Aspen Technology Inc (AZPN) 2007 Q3 法說會逐字稿

Good morning. My name is Stacy and I will be your conference operator today. At this time I would like to welcome everyone to the Aspen Technology 2007 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.

Mr. Miller, you may begin your conference.

Thank you, operator. Good morning, everyone. I'm Brad Miller, CFO of AspenTech. Dialed in from Moscow is Mark Fusco, President and CEO. I would like to welcome you to our third quarter fiscal 2007 financial results conference call. Before we begin, I will make the usual Safe Harbor Statement that during the course of this call, we may make projections or other forward-looking statements about 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 most recent form 10-K and form 10-Q filed with the SEC on March 15, 2007.

Also, please note that the following information is related to current business conditions and our outlook as of today, May 9, 2007. Consistent with our prior practice, we expressly disclaim any current intention to update this information prior to the release of our fourth quarter fiscal 2007 financial results, which is scheduled for sometime in August. The structure of today's call will be as follows. I will begin with the financial details of the quarter. Mark will then provide additional color to our third quarter performance and highlights. Finally, I'll finish by providing updated guidance. We're very pleased with the Company's performance in the quarter. Our business momentum remains strong coming off a record second quarter as our third quarter results were at or above the top end of our guidance.

Taking a look at the results for the quarter, total revenues for the third quarter were $80.3 million, representing growth of approximately 4% on a year-over-year basis. As a reminder, our third quarter is typically a seasonally weak quarter. However, the third quarter of fiscal 2006 was unusually strong as a result of the positive impact of large deals. This should be kept in mind, as it does skew several year-over-year comparisons.

Within total revenue, software licenses came in at $43.6 million, while services revenue came in at $36.7 million. Software license revenues increased 3% on a year-over-year basis, a comparison that is skewed due to the just-mentioned large deals in the prior-year period. Our year-over-year growth in license revenue for the first nine months of 2007 is 22%. This demonstrates the strong growth in our business on a longer-term trend basis. While there can be fluctuations on a quarterly basis, it is worth pointing out that approximately two-thirds of our license revenue continues to be driven by five to six-year term-based license agreements where our renewal rates have historically been in the mid- to high 90% range. Our high degree of customer satisfaction and loyalty combined with a large base of renewable contracts is a significant long-term asset for AspenTech.

During the quarter, services revenue increased 6% on a year-over-year basis, which is in-line with our previously-stated expectation of low to mid-single digit growth in services on an annual basis. From an overall perspective, while we view consulting services as a strategic business, our primary services focus is to enable the success of our customers and to drive our license revenue. We closed four transactions in excess of $1 million during the third quarter of fiscal 2007 compared to six in the same quarter of fiscal 2006. In addition, we closed 26 transactions between $250,000 and $1 million during the quarter, as compared to 13 in the prior year's third quarter. Our average sales price this quarter based on transactions above $100,000 was approximately $400,000, in-line with historical averages but below the $600,000 in the prior year's third quarter and $650,000 in the second quarter of fiscal 2007. Both of these prior quarters were positively affected by large, multi-million dollar deals. In summary, customers continue to make strategic investments leveraging our solutions and overall demand was well-distributed across a broad range of customers during the third quarter.

Turning to profitability, from a high-level perspective, we continue to demonstrate solid control over our costs and expenses, which is consistent with our commentary that we will carefully and modestly increase our level of investment in the future while we continue to focus on improving our operational execution and efficiency. In the quarter, gross margins on licenses were 92% compared to 89% in the prior year's third quarter while services gross margins were 49% compared to 47% in the prior-year period. Approximately three points of our services gross margin was related to the recognition of services revenue upon the achievement of a specific customer milestone. Going forward, the timing of revenue and expenses associated with ongoing services on this particular engagement will be more closely matched following achievement of this milestone.

GAAP total costs and expenses were $72.6 million in the fiscal third quarter and increased from $70.8 million in the second quarter and $69.3 million in the third quarter of last year. Importantly, as my commentary in a moment will indicate, our actual ongoing spending rate is roughly in-line with the prior year. Continuing productivity improvements are driving the growth of our business, demonstrating the leverage in our operating model. Taking a look at the individual operating expense lines, sales and marketing came in at $23.5 million, or 29% of revenue. The sequential increase in sales and marketing was due primarily to our sales meeting at the beginning of the calendar year in addition to higher employment taxes incurred at the beginning of the calendar year.

R&D came in at $12.1 million, or 15% of revenue. On an absolute dollars basis, the sequential increase in R&D expense was primarily due to employment taxes mentioned above. In addition, note that we capitalized no R&D costs during the quarter compared to $300,000 in the previous quarter and $1.1 million in the third quarter fiscal 2006. G&A came in at $10.9 million or 14% of revenue. On an absolute dollars basis, the decrease of $3 million from the previous quarter was related to reductions in professional and consulting fees.

Our operating expenses in the third quarter of fiscal 2007 included $3.2 million of non-cash stock-based compensation, $1.6 million of non-cash amortization of intangibles associated with previous acquisitions, $1.6 million in restructuring charges, and $700,000 in losses on sales of disposable assets. The restructuring charges were slightly higher than our guidance for the quarter, as we were able to accelerate some consolidation activities outside the U.S. Including all of these expenses, AspenTech delivered a GAAP operating profit of $7.7 million or an operating margin of 10% compared to $7.9 million in the prior-year period, which was also a margin of 10%. During the third quarter, our operating margin performance was reduced by 9 percentage points due to the previously-mentioned nonrecurring and non-cash items, while our operating margin in the prior-year period was reduced by 7 percentage points due to nonrecurring and non-cash items.

Net income applicable to common shareholders was $8.6 million in the third quarter of fiscal 2007, including the impact of $146,000 in preferred stock dividends and discounts. This represents an increase of over 200% compared to net income applicable to common shareholders of $2.7 million in the same period last year, which included the impact of $3.9 million in preferred stock dividends and discount. As a reminder, the Company's Series D-1 and D-2 preferred shares were converted to common stock in December 2006 and January 2007, respectively.

Net income per share applicable to common shareholders was $0.10 in the third quarter of fiscal 2007, double the $0.05 per share in the same period last year. Of note, there was a $0.07 net negative impact in our reported EPS in the third quarter of fiscal 2007 due to nonrecurring and non-cash items. During the third quarter, these items included a $600,000 foreign currency exchange loss on intercompany balances, offset by a benefit of approximately $1.2 million of interest income accreted on prior securitization transactions. These two items are in addition to those highlighted a moment ago. In total, the $0.07 impact on our third quarter EPS was $0.02 more than we originally anticipated. We note that the analyst averages on First Call back out the net impact of these items and that the $600,000 non-cash foreign exchange loss was the result of accounting determinations made in connection with the financial restatement completed subsequent to our providing guidance for the third quarter. In the prior-year period, nonrecurring and non-cash items had a net negative impact of $0.07 per share. Our diluted earnings per share calculation in the third quarter of fiscal 2007 is based on 91.6 million weighted common shares outstanding, an increase compared to 55.5 million in the same period last year due to the conversion of the preferred shares this fiscal year.

Turning to the balance sheet, we ended Q3 with $101 million in cash, up from $93 million at the end of the prior quarter. The increase in cash was driven primarily by approximately $13 million in cash flow from operations, offset by a $6 million cash dividend payment in January related to the conversion of our Series D-2 preferred shares. DSO for billed receivables was 54 days versus 60 in the same period last year. Including the unbilled receivables, our DSO was 67 days as compared to 71 in the prior-year period. On the liability side of the balance sheet, we remain virtually debt free. In addition, total deferred revenue ended the quarter at $62.5 million, an increase of $3.5 million compared to $59 million at the end of the previous quarter.

Before turning it over to Mark, I also want to point out that on April 9 the Company filed a registration statement with the SEC for a secondary offering of 18 million shares of common stock. The shares are being offered by 15 private equity funds managed by Advent International Corporation. They have also granted the underwriters an option to acquire an additional 2.7 million shares to cover overallotments, if any. If successfully completed, the offering would reduce Advent's ownership position in Aspen Technology from 34% to 14% and if the overallotment option were to be subsequently exercised, the ownership position could be reduced to 11%. Aspen Technology will not be issuing any primary shares and we will not receive any proceeds from the proposed offering. As you might expect, we cannot comment beyond the filing as it relates to this topic and we appreciate your understanding on this matter.

With that, let me turn it over to Mark so we can provide more qualitative perspective on our March quarter performance.

Thanks, Brad. Following the first half of the fiscal year that was ahead of our expectations, we were pleased to begin the second half of the year with a strong performance. The underlying drivers to our revenue have been very balanced during fiscal 2007 including new customer wins and expanded usage and renewal activity with existing customers. Market demand is strong across each of our targeted verticals and AspenTech is benefiting because we have industry-leading domain expertise, the industry's most comprehensive product suite, strong market share across each individual solution category --

Operator, is Mark Fusco still dialed in?

He is not at this time. We are dialing out to him now.

Okay. I appreciate everybody's patience on this. As I mentioned, Mark is dialed in from overseas. Let me see if we can pull him back on to the call. If not, I'll pick up where Mark left off. Operator, I'll pick up where Mark left off while you attempt to pull him back in.

Thank you.

With solid control over our cost structure in place, the focus of our time and energy is on growing the business and our confidence and visibility into solid growth for the long-term is better today than at any point since Mark joined the Company. From an industry perspective, the fundamentals of the process manufacturing industries that we serve are strong, including energy, chemicals, engineering and construction, and they are fundamental drivers for each sector to increase their level of investment with AspenTech.

Starting with the energy industry, which over the past year has been the largest contributor to our license revenue, energy customers need to invest in AspenTech solutions in order to optimize the efficiency of their operations and global supply chain and increase manufacturing capacity as they face pressures to expand profit levels as oil prices moderate. It is expected that energy companies will accelerate their overall level of capital spending and we believe investments in state of the art IT systems to optimize their plant operations and supply chains will create sustainable demand for AspenTech in the foreseeable future.

In the chemical space, many companies need to invest in new systems that can help them effectively manage and optimize their manufacturing environment and supply chain as they move toward higher value specialty chemical businesses. While these customers are in a cyclical upswing, we believe there should be sustainable demand in the chemical sector due to the need for improved operational agility. Finally, there continues to be strong demand in the engineering and construction vertical, driven in part by new plant activity that is taking place in areas such as Asia-Pacific and the Middle East. Taken together, these three verticals make up approximately 80 to 90% of our license revenue with the remainder coming from other verticals such as pharmaceutical. If we look at some details from the quarter, our top ten deals included contributions from each of our major verticals --

Brad, are you there?

Yes.

All right, I don't know where I cut off. Apologize.

That's okay. I've picked up, Mark. We're just on the section relative to the split by vertical.

Okay.

So, if we look at the details in the quarter, our top ten deals included contributions -- about a page down from where you left off.

Okay. If we look at some deals from the quarter, our top ten deals included contributions from each of our major verticals, three in energy, four in chemicals, and three in engineering and construction. Within these top ten deals, demand was well-balanced across our aspenONE suite with engineering being the primary driver of five of the top ten deals and our plant operations and supply chain solutions being the primary drivers on the other five deals. With strong industrial fundamentals, AspenTech is uniquely positioned to benefit, as a result of our blue chip customer base of over 1500 customers, including each of the top 32 petroleum companies, each of the top 50 chemical companies, 17 of the top 20 engineering and construction companies, and 19 of the 20 top pharmaceutical companies. AspenTech has accumulated this customer base over the past 25 years and we have long-term trusted relationships in place with these customers.

The strength of our technology, domain expertise, and proven track record over a long period of time has created a very loyal customer base for AspenTech. That translates into renewal rates in our engineering business that are best in class and it means that when these customers feel the pressure to invest in new systems, they are turning to AspenTech as their vendor of choice. To put some color around these comments, our engineering product line is an asset with a base in excess of $600 million that is renewable every five to six years. And as Brad pointed out, our renewal rates are in the high 90% range.

As we have discussed in the past, many customers seek to expand their usage at some point before the stated renewal date on the term license. Industry analysts estimate that the market in which Aspen serves for engineering solutions is growing in the range of 10% per year and the combination of expanded usage with existing customers and spend with new customers has been well ahead of this level during fiscal 2007. In addition to strong industry fundamentals and market demand, it is important to remind investors of a few internal factors that we believe are helping to drive the strong growth in new business.

First, from a sales management perspective, we have invested significant time and resources to better capture detailed information on each customer relationship, what products they have, what their contract terms are, and when our term deals are up for renewal. With this information in hand, we have been able to significantly improve our account management strategies, including better ability to partner with our customers, identify new sales opportunities, and forecast when expanded deals are likely to close. Second, we have continued to incrementally increase the level of sales force incentives related to generating new business as compared to renewals. Finally, there has been much greater consistency across our sales organization in helping our customers understand the tremendous value we deliver.

We believe AspenTech is unique in our ability to generate significant returns for our customers based on our domain expertise and aspenONE's suite of integrated solutions. The overall increase in new business activity during fiscal 2007 means our pipeline of opportunities, including renewal activity related to our term-based engineering business remains strong in future years. In addition, we are building an even larger renewal pipeline for future years as a result of the expanded usage we have seen this year. During the third quarter, aspenONE-related solutions accounted for over 25% of our license revenue with demand from each of our key vertical markets. As we have stated on prior calls, we expect that aspenONE-related sales will represent somewhere between 20 to 30% of our sales on a longer-term basis. That said, we continue to expand the breadth and depth of our aspenONE suite where we have vertical-specific modules for each of our core vertical markets.

Summary, our end markets are strong and process manufacturers are increasingly looking to invest in systems that help them to optimize their operations. We believe that AspenTech is uniquely positioned to meet this demand based on our domain expertise, industry-leading product breadth, and best in class vertical applications in each category that we compete in. I'm confident in the long-term outlook of AspenTech as the Company is executing at a high level, we have long-term relationships with over 1500 process manufactures, the majority of which are on renewable contracts and we are still in the early stages of rolling out the end to end capabilities of our aspenONE suite. Over the past several quarters, we have received many questions on the capital structure of the Company.

Last quarter I was pleased to announce that the conversion of our preferred shares to common shares both simplified our ownership structure and eliminated over $15 million per year in future preferred dividends. Several weeks ago, we announced the intention of the affiliates of Advent International to offer 18 million shares of their common stock to the public. If successfully completed, this would reduce their ownership percentage from 34% to 14% of our common stock. In addition to making continual improvements in the operational performance of the Company, we believe these are important steps to maximizing shareholder value for the long-term.

With that I'll turn it over to Brad for guidance.

Thanks, Mark. Let me finish by providing fourth quarter fiscal 2007 guidance. Our guidance is on a GAAP basis and will identify expected non-cash or nonrecurring expense items. We expect to see total revenue in the range of 85 to $89 million in the fourth quarter. As it relates to license revenue, excluding the impact that large deals can have on quarterly results from time to time, we remind analysts that our December and June quarters are typically the seasonally strongest license revenue quarters while the March and September quarters are seasonally weaker.

On a year-over-year basis, we continue to look for services revenue growth in the low to mid-single digits. Analysts should keep these factors in mind when modeling our fourth quarter, but also as they start to think about fiscal 2008, which we are not addressing specifically on this call. We currently anticipate total GAAP operating expenses between 69 and $73 million in the fiscal fourth quarter, which we expect will include professional fees in connection with our S1. We appreciate that many analysts still wish to back out non-cash charges and other expenses that are nonrecurring in nature in order to evaluate the ongoing performance of AspenTech. In the fourth quarter, we expect to incur non-cash stock-based compensation expense of approximately $3.3 million, non-cash amortization of intangibles associated with previous acquisitions of $1.3 million, and restructuring charges and losses on sales of assets of $1.7 million.

At the interest income line, we currently expect to receive the benefit of approximately $1.2 million associated with the accretion of retained interest in sold receivables. Finally, there is the potential for a non-cash foreign exchange gain or loss on intercompany balances as we saw in the third quarter. This is not an item that we expect to forecast for GAAP purposes externally and the two important points are, one, that we are in the process of putting in place procedures designed to mitigate this item's impact on our reported GAAP results in the future; and secondly, it is a non-cash item. We currently anticipate fiscal third quarter diluted GAAP EPS of $0.15 to $0.18 per share based on approximately 92 million weighted average common shares. The previously mentioned non-recurring and non-cash items are expected to have a net negative impact of $0.05 per share before considering any potential impact from non-cash foreign exchange losses on intercompany balances.

In other developments, in the fall time frame, we will be moving our global headquarters from Cambridge to Burlington, Massachusetts. While we are not providing guidance for fiscal 2008 at this time, I will summarize some of the expected financial implications of this move. It will be neutral from a cash perspective over the remaining term of the lease in Cambridge and our annual rent expense will be lower by approximately $1 million thereafter due to the lower costs associated with conducting business outside of the downtown Boston area. As a result, it is likely we will take a charge of approximately $10 million in the first fiscal quarter of 2008 on a GAAP basis related to the relocation of our corporate headquarters. This move not only makes sense from a financial perspective, but we believe it represents a significant upgrade in the quality of our office space and will contribute to improving the profile and operations of AspenTech.

So in summary, our third quarter was strong and we are optimistic that continued market demand and interest in our aspenONE suite of solutions positions us well for solid performance in the fourth quarter and the long-term. With that I'll turn it back to the operator to begin the Q&A session. Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Philip Rueppel with Wachovia Securities.

Great. Thanks very much. Along the lines of aspenONE, which continues to perform well, do you have -- can you give us an update on the product road map? Are you continuing to add modules to that? As you do, are they focused on all the verticals or more intensely focused on chemicals and/or energy?

AspenONE, as you know, has been running at or above our expected longer-term target of 20% or more of our license revenue over a period of time. We continue to do a lot of R&D in the integration within the various modules that we sell and also integration of the modules together. We've got quite a robust road map of development for this calendar year and the calendar year beyond that we've been working on in our planning process. We will be adding modules over time to the core verticals that we compete in, but right now we have four main modules and chemicals and five in the energy vertical. We also have verticals around specialty chemicals and other parts of our business as well.

But we are focused very much on the core part of the business in chemicals and in energy and we have lots of opportunity in that space. As you know, despite its traction in the marketplace, we still have relatively few customers in the overall sense who have upgraded to AspenONE, so we see it as a very big opportunity for the Company and for our customers to better operate their business going forward.

Great, thanks. Second of all, the renewals once again were very strong and you did mention that term length was five to six years, which sounds like a little bit longer than it has been in the past. Are customers asking for longer terms locking in their renewal rates?

This has been consistent, actually, Phil, since I've been here. We have various contracts, some are five, some are six years in duration. I sort of think about it as five and a half years in general if I look across the portfolio of contracts. I think the important part about the engineering business is that it is a term-based business. The renewal part of the renewal rates have consistently been very high over time, even when the Company had some difficulties from time to time, but the exciting part that we've seen over the past six to twelve months is the growth that we're seeing. So not only are the deals being renewed, but there's lots of new interest in different products that are added to the solution suite, increased usage, new customers that we're getting. So we're seeing very strong engineering demand across the board from our existing customer base and from lots of new customers as well. So we're very pleased with what we see, not only in the renewal space, but in the growth in the extra usage that we're seeing from all of our customers.

Great. Finally, Brad, you had mentioned about a services deal that affected gross margins. Could you just explain that a little bit? Was it that expenses were front loaded and you haven't been able to recognize revenue, but that will normalize as we move into Q4 and '08?

Sure, Phil. What I was referring to is that the impact on margin was approximately three points. Up until now, we had been recognizing revenue equal to expense and upon achievement of the milestone, the margin was recognized in the quarter. So you'll see some impact on margin this quarter, which we would not expect to repeat, but the revenue -- at the cost level, revenues and expenses matched historically, and going forward we would be recognizing those as well as the margin.

Got it. Okay, thanks.

Thank you. Your next question comes from the line of Dennis Wassung with Canaccord Adams.

Thanks, guys. A couple of quick ones. First off, on the seven-figure deals you had in the quarter, I know last time, Mark, you gave us some detail about the size of the average being around $4 million. Obviously it was a blowout quarter with a lot of large deals that happened. Can you give us any insight into the larger deals that happened this quarter?

Yes. We had several large deals. This, as you know, is seasonally not a stronger quarter, and you can see that in the year over year numbers, although, last year was a strong quarter, and we did have several large deals last year in the third quarter that skewed the results a little bit, but we did have some large deals in all parts of the solutions suite and we describe them as deals that are $1 million or above. It's fair to say, given the detail we gave out after the second quarter, where I think we had eight deals and the average was $4 million. It wasn't nearly that big this quarter, but it was a very strong quarter across all the verticals and across all the different parts of the business that we compete in and we're very pleased with the result.

Okay. On to the top ten deals split that you gave. Three of them came from the E&C space. Anything you can say specific to that activity? It seems like that's been a strong factor over the last few quarters. How do you look at that in terms of longevity there? Is there a lot of activity? Do you expect to see that remaining in that top ten list for quite some time?

I do. The engineering and construction part of our business has been strong for the past two, three years, certainly since I've been with the Company. As you know, any one of the different customer segments can fluctuate from quarter to quarter. For the trailing 12 months, energy has been clearly the largest vertical that we compete in, but engineering and construction has been very solid, around 20% of our license revenue on a quarter to quarter basis. And we think it's a leading indicator or a continued leading indicator and strength in the process business as there's lots of new plant construction in Asia and the Middle East. There's lots of retrofits to existing plants all over the world and I think that's helping drive demand for our engineering products, not only in the E&C vertical, but in the other owner-operated verticals as well.

And we're also seeing it as these plants come online. They need software from our plant operations and supply chain. So we see it as a general very strong leading indicator, because we would typically see our engineering solutions be used up-front and then in the longer term by the owner operators and then we see our plant, office, and supply chain software come later. So we think it's a good leading indicator and it's been a solid performer for us and we think it will continue to be so.

Has the E&C business been weighted to energy or chemicals, or pretty much across the board?

it's been across the board.

Last one. The renewal activity, I'm just wondering, in the quarter, it sounded like you had five deals in engineering, that's mostly weighted towards the renewal side with the supply chain side being the other five. How much of an impact is aspenONE having on your renewal activity at this point? Are you seeing that happen earlier than expected? You mentioned a little about that in your comments. Just wondering how that plays as you look forward.

I think the aspenONE modules that we have in the engineering part of our business I think have been very important. There's lots of new software that we've brought into those modules over the past couple of years and we're seeing lots of interest in those specific pieces of software with our engineering customers that didn't have it. So as the deals come up for renewal, and I think we made some comments about changes in our sales methodology and lots of investment that we made in that area, I think we're doing a much better job working with our customers to introduce them to the new things that we can do, to the value we can help them create for their businesses and aspenONE is an important part of that on the engineering side.

On the other side in the plant, office and supply chain, the integration of those modules is going to bring lots of value to our customers. We've now been selling it for 18 months or so. We've had very good traction and I think it's having a dramatic difference in the sales channel in that we're going from a individual product sale to a much broader set of discussions around optimization across the business. And that's good for Aspen, that's good for our customers, we believe, and so aspenONE is having a very positive impact in the way we take our Company to the market.

Great. Thanks very much, guys.

Sure.

Operator, next question, please?

Your next question comes from the line of Richard Davis with Needham and Company.

Thanks. Mark, if I kind of do the math and look at the maintenance and service line and I assume that maybe half of that line is maintenance, which may or may not be right, it would imply that the services margins are 13 to 14% or something like that. This is a huge improvement from a few years ago, but I remember two or three quarters ago, you talked about driving up the services gross margin, but kind of moving up the value-added ladder. Could maybe you update us on that? Because it seems to me there'd be some leverage opportunity there that could add whatever, one to three points to overall gross margins if you got that thing to where maybe it should be?

Richard, we're very -- I guess we're pleased with how the services business is run from a margin perspective for the last couple years or so, because we have gone up about ten points in the gross margins that we've been reporting to you. Maintenance is roughly 55% of that revenue number, we've disclosed that in the past in some of our filings. I would expect over a period of time that we can drive up margins a little bit in the services line, but you also have to remember that two years ago, even when our margins were much, much lower, we didn't have things like stock-based compensation and some of the other items in those numbers, so the comparisons are not exactly apples to apples.

I think when you look on a year over year basis, we're in pretty good shape from a services perspective with the gross margins being up on a year-over-year basis. We are working at trying to expand not only the revenue line, which has been modest growth this year so far in the 3% range for the nine months, but we'd be hopeful that we could expand all of our margin lines. And I think if you look across P&L, you'll see that licenses services, gross margin, operating costs as a percentage, all those numbers have moved in the right direction and we continue to be focused on them.

Got it. Is it fair to say that aspenONE has penetrated, as best we can tell, less than 15% of your addressable market?

Yes.

Okay. That's kind of what I thought. All right. Those are my questions. Thank you very much.

Your next question comes from Robert Schwartz with Jefferies & Company.

Thank you very much. Mark, you mentioned that few had really upgraded in the previous question from Richard -- says less than 15%. What is going to drive people to upgrade to A1? What is the motivating factor to get them to adopt aspenONE?

Rob, if you break it apart, there's lots of investment that our customers are doing in all parts of their business. I think the uptake of aspenONE has been relatively good and certainly in some cases ahead of the expectations that we set for everyone a year or so ago. But these are complicated buying decisions and they've also got lots of new plant and other investments that they're making. And in some cases we have new software that we're bringing to the market, which is being installed now in the first customers. And I think in some cases people are looking to see how those installations go and the relative value that it brings to the customers. So I think as we get a little further down the track and as the usage grows incrementally and as people start to see some of the new modules out there and working and bringing the value that both we and our customers believe will be there, I think we'll start to see the uptake in some of the supply chain and plan operations parts of the business in a much more dramatic way. As far as the engineering part of the business, I think that's gone very well from a growth perspective. Both sides have gone well, actually. I just think the supply chain and the plant is a little bit more complicated from an installation perspective and our customers are -- the uptake is a little bit slower, because it is so complicated. But I expect that we're going to continue to see good momentum here.

Are you seeing the success you expected from the overlay team for aspenONE?

I am. I am. We're about nine months into that now. They've been working with our field sales organization and partnership. And the deals that we started working on nine months ago, they're now very solid in the pipeline and these are the ones that we expect to continue working on and growing our top line. Obviously, if we're successful with aspenONE, our customers will be very successful as well as we bring this to market. So we're very pleased with the overlay and we're very pleased with the execution.

And you mentioned that some of the actions you've taken in sales management have led to better visibility on the closing of large deals. You had sort of spikes in large deals last quarter and a year ago. I'm wondering how large deals are faring in your pipeline now? What are you seeing in the immediate run, and how does that affect your guidance for next quarter?

The changes that we've made in our sales management methodology have given us much more visibility into the pipeline, into the lead generation process for both big and small deals and give us more confidence as we guide externally going forward. We have, I believe, a much better understanding as to where the deals are in the pipeline and what their relative closure rates are going to be. As far as the pipeline goes, we have a very strong pipeline across all parts of the business, both big and smaller deals. We are obviously working on some very large ones at all times. That's one of the benefits that Aspen does have is very large deal flow from time to time. As you saw last quarter and the second quarter, we had a lot of big deals; this quarter, less so, but it was expected. So always expect it to be that way. But it was a very solid quarter and going forward we see very solid pipelines in all parts of our business and we would expect renewal rates and expansion in our engineering business to continue to be strong.

I guess my question was, was the large deal expectation or very large deal expectation built in your guidance?

Yeah. Rob, in the past, what we've said is we don't necessarily put them in the guidance because we don't know how they're going to be forecast. As we've gotten more -- we haven't changed that policy, but as we've gotten more comfortable, it's allowed us, I think, to be a little narrower in the range of our expectations. So while we don't include them all, we clearly have to include them at some level from a factoring perspective, but I think the changes in the management in the sales channel have given us much more confidence that we have deals in the pipeline, we know where they are, and whether they're going to close. That said, deals close when they do and customers buy when they want to, and we can just do the best we can to manage it.

Thanks. Last question, if I may, before handing it off. What are some of the catalysts investors should be aware of coming up in the next six months in terms of sales, products?

Well, from a catalyst perspective, we've got another new release of software. While we're not a specific release-driven company, meaning when we release there's a flurry of activity, we have continued releases of software every year. As you know, aspenONE every year in the development becomes much more integrated from a module and from an overall suite perspective. We're bringing lots of new functionality to our inventory management. Part of our business in our olefin scheduling module for chemicals, and we've also got some major installations of both inventory management and olefins coming up here in the next six months or so and good performance there with those customers and some good use cases will be very helpful in converting pipeline into solid deals in the next fiscal year.

Thank you.

Your next question comes from the line of Philip Alling with Bear Stearns.

Thanks much. Just wanted to get an update from you with respect to your longer-term goals given the improved visibility that you highlighted this quarter. In the past you have talked about 15% longer-term license growth and low double digit total revenue growth. I was wondering, given your performance this quarter and the outlook, whether you could update us on the longer term view as far as those goals are concerned?

Phil, when I came to the Company a couple years ago, what we said from a long-term operating model, while we didn't give any specific guidance on the topline, because it wasn't clear at that time, but we put out an operating model on the revenue line and also on the cost line of wanting to achieve 20% operating margins at the bottom line. We updated that maybe a year or so ago to talk about low double digit overall growth and we're very pleased to be in the 13% or so range for the first nine months with very solid 20% plus license growth. So we're at the back half of the fiscal year and we're not changing where we're at in the longer term. We want to achieve our goals, so to the extent and with the guidance we just gave, we're going to be above 20% operating margin for the full fiscal year. We'll update in the summer as to what the next goals of the Company will be. We're not giving specific guidance on the call tonight either about FY '08, but one should expect continued growth. We're continuing to be focused around our license line and being very solid in the double digits there, and then we'll see how our services business comes along.

That's helpful. Could you give us any update as far as investments in sales coverage or the shift in geographic focus or product investment that you want to make going forward to sustain your growth and any changes there given the improved visibility that you have?

Yeah. We're not changing the overall structure of what we're doing, nor are we forecasting out a dramatic change in the cost structure of the Company. As you've seen this quarter, we still are working off some of the restructuring issues of the past that I inherited here and we're working on them as quickly as we possibly can. The good news about that is we continue to get relief in some parts from a cost perspective, which allows us to reinvest in other parts of the business and maintain a relatively flat overall cost structure. In the longer-term, we will have to invest, but the way we see it, to sustain double digit growth, there'll be some modest incremental investment over a period of time in dollar terms on a year-over-year basis. We think it will be relatively modest and we still have some operating leverage, financial leverage on the income statement as we work through some of these issues of the past, clean them out of the income statement. We can then apply those dollars to other things.

Okay. Just finally, two housekeeping items for me. One is just the income tax provision that we should be modeling for the next quarter? And if you could just let us know what the currency impact was on revenue in the quarter? Thanks.

Income tax line, really no change there. We've been describing that in terms of an amount, not a rate. You'll see that this quarter was in that 1 to $2 million range, which is where I would expect it to be going forward through the fourth quarter. Then as it relates to the currency impact, I want to sort of split the question, if I could. The comments that I made previously don't affect revenue at all. Those are simply the way that we do our internal consolidation with our foreign operations. As it relates to revenue denominated in currencies other than the dollar, that tends to be less than a quarter or so of our revenue that would be denominated in non-USD, so not something that would be significant one way or another.

Okay, thanks.

Your next question -- you have a follow-up question from the line of Dennis Wassung with Canaccord Adams.

Just a follow-up on some of the sales strategy and incentives that you talked about, Mark. You made some comments about a better sales infrastructure, better forecasting, sales force incentives focused on new business versus renewals. Can you give a little more detail on that? When were some of those changes officially in place and how much of an impact do you think that's had over the last couple of quarters as you guys put up pretty good results?

We started that -- actually, we made the first change to the sales compensation plan in July of '05, which was about six months after I got here. So for the fiscal year '06, we changed to incent people more on the new business part as opposed to just doing a straight renewal. We did update that again for the fiscal year '07, so July of '06, we did change it and make more incentive towards new business and in some ways take -- if you're going to give some, you're going to get some back. Meaning, if you just do a renewal, you don't get paid the same sort of commission rate that you would if you're growing your business and working with your customers.

That's just a minor piece of what we did, but we have spent a lot of time and effort in the sales channel, in sales management, in our sales operations function in each region and at the corporate level in some of the backoffice systems and use of our sales automation tools in the like in training of the sales force, in solution selling as we transition from point product sales to more of a suite sale. So I think there's a lot of things that have changed in the management of the Company, in the sales management, in how we run that part of the business, which have led us to having better results and more consistent results over a period of time. And we're going to continue to apply that rigor and stay on point in this area.

So as you transition to more of that solution sale versus the point tool sale and as you look forward here, do you have what you need in place at this point, or do you anticipate any other significant changes in that sales infrastructure of management?

No, I don't expect any dramatic changes. But we'll continue to fine-tune each piece of the business, whether it's engineering or playing off the supply chain, how we look at the customers, how we look at the things that we take to market, and the new solutions that we want to offer in the longer term. So we'll continue to focus in this area and continue to execute in the basic framework that we've set up. From an investment perspective, our overall head count in this area has remained relatively flat for the past six months or so. We would expect that that will be roughly the same, although we may incrementally increase in one area or the other from time to time, but it won't dramatically impact, I guess, the cost side of the business. But we do expect to continue to get efficiencies here and more productivity from the sales force over a period of time.

Great. Thank you.

Okay, operator. That's all the time we have for questions. We would like to thank everybody for joining us for our third quarter conference call this morning. Appreciate your continued interest in Aspen Technology and look forward to seeing you here in the near term. Thanks very much.

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