Aspen Technology Inc (AZPN) 2010 Q4 法說會逐字稿

Good morning. My name is Brenda and I will be your conference Operator today. At this time I would like to welcome everyone to the Aspen Technology Fourth Quarter and Fiscal Year 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, Mr. Mark Sullivan, Chief Financial Officer, sir, you may begin.

Okay, thank you, Operator. Good morning, everyone. Thank you for joining us to review our forth quarter and fiscal year 2010 results. The period ended June 30, 2010. I am Mark Sullivan, CFO of AspenTech, and with me on the call today is Mark Fusco, President and CEO. Before we begin I'd like to 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 differences include but are not limited to those discussed in today's call and our most recent Form 10-K for fiscal 2010, which is now on file with the SEC. Also please note that the following information is related to our current business conditions and our outlook as of today, September 2, 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 fourth quarter and full fiscal year 2010 and then Mark will discuss some additional business highlights before we open up the call for Q&A. Let me provide a reminder that this represents the first full year in which our results reflect the financial reporting impact of our new aspenONE licensing model. While the majority of the Company's contracts have historically been on a multi-year term basis, the associated license revenue was predominantly recognized up-front. This compares to our new aspenONE licensing model, which has ratable revenue recognition over the life of the contract. Financial reporting impact of moving to our new aspenONE licensing model is that many of our current GAAP related year-over-year comparisons are not particularly meaningful. For the next several years we believe investors will benefit from business metrics, in addition to our GAAP financial statements in order to better evaluate the Company's performance. Total product related bookings is a measure of business closed during any period and represents the combination of license and maintenance fees that are included as part 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. Total product related bookings for the fourth quarter of fiscal 2010 were a record $138 million, which was over 65% greater than we anticipated. The strong performance contributed to a record full year bookings performance of approximately $366 million. This is nearly $100 million greater than our original guidance of $270 million provided on our second quarter conference call. Several factors contributed to this outcome. First, we've seen strong customer interest in moving to our new aspenONE licensing model. This contributed to increased early renewal booking activity during the fourth quarter and fiscal year. These early renewals did not have an immediate benefit to AspenTech's financial results, but they are beneficial because our customers are committing their business for an extended period of time.

Additionally we believe accelerating the migration of customers to our new licensing model will improve our ability to drive expanded usage as our customers gain access to our full product suite. Second, we saw strong increase in bookings related to new and expanded usage. This is the component of our bookings that drives the longer term growth of our business and related total term contract value metric, which grew approximately 10% during fiscal 2010. Finally as we've stated in the past, the timing of closing large contracts can significantly impact period to period booking comparison. And during the fourth quarter one of our larger customers elected to move to our new aspenONE licensing model. This represented approximately $30 million of our product related bookings in the quarter. In order to provide additional transparency during fiscal 2010 we are providing year-over-year bookings comparisons on a net present value basis, consistent with how we reported license bookings prior to the introduction of our new aspenONE licensing model. In the year ago quarter, we reported license bookings of $59 million on an NPV basis. Our $138 million in total product related bookings in the fourth quarter translates to approximately $95 million on a comparable basis, an increase of over 60%.

On a fiscal year basis, license bookings increased more than 25% compared to fiscal year 2009. Another key metric we track is total contract value, a measure of the renewal value of the Company's multi-year term contract customer base. We believe total contract value is a useful metric for evaluating the growth of our business because it is driven by retaining customers, adding new customers and expanding product and token usage across our customer base. As we move into fiscal 2011, we've adjusted the manner in which we calculate total contract value. We now take the value of the final year of each of our multi-year term agreements and multiply that value by the length of the existing contract. Our contracts typically have annual price increases, which means the last year of the contract has the greatest value and it is the basis for which the contract will ultimately be renewed. Our prior methodology assumed annual price increases throughout the renewal time period. Although we expect to be able to continue the practice of building price increases into our term contracts, we thought it was best to base this metric off the final year of the current contract with no additional pricing assumptions.

This change in methodology has been applied across all historical periods so the long-term trend is consistent, as I'll share in a moment. Based on our updated methodology, total contract value was approximately $1.2 billion at the end of fiscal 2010, an increase of 17% compared to $1 billion at the end of fiscal 2009. Total contract value in 2009 was up approximately 6% compared to the end of fiscal 2008. As discussed previously, beginning in fiscal 2010, the maintenance that is bundled with our subscription and term contracts is now a component of our total contract value. This addition contributed approximately seven percentage points of our 17% total contract value growth in fiscal 2010. So on an apples-to-apples basis the license portion of our total contract value increased by slightly over 10% during fiscal 2010 compared to the just mentioned 6% growth in fiscal 2009. The license portion of our total contract value has a three year compound average growth rate of approximately 10%, which is consistent with growth levels we previously discussed. Turning to our other business metrics, we closed 20 customer bookings that were greater than $1 million during the quarter and 50 transactions between $250,000 and $1 million.

The average deal size for customer bookings over $100,000 was $1.1 million, which was aided by the large customer transaction that I referenced earlier. Another new metric we began providing this fiscal year is our billings backlog, which represents the value of our multi-year term based contracts that have not yet been recorded as revenue and is not reported on our balance sheet. Our billings backlog was $389 million at the end of the quarter, which is an increase from the $270 million level at the end of last quarter and $101 million at the end of fiscal 2009. The future cash collections of AspenTech is the sum of the Company's billings backlog, net receivables, plus deferred interest from committed term license contracts. We also added collateralized receivables to this calculation in order to more closely match our future cash collections metric to the presentation of our GAAP cash flow statement where changes in collateralized receivables impact cash from operations. This updated metric better reflects the cash generating capabilities of our business.

Upon renewal of collateralized contracts we will retain the related annual payments, as we've not sold receivables for nearly three years and plan to continue that practice. The Company's future cash collections at the end of the fourth quarter were $625 million, an increase from $537 million at the end of last quarter and $466 million at the end of fiscal 2009. The significant increase is indicative of our growing subscription cash flow model. I would also mention that our future cash collections metric, including the billings backlog component, is now in our fiscal 2010 10-K for each of the last five quarters. Let me turn to our financial results on a GAAP basis. Total revenue, $38.2 million, was down from $71.3 million in the prior year period, primarily as a result of the ratable revenue recognition associated with our new aspenONE licensing model. Subscription revenue came in at $5.9 million, which is an increase from $4 million last quarter and there was no subscription revenue in the prior year period, as we launched the new aspenONE model during the first quarter of fiscal 2010.

Approximately three quarters of our fourth quarter and fiscal year product related bookings were on a subscription basis. However, 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 the subscription revenue to build. Software revenue is the component of our revenue that is most impacted by the move to our new aspenONE licensing model. Software revenue relates to new perpetual license contracts, any term based license contracts for point products, as well as the recognition of software license fees that were deferred from prior fiscal year periods. Software revenue for term arrangements is generally recognized annually as customer payments become due. While this software revenue is not recognized on a daily subscription basis, it is another source of recurring revenue. Software revenue does not include maintenance fees that are now bundled as part of our term contracts for point solutions. This is reported in our services revenue line.

Software revenue was $8.1 million in the fourth quarter of fiscal 2010 with $4.1 million related to point products sold with bundled maintenance, approximately $600,000 related to perpetual license agreements and $3.4 million related to software fees that were recognized under the Company's prior licensing model. We expect software revenue to be variable on a quarter to quarter basis, due primarily to the timing of customer invoicing. Looking back at our software revenue, which was $41.6 million in the fourth quarter of fiscal 2009, I would remind investors that in prior fiscal year periods the Company predominantly recognized term license revenue on an up- front basis. Finally, services and other revenue was $24.2 million compared to $29.6 million in the year ago period. The decrease was primarily a result of the challenging macroenvironment. Our services and other revenue will likely decline over the next several years, even if the underlying economics of the business are unchanged because maintenance revenue will increasingly be reported within the subscription revenue line as more contracts are converted to the new aspenONE licensing model.

Turning to profitability, gross profit was $20.7 million with a gross margin of 54%, which compares to $51.2 million and a gross margin of 72% in the prior year period. The year-over-year reduction is primarily due to the majority of the Company's license bookings in the fourth quarter of fiscal 2010 not being recognized on an up-front revenue basis, whereas they were in the prior year period. Over the long-term we expect gross margins to be higher under the new commercial model as a result of the full value of customer payments being 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 $56.4 million in the fourth quarter up from $48.9 million in the year ago period and $50.6 million last quarter. There were a couple primary drivers to the higher than expected increase in operating expenses during the quarter. Most significantly, variable sales expense was well above plan as a result of the fact that our fourth quarter product related bookings were more than $55 million higher than anticipated.

Second, we increased our legal resources due in part to increased efforts to protect AspenTech's intellectual property rights on a global basis. Finally, restructuring expense increased during the quarter due to an updated estimate related to a previously restructured lease. Continue to make progress reducing our finance and audit related expenses to levels that are more normal and sustainable. In addition, if we exclude stock-based compensation expense, which was higher than normal due to our catch up grant in fiscal 2010, our full year fiscal year total expenses were approximately $260 million, which was down slightly from approximately $263 million in fiscal 2009. Operating loss was $35.6 million for the fourth quarter of fiscal 2010 compared to operating income of $2.3 million in the year ago period. Net loss of $34 million in the fourth quarter of fiscal 2010 compared to net income of $10.2 million in the fourth quarter of fiscal 2009. Turning to the balance sheet and cash flow. The Company ended the fourth quarter with $124.9 million in cash, which was up $5.9 million from $119.1 million at the end of the prior quarter.

The Company did not sell any installments receivable to raise cash during the fourth quarter of fiscal 2010 and it continued to reduce its secured borrowings balance, which was down by $11.3 million from the end of the third quarter of fiscal 2010 ending the fourth quarter at $76.1 million. As a reminder our secured borrowings are fully collateralized. The Company's collateralized receivables balance at the end of the fourth quarter was $51.4 million, while our Company owned receivables balance was $160.3 million, down from $175 million at the end of the third quarter. Our installments receivable balance will continue to decline moving forward. The majority of future license bookings will not be recorded as installments receivable, but will instead be included in our Billings backlog. Accounts Receivable will continue to reflect the value of invoices that have already been billed and are yet to be collected.

From a cash flow perspective the Company generated $14.6 million in cash from operations during the fourth quarter leading to a full year cash from operations of $38.6 million and free cash flow of over $35 million. This was greater than our initial guidance of free cash flow in the range of $30 million, though it was shy of our updated view of annual free cash flow in the range of $40 million. This was due to the fact that an anticipated $13 million tax refund was received in two separate payments and the second payment of $6.5 million was not received until the first quarter of fiscal 2011. I feel good about the overall cash performance of the Company in fiscal 2010 and most important is the foundation that we put in place for cash flow to scale longer term. With that let me turn it over to Mark Fusco. Mark?

Thanks, Mark, and thanks to everyone for joining us today. We are very pleased with the Company's fourth quarter and fiscal year performance. Fiscal 2010 was largely about launching our new aspenONE licensing model, which provides customers with access to all of our solutions within a product family, such as our engineering suite. We believe we provide customers with the best adoption model, a multi-year subscription agreement similar to a software as a service model and customers commit to a level of spend based on their expected usage levels. Customers can choose and use any of our applications up to their committed spend level and they grow over time as they expand their overall usage levels. Importantly, our solutions are highly mission critical, customers design and operate their plans using our software and as a result we have a long-term track record of best-in-class renewal rates and expanding the scope of our customer relationships. Our solutions also have the ability to deliver a significant return on investment.

We believe providing customers with the ability to trial our software will further lower the barriers to adoption, as customers can more easily realize the value potential and then scale their implementations. For AspenTech the benefits are equally as attractive. For the first time our entire Company and business model are aligned. The way our products are packaged and sold, revenue is recognized and cash flow occurs are all aligned to provide AspenTech with a long-term subscription based model. This provides AspenTech with improved visibility and predictability, which we believe will drive increased shareholder value over time. Our business model is now very simple for customers, as well as AspenTech. We believe this will also further improve our ability to scale from a long-term perspective, both from a back office perspective as well as from a sales perspective as we move away from focusing on renewing deals and we become increasingly focused on growing our customer relationships.

While we have long contracted with our customers on a multi-year term license basis, at the start of the year it was still somewhat uncertain how customers would take to the new packaging of our suite of solutions. The results at the end of the first year far exceeded our most optimistic goals. Approximately 75% of our product related bookings for the full fiscal year 2010 were on the new aspenONE licensing model. As a result, over 20% of the license value of our portfolio of term contracts has already moved to the new aspenONE licensing model. Total product bookings for the full fiscal 2010 were approximately $100 million greater than our original expectation and new and expanded usage drove double-digit annual increase in the license portion of our total contract value. During fiscal 2010 our sales organization was incented to migrate customers from their current multi-year term licenses to our new licensing model. While we were very pleased with the Company's performance from a renewal perspective, we are even more encouraged by the strong growth associated with customers expanding the scope of their deployments and increasing their usage of our applications.

As we start fiscal 2011 we are comfortable that our new aspenONE licensing model has been proven and as such we are decreasing the level of focus on pure migrations and further increasing our focus on driving growth with new and existing customers. We have grown the license portion of our total contract value over 10% annually over the last three years and we were able to deliver a similar performance in 2010 in spite of a challenging economic environment. We believe we have the opportunity to drive similar double-digit growth on a longer term basis, assuming a healthy economic environment. To be clear, in the near-term we expect the growth of our total contract value will be even higher as maintenance is bundled as part of the subscriptions under the new aspenONE licensing model. From a vertical perspective, chemicals was our largest contributor during the fourth quarter due in part to the fact that this is where our largest deal occurred during the quarter. Energy and E&C were at fairly similar levels.

For the full fiscal year 2010, energy represented approximately 34% of our bookings, chemicals 32% and engineering and construction 28%. Some of our top three verticals, again, represented north of 90% of our total product related bookings. From a product perspective we continue to see balance demand across our suite of solutions. Engineering increased to approximately 75% of our product bookings from the usual level of approximately two-thirds due in large part to the fact that a majority of the early contract renewals in fiscal 2010 related to our engineering solutions. Our manufacturing and supply chain solutions contributed the remaining 25% of our product bookings. From an overall perspective engineering, manufacturing, supply chain each delivered full year product related bookings that exceeded our expectations. We believe there's plenty of room for growth long-term. We are still in the early stages of bringing our new aspenONE 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.

We are also investing in new markets such as the Middle East, Latin America, Russia and China where we believe there are attractive growth opportunities. As we look ahead to fiscal 2011, we are focused on continued progress of our strategy and business model. We expect the Company's subscription revenue to begin scaling rapidly as the result of the significant growth of our billings backlog during fiscal 2010. We also expect reported operating losses to reduce significantly and the completion of our revenue model transition to result in AspenTech generating GAAP operating margins in the mid to high 20% range over the next four to five years. Equally, or even more important, is the continued progress related to setting the foundation for a subscription based cash flow model. We believe AspenTech is well positioned to emerge with one of the strongest market positions in all of software, over $1 billion in total term contract value, a growth opportunity in the double-digit range, a subscription model that provides high visibility into future revenue and cash flows and best-in-class profitability margins.

I will close with a brief remark relative to the secondary offering that we filed in July. Advent International is looking to sell approximately 17 million shares and we do not intend on selling any primary shares. Their investment in AspenTech dates back to 2003 when their financing saved the Company. Their primary focus is private investments and we have said in the past we are obligated to help them market a transaction at the right time in order to make the process as efficient as possible for our overall shareholder base. We are living up to that committment now that our Company is current with our filings and we are on file with our first 10-K under the new licensing model. We look forward to improving the diversification of our institutional shareholder base as we reduce Advent's position. With that I'll turn it over to Mark Sullivan for some guidance.

I'd like to close by providing guidance for fiscal 2011. We're targeting product related bookings of approximately $300 million to $325 million for the full year fiscal 2011. This compares to $366 million in fiscal 2010. We have a higher level of natural renewal activities scheduled in fiscal 2011 as compared to fiscal 2010. We are assuming a lower level of early renewal activity in fiscal 2011. In addition, as I mentioned in my earlier remarks, we had a $30 million product related booking during fiscal 2010 which skews the year-over-year comparison. We believe the growth of our business is more important than the level of total booking activity. In fiscal 2011 we currently expect the growth component of bookings to be in the same range as 2010 leading to growth in the upper single-digit to double-digit range for the license portion of our total contract value and total contract value growth in the mid-teens range. We are targeting total revenue in the range of $180 million to $190 million for fiscal 2011 and we are assuming that subscription revenue will increase to over 25% of our total revenue in fiscal 2011, up from approximately 7% in fiscal 2010. We currently expect a full fiscal year operating loss in the range of $70 million to $80 million and loss per share is expected to be in the range of $0.76 to $0.86 based on shares outstanding of approximately 94 million.

Finally, we are targeting cash from operations in a range of $60 million for the full year of fiscal 2011, with free cash flow in the mid $50 million range with a reasonable amount of variability. This would represent an increase of over 50% compared to fiscal 2010 and, similar to fiscal 2010, we expect the second half of our fiscal year to be seasonally stronger. We've not sold receivables to raise cash for over three years now and over the last couple of years, we've been increasing the portion of our business that is on annual payment terms as opposed to up-front. The strong growth in our future cash collections metric is evidence of the fact that our subscription cash flow model is building and we expect the transition to be largely complete by the end of our fiscal 2013. By this point in time we will have renewed the strong majority of contracts under which receivables were sold in the past and our secured borrowings will have been reduced to immaterial levels. We believe our free cash flow has the potential to be $1 per share or better in fiscal 2013, assuming shares outstanding in the mid 90 million range. In summary we're very pleased with the Company's execution in the fourth quarter and fiscal year 2010 and we're optimistic about the Company's long-term outlook. With that, we are now happy to take questions. Operator let's begin the Q&A.

(Operator Instructions) Your first question comes from the line of Richard Williams.

Good morning guys.

Good morning.

Could you give me some color on each of the business areas by geography?

Sure. As we just mentioned on the call and you would have seen in the filings, we had a very strong bookings year overall. It was strong horizontally, it was strong vertically, and it was also strong geographically. We had multiple different operating groups within the Company that actually had record bookings years. This year the US was strong, as it has been for the past few years. Surprisingly, at some level given the news in the spring out of Europe, Europe actually had a record year for us and did very well. And other parts of the world, including Asia and Latin America, did well. So we were strong across-the-board in all the different geographies, including our global accounts. It was just a very solid year and we're very pleased with the Company's execution and we're pleased with the performance.

Okay, thanks.

(Operator Instructions) And there are no further questions at this time. Presenters, do you have any closing remarks?

Yes, I would like to thank everybody for joining the call. We're very pleased with the Company's performance in fiscal 2010. It was a good rollout to the aspenONE licensing model. It was a good performance, I think, and execution by the team around the world and I want to thank them for that. And I also want to thank those of you who have been around the Company for quite some time that have lived through the first year of our transition. We're now on the way up and we had a very good rollout of the new model. We're very pleased with it and we're also, I think, through the worst of really setting up a nice foundation for a subscription business, which has very good visibility. It's a good subscription cash flow model, which we can build off in the future, which we think will help us build lots of shareholder value. So thanks, again, for everybody's interest today and interest in the Company and we will look forward to talking to you soon. Thanks.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.