Aspen Technology Inc (AZPN) 2010 Q1 法說會逐字稿

Good morning. My name is Arneka and I'll be your conference operator today. At this time I'd like to welcome everyone to the Aspen Tech first-quarter 2010 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 Mark Sullivan, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us to review our first-quarter 2010 results for the period-ended September 30, 2009. I'm Mark Sullivan, CFO of Aspen Tech. With me on the call today is Mark Fusco , President and CEO.

Before we begin I will make the our 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 call and in our most recent Form 10-K for fiscal 2009 and Form 10-Q for the first quarter of fiscal 2010, both of which are filed with the SEC. Also please note that the following information is related to our current business conditions and our outlook as of today, December 21, 2009. Consistent with our prior practice we expressly disclaim any obligation to update this information.

The structure of today's call will be as follows. I will begin with a review of our financial results for the first-quarter fiscal 2010. In doing so I will discuss important changes to the presentation of our financial statements that coincide with the launch of our new aspenONE licensing model at the beginning of fiscal 2010. We will also review the metrics that we plan on providing moving forward. After I'm finished, Mark Fusco will provide some brief comments before we open up the call for Q&A. However, we will be keeping the discussion to our first quarter performance. We will need to hold second quarter and other forward-looking questions until our next call, as we are currently in the quiet period for the December quarter.

Let me begin with some comments related to our filing status. With the filing of our 10-Q for the first quarter of fiscal 2010, Aspen Tech is now current with all its SEC financial reporting requirements. This has been a lengthy process and the improved execution of the finance organization is evidenced by the significant reduction in time required to complete recent quarterly reviews, as well as the fiscal 2009 year-end audit. There's still room to further improve our back-office systems and processes, which we are focused on, but we believe the improvements that have already been made position Aspen Tech to remain current with its SEC filings. As a result of our progress we are continuing with our plan to begin the process of seeking a relisting of our common stock on a major US stock exchange during the first fiscal quarter of 2010, with a focus on doing so after we file our 2Q results. The last item I would mention related to the trading of our stock is that the Company, as well as its board of directors, affiliates and current employees, remain in the blackout period as a result of the fact that we are in the quiet period for the December quarter. This will remain the case until we file our second-quarter results.

Now let me turn to the Company's first-quarter fiscal 2010 financial results. Before getting into the details, let me remind investors this represents the first quarter, in which our results reflect the financial reporting impact of our new aspenONE licensing model. As we discussed at our analyst day in July and reiterated on our fiscal-year 2009 financial results call, the near-term impact of the new aspenONE licensing model is significantly lower reported revenue and larger operating losses. While the strong majority of the Company's contracts have historically been on a multi-year term basis, sales of the new aspenONE licensing model will have ratable revenue recognition as opposed to the term-based commercial model where licensed revenue was predominantly recognized on an upfront basis. As our term customer base renews and moves to the new aspenONE licensing model over the next several years, we expect our long-term financial results to ultimately exceed that which would have been possible under the predominantly upfront revenue licensing model.

With that as background let me turn to definitions of the three revenue categories which will be reported moving forward. First, subscription revenue includes all revenue associated with our new aspenONE licensing model, which provides access to all of the products and particular product suite, as well as rights to future aspenONE solutions. Subscription revenue is recognized on a daily basis over the term of the contracts, commencing when the first payment is due, typically 30 days after signing the agreement. As a reminder, subscription fees from the new aspenONE licensing model include maintenance as part of the overall subscription. Since we previously recognized much of the revenue associated with term license agreements executed prior to 2010, we will report significantly-lower revenue for several years. It will take time for subscription revenue to build. Until such time, as existing contracts expire and are renewed under the new aspenONE licensing model, we will not report license revenue comparable to prior-year levels.

Second revenue line item that we are reporting is software, which consists of all non-subscription license revenue. This includes license revenue associated with new perpetual license contracts, any term-based license contracts, or specifically-defined sets of products, which we refer to as point product solutions, with or without bundled maintenance, and recognition of software license fees that would defer from prior fiscal-year periods, most notably from fiscal 2008 and '09, as discussed on recent conference calls. We expect the revenue in this category to be variable from quarter to quarter because it includes transactions that are recognized on an upfront basis and also includes transactions that are recognized when individual payments are due or received, depending on the particular characteristics of the contract.

Finally, our services and other revenue line is the same as it's been in the past. It includes revenue associated with professional services, maintenance, training and other. As the subscription business grows maintenance revenue will migrate from services and other to subscription revenue because it will be included in the single bundle fee paid by the customer. Eventually we expect the majority of our maintenance revenue to be included as part of our term license contracts and reported services and other revenue will likely decline over the next several years, even though the underlying economics of the business are unchanged.

That as background, the Company reported total revenue of $39.8 million in the first quarter of fiscal 2010, which compares to $86.4 million in the first quarter of fiscal 2009. If we look at the $47 million year-over-year reduction in total revenue, the strong majority relates to what we now classify as software, which went from $49.6 million in the first quarter of 2009 to $11.1 million in the first quarter of fiscal 2010. Software is the revenue line item that is the most impacted by the adoption of our new aspenONE licensing model. In the first quarter of fiscal 2010 licensed bookings that would have been recognized on an upfront basis in prior periods now get recognized over the life of the multi-year contract. The year-over-year comparison is further skewed by the fact that software revenue recognized in the first quarter of fiscal 2009 was approximately $15 million more than the licensed bookings in that period as a result of recognizing revenue on prior-period bookings, the majority of which was deferred from fiscal 2008.

Drilling down further into software revenue for the first quarter of fiscal 2010, $2.8 million related to contracts closed in the quarter with upfront revenue recognition, the strong majority being term-based contracts on the upfront licensing model and a small minority being perpetual licenses. Approximately $800,000 of software revenue was related to term-based contracts for point product solutions. which were sold in the quarter and will be recognized over the term of the contract as a result of including maintenance with the term license. The remaining $7.5 million of software revenue related to license bookings closed but not recognized during prior-year periods. We currently expect approximately $20 million of licensed bookings from prior-year periods to be recognized in our software revenue category during 2Q and through 4Q of fiscal 2010. However, there may be a level of variability associated with this figure depending on the timing of customer payments.

Our services and other revenue was $28.7 million in the first quarter of fiscal 2010, which was below the $36.8 million level the year-ago period. The vast majority of the year-over-year decline related to professional services due to the difficult economic environment, as discussed in recent calls, and also due to the timing of revenue recognition and changes in reserves. On a sequential basis services and other revenue was down approximately $1 million. We currently expect our services and other revenue to be generally stable in the near term. Finally, the new aspenONE licensing model was launched during the quarter and our first quarter subscription revenue was only $25,000, reflecting the short period of time the new offering has been available. Recall that subscription revenue is recognized on a daily basis over the course of the multi-year contract and, as just mentioned, subscription revenue recognition begins when the first customer payments due.

Before moving to profitability measures let me review some supplemental metrics that we plan on providing moving forward. First, as we previously discussed, licensed bookings in the first quarter were approximately $32.2 million, which represented a decline of over 20% compared to the prior-year period. As maintenance is now bundled as a component of our new aspenONE licensing model we are going to focus on total product-related bookings moving forward. In the first quarter total product-related bookings were approximately $37 million, which includes maintenance as part of the subscription contract. This is a figure that we will continue to report quarterly. As a reminder, the bookings metric for the period includes both the value of license renewals, as well as growth, either from new customers or increased contractual value from existing customers. The timing of license renewals and the variability of closing large contracts impacts period-to-period income comparisons. A metric which provides visibility into the Company's long-term health is our total term contract value, which is on a gross basis for contracts that get done on our new aspenONE licensing model will also include bundled maintenance. This was over $1.1 billion at the end of the first quarter of fiscal 2010. Our current intention is to provide a more detailed total term contract value at least two times per year, at the halfway point and fiscal year end.

Another metric that we are going to share going forward is what we classify as our billings backlog, which represents the value of term-based contracts, including multi-year maintenance sold in the aspenONE licensing model that is not reported on our balance sheet, either as receivables or as deferred revenue. At the end of the first quarter our billings backlog was approximately $130 million, which at this point is primarily comprised of the contract value of license bookings closed in fiscal 2008 and '09, the revenue for which has yet to be recognized. Over time we believe the primary driver to growth in our billings backlog will be related to future subscription-based bookings on our new aspenONE licensing model.

We will continue to report on large deal activity and average deal size. We closed nine product-related bookings that were greater than $1 million, and 23 that were between $250,000 and $1 million during the first quarter of fiscal 2010. These figures are slightly different from the five and 25 levels that we shared with you previously as a result of the fact that we now are including the value of bundled maintenance with new aspenONE license contracts. The average deal size for product-related bookings over $100,000 on a gross basis increased year over year to approximately $550,000 versus $500,000, which we announced in November. The figures in the November announcement excluded the maintenance component of the bookings. As we have in the past, we will continue to report on product line, geographic and vertical breakdowns and we will focus these metrics on bookings as opposed to revenue for the foreseeable future. At our analyst day we provided a breakdown of our bookings by new and renewals for the first time in the Company's history. It is the current intention to report this bookings metric at least once per year at the end of the fiscal year.

With that, let me turn to profitability. Gross profit was $22.3 million, or a gross margin of 56% in the first quarter of fiscal 2010, which compares to $67.2 million, or a gross margin of 78% the prior-year period. The year-over-year reduction is a result of the fact that a majority of the Company's licensed bookings for the first quarter of fiscal 2010 were not recognized on an upfront basis, while related costs were recognized. From a long-term perspective we expect gross margins to be higher under the new commercial model as a result of the fact that the full value of customer payments will be recognized as revenue, whereas in the prior upfront revenue model a portion of customer payments were broken out and classified as interest income. Operating expenses were down $1.8 million from the comparable year-ago period. Sales and marketing of $20.6 million and R&D of $10.9 million, which now includes product management costs, were both lower on a year-over-year and quarter-over-quarter basis. This reflects the Company's efforts to manage operations efficiently.

G&A expense was $15.4 million in the first quarter of fiscal 2010 compared to $14.1 million in the year-ago quarter, and up slightly from $15.3 million in the fourth quarter of fiscal 2009. Total audit and financial consulting expenses were $6.4 million in the first quarter of fiscal 2010, which was up from $5.2 million in the year-ago quarter, but down sequentially from $8.1 million. G&A costs, exclusive of audit and financial expenses, were up sequentially due primarily to the fact that Q4 of fiscal 2009 included a credit to bad debt reserves of approximately $2 million. Finally, total expenses, including cost of revenues of $64.6 million, were down $3.5 million from the prior-year period. Operating loss was $24.8 million in the first quarter of fiscal 2010, which compared to an operating profit of $18.3 million in the year-ago quarter. The level of operating loss was consistent with the directional commentary that was provided at our analyst day when we described the impact of profitability as a result of moving to our new aspenONE licensing model. This resulted in a net loss of $21.1 million in the first quarter of fiscal 2010, which compares to net income of $11.7 million the first quarter of fiscal 2009.

Now let me turn the balance sheet and cash flow. The Company ended the first quarter with $109 million in cash, which compared to $122 million at the end of fiscal 2009. The Company did not sell any installments receivable to raise cash during the first quarter of fiscal 2010 and it continued to reduce its secured borrowings balance, which was down by approximately $3 million from the end of the first quarter of fiscal 2009, ending the first quarter at approximately $109 million. The Company's collateralized receivables balance at the end of the first quarter was approximately $93 million and secured borrowings balance was $109 million. It's important to point out that our secured borrowings are fully collateralized. The difference between these amounts relates to the fact that a portion of the secured borrowings is collateralized by a contract contained in billings backlog. At the end of the first quarter the Company's -- the Company-owned receivables balance was $206 million, which was up from approximately $191 million at the end of the year-ago period and down from approximately $228 million at the end of the fourth quarter.

As we have discussed since announcing the new aspenONE licensing model, the installments receivable balance will decline moving forward. The majority of future licensed sales will not be recorded as installments receivable but will instead be include in our billings backlog metric. Accounts receivable will continue to reflect the value of invoices that have already been billed and are yet to be collected. Taken together, installments [reportable and] deferred interest income related to installments receivable and billings backlog represent the expected future cash collections from committed term license contracts. Remember that installments receivable are recorded on a net present value basis, so it is necessary to include the deferred interest component to arrive at total expected cash collections. Customers transition to the aspenONE license model, installments receivable and deferred interest income will decline and billings backlog is expected to grow.

From a cash flow perspective the Company used $5.2 million in cash from operations during the first quarter. As we discussed in our last conference call, the Q1 cash balance was influenced by several factors, including seasonal payments in the first quarter related to the fiscal 2009 year end in fourth quarter, lower licensed bookings in recent quarters, as well as a lower amount of business with upfront payment terms. We expect our cash balance to increase modestly from current levels over the course of the fiscal year. As we discussed in the past, we've will continue to focus on paying down our secured borrowings balance. We've made significant progress over the past couple of years, as evidenced by the fact that the Company has not sold receivables to raise cash in the last seven quarters, while we've continued to grow the portion of our business that is based on annual subscription-based cash flows for our aspenONE solutions. We also continue to reduce perpetual license mix of our business.

From a detail perspective, the percentage of of our licensed bookings that were derived from the perpetual licenses declined from the low double digits between fiscal 2005 and fiscal 2008 to just 2% in fiscal second '09 to less than 1% in the first quarter of fiscal 2010. Moreover, during the course of the same fiscal years, Aspen Tech increased the the percentage of its multi-year term-based license bookings that were paid annually to as high as 90+% in recent quarters. This evolution of our business model was taken into consideration when, at analyst day, we provided direction that the cash flow would be in the $30 million in fiscal 2010, provided that license bookings were at a comparable level the fiscal 2009 with a range of variability due to working capital fluctuations. The Company will continue its progression to a subscription-based cash flow model as the portfolio of our term based contracts renew and we continue to increase the percentage of our term contract portfolio that is on annual payment terms.

I'll wrap up with deferred revenue, which decreased $3.2 million from the end of fiscal 2009 to $75.7 million at September 30, 2009. We expect deferred revenue to grow as our subscription business scales and deferred revenue balance reflects -- the deferred revenue balance reflects the difference between amounts billed and revenue recognized. However, until the subscription business becomes more material there are likely to be fluctuations in the deferred revenue account balance due to the timing of recognizing revenue -- software and maintenance revenue. The modest decrease in the first quarter is attributable to seasonal fluctuations associated with our maintenance business.

With that let me turn it over to Mark Fusco for some additional perspective on our first quarter.

Thanks, Mark, and thanks again to our shareholders for your patience as we work to bring our financials current. While it was a long process we are pleased with the team's execution and ability to process the fiscal 2009 and first- quarter fiscal 2010 financial reporting documents in a timely fashion. We are excited about our plans to begin the relisting process and move forward to a normal reporting cycle beginning with our second quarter of fiscal 2010 results. Our current plan is to provide some additional forward-looking details related to our financial plans on our second quarter call, including our fiscal 2010 view for GAAP revenue, operating income and cash flow.

In addition, Mark just shared with you the metrics that we plan on sharing to provide additional insight as to the health and momentum of our business. We may introduce additional metrics over time and leave open the potential for greater frequency of certain metrics. However, our top priority at this stage is bringing our financials current and getting the Company on track to remain a timely filer. Among the metrics Mark discussed our primary focus for fiscal 2010 and longer term is to continue growing the value of our portfolio of term-based contracts. We believe we are well positioned to do so based on our large customer base, differentiated value proposition and our new aspenONE licensing model.

With that, we'll take some questions and I will remind everyone that we will need to defer many or all questions related to the current quarter or more forward-looking questions due to the fact that we are currently in the quiet period for our December quarter. We hope you understand. Operator, we'll take some Q&A.

(Operator Instructions). Your first question comes from Richard Davis with Needham.

Thanks very much. So the question I have and I guess it's technically it's a little bit forward, but really what I wanted to ask because I think, frankly, this is what people are interested in and we'll get through the auditing stuff some day, is aspenONE. aspenONE was introduced, I think it was like '04 as I recall, but somewhere around then. One of -- we're five years into the launch of this thing or the roll-out of this thing, what are the gating issues to create adoption? Is it just -- are people upgrading, so talk around that? And then, is the software -- is there a portion of the software that over time could be moved into the cloud because my understanding now is aspenONE is mostly behind the firewall and I understand that that's important, but is there a portion of this that goes into cloud and if so, is that a good thing for you guys in terms of operational expenses and things like that? So really just how you thing about that, not so much what it means by the next quarter, but that would be real helpful.

Okay, Richard. So aspenONE, you're right, was announced quite some time ago, back in the '04, '05 timeframe. There's certainly been a transition over the past several years, as people have included and started to use more of our solutions as they become integrated. We dropped the metric, as you remember, a few years ago on what was an aspenONE deal because it got to be a huge percentage of the Company's licenses, so I -- I like to differentiate between the licensing model, which we talked about here today, and the accounting associated with it with uptake of people who are running our applications in an integrated way, which continues to scale and continues to grow.

So from an operating and operational perspective with the sales force and going out and working with the customers, not much as changed other than we now for the first time include all of our products or all of the solutions for the engineering suite or the manufacturing supply chain suite in the token model and that is a simplification and an expansion of what the customer gets in their entitlement when they sign as a result of the aspenONE licensing model. So there's no impediment for people adopting and using more of our software. If anything, the new licensing model enables them to have more access to our products in a simpler way and they can turn them on as they choose.

As far as the aspenONE licensing model goes, the great effect of that obviously is ratable or subscription revenue recognition and the bundling of maintenance over time. As far as the cloud goes, the Company's experimented in the past with licensing models or hosting models or other things that, frankly, our customers really weren't all that interested in. Now whether we're going to get into more cloud computing, there could be some applications that are processor intensive from a modeling and math perspective, which may benefit from this, but we already do a lot of multi-processor processing with a bunch of the different applications, so I would say in the short term probably not but it'll be something we'll look into as we move forward.

Got it, and then one quick follow up. In terms of penetration I remember a few quarters ago it that was the low teens in terms of a notional penetration of aspenONE and upgrade cycle. Is it still [20 or] something like that, or how far are we into this game because I know it's a moving target?

Yes, it's a bit of a moving target, but there's still a bunch and I think you differentiate between revenue and overall customers. Many of the larger customers from an annual spend perspective are already running the aspenONE software. I think we described in the analyst day that there was a whole segment of the population of our customers that are in the medium size that would not have been able to run the aspenONE software on a tokenized basis because of the old revenue model, so we're clearly targeting those folks. But we're still, we believe, in total customers there's still plenty of running room here and there's also plenty of running room for penetration into the larger customers and get them running more of our applications, so it's still, in our terms, relatively early days.

Got it. Thank you very much.

Your next question comes from Mark Schappel with The Benchmark Company.

One of the Company's goals over the next 12 months was to increase the number of partners or the number of bars that you had, especially in your non-core verticals, and I was wondering if you could comment on any progress you made on this front in the quarter?

We actually have made a bunch of progress over the past three or four quarters. We've got some new leadership in that space. They're doing a good job. It's still a de minimus amount of our overall license bookings here in the first quarter, but we expect it to scale this fiscal year a little bit. We've got some very active partners and resellers around the world. We're also -- you would have noticed as we move towards a direct sales model in the Middle East, we also have partners and resellers in that region. as well. So we expect it'll scale a little bit during this fiscal year, become a more material part of our business. The overall size of the group continues to grow modestly. We're interested more in the quality and the activity of the group as opposed to the volume, but so far we're meeting our goals and we expect it will improve a little bit as we move forward.

Okay. And if you exclude your business model transition for a minute here and you look at your business on a year-over-year basis, would you characterize it as being up slightly, down slightly, pretty much flat? Could you give us a little -- give us a better handle on that?

I guess we'll break it into a couple of pieces. On the services front it's clearly down on a year-over-year basis as we've seen the economy affect our professional services business, our training business and to a bit of a lesser extent, the maintenance business. From a software perspective, last year bookings -- so from '08 to '09 -- were down on a sequent -- on a year-over-year basis about -- in the mid-teens. From a bookings perspective in the first quarter we were down in the low 20s year over year. But as we've said in the past, renewals come up at varied during each fiscal year and our job is to renew those deals. We said in the past that we're in the high 90s from a renewal perspective. That continues to be the case and our job is to grow those engagements as they move forward.

I think given the fluctuation and the global economy and the end markets that we serve, which are under some pressure and have been over the past year or so, I think our business is up a little bit in the license line, which is good. We announced -- and you would have seen last summer -- the total backlog of licenses that were up from about 850 to 950 at the end of the third quarter was the number that was out there on an MPD basis. We're clearly up and we're clearly doing a bunch of things right. but over time, we intend to continue to grow that install base and I think we have done so, despite the economy, and we'll the continue to see how we do as people transition to the new model.

Then a final question, with respect to headcount, I didn't catch that. What was the headcount at quarter end?

Headcount has remained flat over the past several quarters at just about 1,300, a little more; 1,305, something like that.

Thank you.

Your next question comes from Philip Rueppel with Wells Fargo Securities.

Great, thanks very much. Now that you've had about five months selling the new model, have you seen any pushback from customers or existing customers that don't want to transition for whatever reason? And conversely you had mentioned that that there might be some benefit of the new model to spur renewals that were even higher than they had been in the past. Have you seen any examples of that yet?

We haven't seen really any pushback, Phil, in people wanting to move to the new model. Obviously, there are negotiations that go on every day. People are more or less interested and depending on who they are and where they are, but in general the adoption or the interest has been good. It's unclear yet. We're partway through the second fiscal quarter. We didn't start selling until the summer so we'll see how the quarter closes out and when we do our call in February we'll have a much better metric on what the adoption rates were, what the issues were and the like.

Great, thanks.

And then so far, so good.

Great. Just looking at $32 million in bookings -- license bookings, from what you've said peeling out where the software revenue line item came from, it looks like most of that minus maybe $3.5 million, $3.6 million were subscription based. Is the term those subscriptions similar to what you'd seen before, roughly five years on a term basis?

Yes.

Great. And then finally, from a G&A perspective, how much of that was -- would you consider excess accounting fees and how should we think about that going forward? Does that just ramp down slowly over the next couple of quarters, or does it -- do you just get to shut it off soon?

I don't think -- it doesn't fall off a cliff but you will see a significant decrease as we go for the second quarter and continued reductions throughout the fiscal year. So it's going to come down at a relatively rapid rate but again, not immediately all next quarter.

Okay, that's it for me. Thanks very much.

At this time, there are no further questions. I would now like to turn the call back over to to the presenters.

Okay.l Thank you all for your attendance here this morning and thanks to all of our shareholders again for your patience as we moved our way through our back filing requirements. We're very pleased with the performance of our finance team over the past six months or so to get a lot of filings done and we're very pleased to be back current in our financials and we'll move our way forward here to relist on a major stock exchange and get back to normal. Thanks again and happy holidays to all.

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