Aspen Technology Inc (AZPN) 2010 Q3 法說會逐字稿

Good afternoon, my name is Janelle, and I will be your conference operator. At this time I would like to welcome everyone to the Aspen third 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). I would now like it turn the call over to Mr. Mark Sullivan, Chief Financial Officer. Thank you. Mr. Sullivan, you may begin your conference.

Thank you, operator. Good afternoon, everyone. Thank you for joining us to review our third quarter fiscal 2010 results for the period ended March 31, 2010. 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 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 third quarter of fiscal 2010, both of which are on file with the SEC. Also please note that the following information is related to our current business conditions and outlook as of today, May 6, 2010. 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 third quarter of fiscal 2010, and then Mark Fusco will discuss some additional business highlights before we open up the call for Q&A. Now we turn to the Company's third quarter fiscal 2010 financial results. Let me remind investors that this represents the third quarter in which our results reflect the financial reporting impact of our new Aspen One licensing model. While the majority of the Company's contracts have historically been on a multi-year term basis, the associated licensed revenue was predominantly recognized up front. This compares to our new Aspen One licensing model which has ratable revenue recognition over the life of the contract. While there is a negative impact on our P&L from the near-term perspective as a result we expect our long-term financial results to ultimately exceed that which would have been possible under the predominantly up-front revenue licensing model as our term customer base renews and otherwise moves to a new Aspen One licensing model.

Another financial reporting impact of moving on our new Aspen One licensing model is many of our current GAAP-related year-over-year comparisons are not particularly meaningful in assessing our business. Over the next several years, we believe investors will benefit from financial information, in addition to our GAAP financial statements, in order to better evaluate the Company's financial performance as well the long-term health of our business. As a result, we are providing a series of supplemental metrics. Total product related bookings is a measure of overall business activity during any period and represents the combination of license and maintenance fees that are included as parts of a contract. This metric includes the value of license renewals as well as growth, either from new customers or increased contract value from existing customers. Keep in mind that the timing of license renewals and close dates for large contracts impacts period-to-period bookings comparisons. Total product-related bookings were approximately $94 million during the third quarter of fiscal 2010, consistent with the level of our seasonally stronger second quarter.

In order to provide additional transparency during fiscal 2010, we are providing estimates related to year-over-year net present value comparisons. That is how we reported licensed bookings prior to the introduction of our new Aspen One licensing model. In the year-ago period we reported license bookings of $41 million on an NPV basis. During the third quarter of fiscal 2010, our $94 million in total product-related bookings would translate to approximately $62 million of licensed bookings on a comparable basis. On a fiscal year-to-day basis, our licensed bookings are up over 10% compared to the comparable period of fiscal 2009. As a reminder, when we enter fiscal 2011 and have year-over-year comparisons on the new reporting basis, we will only report and comment on total product-related bookings. We closed 21 product-related bookings that were greater than $1 million during the quarter, which compared to 18 last quarter. And there were 39 transactions that were between $250,000 and $1 million compared to 57 last year. The average deal size for product-related bookings over $100,000 on a gross basis was approximately $807,000, which compares to $778,000 last quarter.

Another new metric we began providing this fiscal year is our billings backlog, which represents the value of our multi-year term-based contracts. It has not been recorded as revenue and is not reported on our balance sheet, either as receivables or as deferred revenue. Our billings backlog was over $270 million at the end of the quarter, which is an increase from the over $205 million level at the end of last quarter. Expected future cash collections is the sum of the Company's billings backlog net accounts and installments receivables, plus deferred interest from committed term license contracts. The Company's contractually committed future cash collections as of the end of the third quarter was over $435 million, which is an increase from over $400 million at the end of last quarter. Total contract value is another key non-GAAP measure that we used to measure the value of the Company's overall customer base and associated multi-year term contracts. This metric is reported on a gross basis and beginning in fiscal 2010 includes maintenance when it is bundled with the term-based license arrangements. As previously shared our total term contract value at the end of the second quarter was over $1.18 billion. This figure grew on a sequential basis as a result of new and expanded usage in the quarter in addition to new contracts renewing with maintenance now included.

Let me turn to our financial results on a GAAP basis. Total revenue of $45.6 million was down from $71.3 million in the prior year period, primarily as a result of the ratable recognition associated with our new Aspen One licensing model. I indicated a moment ago, the Company's total product-related bookings were up meaningfully on a year-over-year basis. Subscription revenue came in at $4 million, which is an increase from $1.2 million last quarter. There was no subscription revenue in the prior year period as we launched the new Aspen One licensing model during the first quarter of fiscal 2010. As a reminder, subscription fees from the new Aspen One licensing model include maintenance as part of the overall subscription. Given the fact that we are recognizing subscription bookings over the course of a five-plus-year average contract length, it will take time for subscription revenue to build.

Software revenue is the component of our revenue that is most impacted by the move to our new Aspen One licensing model. Software revenue relates to new perpetual license contracts, any term-based license products for point products as well the recognition of software license fees that were deferred from prior fiscal year periods. As a reminder, we now bundle maintenance with term-based contracts for point products. The software revenue for these arrangements is recognized annually as customer payments become due. So while this software revenue is not recognized on a daily subscription basis, it is another source of recurring revenue. Software revenue was $14.7 million in the third quarter of fiscal 2010, compared to $41.1 million in the prior year period. Within our third quarter, software revenue, approximately $2.7 million related to transactions recognized on an up-front basis including $745,000 related to perpetual licenses. We expect software revenue to be variable on a quarter-to-quarter basis, due primarily to the timing of customer invoicing. In the fourth quarter, we expect substantially lower software revenue as compared to the third quarter, as a result of the timing of invoicing related to contracts and our billings backlog. Looking back at our fiscal 2009 software revenue, I would remind investors that in prior fiscal year periods the Company predominantly recognized term license revenue on an up-front basis, and the majority of licensed bookings were recognized as license revenue in the same period.

Finally, services and other revenue was $26.9 million compared to $30.2 million in the year-ago period. The year-over-year decrease was primarily the result of a challenging macro environment facing professional services. In addition, maintenance associated with the new Aspen One licensing model is now included within our subscription revenue. On a sequential basis, services and other revenue was down from the prior quarter, primarily due to the fact that last quarter we reached a milestone associated with a sizable professional services engagement which triggered the recognition of revenue for work to span multiple quarters. We had called this out as the driver to sequential growth in our services and other revenue last quarter. Our reported services and other revenue will likely decline over the next several years, even though the underlying economics of the business are unchanged. As a result of the maintenance revenue being reported in our subscription revenue when it is included as part of our new Aspen One licensing model.

Turning to profitability. Gross profit was $30.9 million with a gross margin of 68% which compares to $52.9 million and a gross margin of 74% in the prior year period. The year-over-year reduction is due to the vast majority of the Company's licensed bookings in the third quarter of fiscal 2010 not being recognized on an up-front revenue basis where as they were in the prior period. Over the long term 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 up-front revenue model, a portion of customer payments were broken out and classified as interest income.

Operating expenses were $50.6 million in the third quarter, which was up slightly from $48.4 million in the year-ago period but down from the $55.5 million level last quarter. The sequential decline in our operating expenses is entirely related to stock compensating expense as we had a catch-up grant last quarter when the Company became current with its financial reporting requirements for the first time in a couple of years. We continue to make progress in lowering our G&A expenses. The key driver to this reduction is bringing down our total audit and financial consulting expenses now that we are current with our financials. During the third quarter, these expenses were $3.4 million, which was down from $5.7 million in the year-ago quarter, and $4.9 million in the second quarter fiscal 2010. In addition, if we further break this down, in the third quarter of fiscal 2010, our audit-only costs of $1.5 million were down from $2.2 million in the year-ago quarter and down from $2.7 million last quarter. Operating loss of $19.6 million in the third quarter of fiscal 2010 was an improvement from a $29.3 million operating loss in the second quarter of fiscal 2010 and it compared to operating income of $4.5 million in the year-ago period. Net loss of $21.8 million in the third quarter of fiscal 2010 was also an improvement from a net loss of $30.7 million in the second quarter of fiscal 2010, and compared to net income of $8.1 million in the third quarter of fiscal 2009.

Now let me turn to the balance sheet and cash flow. The Company ended the third quarter with $119.1 million in cash, which was up $9.6 million from $109.4 million at the end of the prior quarter. The Company did not sell any installments receivable to raise cash during the third quarter of fiscal 2010, and it continued to reduce its secured borrowings balance which was down by $9.1 million from the end of the second quarter of fiscal 2010, ending the third quarter at $87.4 million. The Company's collateralized receivables balance at the end of the third quarter was $63.5 million. The difference between the collateralized receivables and secured borrowings relates to the fact that a portion of secured borrowings was collateralized by a contract containing the billings backlog. Our secured borrowings have fully collateralized.

At the end of the third quarter the Company owned receivables balance was $175 million, which was down from $192.1 million at the end of the second quarter. Our installments receivable balance will continue to decline moving forward. The majority of future license bookings will not be recorded as installments receivable and will instead be included in our billings backlog. Accounts receivable will continue to reflect the value of the invoices that have already been billed and are yet to be collected.

From a cash flow perspective, the Company generated $19.4 million in cash from operations during the third quarter, and as I will discuss later, we have increased our expectations for cash flow for fiscal 2010. We remained focused on moving the Company's overall book of business to multi-year agreements that are paid annually. Our progress in doing so was evidenced by the fact that the Company had not sold receivables to raise cash in over two years. We continue to reduce the perpetual license mix of our business, and we have increased the percentage of our multi-year term-based licensed bookings annually to as high as 90% plus in recent quarters.

I'll wrap up with deferred revenue, which reflects the difference between amounts billed and revenue recognized. Deferred revenue was $85.6 million at the end of the quarter, which was an increase from $73 million at the end of last quarter. We expect deferred revenue to grow as our subscription business scales. With that let me turn it over to Mark Fusco for some additional perspective on our third quarter performance.

Thanks, Mark, and thanks to everyone for joining us today. We are pleased that our momentum from the second quarter continued into the third quarter, and we are optimistic about our outlook for the fourth quarter, as well. We return to positive year-over-year bookings growth last quarter, and our licensed bookings were up again in the third quarter, driving our fiscal year-to-date licensed bookings growth to over 10% on a year-over-year basis. In addition, our product-related bookings were essentially flat on a sequential basis despite the fact the third quarter is typically much weaker seasonally than our second quarter. The primary driver to the strong bookings performance was customer interest in moving to our new Aspen One licensing model including situations where there was not a current need for expanded usage. Customers wanted to move to the new Aspen One licensing model because they want the flexibility of having access to all of our solutions within a product family. We believe this is a positive for Aspen Tech from a long-term perspective as customers commit to including maintenance over the long term, and they are more likely to test drive additional applications and realize the incremental value and productivity improvements. This has the potential to drive increased product usage and revenue for Aspen Tech.

During the third quarter, approximately 80% of our product-related bookings were on our new Aspen One licensing model. From a vertical perspective, energy was the strongest segment followed by chemicals. The combination of energy, chemicals, and engineering and construction represented over 90% of our total product-related bookings in the quarter. From an overall perspective, we feel very good about Aspen Tech's market position and long-term outlook. Our competitive position in our core markets remains strong as it has ever been, we are maintaining or gaining market share in the key markets that we serve, and we continue to be the only software vendor focused on the process, manufacturing industry that delivers a full suite of best[-of-breed] solutions across engineering, manufacturing, and supply chain.

From a product perspective, we are still in the early stages of bringing our new Aspen One licensing model to our very large blue-chip customer base, and there is plenty of room to continue expanding our relationships through broader adoption of our full suite and increased day-to-day usage. From our geographic perspective, we are investing in new markets such as the Middle East, Latin America, Russia, and China where we believe there are attractive growth opportunities. Aspen Tech's value proposition and differentiation is just as strong for these markets as they are in the core geographies we serve. From a business model perspective we are in the final quarter of what we expect to be the trough year for GAAP business model transition. Our billings backlog is growing, and that will start to convert into a growing subscription revenue stream in fiscal 2011, which we expect will significantly reduce the level of operating losses and drive the Company to its long-term operating margin target of 27% GAAP operating margin over the next four to five years.

From a cash flow perspective, we have increasingly moved to a subscription cash flow model as Mark Sullivan discussed a moment ago. Not only is cash flow on track to be above our initial expectations for 2010, but we expect to increasingly progress toward a normalized cash flow run rate in fiscal 2011 with the process being completed over fiscal 2012 and 2013. As we look ahead, we believe the Company is well positioned to emerge with one of the strongest market positions in all of software with over $1 billion in total term contract value, a subscription model that provides a high level of visibility into future revenue and cash flows, best in class profitability margins and an attractive long-term growth opportunity. With that, let me turn it back to Mark for some additional comments.

Thanks, Mark. I'd like to close by providing updated guidance. From a product-related bookings perspective, we are now targeting full fiscal year bookings of approximately $310 million, which is an increase from our original target of $270 million. This is on a gross basis and includes maintenance, that is part of our term-based license contracts. This implies mid-to high single-digit year-over-year growth in the license-only portion of our product-related bookings with all that growth coming in the second half of the fiscal year. We continue to target total GAAP revenue in the range of $165 million, with a reasonable amount of variability. Operating loss is expected to be in the range of $100 million, and loss per shares is expected in the range of $1.05 based on shares outstanding of approximately $91 million. Finally, from a free cash flow perspective we are now targeting free cash flow of approximately $40 million plus or minus reasonable variability. This is an increase from our initial target of approximately $30 million, primarily due to the Company's strong third quarter performance, particularly from a bookings and cash collections perspective. With that, we will now be happy to take your questions. Operator let's begin the Q&A. Thank you.

Certainly. (Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Phillip Rueppel with Wells Fargo Securities.

Great. Thank you very much. And nice bookings this quarter. Could you comment a little bit -- you're gave us some updated guidance that will imply strength in the fourth quarter. But could you comment a little bit more just about the qualitative pipeline building as well as whether any of the deals that closed in Q3 were they pulled forward from Q4?

We -- we have a good pipeline. I think we mentioned on the last call that we -- the pipeline had been expanding and there was interest in the new suite of products and the new Aspen One licensing model. We continue to have a very solid pipeline as we enter the fiscal fourth quarter. As a reminder it's usually a very good bookings quarter for the Company, as we move toward the end of our fiscal year. We expect that to continue. The third quarter came in, I would say, a little bit better than we would have expected. We rarely model out that we're going to be flat on a sequential basis from Q2 to Q3. Q3 is usually softer, and we certainly saw that last year. And we've seen it in prior periods. So I would expect the fourth quarter to be pretty good, Phil. It usually is.

Given the customers and the markets that we serve and the overall I would say general better feeling in the core customer segments and the core verticals that we serve, we had a user group meeting this week and I would say generally people were in pretty good form. And-- they were feeling pretty good about their business. So given a reasonable performance in the economy, I would expect our fourth quarter to be pretty good as it usually is. And we do have a strong pipeline. We have lots of opportunities, as we say in the past, big deals can go one way or the other in a quarter. And we certainly closed our fair share of them in the third quarter. We'll see how we do on our close rates for the fourth quarter, but we're optimistic that we end the fiscal year and hopefully turn the corner into fiscal 2011 in very good shape with a very good pipeline.

Great. And then second, maybe for you, Mark. On the cash flow, was there anything unique about the quarter -- I know you did raise full-year cash flow guidance, but was curious if there was anything in terms of extending payables or bringing in some receivables that would be unusual and not something that would be consistent going forward. Thanks.

Well, Phil, I think from a cash flow perspective, we've been messaging out that this transition has been ongoing for several years. As we stopped factoring receivables about 2.5 years ago, we started getting the benefits of building up billings backlog and cash that was going come to the company over a period of time. The first couple of quarters, I'd say cash flow was relatively anemic as we turned the corner with a new revenue model. It was a weak quarter in the first quarter. We've got a little -- it got a little bit sequentially better in the second quarter. This was really the first quarter that you can see that the company is making good progress toward a normalized cash flow rate that I think we and our investors will be happy with. It can vary from time to time, and forecasting how collections are going to be at any given quarter is sometimes difficult. But, we generally feel pretty good and have good visibility as to how the cash is going to come. And we think, we've hit the trough and we're moving through that toward normalized run rates as we said in our prepared remarks on cash flow. So I would say this Q3 is the first quarter that we'd be I guess relatively happy with how cash flow and I think it generally represents how we think about Aspen as a Company. It will improve I think a little bit over time. But it was a really good result, and it's nice to see for the first time that the Company can operate a subscription cash flow model and have it come out the way I think our investors and certainly the Company wants. But there was nothing particularly unique other than we are executing well, and we are collecting.

Great. Thanks. That's it for me, and congrats on the progress.

Thank you.

(Operator Instructions). Your next question comes from the line of Richard Williams with Cross Research.

My question -- good quarter, guys. Wonder if you could give me some color on supply chain side of the business?

Sure. Thanks, Richard. We saw -- we've seen pretty good demand across the product line throughout the year. I would say it's been generally a little stronger in the engineering part of our business, which isn't surprising as we moved to try to transition a lot of legacy contracts, the term contracts that were in the total contract value to the new model because that will drive our growth in the future. The manufacturing and supply chain is a bit more variable with the economy. We've started to see more strength over the past couple of quarters. This wasn't -- this is a pretty good quarter. We picked up a couple of nice supply chain deals during the quarter. And I expect going forward our customers, especially in the area of petroleum supply chain, this is an area that Aspen leads and has number-one market position and some unique differentiation with the modules that we own and bring to market and as those modules have been built out and integrated over the pas severalt years by the developers, they start to bring material changes to what our customers can do in supply chain. So we expect to in the coming quarters here, if the economy stays reasonable, some real demand for petroleum supply chain solutions and Aspen is unique in that area. So it was a decent quarter in the manufacturing and supply chain space, and we expect that it will continue.

Okay. Thanks very much. Good luck.

There are no additional questions at this time. I would now like to turn the call back over to the management team for closing remarks.

Thank you, operator. And thanks everyone for joining us today. We're very pleased with the third-quarter results. We're glad that we're moving our way through our transition. We're now almost through the first fiscal year of the revenue transition which is important. And I think importantly we've shown that whereas in the past we haven't had a subscription cash flow model, we do now. And for the first quarter, I think the results from a cash flow perspective were good. And it's something that we've been working toward for several years now. It's nice to it finally happen. And we're also happy to continue to pay down our installments receivable debt. Thanks to all of our investors and to our employees for the hard work in the quarter. And we'll look forward to seeing you this quarter at several industry events. Thank you.

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