Aspen Technology Inc (AZPN) 2006 Q4 法說會逐字稿

Good afternoon. My name is Wesley and I will be your conference operator today. At this time I would like to welcome everyone to the Aspen Technology fiscal 2006 fourth quarter earnings call. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Brad Miller. Please go ahead, sir.

Thank you. Good afternoon, everyone. I am Brad Miller, Chief Financial Officer of AspenTech. As many of you are aware, I came on board effective September 19 and I'm pleased to be on the call today with Mark Fusco, President and CEO of AspenTech. I'd like to welcome you as we discuss our final results for our fiscal fourth quarter 2006 in addition to details regarding the conclusion of the restatement process that we disclosed on our September 6 conference call.

Before we begin, I will make the usual Safe Harbor statements 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 our 1934 Act reports. Please note that we submitted our 10-K earlier this afternoon and it is not yet showing up with the SEC website.

Also please note that the following information is related to current business conditions and our outlook as of today. Consistent with our prior practice, we expressly disclaim any current intentions to update this information prior to release of our fiscal 2007 first-quarter financial results, which is currently scheduled for some time in November.

The structure of today's call will be as follows. I will begin with the summary impact related to the restatement of certain prior period financial statements. Then I will pass it over to Mark to review our full fourth-quarter and fiscal 2006 results, focusing on those areas that we were not able to discuss on our September 6 call. We will then open up the call to Q&A.

Let me now begin with the results of our financial restatement. As was discussed on the call on September 6 in connection with the preparation of our financial statements for the fiscal year ended June 30, 2006, a subcommittee of independent directors has reviewed the company's accounting treatment for stock option grants in prior years. Based upon the subcommittee's review, the audit committee & company management determined that certain stock option grants during fiscal years 1995 to 2004 were accounted for improperly and concluded that stock-based compensation associated with the grants in those years was misstated in fiscal years 1995 through 2005 and in the nine months ended March 31, 2006.

The subcommittee identified errors related to the determination of the measurement date for grants of options allocated amongst a pool of employees when the specific number of options to be awarded to specific employees had not yet been finalized and other measurement date errors. As a result of the errors in determining measurement dates, the company has reported stock-based compensation adjustments for $7.2 million in fiscal 2004; $500,000 in fiscal 2005; and $1 million for the nine months ended March 31, 2006.

As a result of the option review, we recorded payroll withholding tax related adjustments of $1.5 million in the fourth quarter. In connection with the review, stock-based compensation charges totaling $50 million for the periods prior to fiscal 2004 are reflected in the July 1, 2003 beginning accumulated deficit. The restatement of prior year financial statements also includes adjustments for the correction of errors identified after the applicable period had been reported. Such errors were not previously recorded because the company believed the amount of any such errors both individually and in the aggregate were not material to its financial statements.

As it relates to the first nine months of fiscal 2006, compared to previously reported results, the correction of other errors resulted in an overall increase in net income attributable common stockholders of $2.5 million.

Now I would like to turn the call over to Mark to review the full financial results for the fourth quarter and fiscal year 2006. Mark?

Thanks, Brad. As we previewed on September 6, we were very pleased with the company's performance during the June quarter and for 2006 as a whole. Looking at the details of the fourth quarter, total revenues were in the $79.2 million range, representing a 10% growth on a year-over-year basis. As we discussed on the last call, software licenses drove our growth in the quarter, coming in at $44.4 million and increasing 20% year-over-year.

Turning to costs and expenses, gross margins on licenses for the quarter were 91%, an increase compared to 89% in the prior quarter and prior year's quarter. Services gross margins were 46% in the prior quarter but up from 44% in the prior year's quarter. GAAP total costs and expenses were $70.8 million for the fiscal fourth quarter and slightly above the high end of our $67 million to $68 million guidance. Within the $3 million increase in expenses, approximately half of the increase was related to the restatement of stock compensation and related expenses.

Better-than-expected revenue led to fourth quarter GAAP income from operations of $8.3 million or a margin of 11%. In the year ago period, the company reported a GAAP loss from operations of $22.8 million. GAAP operating expenses in the fourth quarter of fiscal 2006 included $1.7 million related to non-cash stock-based compensation; $1.5 million of payroll tax related charges resulting from the stock option review; $1.7 million related to non-cash amortization of intangibles associated with previous acquisitions; and approximately $700,000 related to restructuring charges and the loss on sales and disposals of assets, which combined to reduce the company's GAAP operating margin by approximately 700 basis points.

GAAP net income applicable to common shareholders was $2.9 million in the fourth quarter of fiscal 2006 including the impact of $3.9 million in accretion of preferred dividends. In the prior year period, AspenTech reported a net loss of $30 million including the impact of $3.7 million in accretion of preferred dividends. GAAP net income per share applicable to common shareholders on a diluted basis was $0.05 for the quarter ended June 30, 2006, compared with a loss of $0.70 in the same period last year.

Our fourth quarter GAAP EPS of $0.05 was in the $0.05 to $0.07 guidance EPS range we provided on our third-quarter results conference call; however, it is important to note that the restatement of prior period results had a $0.03 per share adverse impact on our reported fourth quarter results. The impact was not anticipated at the time we established guidance last quarter.

Looking at our financial results on a full fiscal year basis including the previously discussed adjustments, total revenue was $293.3 million in fiscal 2006 an increase of 9% from the prior fiscal year. Topline growth was given by license revenue of $152.7 million which increased 18% while services revenue of $140.6 million was even with the prior fiscal year.

GAAP income from operations was $21.9 million or an operating margin of 7% in fiscal 2006, which compared to a GAAP loss from operations of $68.8 million in the year ago period. GAAP operating expenses in fiscal 2006 included $6.9 million related to non-cash stock-based compensation; $2.3 million of payroll tax related charges resulting from the stock option review; $7.1 million related to non-cash amortization of intangibles associated with previous acquisitions; and approximately $4.9 million related to restructuring charges and the loss on sales and disposal of assets, which combined to reduce the company's GAAP operating margin by approximately 700 basis points.

GAAP net income applicable to common shareholders was $3 million in fiscal 2006 compared to a loss of $85.2 million in the prior fiscal year. GAAP net income applicable to common shareholders includes the impact of $15.4 million in accretion of preferred dividends in fiscal 2006 and $14.5 million in the prior fiscal year. GAAP net income per share applicable to common shareholders on a diluted basis was $0.06 for the fiscal year ended June 30, 2006 compared with a net loss per share applicable to common shareholders of $2.01 in the prior fiscal year.

Turning to the balance sheet and cash flow, in addition to strong operating results we generated significant cash from operations as we ended the fourth quarter with a very solid balance sheet. Cash was $86 million at the end of the fourth quarter, a 23% increase from the $70 million at the end of the prior quarter due to the strong cash flow from operations.

Our DSOs for billed receivables were 63 days versus 65 days in the same period last year. If you include unbilled receivables, our DSOs were 73 days versus 78 days in the prior year's period.

With that, I will turn the call back to the operator to begin the Q&A session. However I will stress up front that the purpose of this call is solely to discuss prior period financial results and the conclusion of our restatement. Given the timing of where we are at in the September quarter, we will not be discussing the current quarter or providing guidance on any forward-looking metrics.

We hope that investors appreciate the unique position we are in as it relates to the timing of this call and I will thank you in advance for not attempting to ask questions that we are not in a position to address at this time.

With that, operator, we'll take some questions.

(OPERATOR INSTRUCTIONS) Robert Schwartz, Jefferies & Company.

I have a couple questions on some of the expenses if I might. Maybe you can help he understand, you said I think if I heard you right -- you were going rather quickly, so I apologize if I didn't catch it all that the impact of these restatements were about $0.03 (technical difficulty). Maybe you could walk through what you're including in that $0.03 so we can sort of break those into the various pieces? (technical difficulty)

This is the operator. We have lost your line if you are on mute.

Are you speaking to Robert Schwartz, or are you speaking to the company?

I'm speaking to the company. Ladies and gentlemen, it looks like we're experiencing some technical difficulties. Please hold until the conference resumes.

Ladies and gentlemen, we are on hold until the conference resumes.

And, sir, we are live in the main conference.

It is Brad Miller and Mark Fusco again. I apologize. We somehow got disconnected. Robert, did my response come through?

Absolutely not one word of it.

Let me try again. You had asked about the effect of the restatement on the fourth quarter. Approximately $1.5 million of payroll tax related charges were recorded in the fourth quarter that were the result, the direct result of what we learned during the stock option reviews. So the stock option review gave rise to some payroll taxes that had to be reported in the fourth quarter and that $1.5 million translates into $0.03 per share.

You mentioned $700,000 in restructuring charges but as I look on the statement I only see $265,000 under restructuring charges. Where are you getting the 700?

Sure. It's the combination of restructuring charges and the loss on the sale and disposal of assets, the sum of the two.

I just wanted to be clear on that. Now if look at your G&A for this quarter, there's about $2 million more than I would have expected and I was wondering maybe are there things in there that we should know about that were one time or does this $12 million reflect something that you were expecting or that you see going --? I know you can't talk about going forward per se but anything you can help us to understand why it might be a bit higher?

Yes, Rob, this is Mark. There were a number of sales and compensation related charges in the fourth quarter all throughout the expense lines that relate to the operations of the fourth quarter. And then they were also, as you know, some other charges that were stock comp charges that related to the restatements that are also in these line items as well.

If I look at it, if I look at the payroll tax impact in G&A, it looks only to be about $300,000. I did not know -- is it a bunch of small one time charges that we should think about? Or should we think about it as beyond payroll something that will continue?

Right, well as you probably saw in the table on the press release, Rob, there is a distribution of the costs hitting a variety of line items, some of which have hit G&A.

Right, about $300,000 of the payroll.

Right, and then another about $400,000 of stock-based comp, right?

I remember from your previous call that services were -- where you talked about services were not the priority, that license growth and profitable license growth were more of a priority for the going forward, from which I understand. However this quarter the margin on those services came in at about 46%, which is for then Q3. And I'm wondering is that something that you are addressing or is that the sort of level we should think about going forward?

Rob, the services margins were impacted by some of the restatement activities to -- so what we stated in the past is that we wanted to operate our services business in the up near 50% and if you look at it for the year, we're up in a 49% range, 48%, 49% range. We did have a several percentage points impact due to the restatement on that line, so in actual fact we ran the business at the same margins that on an operating basis that we normally would have, but this is restatement related issues.

Okay. I know accountants who are under the time clock to do this kind of analysis on your options don't come cheaply. How should we think about those expenses? When will they hit?

We can't on this call, Rob, give you any forward-looking information other than we did disclose in the past that we had external council. So they will get paid at some point. We can't give you any further guidance on that.

Was any of it included in this quarter?

In Q4?

Sorry, Q4 yes, please.

No, not related to the stock option review issue, no.

Thank you.

Andrew Matorin, Bear Stearns.

A question regarding -- in your last filing when you had indicated the demand letter received from Advent, I was wondering I know that you guys had indicated in you press release that the 10-K was filed today although I don't think that it is available online yet. Is there any additional information in the K regarding those shares? Or can you give us any insight into expectations regarding Advent?

What we said in the past is that there was no information on any further information on the Advent shares and we will update everybody when something changes.

Okay. You mentioned very strong cash flow from operations. Can you give us that number?

I can't actually on this call. It is outlined in the financial statements which I guess you can't see yet that were filed today. I can't publicly at the moment.

Okay. Can you maybe comment then -- last question -- on the visibility of the business on the license line? I know that on your prior earnings call for Q3 you had indicated that aspenONE was providing enhanced visibility for you. I was wondering is that increased at all or held steady? What could you give us with respect to that?

I can't give you any future looking statements about the business in general. We did say on the last call that aspenONE revenue was strong in the fourth quarter and it was really strong in the fiscal year, but I can't give you any forward-looking statements on that, unfortunately.

Okay, thanks a lot.

Please, for everybody, I would love to give you forward-looking guidance on how the business is going, but we're just constrained and I'd appreciate if you would limit your questions to ones that we can answer. Thanks.

(OPERATOR INSTRUCTIONS) A follow-up from Robert Schwartz, Jefferies & Co.

Just one question. I just wanted to be clear. Have you forced the conversion of the Advent shares from preferred to common?

There is no change with anything as it relates to the Advent shares.

Thank you.

Sir, there are no further questions at this time.

Okay. Thank you all for your interest in the company and in our call this evening and we'll look forward to updating you when we get ready to file our Q1 numbers. Thanks.

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