Aspen Technology Inc (AZPN) 2005 Q4 法說會逐字稿

Good afternoon, I will be your conference facilitator. At this time I would like to welcome everyone to the Aspen Technology fiscal 2005, Q4 earnings release conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Young, you may begin your conference.

Thank you very much. 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 fourth quarter of fiscal 2005 ended June 30, 2005. The Company's earnings released 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. Factor that's might cause such differences include, but are not limited to, those discussed in today's earnings release and in the Risk Factors section in our Form 10-K filed today.

Also, please note that the following information is related to current business conditions and our outlook as of today, September 13, 2005. Consistent with our prior practice, we expressly disclaim any current intention to update this information prior to the release of our first quarter financial results, which is scheduled for sometime in late October or early November. 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 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 structure of today's call will be as follows; Mark Fusco will begin with a high level review of our Q4 performance. Followed by a detailed review the actions the Company is taking to improve the overall profitability of the Company. Charles Kane will then review the specific financial details of Q4 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 on the call to discuss our fourth quarter fiscal 2005 result, which beat the revenue expectations we set back in May. I have just completed two full quarters at a Aspen Tech. And during that time we have successfully moved beyond multiple external events that have negatively impacted the Company's performance in the past. We have made a significant number of changes to improve our execution, change our corporate culture and take advantage of our leadership position in the process industries. I am proud of what our team has accomplished in a very short period of time. And I would like to thank all of our employees for their hard work. Simply put, Aspen Tech is delivering against our key objectives.

I would like to focus on five key areas including; One, we exceeded our Q4 guidance for revenues. Two, gained market traction for aspenONE with two high-profile wins. Three, we improved our services execution and profitability. Four, we made progress on integrating our operating assets and realigned our organization, positioning the Company for improved profitability in the future. And five, we cleaned up the balance sheet providing a strong financial foundation for the future.

Let's start with the highlights of our Q4 results. Total revenue came in in at 74.4 million, which was above the $66 to $68 million guidance we set last quarter. License revenue was 36.1 million, which was down on a year over year basis, but up 16% on a sequential basis and also better than our guidance. The details of our license performance are as follows; We closed four license transactions over 1 million in the quarter, compared to 6 last quarter and 6 in the year ago quarter. We closed 23 transactions between $250,000 and $1 million, which compares to 26 transactions last quarter and 39 transactions in the year-ago period.

Our average sales price in the quarter for deals greater than 100,000 was approximately 460,000, which compares to 525,000 in the year-ago period. The most positive component of our Q4 license revenue was that we closed two multimillion-dollar transactions. We are pleased that this was the first time in several quarters that Aspen Tech has closed deals in the 2 plus million range. Which we believe is evidence that our customers have a significant need for our products and solutions. In addition to the transactions described above, we are pleased to report the first major aspenONE transaction for both our chemicals and petroleum market. While we did not recognize a material amount of revenue from these deals in Q4, they should start to impart our revenue in the next two quarters and provide a significant opportunity in the future.

Let me spend a few minutes to describe these transactions in more detail, as they both represent major validations to our aspenONE strategy. For starters, we closed a significant agreement with our first super major petroleum company, British Petroleum, for our aspenONE inventory management and operations scheduling solutions. Over the past few months we have talked extensively with investors about our customers' strategic initiatives to improve their operational performance and gain better visibility into their day-to-day operations. This significant level of customer interest, lead to the development of our integrated aspenONE modules, which bring together previously disparate software applications into an integrated framework.

One of our most important aspenONE modules for the petroleum industry is our aspenONE inventory management and operations scheduling solution. At our AspenWorld Conference, we committed to bringing this solution to market and we are happy to report that we have delivered on this promise. This solution will enable petroleum companies to manage the operational risk and financial exposure that results from a lack of visibility into their operational inventories. The question of operational inventory is a double of edged sword for petroleum companies. Carrying too much of it ties up working capital, but carrying too little exposes refiners to significant operational risk. Given today's extremely volatile prices of crude oil and petroleum products, our customers must make multimillion-dollar decisions every day based on what they think they have in operational inventory.

aspenONE inventory management and scheduling is designed to provide our customers with a competitive edge; by allowing them to make the best decisions about whether to buy, make or trade crude oil and products based on accurate visibility into their true operational inventory. Over the next 12 months, we will be working jointly with BP to roll out this solution. These solutions are modular and implemented in a series of steps.

In part of our engagement with BP, this first part of the project, which we call the define phase, will help us define the scope of the project and could potentially lead to additional transactions with BP in the future. Aspen Tech was selected by BP because of our robust integration platform and domain expertise as well as our ability to support integration to their back-office applications. The adoption of this solution will offer BP a strong competitive advantage, providing collaboration across their supply, distribution and trading operations. Even though this represented a significant upfront commitment by BP, we are confident that successful execution on our part will lead to even more significant follow-on opportunities down the road.

Our second major aspenONE transaction was with Lyondell Chemicals, the third largest ethylene company in the world. This agreement is a good example of how aspenONE helps our customers solve complex solve large, complex problems by integrating their end to end plant operations. Lyondell had previously purchased a significant number of our point applications for use in their ethylene plants. Lyondell's challenge has been; that it has been unable to bring together their data and IT systems to make informed decisions about to how to run their day-to-day plant operations on a real-time basis.

aspenONE for ethylene scheduling, will leverage several Aspen Tech products in an integrated manner, to enable Lyondell to make better decisions about what feedstocks they need, at what time, in order to optimize their level of production for the end user. Ethylene scheduling the backbone of our chemicals vertical solution. This is the first major deal in this market. And we have targeted 25 major other major ethylene producers worldwide that we can also sell the solution to.

In summary, we now have anchor AspenONE customers in both of our key verticals, chemicals and petroleum. Our success with these customers should encourage others in these verticals to follow suit. And this is a very exciting development for Aspen Tech's long-term future.

In looking at our business by vertical industry our chemicals and engineering and construction businesses turned in a solid Q4 performance. Our petroleum, oil and gas vertical came in on plan as well. As I just referenced, both chemicals and engineering and construction contributed a large multi seven-figure deal during the fourth quarter.

Looking at our license revenue on a geographic basis. Europe was our strongest contributor to license revenue. North and Latin America and Asia were not as strong as we would have liked, but performed reasonably in the quarter. As a reminder, we provide qualitative comments in describing our business on a quarterly basis due to the lumpiness of our transactions. We provide specific statistics on a 12-month basis. Since it more accurately characterizes trends in our business.

For fiscal 2005, the breakdown of the Company's software revenue was as follows. 35% of software revenues were derived from the chemicals market, up from 30% last year. 33% of software revenues came from the petroleum, oil and gas industries, roughly flat with 34% last year. 22% of software revenues came from the engineering and construction industry, up from 21% last year. 10% of our software revenues came from other vertical markets, which include industries such as pharmaceuticals and consumer packaged goods. This was down from 15% in fiscal 2004.

On a geographic basis, the Company's software revenues broke down as follows. North and Latin America represented 41.6%, down from 51.2% in fiscal 2004. Europe, Middle East and Africa was 40%, up from 32.2% last year. And Asia Pacific was 18.4%, up from 16.6% last year. On a product line basis, 67% of the Company's software revenues were related to the engineering business. The other 33% was related to manufacturing supply chain. This mix is unchanged year over year.

I'd like now to discuss our services revenue, which we are pleased has shown improvement since our last call. And is the third area where we have delivered what we have committed to do three months ago. From Q2 to Q4 we have improved the gross margin in our services business from 37.2% to 43.4%. And after declining for four consecutive quarters, our service revenue returned to sequential growth of roughly 4% in Q4. Which was slightly better than our expectations. The top line improvement in our services business was driven by the improved backlog of projects we have referenced on prior calls.

We continue to expect improvements in this area through better utilization, better execution and additional project opportunities relating to our aspenONE solutions. This is a good transition to the fourth area, where Aspen Tech has delivered against our operational targets, which is integrating our assets and lowering the Company's cost structure for improved profitability in the future. During the quarter we reduced our number of R&D locations by 25%. Not only will that streamline our cost structure, but it will also help improve the communications and productivity of our R&D team.

From an operating location perspective, we have reduced the number of office locations from 40 to 33 locations today. And by the end of this fiscal year we hope to get that number below 30. As we mentioned on the last call, we are completing much of the merger integration and clean up work that should have been completed over the past several years. With a simplified reporting structure and verticalization of our entire customer phasing organization, the stage has been set for increased accountability, improved execution and consistent financial performance. The last major component to our reorganization strategy was a head count reduction of 10%, which we announced on our Q3 conference call. The majority of the reduction has been completed and we will start to benefit from this lower cost base in the first quarter.

The last major area where Aspen Tech has delivered against our previously defined goals, is that we improved the balance sheet of the Company. During the quarter we met our debt obligations and completed a transaction that retired our outstanding convertible debt. We now have the foundation to continue to improve our balance sheet in all areas over time. Additionally, we are committed to generating meaningful free cash flow and profitability through top line growth, a streamlined cost structure and better execution.

In summary, we are delivering against the operational plans and goals that we have presented to you on prior conference calls. We exceeded our Q4 revenue guidance. We signed important deals for our aspenONE solutions in our core chemical and petroleum verticals. We improved our services revenue and profitability. We made substantial progress in integrating our past acquisitions. We strengthened our balance sheet. We improved our structure, which establishes the foundation for better financial performance in fiscal 2006.

Our work is not complete, but we have made significant progress in a relatively short period of time, which is encouraging. I look forward to reporting on our progress over the next few quarters. With that, let me turn it over to Chuck to discuss the financials in more detail and provide our business outlook for the upcoming quarter. Chuck?

Thanks, Mark. From a high level perspective, we were pleased with our top line performance in the fourth quarter. However, our expenses were higher than we would have liked. We still feel good about where we stand heading into Q1 from a cost perspective and our substantially improved balance sheet should provide our customers with even more confidence about the Company's long-term direction. I will review the details of the P&L and the balance sheet and then I will close with our updated business outlook. Before turning it over again to Josh to begin the Q&A session.

However, before digging into the numbers I wanted to provide you with an update on our SOX 404 initiative. Our 10-K, which was filed today, indicates that we identified material weaknesses in certain controls and have taken actions to address these matters. Many of these actions were initiated during the December '04 and March '05 quarters, as we concluded our international accounting investigation. However, we have identified additional process improvements and hiring that we will make during the fiscal 2006 period. We have adjusted a number of these processes and procedures, and received a clean audit opinion, as of June 30, 2005. And we will continue to work expeditiously to make sure we have best in class controls processes in place as soon as possible. As I mentioned up front, investors can read our 10-K to reference material weaknesses and the proposed remediation steps that are underway.

And with that I'd turn to the fourth quarter numbers. The total revenues for the fourth quarter were 70.4 million, a decline of 21% year over year, but an increase of 10% sequential quarter. We are working hard to resume top line growth and it was encouraging that we exceeded the top revenue guidance of 66 to 68 million. Within total revenue, software licenses came in at 36.1 million. While services revenue came in at 34.3 million. Software license revenues declined 20% year over year, but again increased 16% sequentially. While our services revenue was down 22% year over year, but up 4% sequentially.

As a reminder, it is not a true apples to apples comparison when you look at the year over year changes in services revenue. As Q4 of last year included revenue from our operated training business, that we have since divested as part of the FTC settlement. As a reminder, that business represented approximately 18 million in services revenued, during the fiscal 2004 period, and a small amount of license revenue as well. What is significant, however, is that after four consecutive quarters of sequential declines, our services revenue increased sequentially over Q3. In line with the expectations we set in last quarter's call. And we believe our services revenue will continue to grow during fiscal 2006.

Total GAAP costs and expenses were 93.9 million in the quarter. Our non-GAAP total costs and expenses in the fourth quarter were 71.3 million. This was above our guidance of non-GAAP total costs and expenses in the range of 66 million for the quarter. And the overage was due to a couple of factors. First and foremost, the R&D number was approximately 1.5 million higher than expected. We had expensed R&D rather than capitalized the number of projects up front, as compared to what we had expected to capitalize at the beginning of the quarter. Secondly, slightly more than 1 million came in from higher than expected reimbursable expenses from our professional services business.

Third, we ended the quarter on target from a restructuring perspective. However, within the quarter it took longer to get to the desired head count adjustments. And lastly, in addition to our audit and our Sarbanes-Oxley fees, were higher than we had expected at the beginning of the quarter. While above our plan, our non-GAAP total expense run rate did decline by 11% on a year over year basis. And as I will discuss shortly, we believe we are still on track to hit our Q1 target of 62 to 64 million on its expense quarterly run rate.

Head count at the end of Q4 was approximately 1,300, down from 1,442 last quarter down from 1,600 at the end of the year last year. We expect our total head count to remain flat over the next couple of quarters. Gross margins on licenses were 88% for Q4 up slightly from 87% in Q3. Our services gross margins continued to improve coming in at just over 43%, up from approximately 42% in the prior quarter. In just a couple quarters, we have improved our services margin to its highest profitability in over a year. And we still believe there is room for improvement in that area.

Turning to our operating expenses, sales and marketing expenses in the fourth quarter were approximately 26.1 million, down 9% from a year ago and up 8% sequentially from Q3. Sales and marketing expenses represent 37.1% of our total revenue for the close of fiscal Q4, '05. R&D was 11.9 million in Q4, which was approximately 2.5 million below last year's fourth quarter, but slightly up from the prior quarter. And as I discussed previously, the sequential increase is due to a higher expensing the capitalizing ratio of R&D spent. Our R&D represented 17% of our revenues for the fiscal fourth quarter.

G&A costs were 13.3 million in the quarter. There were a number of one-time and nonrecurring cost that hit the G&A this quarter. When you exclude these costs, our true G&A run rate was approximately 10 million. And does not reflect the full affect of the back-office cuts that were implemented in May and will be realized from an expense run rate basis in this coming quarter. While our total cost and expenses were higher than we would have liked, our revenue upside helped to offset this overage. And as a result, on a non-GAAP basis, we reported the Q4 operating loss of approximately 900,000.

You will note that we recorded a tax provision of 3.6 million. This was due in part to taxes in foreign jurisdictions that were not covered by our overall net operating loss carry forwards in the North American region. And as well, as part of our year-end close process, we determined that we needed to increase our Q4 tax rate to true up for what turned out to be a much greater than expected international profitability for the entire period. As a result of the tax expense, our non-GAAP net income was break even, compared to non-GAAP net income of 7.6 million from a year ago. Our non-GAAP earnings figures are based on fully diluted share count of 87.6 million shares, which includes the impact of the Series D Preferred Stock. We have showed our non-GAAP earnings per share with a tax provision of 25%, which is the rate we communicated in our guidance.

And these results provide for non-GAAP earnings per share of roughly break even. GAAP diluted per share figures, are based on a fully diluted share count of 42.9 million shares and exclude the Series D Preferred Stock. On a GAAP basis, the net loss applicable to common shareholders totalled 29.8 million. With a diluted per share loss of $0.69, compared to a GAAP net loss of 40.1 million or $0.97 per diluted share in last year's fourth quarter. The current quarter's GAAP results include 3.7 million of Preferred Stock dividend and discount accretion as a result of the Series D Preferred Stock offering.

Turning to the balance sheet. We ended Q4 with 68.1 million in cash and equivalents, which is down 1 million from the previous quarter. This is a significant accomplishment given that we paid off approximately 57 million of convertible debt. And incurred one-time cash payouts for legal, for audit fees and for severance in the Q4 period. The sale of our installment receivables, which we announced on June 15, was the primary source of these funds to retire the debt. We are now in a position to build cash as we go into fiscal 2006. Net installment receivables on the balance sheet, totalled approximately 24.8 million in Q4, which is down significantly from 86.2 million at the end of Q3 this prior quarter.

Going forward, we expect that installment receivables will represent a much smaller percentage of our overall assets than it has historically on our balance sheet. You will notice a new line on our balance sheet titled, Retained Interest in Sold Receivables, in the amount of 16.7 million. As part of our installment receivable transaction, we provided a pool of receivable that's was greater than the net cash proceeds that the Company receives. This line item represents Aspen Tech's interest in these receivables. And this line item will transition back into the regular installment receivable category once the investors are paid in full. Which we expect to complete in calendar 2008.

Our DSO's for billed receivables for the fourth quarter was 67 days, down 9 from our prior quarter. And if you include the unbilled receivables, our DSO was 79 days. Our deferred revenues and unearned revenue, for the quarter, increased 13% sequentially to 58.3 million. This increase was driven primarily by strong quarter maintenance renewals. In addition to a few deals where we bundled licenses and services together, which required revenues to be recognized as the projects were completed on a percentage of completion basis.

Before turning it over to the Q&A back to Josh; I would like to provide fiscal 2006 first quarter guidance. In Q1, we anticipate revenue to be in a range of 62 to 64 million. It is worth noting that we have had large multimillion-dollar deals that have impacted quarterly results in the past. And we have a material number of large deals that could close during the current and subsequent quarters. The timing of these large deals can skew quarterly results, so we try to do our best to minimize our downside exposure during our planning process. From a cost perspective, we expect non-GAAP total expenses to be approximately 62 to 64 million in the September quarter. Leading to a non-GAAP profitability of roughly break even. As we stated on our last conference call, we continue to expect our quarterly non-GAAP expense run rate to decline slightly from Q1, '06 to Q2, '06.

In summary, we are encouraged by the top line performance that was above our expectations. As we enter fiscal 2006, we are gaining traction with our aspenONE solutions as Mark alluded to. Our balance sheet is substantially stronger. And the actions that we have already completed by the end of the past quarter, should drive expenses significantly down heading into the quarter one period. As we had hoped, we are entering fiscal 2006 in a much better financial position. So with that, I'll turn it back over to Josh and we can start the Q&A process. Josh?

Please assemble the Q&A roster.

[OPERATOR INSTRUCTIONS] Your first question comes from Philip Rueppel with Wachovia Securities.

Hi, Good afternoon. A couple things. First, I was a little bit - - I know you talked, Mark, about the progress you made on the operational issues that you identified last quarter. But I couldn't get the feel for the sort of percentage of completion. It sounds like the head count's pretty much done. But has the marketing and sales reorganization taken place? And can you give us a little perspective? Are you entering fiscal '06 with all of that behind you? Or are there still things to be done? I know you mentioned that there are facilities that remain to be closed also.

All of the operational initiatives we outlined on the call a few months ago are either complete or in process to be complete. The reorganization and the verticalization of the Company took place in May. So we're now through the end of the fiscal fourth quarter. We're working on obviously finishing that off. And as we entered the new fiscal year that was substantially complete. As you could expect, anytime that you are in a transitionary period, we have some folks moving between job functions and we have some hiring to do in very us parts of the world. But all the operational initiatives that we set out to do are in action. The organizational structure is set. And we are moving forward and we started on July 1 in the new fiscal year.

Okay. Second of all, sort of on the sort of product and revenue side, it looks like you are getting some traction in placement of aspenONE and it sounds like the funnel is building. Can you give us some perspective of - - and it certainly looks like chemicals was strong but you started to at least get some deals in the petroleum segment. Could you give us some flavor around industries. And then maybe as a corollary, I noticed you didn't give guidance for the full year. Is that sort of saying that you are still - - it is still too lumpy a business to be able to put a forecast around the next 12 months? Thanks.

As far as the products go as we have just announced - - just now started to sell in the last couple quarters, The aspenONE solutions. We're very pleased with the traction that we have gotten. As you may recall in our Q3 conference call, we outlined to you we had about 10% of our software license revenue was aspenONE related. It was down slightly in the Q4 period. But when you add in the deals that we outline with British Petroleum and Lyondell, it was substantially above what we had achieved in the past. So, we are quite pleased with the ramp that we are getting with aspenONE, with the traction that we're getting. And certainly the customer that I'm speaking with are quite interested in our integrated applications and solutions. And we believe that that will be material for us as we go forward.

As far as the vertical industries go, engineering and construction has been a pretty consistent performer for us for the entire fiscal year. And we continue to get good visibility in that space and lots of activity in our sales pipeline. The chemical business, as we have talked in the past, from an operations perspective, most of our customers are starting to do quite well. And have announced material improvements in their operating. And we;re starting to see some of that trickle down into initiatives that maybe have been postponed in the past. That they are starting to be interested in. And all the while, the solutions that we're providing - - our vertical solutions are all about making their businesses more efficient. So, while they may have better operating results and cash flows, they are very much interested in improving their business and maybe some areas that have been postponed in the past.

And from the petroleum perspective, it continues to be a core market for us. We continue to do quite well in it and the end markets are obviously quite strong. And we believe that the customers are now starting to see, as BP did, that getting a better handle on some of the issues around their inventory, management and scheduling can provide a material benefit for them. As they try to work their way through a very lumpy environment for pricing of crude. And with all the shocks and disruptions that we have seen not only in this country with refining, but other parts of the world. So, we're quite pleased with some of the performance and progress that we've made. We have more to do. But we expect that things should be moving forward at a nice pace for us.

As far as our full year guidance, we didn't give any full year guidance on the call. And that's really - - we're just getting started, getting some traction on understanding where this business is at. And I'm only in - - only in my third quarter here as the CEO and we didn't want to get ahead of ourselves. It is important that we meet or exceed the expectation that we set for you. And we thought we were a little ahead of ourselves to give full year guidance. That doesn't mean we won't sometime late they are year, but for right now we will give you the Q1 guidance.

Great, thanks very much.

Your next question is from Richard Davis with Needham & Company.

Hi, thanks. So, as an outsider kind of looking at the opportunity that you guys have, I think most of us all understand that your customers are doing well in terms of profitability in a general sense. Is there a way that you could kind of talk to or characterize the size of the opportunity that you're looking at? And I know it's really hard to pin down when these guys are going to sign deals and stuff. But is there a way to look at it as an outsider in terms of; should we look at the revenues of these companies and they say, well they could spend x amount? Or just try to - - is it bigger than a bread basket and even orders of magnitude? That would be a big help to kind of help us put our arms around this thing.

Thanks for the question, Richard. I think it is very difficult, as we have talked in the past, to have a one to one relationship between operational performance of any of our end user customers. And what may trickle down into the capital spending into our space. There is a, we believe, a large revenue opportunity for us both in the license space and in the services space as we start to get some traction with with our aspenONE solutions. As we have talked in the past as we get some more traction and as we get more visibility and more marketing in sales activity around these solutions with our customers.

And I think it is important to note here, Richard, that no customer really wants to be the first one to take on one of these new solutions. We now have landmark, I would say customers, that have taken the first step with us because of the benefits that it will provide them. And we believe it will provide us some traction going forward. We have multiple modules for aspenONE that are done or are in the process of being completed and we think these will be material. We have talked in the past about revenue opportunity for aspenONE over and above the point solutions that we have provided in the past. And while it is difficult at this time to exactly pinpoint what those are going to be; we believe that there is significant upside over and above what we have sold them already in both license and services.

As far as our point solutions go, as you can see from our engineering business, it continues to be a strong business for us. There continues to be lots of demand for both our engineering solutions and some of our manufacturing supply chain solutions such as planning and scheduling. We are pleased with that and we think there is some upside there as well, as more refineries come onstream in Asia and other parts of the world. So, we are quite pleased with the positioning of where we're at. But it is difficult from the outside, I'm sure, to bring some real clarity.

We are, however - - both Mark and myself spend a great deal of time with the customers. And we are see something very good signals. And that is they are doing reviews on the Company Aspen Tech. which at an opportune time for us to strengthen our financial position. These companies, the large petroleum companies in particular, go through a very strong diligence process when they are looking at major investments. So, there are some good signals out there as we look at our future pipeline. However, these companies are not known to spend immediately when their profits are as high as they are. But they are showing some good signals in our space of the business right now.

Got it. Well, I'll use 0.5 billion for '07 then.

That's perfect.

That's nice and conservative. No. And the last question will be, has there been any Katrina impact? Have you seen any affect at all on decision making cycles or anything like that?

We have not seen any decision making change as it relates to any hurricane here or any storm anywhere else. It is business as usual for us. And we continue to sell and serve our customers as required and as needed. And the opportunities are there. And it is our job, obviously to go get them.

Got it. Okay. Thank you.

Your next question is from Andrew Matoran with Bear Stearns.

Thank you very much. Could you give us a little bit more insight into kind of what your margin goals are both on the services side and the license side? Obviously there has been an uptick there on both those areas. And kind of where you think those margins should be near term and longer term?

Well, in the license base you are right. We are up a little bit this quarter. And that is primarily, as we have talked in the past about just a mix of the software that we happen to sell in that particular quarter And some of the expenses that we have in it and some of the depreciation expense in that line. As far - - so we expect it will hold steady and in a perfect world, obviously, we would like to see it draw closer to 89% to 90%. From the services perspective, we have come from a long way back in the high 30's for services gross margin. We talked about in the past that we wanted to continue to see sequential improvement in services gross margins. We have seen that so far. And I have stated that I believe that we should be in the high 40's for services margin. And ultimately we may be able to achieve 50% or more, but that seems to be out a bit in the future.

We are doing all the things that we need to do in the services space to improve our utilization, improve our pricing on our projects and improve our execution. Make sure that we are doing the things that we need to do in order to get some traction and some leverage in the space. Early returns are good. Although when you look at the year over year basis for utilization, they are clearly down from what they were in the past due to some, let's say, not as good performance in Q1 and 2 in the last fiscal year. So we're working quite hard in that area.

I expect our utilization rates to be recovered for this fiscal year solidly into the 70+% range, which is up about 10 points from what it has been in the past. And that will drive some nice gross margin performance going forward. As well as with improved revenues that we started to see and on a sequential basis from Q3 to Q4. We expect that that trend will continue and that we'll start to see some nice revenue growth in that area as well. So, while we're not exactly in the sweet spot or in the pleasure zone in the services business yet, we're making steady progress. And the team is doing a very nice job at working to identify their issues and move the business forward.

So, would you say you are ahead of plan on improvement in services or at plan?

I would say we're right about where we want to be when we look at what we have for head count on billing, what we have for projects that get booked into backlog from Q3 and Q4. And our start to this quarter. So, I think we're right on the target for where we want to be. The utilization rate is - - continues to improve on a month by month basis. And it gives us a belief that we're moving in the right direction on all fronts. That we're making our investments as appropriate. That we are engaging partners to work with us in this space as needed and as appropriate. And we are building a nice business back from something that I don't think was - - it should have never been where it was. But I think we are moving in the direction that we want to be. And I think the leadership of our global services group and our services groups in each one of our regions is doing a nice job to bring things back.

In addition, the two mentioned aspenONE transactions carry with them a tremendous amount of consultancy work. And the pipeline is filling up on this more visible consultancy business. So that should also improve our overall business in this area.

Okay. And then on the R&D expense you had mentioned that they were higher than you anticipated. What do you expect going forward there? And also in G&A I think you had - - on your last earnings call you had spoken of a target of about 8% of revenues and had indicated that the expenses were a little higher than anticipated this quarter. Kind of looking forward, when do you see that you would get to that 8%?

What we said is we are preparing to get into fiscal 2006 at those levels. And that's what we accomplished during the quarter with just our head count down. But with realization of that adjusted cost run rate will not happen until Q1. With regards to R&D, as I mentioned in my comments, we did capitalize less R&D this past quarter. You will see in the balance sheet a sequential decrease in cap software on the balance sheet and this is the result of amortizing more than what was capitalized. We expect that with the phase in which we are at, with aspenONE development, that capitalization rate will return with what has traditionally been. And we expect our overall R&D run rate to once again come in line with what we had expected at the beginning of last quarter. So, we look towards a 14% to 15% run rate on R&D. And we still are driving the business by streamlining and centralizing back office operations to get eventually to an 8% G&A level.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question is from Robert Schwartz with Jefferies & Company.

Yes, I just wanted to make one clarification. First, is the guidance for $10 million of G&A, does that include the full impact of the staff reductions? And do you think given this surprise you have had in accounting and legal expenses this quarter, that you'll be near that level next quarter?

Yes, we do.

And it does include the full impact?

It would actually be slightly below that number.

Okay, good. We've heard in the past some discussion about being able to do something about maintenance pricing, that it hasn't gone up enough. And I'm wondering if you have given any thought as to where that might be going? And if you've started any processes of trying to raise maintenance prices on some of your longer customers that have been paying low rates?

The pricing in the Company in a lot of different areas hasn't changed dramatically over time. One of the things that did happen at the end of fiscal fourth quarter as we started to sell and represent our products and our solutions differently in the marketplace, obviously our pricing had to change. So we have undertaken a change in our pricing as we look at how we sell our margins and point products from a product and a licensing perspective. The same can be said for the services business, that we're undertaken that as well. We are now in the process of assessing really the overall pricing policy of the business. Not only in continuing to look at the licenses and the services, we are starting to look at our SMS revenues as well. Those also have not changed over a period of time. And they may or may not be appropriate as going forward but at this time they remain level with the past.

Could you give some characterization of the pipeline and the business out there? Are you seeing larger deals now that were - - your customer margins - - their own margins, for some, are at record high levels. And I am wondering if you are starting to see more - - you should have visibility of just about big deal that's out there. More big deals starting to pop up.

I think we are seeing a couple of different things. I think we are seeing overall robustness in the pipeline in general when we look at and back tested on a year over year basis. We're also seeing larger deals as it relates to interest to interest in our aspenONE solutions. By definition, they tend to be more enterprise-like. And therefore, they're larger as it relates to their licenses and their services components. So, I think that is a fair assessment that the end users in our space in all the major markets that we are targeting are interested in our solutions. And because they're larger solutions in general, we are seeing much greater interest in larger deals, more complicated deals. And that's both - - that's a very good thing for the Company. But as you can imagine, it also provides some lumpiness to the revenue flow, which is why we are conservative in our guidance going forward.

Do you have the sales resources to close those big deals ? Do you think you have the talent to do it?

I think we do have the talent to do it. We talked in the past about our transitioning of our sales force to selling more larger enterprise-like transactions. I think that is coming along relatively well. We have undertaken a number of different training initiatives in the first calendar half of this year, which we think is starting to yield some results. And some of which you have seen today on this call. And the larger deals that we have chasing and actively involved in, in general, we are doing very well against our competition. And we have the products and solutions that our customers are asking for. And the vertical expertise in those spaces that most of our competitors do not have. So, I think we do have the right team in place. It is always a work in progress. And we will continue to enhance and enable our sales force as we - - as best we can. But we think we have good team in place and we're moving forward as we should be.

And my last question is, I have had a couple of conversations with different investors. And sort of the tenor of the conversation always comes down - - well, the nub of the conversation always comes down to; given where oil prices are and given where margins are for a chemical refinery, if Aspen can't make money now, when are they ever going to make money? And it is a tough question, but the real question, I'll turn it to you, how do you respond to that if investors were to ask you?

I think you have to go back to the initiatives that we outlined on the call several months ago. Which, we obviously need to execute better. We have a number of strategies and execution plans in order to streamline our business and focus ourselves so we can do that. We have verticalized the Company around our major markets that we serve. And that helps us not only provide solutions for them that are integrated, but helps derive product cycles that are integrated as well. So, I think that's an important start.

We've improved the balance sheet, which gives us a much better place to begin our discussions with most of our customers. Because they are large and risk averse and they are making large bets on our Company. So, it is important that we are a stable Company going forward. And the integration of all the past acquisitions while the plans are in place and the execution is unfolding. It started, really, the first week of May. These things take some time to wrestle all the costs and gain all the efficiencies that we should have.

So, I think that we are well on our way to having a cost structure where it ought to be. And that we are going to have our products and solutions where we want them to be. And getting traction in the marketplace. And having a services business that is growing for the first time in awhile, with the appropriate gross margins. So I think we're doing the things to reduce our costs, start to get some growth on the top line. And we are committed, as I have stated since my first call, to having a profitable Company. And one that generates meaningful earnings and cash flow.

And if if I may speak on one clarification, I may have missed it. How much of the revenue this quarter - - licensed revenue was from new customers?

Less than 5%. We typically get anywhere from 90% to 95% of our business from existing customers. As we mentioned last quarter, we are focusing a big part of our investment on chemicals and petroleum.

Thanks.

Your next question is from Richard Williams from Garban.

Just following on with Rob's question, because having covered this Company for many, many years, we sort of came to kind of a consensus understanding that when oil prices are at profitable levels and fairly stable, that creates optimal opportunities for storing software into large petroleum and chemical companies. Help us understand what happened over the last 12 months? Where apparently we had the perfect storm only in a very good way for these companies, cracking spreads are rumored to be up to like $40 a barrel. If you can just help me, that would be interesting to hear.

Well, clearly the end users for our products both in petroleum, chemicals, engineering and construction, they are all doing very well. And there is increased spending in plants and adding capacity in some parts of the world. You may recall this Company at the beginning of the last fiscal year, while there may have been the perfect positive storm from an external perspective, we had a number of uninternational Company issue that I think challenged the Company in its execution. Including a change in leadership for the senior management, including sales, And a number of other areas. So, while your thesis I guess is partly correct, it is not entirely correct as it relates to Aspen Tech. And I think where we are at today is these things are now behind us.

We have our team in place and our products and solutions moving forward. And we have really done I think the steps that we need to take to get the cost level of the Company where it ought to be. To focus our investments where they should be. To organize our Company the way our customers buy and in the places that they buy it. And that will include added investments in some of the developing parts of the world. Because we agree with you, there is opportunity in this business and we want to get it. And for the first time in fiscal '06, a lot of external distractions are now behind us. We settled all of our - - most of our legal issues as it relates to the past problems that we have had. And we're really focused, 100% of our time on running our business. So, fiscal year '06 is the time for us to show what we can do and what our products and solutions can do for our customers.

Just a final follow-up, help me understand if there is any change in the competitive complexion of the marketplace over the last year. New entrants with any shift in the traditional suspects ?

No, I think the market is fairly consistent. We continue to see and compete with similar companies and spaces, whether it is our plant operations business, supply chain, engineering. But the strength of Aspen Tech point products and the high visibility of market share that we have in many of these verticals, as well as our integrated solutions are really starting to get some traction in the marketplace. I think there may have been some skepticism last fall when we announced that we were going to integrate our point products and bring this to fruition into solution. But I believe our customers now are starting to be very interested in this because we believe we are right in the operational efficiencies we can bring to them. And we are the only Company right now that is in the process of selling and delivering an integrated solution suite for the plant operation business. And we think we are in the right place at the right time.

[OPERATOR INSTRUCTIONS] Mr. Fusco, I would now like to turn the call over to you for closing remarks.

Thank you very much. I would like to thank all of you for joining us this evening to discuss how we did in the last quarter and for the fiscal year. I appreciate your interest and continued interest in Aspen Technology. We have accomplished a lot in a very short period of time. We're pleased that we exceeded the expectations that we set for you several months ago. We do have a solid operating cost model going forward, which will help us with profitability in our cash flow. And we are starting to get some traction with our new solution strategies for aspenONE. Our balance sheet is now clean and solid. And I believe the Company is set up for a very bright future. So once again thank you very much for your time and interest today. Have a good day.

And this concludes today's Aspen Technologies conference call. You may now disconnect.