Aspen Technology Inc (AZPN) 2006 Q2 法說會逐字稿

Good afternoon. My name is Natasha and I will be your conference facilitator. I would like to welcome everyone to the Aspen Technology fiscal 2006 second quarter earnings 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 session. [OPERATOR INSTRUCTIONS] Thank you. I would now like to turn the call over to Mr. Kane, Chief Financial Officer. You may begin your conference.

Thank you, Natasha and good afternoon, everyone. I'm Chuck Kane, CFO of AspenTech, and with me today is Mark Fusco, the President and CEO. I'd like to welcome you to our fiscal second quarter 2006 financial results conference call. 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 November 9, 2005. Also, please note that the following information is related to current business conditions, and our outlook as of today, February 7, 2006.

Consistent with our prior practice, we expressly disclaim any current intention to update this information prior to release of our third quarter financial results, which is scheduled for sometime in late April or early May. 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 importance, as well as the full reconciliation with the corresponding GAAP numbers. You will also see the reconciliation to GAAP in our press release. The structure of today's call will be as follows: I will begin with the financial details of the quarter, Mark will then comment on what is driving our results, and I'll finish by providing an updated guidance before turning it over to the Q and A session. We were extremely pleased with the Company's performance during the December quarter. This quarter was the first time we realized the potential of our improved cost structure combined with a strong revenue performance. We made significant progress improving our financial profile and operating infrastructure and it culminated in the December quarter with the highest level of pro forma profitability since AspenTech went public in fiscal 1995.

Total revenues for the second quarter were $76.4 million, representing 7% growth on a year-over-year basis. Within total revenue, software licenses came in at $41.7 million, its highest level in a year and a half, while services revenue came in at $34.7 million. Software license revenues increased 13% year-over-year and 71% sequentially, while our services revenue was down 1% year-over-year, and 3% sequentially due to typical December quarter seasonality. Excluding prior period services revenue associated with the operator training business, which we sold in December 2004, our services revenue was up 2% on a year-over-year basis.

In terms of details, we closed six transactions in excess of $1 million during the quarter, compared to two in the prior quarter and eight in the prior year. In addition, we closed 17 transactions between $250,000 and $1 million during the quarter, as compared to 19 transactions of this size in the prior quarter and 18 in the prior year. Our average sales price this quarter was $600,000 compared to $400,000 in the prior year. As a reminder, we quote our average sales price based on transactions that are above $100,000. Before turning to the cost of revenues and operating costs, I'll remind you that we adopted FAS 123R at the beginning of fiscal 2006.

We will be providing non-GAAP measures of each 2006 expense category, which excludes the stock-based compensation charges in order to provide comparisons to prior periods which do not include such charges. All comparisons will be using the non-GAAP current period results.

Gross margins on licenses for the quarter were 90% an increase from 84% in the prior quarter and 87% in the prior year. GAAP and pro forma services gross margins were 49% for the quarter. It increased from 37% in the prior year and a slight decrease quarter-to-quarter.

Services margins were in line with our expectations and the 50% long-term target we stated in the past and which we achieved in the first half of this fiscal year. The following were expense levels determined in accordance with GAAP. Sales and marketing $20.6 million, R&D, $11.8 million and G&A, $9.9 million. For the second quarter, our GAAP income from operations was $8.9 million. For the December quarter the net income applicable to common shareholders was $4.3 million and the resulting GAAP diluted earnings per share was $0.08.

Turning to non-GAAP profitability, which primarily excludes the amortization of intangibles associated with past acquisitions, stock compensation costs and restructuring costs, our pro forma total cost and expenses were $63.1 million in the quarter, a 10% reduction on a year-over-year basis. This was above our guidance of non-GAAP total cost and expenses in the range of $60 million to $61 million. We were, however, pleased with the Company's execution on expense management as the majority of the expense overage was related strong top line performance in the quarter. Within total operating expenses, sales and marketing came in at $20.4 million, or 27% of revenue. This was down from 32% of revenue in the prior quarter and 33% in the year ago period.

The quarter-to-quarter absolute dollar increase in sales and marketing was driven primarily by increased commissions due to the significant sequential increase in licenses revenues during the quarter. R&D was $11.5 million, or 15% of revenue, which is down from 17% of revenue in the prior quarter and 16% from a year ago. The quarter-to-quarter absolute increase in R&D was related to investments in our aspenONE solution suite, some of which costs not eligible for capitalization. Our G & A expenses came in at $9.1 million, or 12% of revenue. This was down from 13% of revenue in the prior quarter and up from 11% from a year ago.

The quarter-to-quarter absolute increase in G & A was due to employee bonuses and further solidifying our balance sheet. The combination of top line overage and a tight focus on managing expense growth enabled the Company to deliver a non-GAAP operating profit of $13.3 million, or a margin of 17%. This was ahead of our guidance of $10 million to $11 million. Non-GAAP net income of $12.5 million was the highest level of profitability in over a decade, and it led to non-GAAP diluted earnings per share of $0.14, based on a pro forma fully diluted share count of 89.1 million shares. This was $0.05 better than the high end of our guidance.

Turning to the balance sheet, we ended Q2 with $57 million in cash, up from $48 million at the end of the prior quarter. The increase in cash was driven primarily driven by the strong net income we generated during the quarter. In addition to a $9 million increase in our cash balance, we also saw a $12 million sequential increase in our installment receivables balance at the end of the quarter. Our long-term strategy of monetizing our installment receivables balance remains the same, and if we are successful in executing against our operational plans, we believe we will continue to generate material cash flow on a go-forward basis from this line item.

Our DSOs for build receivables were 53 days versus 68 in the prior quarter. If you include the unbuild receivables, our DSO was 64 days versus 84 in the prior quarter. On the liability side of the balance sheet, we remain virtually debt free. In addition, total deferred and unearned revenue ended the quarter at $59 million, up from $56 million at the end of the prior quarter and $51 million at the end of the year. Within this number, unearned revenue increased $7 million, partially as a result of several aspenONE bookings in which we deferred recognition of revenue.

This is in line with prior comments we have made regarding the positive impact of aspenONE sales could have on our balance sheet from time to time, and it is noteworthy given that it comes on top of the license revenue number that was materially better than our expectations this past quarter. On this note, let me turn it over to Mark so he can provide more qualitative perspective on our December quarter performance. Mark?

Thanks, Chuck. The December quarter marked the end of the first year, of my first year as CEO of Aspen Technology and I'm pleased to report we were able to successfully return the Company to material top line growth while delivering the highest level of profitability in the history of the Company. Not only did we see a record performance from a P&L perspective, but as Chuck just went through, we also continued to strengthen our balance sheet and cash flow. From top to bottom, the December quarter was solid. License revenue, services margins, overall expense management, cash, deferred revenue and aspenONE sales.

The dramatic improvement in the Company's financial profile over the past 12 months is a direct result of the hard work of AspenTech's worldwide employees and the tremendous loyalty and support of our customer base, without which none of this would be possible. I am optimistic about our outlook due to the fact that our end markets remain strong. AspenONE is gaining momentum, customers are confident about doing business with AspenTech again, and our execution has improved considerably.

For the first nine months of my tenure as CEO, much of my focus was on cleaning up the Company and reestablishing relationships with our external constituents. During this time frame, we revamped our management team, completed the restatement of our financials, eliminated our convertible debt, realigned our organization around key verticals, and lowered our expense structure.

The foundation of the Company has been solidified, and as we stated on last quarter's conference call, our focus in the December quarter and moving forward was on restoring and sustaining top line growth. The strength of our end user market, should help us do just that, combined with the fact that we have the customers, products, and proven track record of delivering business benefits through the use of our solutions.

Even during the toughest times for AspenTech, our customer satisfaction ratings were best in class, as were renewal rates on our term licenses. Our great customer base helped the Company make it through a very difficult past couple of years, and the strength of our December quarter results is an indication that they are feeling more comfortable investing in significant new projects with AspenTech after witnessing the progress we have made and listening to the strategic direction of our Company.

If we take a look at the details of our December quarter, results were solid across both verticals and geographies. From a geographic perspective, we saw solid performance across all of our major segments, North and Latin America, Asia Pacific, and EMEA, as well. In addition, we saw particular strength in our global accounts team during the December quarter, including a major aspenONE deal. During the quarter, aspenONE solutions represented roughly 30% of our license sales. This is by far the best aspenONE quarter since we brought these new integrated solutions to the market and it supports my belief that aspenONE will be the most successful product launch in the history of the Company.

Due to the large deal sizes, there will always be variability in our quarter-to-quarter metrics, but over the longterm we believe aspenONE could represent 20% to 25% of our license revenue. This is a major opportunity on top of our recurring engineering plan operations and supply chain businesses. From a vertical perspective, we saw strength in both chemicals and energy, while engineering and construction, once again, represented our third largest license contributor.

Evidence of the balanced demand we saw in the quarter is the fact that of our eight top deals three were in energy, three were in chemicals, one was in engineering and construction, and one was in pharma. The December quarter represented the second quarter in a row that we delivered strong results from the energy sector. The end user fundamentals continue to be strong and we see energy companies increasingly looking for ways to improve their efficiency as they look to increase their capacity and improve year-over-year profitability, which are already at record levels.

Our unmatched domain expertise in the process industries, combined with unique integrated aspenONE solutions makes AspenTech the clear choice for these customers. For the past several quarters, we have spoken about our relationship with BP and the potential for substantial follow-on business down the road. In the December quarter, we significantly expanded the scope of our aspenONE rollout with BP in which we received our first major aspenONE inventory management license sale. This win with inventory management is an important first step in our rollout of aspenONE for energy. We anticipate future industry opportunity as a result of our success with BP. During the December quarter, we also closed significant business with Chevron-Texaco, China Petroleum and Chemical Company, and Repsol Petróleo in the energy vertical.

Mostly related to energy, the building of new plants abroad is driving demand for our solutions in the engineering and construction vertical, and during the quarter we signed a significant deal with Jacobs Engineering. Once these plans come online, we believe we'll be well-positioned to sell aspenONE solutions to the process companies to help them optimize the operations of those plants. During the December quarter, we continued to see solid results out of the chemical sector, and for the past year it's been established as a reliable source of revenue.

We believe most major chemical companies are still in the early stages of implementing systems that optimize their operations. In most instances, these companies have completed the ERP rollouts and are beginning to focus on end-to-end optimization at the plant level.

In summary, we were very pleased with the second quarter results, we exceeded our guidance, returned top line growth and delivered record pro forma profitability. AspenONE continues to grow at a healthy pace and it is in the early stages of rollout in our very large and loyal customer base. With that, let me turn it back to Chuck to review our updated guidance.

Thanks, Mark. Before turning it back to Natasha for Q and A, I would like to provide some fiscal 2006 third quarter guidance. From a revenue perspective, we expect to see total revenue in the range of $70 million to $72 million in the March quarter, which would represent another increase in our year-over-year growth rate to approximately 10%, which was our long-term target. We would expect to see a slight sequential increase in our services revenue during the quarter with the remainder coming from license sales. To reiterate from prior calls, large multimillion dollar deals have impacted quarterly results in the past and we continue to have large deals in our pipeline.

The timing of these large deals can skew quarterly results at times, but we do our best to minimize our downside exposure during our planning process and forecasting. From a cost perspective, we expect non-GAAP total expenses to be approximately $62 million to $64 million in the March quarter. This would lead to non-GAAP EPS in the range of $0.06 to $0.08. So in summary, we were extremely pleased with our December quarter results, which exceeded all of our targets. This quarter showed the operating leverage potential of our new business model and we are very optimistic about our ability to sustain our return to growth and to continue to drive profitability going forward. So with that, Natasha, I'll turn it back to you for Q & A.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q & A roster. Your first question comes from the line of Philip Rueppel with Wachovia Securities.

Great, good afternoon, guys, and congratulations on the quarter. A couple of questions. One on the license strength. Can you give us a little bit of color around sort of where you saw the upside? Were there some new customer wins, or at least new installations at existing customers, or was it really just expanded usage or particularly high renewals in the quarter?

It was a combination of a variety of factors. All parts of our business were strong, our engineering business was strong. Our plant operations and supply chain business were also strong. We had the first quarter where we had some material aspenONE revenue on the license line, which we really haven't seen to this great extent in the past. We expanded some of the business, you know, a little bit more than maybe we had anticipated. Overall, we had forecasted for you that we had a strong pipeline coming into the quarter and that we expected this would be a good quarter for us and in fact, it turned out to be so.

And in terms of sort of the big deal pipeline, you know, your guidance suggested that you still have plenty, at least in the funnel, is that true? Or was this? You talk about the variance in multimillion dollar deals. Was this quarter, the fourth quarter, or the December quarter, was that higher than expected? About as you expected? And what's sort of the outlook into calendar '06?

We continue to build our pipeline, Phil, and the timing of these large deals and when they come to fruition is what I'm referring to in that comment. But we're very pleased with our pipeline, particularly as it relates to aspenOne opportunities, and we expect pending any sort of timing that the continuation of the growth will remain.

Great, thanks very much.

Sure.

Your next question comes from the line of Jon Maietta of Needham & Company.

Thanks very much. Chuck, I just wondered if you could repeat something. I think I missed it at the beginning there. Was it 18 deals between $250,000 and the million in the quarter?

Yes, I believe it was 18 deals as compared -- actually 19 deals this past quarter compared to 18 last quarter.

Got it, and what was cash from operations in the quarter?

Cash from ops was plus $9 million.

Okay. And Mark, just a little bit of comment there around the pipeline with respect to supply chain and engineering, is that pretty healthy all around?

I think as we've grown and matured over the past year, we have better execution and better visibility into our sales pipeline. I think we're managing it better. We have strength across all parts of our business. And we're particularly pleased with, you know, what happened last quarter with our aspenONE sales, and with the interesting opportunities we have going forward. So it was pretty much across the board, a solid performance from all of our product groups and our verticals and our geographies. It was solid everywhere.

Great, thanks very much.

Your next question comes from the line of Robert Schwartz with Jefferies & Co.

Thank you very much. My first question is really a clarification. I think you said you did about 30% of license sales in aspenONE products this quarter, which is a great number. And then you followed up, Mark, by saying that you thought in the future it could be 20% to 25% of the business. And I guess maybe you could help me understand why it wouldn't be a bigger number? And why more and more products wouldn't be coming under the aspenONE rubric?

Rob, I think if you've seen in the past, we've been fluctuating in the past quarters between 5% and 10% of license revenue being from our aspenONE product line. This is the first quarter that we had really a large and substantial increase, you know, on a percentage basis. What we said all along is that we expected aspenONE to be an additional 20% to 25% revenue opportunity for us, you know, in the longterm. As it turns out this quarter, we were able to bring some of these deals and finish them off in the December quarter. You know, it isn't always going to be 30% going forward. We feel comfortable with our target of 20% to 25%. If that changes, we'll update it for you going forward.

Okay. And then questions for you, Chuck, about the balance sheet. Your long-term installment and receivables really jumped and that represents something you can sell in the future, and talked about something that you had managed. I wonder, is there a target you manage to there? And then also, could you speak to the fact, you had these, you know, these very strong unearned revenue, which I expect to come off the balance. Could you give us some sense of when that might come off the balance sheet?

Yes, the first question related to the installment receivables, some of that is timing. Deals that are done towards the end of the quarter from a timing perspective, we package these up in portfolios and, some of which have already been sold subsequent to the end of the quarter. Our longterm goal is to continue to sell as much of that line as we can, but from time to time, as we've mentioned in the past some customers refuse to allow us to sell paper to third parties, and some geographies are not active with the third party providers that we have. So there will be some line item there ongoing, Rob, with customers that we've had for many, many years so we know the viability and such of the customers. The second question, I'm sorry, the second question related to?

You had --

Unearned revenue. The unearned revenue line. What you will see and what reference was made in the commentary was that as aspenONE becomes more and more a part of our revenue flow, you will see from time to time unearned revenue going up as we defer some items that in combination with licenses there are consultancy assignments. So we will be taking some of that revenue more radical than we have historically, and the jump in that line relates just to that.

Okay. And when we're talking about, just one last question, when we're talking about aspenONE, are we talking about infrastructure per se, it seems to me you have a lot of products carrying the aspenONE, or a growing number of products that are going to be carrying the aspenONE rubric and brand. Shouldn't we expect that, I guess I'm going to come back to that, shouldn't we expect that to be just a bigger and bigger piece of the business? Or am I missing something here?

I think at some level, Rob, you could say that in all of our portfolio is of products is somehow related to the aspenONE modules that we sell. But the way we're forecasting and looking at the business, we have an ongoing, sustainable engineering plant operations and supply chain business where we sell point solutions and we sell our services, you know, consistently as we've done in the past, and then we also have new modules and new opportunities for much broader penetration and implementations in our customer base. So we do segment them specifically and that's why we don't include everything under the aspenONE, you know brand and that maybe part of your confusion.

Okay. And I'm sorry, that was my last question, but I really just had a couple of clarifications. Could you talk about depreciation, CapEx, and tax rate for the next quarter?

The tax rate, we expect to be in the 25% range, again that will fluctuate depending upon where the profitability lands. This past quarter, for instance, we actually had a larger denomination of our earnings falling into the North American region where we have a flow of NOLs to apply against. Depreciation going forward will be somewhere in the $2.5 million to $3 million range and expect that going forward.

and CapEx?

And CapEx is about between $1 million and 2 million.

Thanks, again.

Sure.

Your next question comes from the line of [Anthony Schroenn] with Bear, Stearns.

Hi, thanks very much. Could you just comment a little bit more on the makeup of the pipeline, the new customers versus existing customers and maybe some of the vertical splits, just give a little more flavor as to what you're seeing out there?

We never really comment, specifically, about our pipelines going forward. In the last quarter we had solid, a solid pipeline coming into the quarter and we did have solid performance across all of the product lines engineering, and was about two-thirds of our revenue that's consistent with what it's been in the past. Our plant operation supply chain business was strong, as well.

And as we mentioned from a vertical perspective, and from a regional perspective it was strong, as well. So we feel comfortable going into, you know, the next quarter as we get into the back half of this fiscal year with the pipeline. We don't get into too much detail forecasting going forward other than to say that we are pleased with it, and as we've said in the past, we have had large deals in our pipeline which we monetized in the last quarter and we also have good opportunities going forward.

Would you say there's been no change in your view of the pipeline then since last quarter when you made the comments that you felt like you had a very strong pipeline?

I think we feel comfortable with our -- we felt comfortable with our pipeline, last quarter and we feel comfortable with it this quarter.

Okay. And then can you just comment a little bit more on the improvements in the DSOs, if you expect a reversion to kind of historical norms or --

The historical norms have been in the 60-day range. I think that we made a concerted effort this past quarter in certain geographies that have helped considerably and I would say, though, to expect DSOs to remain in the 55-60 day range which we're pleased with.

Okay, great. Thanks a lot.

Your next question comes from the line of [Dennis Hung] with Concord Adams.

Thank you. A couple of quick questions. First off for Mark, you made a comment in your prepared remarks that sort of after the resolution of all of the issues you guys have overcome in the last year or so, customers are more willing to do business with Aspen and are more excited. I was wondering if you could give us any examples of that in a quarter or, I'm wondering if that's the source of some of the upside you're seeing?

It's possible that's some of the source. It's fair to say when I came to the Company a year ago, we had a number of challenges that were quite public that we were working our way through. Through the hard work of our team here, we've worked our way through them.

I think our customer base, that really does depend on in their operations for our software. They were concerned about AspenTech, they were concerned about the things going on in the Company and about our long-term viability. Those issues are behind us and over.

We're very confident in what we have for a product and solution base and employee base, a services base and we think we're in a strong position as we turn the corner into this next calendar year. And I think our customers are reacting positively to it as we would expect them to.

And I think we've also spent a lot of time, and our people in the field have spent a lot of time with the customers, making them -- giving them information and helping them understand where we're at in our turnaround and I think they're pleased with what they see.

Great. That's helpful, and I guess sort of a follow-on and related question there. As you guys put up some upside here this quarter and you're talking about your pipeline remaining pretty confident here, pretty strong. I wonder if you're seeing a lot of unforecasted business, or revenue in the quarter that really wasn't in the pipeline as you entered the quarter? Any dynamic on that side of it to talk about?

Well, you know, nothing to speak of. You know, we understand, where our revenues are coming from, we have a very solid and blue-chip customer base who has many operational initiatives that they're undertaking, I believe we've improved quite a bit from a sales execution perspective over the past 12 months, which gives us better visibility into what's going on into the field, into our sales, pipeline.

And we've also improved our systems internally over the past 12 months, as well, which gives us additional color on what's going on in our business. So we feel comfortable where we're at, we believe we understand where our revenues are coming from, and they're coming in the way we expect. And we feel comfortable with the pipeline going forward.

Great, thank you.

Sure.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Richard Williams with Icap.

Hi, congratulations on the quarter. Happy to see the turnaround continuing. Can you talk a little bit about your margin assumptions as we go forward? What kind of margin expansion would you expect over the next few quarters?

As you can see from the margin analysis this past quarter we've made some pretty substantial steps forward this past quarter, driven by the top line. But we're now starting to get into a more consistent and more predictable pattern with our operating model. The margins that we're looking at, I would say are going to be consistent on an annualized basis with what we just achieved in this past quarter, but there will be, there'll be from time to time and quarter-to-quarter because we do have seasonal blips in our quarters, in particular the third and first quarters each year differences. But for the most part we're driving towards our longterm objective, over 20% net income margin. And our gross margins that we achieved this past quarter, you should expect to see that pretty much consistently going forward.

Okay. Also if you could talk a little bit about the supply chain marketplace, just how it's changed over the last few quarters up to the current?

Well. It's important to note that in the supply chain space, we are not in all parts of, in every vertical and really a generic supply chain Company, we are in the supply chain business in the process industries and specifically in energy and chemicals.

In that space, we have a very, our number one position in that space worldwide. It's been a strong business for us in the past, this past quarter it was quite strong for us, as well. It not only supports our license business but our services business, additionally. We expect to see, you know, continued traction with some of our supply chain products and both energy and chemicals and occasionally, you know, we get some traction in some of our other verticals, as well.

We're pleased with it. It's a material part of our business, it's important that we have a supply chain business in the process industries to help us optimize what our customers are doing. If you can't optimize and help them optimize their supply chain, you cannot be effective in stringing a vertical solution together and helping them optimize all the pieces of their plant operations. It has been strong, and we expect it will continue to be.

Great. Good luck to you.

Thanks.

At this time, there are no further questions. Mr. Kane, are there any closing remarks?

Closing remarks are again, we're extremely pleased with the progress that we've made in this past year, we're very thankful to our employee base and our customers who remain loyal, and we're looking forward to continued momentum going forward. Thanks to everyone for participating on the call.

This concludes today's Aspen Technology fiscal 2006 second quarter earnings conference call. You may now disconnect.