiencies out of the business, particularly in the way that we've moved towards the integration of our products and the improved sales productivity. So, we believe what we've done here is well within bounds and when you look at how we've done it, you will see that the majority of the reductions were taken in the R&D and product management area. And the way that we've been able to do that is, by what I mentioned to Richard a few minutes ago, we've moved from two different business units with 19 different product families into one products organization focused around five product families, moving in the direction of integrated releases of all the product was separate, that has created a lot of efficiency which we can now mine out of the business. In sales and marketing we've actually reallocated an increased spend based on the belief that that will help us get more traction with our new products and start to deliver growth and there, where we've added investments around vertical marketing, vertical sales and pre sales support and delivery also little more launch activity in an AspenWorld '04 is also an investment we are making this year.

In addition to that David, with regard to the infrastructure of the company. The company has been a consolidation of many acquisitions over many years, and so we've been able to streamline from a facilities and from a infrastructure delivery standpoint, some of the efficiencies that come very easily when you consolidate companies and functions over time. So we've been able to take advantage of that as well.

Fair enough. Just one clarification. Your 69m number, does that include the divestiture or is that post the divestiture?

That does not include the divestiture, that is before the divestiture.

So, would it be --

It would be in the range of roughly 66m-ish.

Okay. Thank you.

You are welcome.

Your next question comes from Phil Rueppel with America's Growth Capital.

Yes, thanks, first a couple of just housekeeping clarifications, and then maybe a more general question. Just sort of following up on that last question, I assume that the guidance for revenue in first quarter assumes a full quarter -- continued operations of the operator training business.

It does so.

And then on the amortization of the technology that's now in cost of revenues, should we assume that roughly the current run rate is what will be on a quarterly basis over the course of '05?

You should, it will slightly decrease over time, but roughly in that level, yes.

And you mentioned that it had been in G&A in the past. Had you, in your pro formas have you been pulling that out as a charge or had that been --

We have not historically pulled that out, for comparative purposes we obviously pulled it out for any kind of comparison that was done with this quarter.

Okay, great. And then more general, I'd love to get a little color on the chemicals market, it sounded like that was an area, one, where you got some big deals and two, where manufacturing/supply chain helped. Was it skewed along those lines and is that what makes it potentially a little bit more volatile or continue to be volatile going forward, or did you see a broader base strength then what I at least heard from some of the examples you talked about in the conference call?

Phil, the MSC component of our license revenue did move up and has moved up over the second half of the year, driven by its increasing strength. The deals that I mentioned certainly have powered that. Does that mean that the business going forward gets a bit more volatile? Possibly, the mix is not skewed to the point where I believe that that's going to be an issue, so I don't see that being a factor in the near term.

Okay, thanks very much.

Okay.

Your next question comes from Robin Roberts with Stephens Incorporated.

Hi Chuck and Dave. First question, where does Wayne Sim go, what is his position after Aspen?

Robin I don't think Wayne has decided, that would be question you have to ask him, I'm not sure that he has decided.

Okay. And looking into your quarterly guidance, last quarter when you gave the guidance for fourth quarter of '04, you did not include any mega deals. And also at one point you mentioned that the two mega deals accounted 40% of license revenue right?

No, what we said is that are greater than $1m deal.

Okay.

We're six in total, which is slightly better than what we had last quarter.

And so when you pull out the two-mega deals that were not in your guidance going into the quarter, how does the rest of the business compare to your own expectations?

Let me clarify once again Robin. The two mega deals, we did not say they weren't in our guidance as we looked at the fourth quarter. As we look out, again we've been encouraged by our ability to close large deals, however, large deals are always lumpy and timing can be a factor. So, what we need is a better balance of large deals and ongoing medium size to smaller deals, which we've been getting better at these last two quarters. And again, we are encouraged that that trend continues hopefully going forward.

While I look at the sequentially increasing license revenue, that is about a $7.6m and sales and marketing increased sequentially by about $4.4m. So, about a 58% of license revenue increased running into sales and marketing and I am just wondering about an increase of $4.4m, how much of that is increasing in AspenWorld versus adding sales people versus additional variable pay?

I would say, it's evenly spread throughout, that delta is evenly spread throughout, the commission plus AspenWorld plus adding new sales people again targeting hunters that go after the new type of business that we have which have a smaller quota and a smaller commission base actually.

It is great that you reduced your cost structure to improve the operating margin next year. How far can you go in terms of double-digit operating margin?

Well, the current structure that we've put is based on our targets to double-digit, which we claim in our presentation as our overall objective. That offers an upside obviously on the topline, but we are going to spend and invest in our new product areas if that upside occurs to some level, some of that will end up on the bottom line, but to some degree we will continue to invest to expand and grow the seed to the future. Well that is why the guidance on the topline is so much flexible at this time.

We have now reached the end of our allotted time, Mr. McQuillin you may proceed with any closing remarks.

Great. Well, I like to close by extending my sincere appreciation for the efforts of all the employees at AspenTech. Our solid FY04 results would not have been possible without their countless hours of hard work and dedication to capturing value for our customers. As a company, we've gone through many changes that have been difficult and that have challenged us, but I am very proud of how all the employees have responded and we have put our self in a position to make even more progress in fiscal 2005. For those investors interested in seeing the company present, we will be at the CIBC Oppenheimer Conference in New York, next Wednesday, August 11. We also invite you to schedule a one-on-one with myself or Chuck or to officers in Cambridge mass. And with that, I would like to thank you for joining us this evening. Thank you very much.

That concludes today's AspenTechnology Fourth Quarter and Full Fiscal Year '04 Conference Call. You may now disconnect