Aspen Technology Inc (AZPN) 2005 Q3 法說會逐字稿

Good afternoon, my name is Tamara and I'll be your conference facilitator. At this time I'd like to welcome everyone to the Aspen Technologies third quarter earnings release 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 and the number 1 on your telephone key pad. If you would like to withdraw your question, press star and 2. Thank you, Mr. Young, you may begin your conference.

Thank you Tamara. Good afternoon, I'm Joshua Young, Director of Investor Relations for Aspen Tech., and with me today are Mark Fusco, President and CEO, and Chuck Kane, our Chief Financial Officer. I would like to welcome you to this conference call to discuss our financial results for the third quarter of fiscal 2005 ended March 31, 2005. The Company's earnings release and financial tables, in excel, are available to be downloaded on Aspen Tech's website.

Before we begin, I will make the usual safe harbor statement that during the course of this conference call we may make projections or 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 section in our form 10-Q filed on March 15, 2005. Also please note that the following information is related to current business conditions and our outlook as of today, May 5, 2005.

Consistent with our prior practice, we expressly disclaim any current intention to update this information prior to the release of our fourth quarter and fiscal year end financial results which is scheduled for sometime in August. 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 4 and why we believe non-GAAP is important in describing our operating performance.

As well as a full reconciliation with the corresponding GAAP numbers. You also see the reconciliation to GAAP in our press release issued today. The structure of today's call will be as follows: Mark Fusco will begin with a high level review of our Q3 performance followed by detailed review of actions the Company is taking to improve the overall profitability of the Company. Chuck Kane will then review the specific financial details of Q3, before providing updated guidance and business commentary. Now, I'd like to turn the call over to Mark Fusco.

Thanks, Josh. I would like to welcome everyone to the call today to discuss our third-quarter fiscal 2005 results and talk about our plans for moving the Company forward over the next fiscal year. I will begin by covering three main topics: a high-level review of our third quarter results, details of the significant transactions and developments in the quarter and operational changes we are making to the business. As many of you know, this is the first quarter that I have directed as the new CEO of the Company.

As we previously indicated our financial performance was down this quarter. On our March 15 conference call we stated we that expected license and services revenue to be down sequentially and we expected to report a loss for the quarter. That was our straightforward assessment of the business at the time and our third quarter results are in line with the directional expectations that we set. But please understand that we find these results unacceptable. We would have liked to deliver better top and bottom line results and we expect to perform better in the future.

For the third quarter, license revenue came in at 31.1 million, which was a decrease from the 36.6 million in the -- in Q3 fiscal 2004. Our March quarter is typically a seasonably weaker quarter. Over the past three years we have seen a consistent pattern to our business where software revenues are strongest in our December and June quarters and seasonably weaker in March and September quarters.

Our management turnover and the ongoing uncertainty caused by our financial restatement which we were unable to resolve until there were only two weeks left in the third quarter, contributed to our year-over-year decline. The past 9 months have been quite challenging in dealing with these issues that have nothing to do with the operating of our business or serving of our customers and we are glad to finally enter a quarter focus in which we can focus entirely on the business. There is no question that over time we should command additional spending from our customers given the unique breadth and depth of our vertical solutions. Aspen Tech's execution has been inconsistent and it needs to improve.

We are making changes to the way we operate and the way we are organized which will put the Company in a better position to increase our percentage of software spending from the world's largest process manufacturers. Over the past month I have had over a dozen meetings with significant customers, all of whom are looking to increase their level of IT investments for process-related activities in the next 12 months. We also held a meeting with 40 executives of our top customers earlier this week in New York to talk about how we can better support their business objectives. While sales cycles remain unpredictable our win rates remain very high and we have a healthy pipeline of large deals which could provide us with up side potential over the next 2 to 4 quarters. Our services revenue came in at 33.1 million , decline from 34.9 million in the prior quarter.

The decline in our services revenue was in line with our comments from the March 15 call when we stated we expected our services revenue to bottom in Q3. Keep in mine that this was the first quarter that we had no revenue from our operator training business which we divested to Honeywell at the end of December. We have increased our focus on services bookings which will help us to grow our consulting revenue but it takes time for projects to get started and fully ramp up. We are addressing the issues that have hurt our services business and these changes will improve utilization and profitability in the coming 12 months. We believe that we have reached a point of stabilization in our services business from which our results will improve over time.

To summarize, our revenue performance for the fiscal third quarter was in line with our expectations, however, it was not the type of performance that I consider acceptable. We believe we will see an improvement in June in license, service and non-GAAP profitability. We are implementing a plan that will help Aspen Tech deliver more consistent and sustained performance in the future.

Now, for the third quarter transactions and some details. Now I'd like to switch gears and drill down to some of the details for the quarter. We closed six licensed transactions of 1 million or more in the quarter which was one higher than last year. We closed 26 transactions between 250,000 and $1 million down from 31 transactions in last year's third quarter. Our average selling price in the quarter for deals of 100,000 or greater was approximately 300,000, which is slightly down year-over-year. From a product perspective, our engineering product line continued to represent roughly two-thirds of our software license revenue with the other third coming from our plant operations and supply chain solutions.

Looking at our license revenues on a geographic basis our Asia-Pacific and European regions met performance targets with Europe representing highest percentage of our software revenue. North and Latin America under performed on a relative basis. On -- our NALA regions typically post its best performance in seasonally strong fourth quarter and I expect this region will improve sequentially as it has done in past years. Looking at our business by industry vertical, the petroleum and oil and gas markets continue to represent the highest percentage of our business coming in at well over one third of our software revenues while the amount of software revenues generated from chemicals business represented just under 30% of software revenues.

The engineering construction market represented the largest -- largest portion of the remaining business. Within these core verticals we closed several important software license transactions in in the quarter. Some example of our important customer wins this quarter include a large deal with Stat Oil, the national oil company of Norway and the largest oil producer in the North Sea. This deal represents a significant win in the promising up stream oil and gas segment. This sale of integrated components, which comprises one aspect of our Aspen 1 solution, will enable Stat Oil to increase efficiency and allow executives to access offshore date in real time to make better operational decisions. This was a highly competitive win over competitors such as ABB, Seaman's and OSI and Metricon.

Stat Oil also completed a second license transaction with us in the March quarter to expand the use of our engineering solutions in their oil and gas business. This was a competitive win over Inventis. Another transaction, INA, the national petroleum company in Croatia, signed a large license transaction for our AspenONE solution for planning scheduling and blending. They were previously using point solutions from some of our competitors and wanted to integrate their refinery, planning and scheduling activities to optimize their refinery performance. Aspen Tech was the only vendor that could provide an integrated solution today and a road map that would enable INA to incorporate additional functionality into an integrated framework in the future. INA was another confirmation of the value of our AspenONE solution strategy and it was a competitive win versus KBC and Honeywell.

In addition it shows how the breadth and integration of our point product into integrated AspenONE modules is helping us to win business. Nova chemicals, an important Aspen Tech engineering solutions customer, purchased our suite of supply chain planning solutions to improve their production planning, inventory management and visibility into the supply chain. Nova indicated that our solution was the only one that could fulfill all of their requirements, a reflection of our domain expertise and unique vertical offerings. This was a competitive win over Honeywell and WAM Systems and SAP and affirms our supply chain leadership position in the polymers market. In addition, this deal also highlights the opportunity we have to sell supply chain and plant operation solutions to our engineering customers.

And finally, DuPont purchased AspenONE for energy management to access real time data about its energy use.This will enable them to manage their operations in a more efficient way and achieve energy cost reductions of up to $15 million as part of their plan to deliver 80 million in total energy savings. With the high cost of energy, energy cost savings one of the top priority of the process industry executives and Aspen Tech is uniquely positioned to meet this need. As you can see from some of the deals we described above, we are starting to see AspenONE adoption by our customers.

Let me take a moment to reiterate our AspenONE strategy. AspenONE is the branded name for our vertical solutions offerings. These offerings are a combination of current Aspen Tech products and new products and functionality, integrated together to deliver greater value to our customers. We are very pleased with the progress we are making on AspenONE and by the early adoption of our newest modules by our customers. We are looking forward to report on this continued market traction in fiscal 2006.

The last important detail in Q3 is that we also made some important additions to our leadership team. During the quarter we brought on Blair Wheeler to head marketing organization. Blair has a distinguished career in sales, marketing and production across a variety of organizations including Cisco and Amoco. We announced, a few weeks ago, that Hedde Whitney (ph) has come on board as our head of human resources. An important role given the changes that we are making to our organizational structure and our desire to improve employee productivity. Additionally, we have appointed Steve Pringle head of global services business.

I'd like now to share with you some details of the operational changes that we believe will have a positive impact on our business and financial results in the coming quarters. From a high level perspective, it is important to look at the history of Aspen. Over the past 20 years the Company has completed over 25 acquisitions, bringing in-house many important pieces of technology, applications and human capital. While significant benefits have accrued from these acquisitions, and they helped Aspen Tech to scale significantly, they have also led to a less than optimal corporate structure because they were never fully integrated. In order to improve our operations and financial performance, we are focusing on three major areas. One, improving the operational efficiency of the Company by integrating our operating assets, two, aligning our entire customer facing organization around our major vertical markets, and three, integrating our marketing and product management groups into one organization.

Let's start with the operational improvements. This is critical to the Company's success from a short and long term perspective. We are aggressively moving to integrate and consolidate past acquisitions. Much of this work should have been done -- completed years ago but it wasn't, so we are focusing mainly on consolidating operations -- operating locations and back office functions. We are streamlining the organization thereby eliminating excess costs, improving information flow, decision-making and making the daily operations of the business simpler and more efficient. A major goal of our new organizational structure will be to increase accountability from the top to the bottom of our organization.

In short, we are making the hard decisions to create an efficient company which is the foundation from which we can build a successful future. As part of our operational improvement plan, we are reducing our work force by approximately 150 people. The vast majority of these reductions are back-office related, with minimal impact to research and development, and no impact on our sales organization. The net result should be a reduction in the Company's quarterly run rate by roughly 3 to 4 million over course of fiscal 2006. Aspen Tech has the market position and size to be profitable at current levels -- current revenue levels, and these steps will make that happen.

The second major operational adjustment we are making is to align all of our customer facing resources around two business areas. Number one, petroleum, oil and gas, which also includes engineering and construction, and, two, chemicals which includes chemicals, specialty chemicals, pharmaceuticals and consumer products. The AspenONE solution strategy is about vertical solutions but in order to truly deliver against a vertical go to market strategy it is critical to have product marketing, product management, pre-sales support and the direct sales force all aligned with a common vertical focus. Although some elements of our association were previously organized around vertical, our whole company will now be focussed on vertical market orientation. This will lead to a much higher degree of accountability across all functional departments within each vertical.

It will also improve the efficiency of how resources are allocated and insure that verticals are developing in delivering solutions that are in high demand from our customers. Going forward we will be smarter about how we deploy our resources into and outside of our core vertical markets. This will include leveraging an indirect sales strategy outside of Aspen Tech's core industries in a more meaningful manner. Historically, since all of Aspen Tech sales have been from our direct sales force and by leveraging in indirect channels we will prevent being spread too thin and make the most of our investment in our core markets where we are selling integrated vertical solutions.

Other significant components to our operational plan is that we are integrating our marketing and product management groups to simplify our organization and better define and execute our marketing strategy at both the corporate and regional levels. This change will result in a smaller corporate marketing team and an increase in the number of industry marketing resources in our field operations closer to our customers. We believe this new structure will better align our product strategy with the market and our customers' long term solutions needs as well as helping Aspen Tech improve vertical sales execution. Short term, the actions we are taking will improve our performance and profitability. Long-term, Aspen Aspen Tech will be better positioned to execute our strategy, take our products to market and help our customers improve their operations.

Ultimately, this will enable Aspen Tech to profitably grow our business. I have outlined an aggressive plan to help bring the Company forward. The problems that faced Aspen Tech can be fixed in the near term. We expect to see financial improvement in the June quarter but the improvements that we are making will not be fully realized this quarter. Our new operational initiatives will better position the Company for improved financial in fiscal 2006 and set the foundation for Aspen Tech to deliver consistent sustained performance over the long term.

With that, let me turn it over to Chuck to run through the numbers before we turn it over to questions and answers. Chuck?

Thanks, Mark, I will first review the P & L and the balance sheet and then I will turn to our business outlook before turning it back to Josh to begin the Q & A session. Total revenues for the third quarter were 64.2 million with software license revenue of 31.1 million and services revenue of 33.1 million. These results were in line with the directional guidance we gave on our March 15 call.

Software license revenues declined 15% year-over-year and 15% sequentially, while our services revenue was down 26% year-over-year, and 5% sequentially. As a reminder, it is not an apples to apples comparison when you look at the year offer year change in service revenues because Q3 of last year included revenue from the operated training business that we have since divested as part of the FTC settlement. What is most important is the fact that the sequential decline in services revenue was fairly modest and we believe this line item hit a point of stabilization in Q3.

And we expect it will increase sequentially in future quarters. GAAP expenses were 73.6 million in the quarter, excluding amortization of intangibles, fees associated with our audit committee review and adjustments to previously recorded restructuring charges, our non-GAAP total expenses in the third quarter were 67.9 million. This was in line with our guidance that expenses would be flat to slightly down from last quarter's 69.9 million and it represents a 6 % decrease in our quarterly non-GAAP expense run rate on a year-over-year basis. Head count at the end of Q3 was 1,442, roughly flat with last quarter, and down from 1,713 at the end of a year-ago period. The year-over-year reduction in head count was planned for.

Gross margins on licenses were 87% for Q3, which is equal to what they were in Q2. Services gross margins came in at 42%. A significant improvement from 37% in the prior quarter. Services gross margins improved due, in large part, to the elimination of costs associated with the operator training business that we divested at the end of the December quarter. In Q2 '05 we were carrying these costs without any corresponding revenue. We are confident we can do a better job of driving stronger profitability in the services business going forward, particularly given Mark's services background and expected contribution.

Sales and Marketing expenses in the third quarter were 24.3 million up 2% from a year ago and up sequentially by 900K. This sequential increase was due primarily to increases in benefits and payroll taxes which we set in the March quarter. It was also partially impacted by a ramp-up in sales training expenses related to our rollout of AspenONE. Our sales and marketing represented 37.8% of total revenue for fiscal Q3 '05.

R&D was 11.6 million in the third quarter, which is approximately 2.7 million below last year's third quarter, and 100K below last quarter. R&D represented 18% of revenues for the fiscal third quarter. G & A costs were 12.7 million in the quarter, included in this number is 4 million for fees related to the financial restatement which concluded on March 15. This figure includes all final costs associated with this restatement. If you exclude the 4 million, our G & A run rate in the quarter was 8.7 million. We believe there is significant leverage to reduce this run rate going forward as Mark alluded to earlier.

On a non-GAAP basis we reported a Q3 operating loss of 3.7 million which is a decline from the prior year's profit of 9.6 million, but again is in line with the directional guidance we provided on revenue and expenses for the quarter. You will note that we recorded a tax provision of 1.1 million which relates to former jurisdictions. As a result of the tax expense, our non-GAAP net loss was 4.4 million, compared to net income of 9.9 million last year. As a reminder, the non-GAAP earnings figures are based on a fully diluted share count of 87.3 million shares, which includes the impact of the Series D preferred stock.

GAAP diluted per-share figures are based on a fully diluted share count of 42.6 million shares and excludes the Series D preferred stock. On a GAAP basis, the net loss applicable to common share holders totaled 13.7 million with a diluted per-share loss of $0.32 compared to a GAAP net income of 3.2 million or $0.06 per diluted share in last year's third quarter. The current quarter's gap results include 3.6 million of preferred stock dividend and discount accretion related to the Series D preferred stock.

Turning to the balance sheet we ended Q3 with 69.1 million in cash and equivalents, down 17.8 million from the second quarter. During the quarter we had 13 million of one-time cash payouts which caused most of the decline in the cash. The majority of these cash payouts were legal and accounting payments related to the audit committee investigation and other legal matters. Our DSOs for build receivable for the third quarter were 76 days, up nine days from the end of last year's third quarter, and from the December quarter. If you include the unbilled receivable, our DSO's were 93 days.

Net installment receivables on the balance sheet totaled approximately 86.2 million in Q3, which is flat with the prior quarter. The combination of our cash equivalence and installment receivables were 155.3 million. At the end of Q3 we had roughly 57 million of 5.25 % subordinated debentures on the balance sheet which mature June 15 of this quarter and are reflected in our short-term debt. We expect to service this debt requirement in a timely manner with installment receivables, financing and cash from operations serving as our primary vehicles of doing so. Our cash and installment receivables are 2.7 times our short-term requirements.

Turning our attentions to the cash flow statements, we used approximately 15 million in cash flow from operations during the quarter. We used 3.8 million in cash from investing activities. And we generated 1.3 million in cash from financing activities resulting in a total use of cash of 17.8 million during the quarter. Depreciation and amortization totaled 6 million for the quarter and our capital expenditures in the quarter approximated 800,000. Before turning it over to Q & A I would like to provide fiscal 2005 fourth quarter guidance.

In Q4 we anticipate revenue will be in the range of 66 so 68 million, with most of the sequential increase coming from license revenue, while services revenue is expected to be up modestly. It is worth noting that we have had large multi-million dollar deals that impacted quarterly results in the past and we have a number of large deals of that nature that could close during the next several quarters, however, in order to be conservative, we have not relied upon any of those deals in our financial guidance. From a cost perspective we expect non-GAAP total expenses to be approximately 66 million in the June quarter, leading to a non-GAAP EPS in the range of break-even to $0.02.

As a result of the operational changes we are making, we expect to incur restructuring charge between 4 and 6 million in the quarter. The majority of this will be a cash charge. We would expect our quarterly non-GAAP expense run rate to decline slightly from Q4 '05 to Q1 '06 and then decline slightly again in the second quarter of the next fiscal year, but we would not expect any major quarterly decreases subsequent to that period. In summary, our Q3 was challenging, but we were not negatively surprised down the stretch of the quarter. We believe we will show an improvement in revenue and profitability in the June quarter, but the most important fact is that we believe we are making the changes necessary to have a successful fiscal 2006 and to set the stage for consistent financial performance in the future. And with that, I will turn it back for Q & A.

Tamara, you can open up the question-and-answer session.

At this time I'd like to remind everyone in order to ask a question, please press star then the number 1 on your telephone key pad. Our first question comes from Richard Davis with Needham.

Hey, thanks very much. Mark, you said with regard to AspenONE that you're kind of pleased with the progress. What does that kind of mean in terms of, you know, customer wins and reference customers and basically kind of what would be a reasonable number of, you know, reference customers to have say by the end of December '05? You know, a handful? 20? Whatever.

AspenONE as we have stated, Richard, is our overall solutions strategy for the verticals that we serve. As you know, all of the products that we have, in our current stable of products today are part of our AspenONE solution strategy. Our solution for AspenONE is the integration of all of those products into a solution for our customer which will allow them to derive huge value in optimizing all parts of their business going forward. So therefore, all of our products that we sell, are part of our solution strategy.

In the past quarter, we had some very nice increases in our revenue, in our operations manager product, which is part--central and core to allowing our customers to view all things in their plants and what is going on, so it is the core backbone of AspenONE. I think it's early to say, you know, right now what we would want to have as the ultimate goal for fiscal 2005, for AspenONE specific customers, but all of the things that we're doing today are driving towards vertical solutions for our customers. We just had our customer event this week in New York.

There's tremendous interest in the integration of our products and what our AspenONE solution can mean to our customers, and how they optimize their plans going forward. We believe that this is the activity that they are going to be focusing on as they work past their ERP implementations, it's making their plans more efficient which can provide tremendous leverage to their income statements going forward, so we believe we are perfectly positioned to roll this out and to help our customers integrate what they have from us already, and make it a much more robust solution for them going forward.

So it's a little early to say what we'd be happy with, ultimately, but we believe we're making very good progress and as we stated, we've got a number of very large customers that we outlined here on the call today that have bought our, you know, the overall solution and are rapidly implementing it and we're very pleased with the traction. And, as you know, we're only about six months into this. We believe the adoption has been quite nice so far and that there's a lot of upside here going forward.

Okay. And then, Chuck, G & A, just kind of -- you know, 20% of revenues I know there is a lot of stuff in there, but most successful companies your size have a G & A figure that's probably half that level.

There is one-time charges for sure. The cost of the entire accounting restatement is captured in that line item.

Right.

I would say that the only non-operational type of items that are additive when you make it relative to prior years, is the cost of Sarbanes which are significant, and our expected to continue to go forward, but our expectation is to get that line item down to 8% of revenue without any one-time charges and on an ongoing basis and that is what we're driving toward. And some of the adjustments we're making.

Yes, that's where it should be. I mean, I know you won't give me a time, but you can always predict a level or a time but never both. But do you think there is a--would you be willing to go out on a limb and say when that's a reasonable expectation? Or should I -- ?

Several quarters. A lot of the actions that we're taking at the end of this quarter as it relates to restructure, is in this area. So it will be the area that we gain the most as far as bottom line increase -- increases.

Got it. Okay. Thank you can very much.

Your next question comes from Brian Foote with IRG Research.

Yes, hi. I had a couple of questions. Some clarification. You're talking about the guidance of between 66 and 68 million for the current quarter with the growth coming from license revenue. Was -- did I hear that correctly?

That's correct.

And you also mentioned some deals that were excluded from that, again, I just wanted to clarify what exactly those deals are and what -- ?

Without getting into the specifics of the deals, on an ongoing basis, on a quarterly basis, we have somewhere in the neighborhood of five to six deals, in that range of million-dollar plus deals. We're talking about deals that are outside of that range and are more of a one-time very significant type of level. So what we wanted to give guidance on was the ongoing operational numbers that we expect and see in the pipeline. There are some renewals and other parts that, that -- that could increase the numbers significantly, but we're not counting on them to do our number this coming quarter.

And the number of the--of those deals is 5 to 6 or is that the 5 to 6 in the million-plus range?

The 5 to 6 in the million plus range.

Okay. The second thing, is how -- how should we be thinking about the cost of licenses in terms of percentage numbers? Seems to kind of jump around?

Our gross margins on licenses were 87% for the quarter. The--they don't really jump around, there is a mix of royalties that go into our license sales, and part and parcel to our sales on AspenONE but I would expect that that gross margin number to be in and around the 87% and, in fact, go up slightly as time goes on here.

Now, you made some improvement in the service and other gross margin lines. Just because of the operator training people are no longer there. As you look out at the guidance that you're making for the current June quarter, do you have a level of optimization or utilization that that should be thought about in terms of those number numbers? Is that improving sequentially off the 42%, is what I'm saying, and are there any drivers with that?

Yes, yes. First let me clarify again that the impact of the prior sale of the operator training business in the prior quarter was very damaging to the margin because we did not have the associated revenues and we were carrying the expenses until we could close the transaction with Honeywell and the SEC resolution. The 42% is not something we're sitting on and happy with. We think there's some more efficiencies that can be gained in the services areas, both cost efficiencies and probably more importantly revenue efficiencies that we see in our pipeline and opportunities that we see in, in -- in prospects with AspenONE rollouts.

In terms of cash consumed by operations this quarter, how much of that was--how much of those expenses were related just to the one-time expenses here?

13 million.

Okay, great. I'll jump back into the queue if I have more questions. Thanks.

Thank you.

Your next question comes from Nick Galussio (ph) with KCW.

Good afternoon, gentlemen. Just a bigger-picture question here. You know, we have seen a boom in demand in the oil and gas and petrochemical refining industries.

Recovery that you would expect to see, you know, demand for your services, and the question is, if you lost the window of opportunity given all the disruption and management changes of the Company and what does the pipeline of new business look like from your people in the field? And in light of President Bush's plan to convert these abandoned military bases to increase refining capacity, you've got a lot of potential, and do you have the opportunity to go out and get it? And what does the pipeline look like right now?

We feel very confident in our positioning at the moment. As you know, we we have had some external issues that we've been dealing with over the past several quarters. Those are behind us. Our core vertical markets are chemicals and petroleum, are performing very well and our customers are certainly having record revenues and profits. These customers are obviously very large in their buying cycles, typically take 12 to 18 to two years to get spooled up once they get started on a major initiative. Our discussions with our customers, and we had numerous ones this week, with all of -- many of our big customers, show that they are very interested in what we do and our AspenONE solutions for their plants. We believe that we're in good shape to capture a lot of that market going forward and, you know, we're very pleased with where we're at.

Obviously our revenues and our earnings in the fiscal third quarter that we just announced weren't up to speed. But we believe going forward that we are right where we want to be and that we will be able to execute on the new plan that we have outlined tonight, execute better, and start to take our products much more efficiently to market, and to gain access to that revenue. There is many, many refineries and chemical plants that are being built in other parts of the world, and we are in the sales cycle on all of those.

There's no guarantee that we're going to win all that business, but clearly Aspen Tech has a tremendous position in this industry.

Well, let me ask you, who is getting the business if you're not getting the business and there's this boom going on?

As I stated, we're not losing market share that we're aware of. We're continuing to win the many, many deals that we're involved in. We're not seeing degradation in any material way on any of our products. These plants are now coming--going to be coming to market in the next couple of years so they're just now starting into the cycle of what's going to be going on in the plant and the picking of the technology. So we believe there will be lots of opportunity in our core verticals going forward.

How much is retrofit versus new refining capacity?

Well, there's both retrofitting in the mature markets in Europe, in --

No, I mean, for you.

Oh, well, there, there's going to be--there's going to be a significant amount of both, but our core business over time has been -- largest parts of our business is in Europe and in the United States there's surely going to be a lot of retrofit business going on there. But in China, India, and all over Asia there is lots of new plants going forward. We believe that there is going to be lots of upside in both parts of our business going forward.

All right. Thank you.

Again, to ask a question, please press star, and then the number one on your telephone key pad. Our neck question comes from Robert Schwartz with Jefferies & Company.

Thank you. I'd like to dive into a couple of topics that were mentioned earlier. If we look at your overall service margin and sort of ball-park your maintenance what we think from other companies, maintenance margins should be, it implies your consulting margins are really too low, are very low relative to many other software companies. I'm wondering if there is something astructural about being focussed on process industries that leads to lower margins to where you think the margins on consulting really can go and how should we think about the opportunity to improve profitability of your services?

As we've talked not only on this call but on the prior call earlier, in March, we believe that there is opportunity in our services not only on the revenue line, but on the margin line, and that's clearly one of my most important focuses going forward. A lot of the things that we've been doing over the last several weeks and months have been around improvement in our service business, because, you're right, our margins are not where they ought to be. We see that there is upside there on the margin line and that our margins will improve in sequential terms over the coming quarters. There is a lot of work to do there.

But I don't think there's anything structural about the process industries per se, or our products or services around them. And we also believe that as we roll out and get more traction with our AspenONE solutions there's a lot of services that go along with them, and this business will improve over a period of time.

Well, if the issue is not structural in terms of needing more labor sort of leads to the conclusion that either your prices are too low or utilization is too low. And I'm wondering what you think it is?

I think there's opportunity in most businesses on many different parts of the income statement, we believe there's opportunity on the pricing side, in some cases, to improve our pricing, but we also think there is a lot of opportunity on the execution side to improve our margins and including the utilization of our personnel going forward. So it's clearly a focus for us. And it's something that we intend to fix going forward to drive margin and profit growth in that business. It has not been a strong business for Aspen Tech over the last few years as you've seen from the declines in year-over-year revenue.

That's something that needs to change. But, you know, first and foremost we can fix the margin line and get our business healthy and moving in the right direction. It will take time to improve the overall top line of the business, but as we've told you in the past, we are seeing improvements in the bookings in that area and we expect that to make its way into the income statement over time.

And if we would look at Asia, which you pointed out is a real growth area for the industries you serve, what makes Aspen better situated than others to take advantage of that? What steps are you taking to take share in the Asian markets as they develop?

Asia in the process business, Asia is the largest growth market for all the companies in our space right now. We are actively improving and increasing our investment in that area over a period of time. And we expect to execute, you know, well in the coming year, and, you know, we're certainly not where we want to be in any of our markets, but our Asia market, as we just said, in this quarter performed up to our expectations. We have a healthy growth plan for next year that we're working with as we work through our final budgeting process and we expect that, you know, we'll be successful.

That said, there's lots of competition in all parts of our business and we're certainly going to compete hard in all the markets but we expect to be successful, given our space and the depth of our solutions.

It is worth adding that we've been in the Asian market well over 20 years and we've penetrated that market nicely and developed tremendous relationships in the large companies that are now expanding in that market and we expect that those relationships will help us leverage, going forward, our revenue stream there.

What indications have you gotten from your customers who might have held back over the last quarter or two because of the financial uncertainties that they're satisfied enough with your financial condition that they're willing to put that -- those issues aside and are willing to sign the big deals? I mean, clearly they're in the pipeline in the sense that these customers have some interest, clearly some thing's prevented them from signing them over the last couple of quarters. I'm wondering why you think that they'll sign them this time soon.

Well, first of all, we do go through a normal course of calls with customers to update them on any of these issues and to make sure that they understand what the issues are from a financial viability standpoint and walk them through the financials to make them understand that from a viability standpoint there is no danger in the company going forward. We did see some delays. We had a number of customers wait for our restatement information to go out publicly.

But they've been very supportive as we have these calls it's clear that our customers are, in many ways, dependent on our technology and want to see us successful because we're so instrumental in their success. And, again, they've been very supportive over these last past two quarters as we've dealt with the FTC and our restatement issues. They are, as much as us, happy to see this behind us, as Mark alluded to earlier, our meeting this past week, it was in some ways a celebration that Aspen Tech can finally look at the business going forward and not be distracted with some of these external factors that have hurt the business in the past.

And then one last question if I may. You have an analysts' meeting coming up in a week or or so, and I'm wondering if you can tell us what are some of the topics you'll be dealing with and maybe, Chuck, if you'll be giving us some sort of target model that we should think about in the longer run for -- for Aspen.

Well as far as a target model goes, we've just given guidance on fourth quarter and some color to that guidance and we will talk in terms of a more detailed operational model for the expectation of this quarter coming up. We're not prepared, as yet, to give any further guidance in the follow-on year. We expect to give that guidance at the end of the year once we're finished with the fourth quarter. So, the analysts meeting will be, most importantly, updating the analyst community on what we've--what our new strategy and our developed strategy on AspenONE is.

It's been a long time since we've been able to speak to the analyst's community, because of all these external issues that we've encountered, and we really look forward to finally getting in front of you folks and rolling out what we think is a very solid strategy, and one that will have a positive impact on our financial rules going forward.

Thanks for taking my questions.

Pleasure.

Your next question comes from Philip Alling with Bear, Stearns.

Mark, just want to get a sense from you, really, since you've been there now, on the sales force, have -- can you give us a sense about the turnover that you've had there, and, you know, is the sales force really, sort of, you know, where you need it to be, and what way, as part of your restructuring, how do you envision sort of, you know, making any changes to the sales force there?

We've undertaken a number of different actions in the Company over the last six months to improve our sales channel and improve the training with which we give to our sales people to help them roll out our solutions better and faster, and as part of our restructuring that we just talked about, we will be increasing the amount of resources in our industry marketing area, with our sales people in the field, going forward, which will improve their ability to interface with our customers. As you know our products and our solutions are quite technical.

And, you know, we believe that in the transition from selling point solutions to more enterprise applications -- that's going to take some time to accomplish. We feel comfortable and confident that we're in the process of making that transition and we're going to do it relatively well. That said, you know, there's clearly improvements that we can make, and we need to get better in all areas. And this gets to the heart of our execution in our business of with how we take our products to market through the sales channel and, you know, there's clearly things we need to do there.

Have you hired any sales people since you've been there.

Absolutely. We continue to work on our sales force. We continue to hire sales people in all parts of the world. This is certainly a core going forward, but it's--it will not, you know, increase, you know, our overall expenses of our business, and it's part of our overall staffing plan going forward.

Could you give us a sense on what the, sort of, target sales force is, you know, that you have in mind and how is that different from what the current level of sales is that you have now?

I mean, we feel pretty comfortable with, you know, with the investment that we have in our sales channels. What we're focusing on is bringing other resources into the regions to help them be more effective. We also talked about, you know, having other indirect sources for our sales channel which will increase our ability to sell our products not only into our current verticals and to some new customers, but into other verticals, as well.

So we feel, you know, that we are making the appropriate investments in this area, and that, you know, over a period of time, you know, we will make a transition, and, you know, we will get the sales force where we want it to be. As we mentioned on the call earlier, you know, we are not cutting our sales expenses; we are actually bringing more resources into the sales channel to work with our customers, and we think this is appropriate.

Okay. What is your sense really about when you should begin to see operational improvements from this restructuring initiative that you've announced today.

Well I think, you know, in the coming, you know, quarter, you know, you should start to see some improvements, as we mentioned, on the cost side of our business. And as Chuck mentioned, in the coming several quarters you will see our expense run rates drop and our overall profitability improve during that period of time. The topline growth is something that we are clearly focussed on in the longer term and the actions that we're taking to be more efficient, to take our products to market better, to move our resources into the field, to beef up our sales channel.

That will take time to gain some traction on but we are focusing on, first and foremost, making this a profitable company and making it one that we can build on going forward, and, you know, clearly we believe that the actions we're taking, the growth will follow, hopefully in the near term but that is a little bit harder to predict. So, we're comfortable with where our plan is at the moment, and the actions that we're taking and we believe they'll drive good performance in the future.

In terms of the sort of the growth opportunities that you're pursuing is it your view that it's primarily among your existing customer base, or do you really think that there is a sizeable set of new customers that you need to go after in terms of, you know, realizing the license growth goals that you have in mind?

We think there is significant opportunity in all parts of our segments. Clearly our core verticals from a financial perspective, our customers are very strong. We believe that that will improve their budgets going forward. We also have a tremendous focus in the up stream with some new products for AspenONE which we believe not only will we sell into our existing customers but will open up some new markets as well. And as I just mentioned we are opening a channel strategy to allow some of our products to be sold into horizontal markets that are different from what we have done in the past. And this is core, you know, to our sales strategy, you know, going forward.

So we believe there is opportunity in all parts of our business, but it's our job to execute and to do it better. And this has clearly been a problem in the past and we're going to work on getting it right.

Again, to ask a question, please press star and the number 1 on your telephone key pad. Next question comes from Samir Spicah (ph) with PCW.

Yes, hi. Chuck, just wanted to check with, your cash has declined because of these one-time users. I wasn't there for the first few minutes of the call, so excuse me if you already answered it. Your convert is coming due. So, how much cash do you really need to to run the business on a day-to-day basis and how do you plan to finance this?

Well, first of all, as you well know, our installment receivables is a source of capital that we have not been able to really use as readily because of the external issues that we've had at hand. So, only recently have we been able to discuss with various financial institutions and sources of tapping into that installment receivable capital, and utilizing that for paying back the debt. As to your question of what do we need for ongoing operations, I would say anywhere between 40 and 50 million in cash, but we are more focussed on utilizing the installment receivables as the source of funds to pay down the debt, which we expect to do on a timely basis.

So at this point do you do you have 58 million due and 69 cash?

Correct. 57 million due on June 15.

Right. So basically, let's say, you know, you take out another 15, 20 from your balance sheet, so you need to get about 40 million or so from your receivables?

Roughly 35 to 40 million, that's correct.

And you fair, you know, you feel pretty confident, at this point, you can do that?

The, the -- as I said, until we were done with our restatement, it was difficult for us to discuss with financial institutions. Since that time frame we've had a lot of success in those discussions and we expect to have a positive outcome in those.

So you won't be coming to the market again to do another -- ?

We don't expect to.

Okay, thanks.

Um-hum.

At this time, there are no further questions. I would now like to turn the conference over to Mr. Fusco.

I would like to thank everyone for joining us this evening. We're working hard to get the Company back on track to report improved financial performance in the future. We hope to see many of you at our investor conference on Tuesday, May 10, from 12:00 to 2:00 clock at the Grand Hyatt in New York City. We will also be presenting at the Bear, Stearns and Credit Suisse First Boston software conferences in June. We also invite many investors to visit us in Cambridge during the quarter. Thank you and good night.

This concludes today's conference call. You may now disconnect.