Aspen Technology Inc (AZPN) 2011 Q1 法說會逐字稿

Good morning, my name Nicole, and will be your conference operator today. At this time I would like to welcome everyone to the first quarter fiscal 2011 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 Mr. Mark Sullivan, Chief Financial Officer, please go ahead, sir.

Thank you. Good morning, everyone thank you for joining us review our first quarter fiscal 2011 results for the period ended September 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 will make the usual Safe Harbor statement. 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-Q for the first quarter of fiscal 2011, 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 November 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 first quarter, and then Mark will discuss some additional business highlights, before we open up the call for Q&A. The start of fiscal 2011 we are now in our second year of our aspenONE subscription offering, with substruction-based revenue accounting, As compared to the Company's upfront revenue recognition model in prior fiscal year periods. Although we now have year-over-year comparisons on a comparable basis, it will still take another four or five years for our P&L to normalize.

The reason for this is that our multi-year term contracts are typically five to six years in length. And the remaining term of the risk existing contracts need to expire and subsequently be renewed in order for AspenTech to begin recognizing revenue on a subscription basis. As a result of the change to subscription-based revenue recognition, revenue dropped from $312 million to $166 million from fiscal 2009 to fiscal 2010. We expect that gap to close at a relatively steady annual pace over the next four to five years.

During the revenue model transition, we believe that investors will benefit from analyzing other business metrics in addition to our GAAP financial statements, in order to best evaluate the Company's performance. We believe the metric that provides the most meaningful measure of the Company's growth is total contract value. TCB is a measure of the renewal value of the Company's multi-year term contract customer base. Total contract value is maintained by retaining customers, and it grows by adding new customers and expanding product usage and by increasing prices across our customer base.

As a reminder, we ended fiscal 2010 with total contract value of approximately $1.2 billion, and it grew 17% from the end of fiscal 2009. Beginning in fiscal 2010, maintenance that is bundled with our subscription and term contracts is now a component of our total contract value. The inclusion of maintenance contributed approximately 7 percentage points to our 17% total contract value growth, meaning that the license portion of our total contract value grew by 10% in fiscal 2010, Which was consistent with the three year compound average growth rate of this metric.

We provided guidance for the license portion of our total contract value to grow in the upper single-digit to double-digit range in fiscal 2011. We are still early in the year, but the Company got off to a solid start with a 1.5% sequential increase, what is typically a seasonally slow quarter. The license portion of our total contract value grew by a similar amount on a sequential basis in the first quarter of fiscal 2010. Including the value of bundled maintenance, TCB grew 2.5% sequentially during the first quarter of fiscal 2011.

Bookings are a measure of business closed during the fiscal period, and represent a combination of license and maintenance fees that are included as part of our contracts. Bookings include the value of license renewals, as well as growth. Particularly the focus on the growth portion of bookings, because the growth component drives increases to TCB and leads to an increase in future revenue and cash flow.

Bookings for the first quarter of fiscal 2011 were approximately $74 million compared to $39 million in the year ago period. In addition to the solid new bookings performance that drove the increase in TCB, we also had a strong renewal activity in the first quarter of the year. We often explain the timing of renewals and large individual transactions can influence quarterly and even annual bookings comparisons. What is most important from our perspective is the degree to which we are growing our customer relationships, which is ultimately captured in our total contract value metric.

Turning to other business metrics, we closed 19 customer bookings that were greater than $1 million during the quarter, compared to nine in the year ago period. We closed 34 bookings between $250,000 and $1 million, compared to 23 in the year ago period. The average deal size for customer bookings over $100,000 was approximately $806,000, compared to approximately $561,000 in the year-ago period.

The future cash collections of AspenTech is the sum of the Company's billings backlog, accounts receivable and the undiscounted value of installments in collateralized receivables. This metric provides a level of visibility into the cash generating capabilities of our business. The Company's future cash collections at the end of the first quarter was $653 million, an increase from $625 million at the end of last quarter, And $465 million at the end of the year ago period.

The largest component of our future cash collections is billings backlog, which was $436 million at the end of the quarter, an increase from $389 million at the end of last quarter, and $128 million at the end of the year-ago period. Keep in mind that our future cash collections mentioned does not include the value of our maintenance arrangements, that are still renewed on a annual basis. Despite being highly predictable, having mid-90% renewal rates. The value of multi-year maintenance does get included in this metric as customers migrate to the aspenONE subscription offering.

Now let me turn to our financial results on a GAAP basis. Total revenue of $43.1 million was up 8% from $39.8 million in the prior-year period. Subscription revenue was $9.7 million, an increase from $5.9 million last quarter, and $25,000 in the prior year period. Given the fact that we are recognizing subscription bookings over the course of a five-plus year average contract length, it will take some time for subscription revenue to build.

Now that we are in the second year of our revenue model transition, we are also starting to see growth in deferred revenue, representing the value of invoiced business that has not yet been recognized as revenue. This is a result of our building subscription-based business. The end of the first quarter, total deferred revenue was $101 million, an increase of $14 million from the fourth quarter and up 34% compared to the end of the first quarter of fiscal 2010.

Software revenue is the component of our revenue that is most impacted by the move to our aspenONE subscription offering. Software revenue includes new perpetual license contracts, term based license contracts for point products with bundled maintenance, as well as the annual invoice value 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 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 bundled as part of our term contracts for point solutions. This is reported within our services revenue line.

Software revenue was $9.3 million in the first quarter of fiscal 2011, which compares to $11.1 million in the year ago period. Within software revenue, $5.6 million related to point products sold with bundled maintenance, approximately $900,000 related to perpetual license agreements, and $2.8 million related to software fees that were recognized under the Company's prior licensing model. Software revenue can be variable on a quarter to quarter basis because it's primarily tied to the timing of customer invoice due dates.

Finally, services and other revenue was $24.1 million, compared to $28.7 million in the year ago period. There are a few drivers to the year-over-year decline. First, the economic environment continues to present headwinds on our professional services business. Second, we deferred recognition of approximately $1.4 million of services revenue related to work performed in the quarter that won't be recognized until later time periods. Third is, as we have previously discussed maintenance revenue will increasingly be reported within the subscription revenue line, as more contracts are converted to the aspenONE subscription offering. To this point, the maintenance component reported in our services line was down approximately $1.7 million on a year-over-year basis, even though our total maintenance business was up on a year-over-year basis.

Turning to profitability. Gross profit was $29.9 million, with a gross margin of 69%, which compares to $22.3 million on a gross margin of 56% in the prior-year period. As our revenue normalizes over the next four to five years, we expect gross margins to increase to the 77% to 80% range. Operating expenses were $49.6 million in the first quarter, and included $1.1 million of expense related to completing our secondary transaction. In the year ago, period operating expenses were $47.1 million. Total costs and expenses were $62.8 million in the first quarter, which is down from $64.6 million in the year ago period. Total costs and expenses continue to be managed well, and we believe the Company is on track for full-year GAAP costs and expenses to be in the $250 million to $270 million range, consistent with our guidance.

Operating loss was $19.7 million for the first quarter of fiscal 2011, an improvement compared to an operating loss of $24.8 million in the year ago period. Net loss of $15.5 million or $0.17 per share in the first quarter fiscal 2011, compared to net loss of $21.1 million or $0.23 per share in the first quarter of fiscal 2010.

You'll notice in our press release that we begin reporting non-GAAP results in the first quarter in order to meet investor demand for supplemental information that provides greater comparability of financial information between AspenTech and other subscription-based software vendors. This information is less meaningful now as the Company's overall GAAP P&L will take four to five years to normalize, but it will become more relevant over time.

Our non-GAAP results exclude the impact of stock-based compensation and restructuring charges. While we are not currently having amortization of tangibles associated with acquisitions, if we were to incur such charges at future time periods, they would also be excluded from our non-GAAP results, consistent with how most of software companies report.

Our non-GAAP operating and net loss for the first quarter was $16.9 million and $12.8 million respectively, an improvement from a non-GAAP operating net loss of $22.6 million and $19 million respectively in the year ago period. Our non-GAAP loss per share was $0.14 in the first quarter fiscal 2011 compared to a non-GAAP loss per share of $0.21 in the first quarter of fiscal 2010. Reconciliation of GAAP to non-GAAP results is provided in tables within our press release which is also available on our website.

Turning to the balance sheet and cash flow, the Company ended the first quarter with $123.2 million in cash, which was down $1.8 million from $124.9 million at the end of the prior quarter. From a cash flow perspective, the Company generated $6.4 million in cash from operations during the first quarter and free cash flow was $5.6 million, which was an increase from negative $5.3 million and negative $6.4 million respectively in the year ago period. As previously discussed and expected, the first quarter included a US federal tax refund of approximately $7 million.

We generally expect the first quarter to be a seasonally weaker cash flow quarter, due in part to the payout of prior fiscal year incentives. We're pleased with the cash performance in the first quarter. I believe the Company remains well positioned to achieve his goal of free cash flow in the mid-$50 million range for the full fiscal year. The Company did not sell any installments receivable to raise cash during the quarter of fiscal 2011, and have continued to reduce its secured borrowings balance, which is down by $4.9 million in the end of the fourth quarter of fiscal 2010, ending the first quarter at $71.2 million. As a reminder, our secured borrowings are fully collateralized.

Our collateralized receivables installments receivable balance 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. With that, let me turn it over to Mark Fusco, Mark?

Thanks Mark, and thanks to everyone for joining us today. We are pleased with the Company's performance in the first quarter, which is a solid start to the year in what is traditionally a seasonally slower quarter for AspenTech.

In addition to a solid operational and financial performance of the quarter, we are also very pleased to have completed the secondary offering of Advent International Shares. As a reminder, AspenTech did not raise any cash as part of this offering. We were fortunate that high interest levels enabled the Company to increase the size of the offering compared to our original filing, which ultimately reduced Advent's ownership position in AspenTech from over 30% to less than 10% of our common shares. This was an important milestone for AspenTech, and we believe it is positive for the company and our overall shareholders that we have taken a big step forward in increasing the diversification of our shareholder base.

We also announced that our Board of Directors has approved a share repurchase program of up to $40 million. This is another indication of the confidence and visibility that we have into the future scalability of the Company's free cash flow. With over $1.2 billion in total contract value and best-in-class renewal rates in the upper 90% range, we expect to increasingly benefit from a series of business practice changes that we have made over the last several years. This includes the elimination of factoring of receivables nearly three years ago, around the same time we converted our manufacturing supply chain business to the same multi-year term model that our engineering business has been on for decades, and we have been increasingly moving customers to annual payment terms as opposed to upfront payments for term contracts.

We are now in a position to enjoy the benefits of these changes. Our cash balance is strong and our secured borrowings balance is down significantly and will be retired by the end of fiscal 2013. With visibility into cash flow ramping at significant levels, we will continue to evaluate how to best use our cash to drive shareholder value. Our announced share repurchase program is consistent with this objective and we will evaluate tuck-in acquisitions that can complement our existing solutions and provide additional growth opportunities.

Importantly, we believe we still have a significant growth opportunities with our existing solutions and customers. Our engineering solutions have typically represented approximately two-thirds of our business, yet the majority of our customers still only use a limited amount of our comprehensive capabilities. We believe there is a meaningful opportunity to expand the usage of our functionality and drive broader adoption from a user perspective. We believe our aspenONE subscription offering will drive increased product usage as it provides customers with access to all of our solutions, enabling customers to easily try to new applications and realize the value potential before making significant upfront investments.

In addition, our continued efforts to improve the user experience and integration among our modules are focused on driving increased adoption and product usage, both of which drive increased contract value and ultimately revenue for AspenTech. There is a similar if not larger opportunity to bring our suite of manufacturing and supply chain applications to our large customer base that includes all of the largest energy chemical and pharmaceutical companies in the world, many of which have not optimized their businesses in these key areas. Manufacturing and supply chain is the largest segment of the multibillion-dollar market opportunity we are addressing, and industry analysts expect it to be the highest growth segment as well. These solutions currently represent the remaining third of our business.

We feel good about our ability to capitalize on these growth opportunities because of our strong market position. A combination of our leadership position and unique suite of solutions have enabled the Company to double its total contract value since I took over here, approximately six years ago, and I believe we can more than double the size of our business again in the years ahead. We continue to see solid demand for our solutions across each of the major verticals that we serve.

During the first quarter, energy was again the largest contributor to our bookings, followed chemicals and then engineering and construction. The combination of these three verticals represented just under 90% of our total bookings in the quarter. This is down several points compared to what is more typical, due primarily to a strong performance from our pharmaceutical group in the first quarter. We are still early in building out our dedicated pharma practice and we are encouraged by our progress. We believe Pharma has the potential to be a 5 to 10% contributor to our business in the longer term.

In summary, as our revenue and cash flow models complete their transition, we continue to believe AspenTech is well positioned to emerge with one of the strongest profiles in the software industry, over a $1 billion in total contract value, a growth opportunity in the double-digit range, a subscription model that provides a high level of visibility into future revenue and cash flows, and investment cash profitability margins. With the Advent secondary and first year of our revenue model transition now behind us, coupled with cash flow scaling and a share repurchase program to return cash to shareholders, we are optimistic that the strength of AspenTech's business and market position will be increasingly appreciated and rewarded.

With that, I'll turn it back to Mark Sullivan for some additional comments.

Okay, I'd like to close with some thoughts regarding our guidance for the current fiscal year, as well as a helpful way to think about our business longer term. From a guidance perspective, we are reiterating our previously shared full-year guidance for total contract value growth, bookings, revenue, operating loss and cash flow from fiscal 2011. The additional guidance will provide translate our GAAP guidance to non-GAAP guidance. Our guidance for a GAAP operating loss of $70 million to $80 million remains the same, and non-GAAP operating loss is expected to be $60 million to $70 million. Our guidance for GAAP net loss per share remains $0.76 to $0.86, and we expect non-GAAP net loss per share to be in the range of $0.65 to $0.75.

We are not providing quarterly guidance; however, I will provide some directional commentary to help you update your models. Within total revenue, we currently expect subscription revenue to continue growing on a sequential basis in the second quarter. While there is potential for software revenue to decline by several million sequentially, and services revenue could be approximately flat. The software revenue line in particular can have quarter to quarter variability, depending on the timing of customer invoices and in certain cases, the timing of receiving customer payments that become due. In addition, software revenue can be impacted by contracts being converted to our aspenONE subscription offering.

Taking all this into consideration, there is potential for our GAAP revenue to be flat to down in the second quarter, followed by a meaningful increase in the third quarter. Again, within the context of our full-year guidance that we are reiterating today. To complete the revenue model transition there will be a challenge to modeling the quarter to quarter low of our P&L, which is why we provide a range of non-GAAP metrics that we believe are more meaningful for the evaluating our business at the present time.

I'd also like to run to a quick pro forma illustrative model that we use to look at the business that you may find helpful to help understanding our longer-term target model and our previously shared guidance for free cash flow guidance in the mid $90 million range for fiscal 2013. As we reported in our 10-K for fiscal 2010 we exited fiscal year 2010 with total contract value of approximately $1.2 billion. In order to get an approximation for what annual subscription and software revenue would be if we had already completed our revenue model transition, divide the $1.2 billion of TCB by the midpoint of our five to six year contract length, then grow that number by a nominal amount toward the low end of our licensed TCB growth guidance. And finally add comparable services and other revenue, which you can get from our fiscal 2010 financials. If you do that, you get to a normalized annual revenue level for FY 2011 that is the range of approximately $330 million.

Our applied total expense guidance for FY 2011 is $250 million to $270 million, so if you take the midpoint, you will get to approximately $70 million in GAAP operating income, which is consistent with the GAAP operating margin in the low 20% range. This now shows that were not too far from achieving our long-term target model of 25% to 30% GAAP operating margin. Our goal is to reach this target by the time our revenue model transitions complete in fiscal 2015.

This view of the business also shows that pro forma EBITDA would be in the range of $90 million for fiscal 2011, if we achieve our financial plan, after adding back non-cash expenses of approximately $20 million to the just mentioned pro forma GAAP operating income of $70 million. The primary reason we expect FY 2011 cash flow to be less than the $90 million of pro forma EBITDA is due to the cash flow impact associated with a portion of customers having previously paid for their entire multi-year contract upon signing. Each year we have customer contracts coming up for renewal that will now be done on annual payment terms. As that happens, we will continue to scale our cash flow, simply by renewing contracts.

We expect AspenTech's annual cash flow to normalize over the next three fiscal years, somewhat more rapidly than the revenue transition. If you consider that our underlying business should generate normalized adjusted EBITDA in the range of $90 million in fiscal 2011, we don't believe it's a stretch to expect free cash flow that is at least in the mid $90 million range for fiscal 2013, as we continue to renew contracts on annual payment terms between now and then. With that, we are happy to take your questions. Operator, let's begin the Q&A.

(Operator Instructions). Your first question is from Phil Rueppel of Wells Fargo Securities.

Great, thanks very much. Couple questions, first of all just given your comments about the seasonality of the year perhaps being a little bit softer in the December quarter. Is that something that is reflective of the renewal portfolio or of your ability to close new business? And then second of all, maybe from a general perspective can you give us a progress report on what's going on in the Middle East and your move to direct sales there? Thank you

Okay as far as the seasonality of the business, Phil, we expected to be normal seasonality. This first quarter, fiscal 2011, we had more renewal activity and stronger bookings then we have normally had, which relatively a softer quarter. I would expect seasonality to be normal in the December, March and June quarters where December will be better than September, usually March is a little bit not quite as good as December, and then we finish strong in fiscal year in June, as we did really year every year since I've been here. So I would expect seasonality to be generally the same, although we had a very good start to the year from our overall bookings perspective, and as we saw, we said in our prepared comments, we had pretty good growth in our TCB as well, which is consistent with our prior year period, so we are in very good shape as we start the year here and expect seasonality to be the same.

As far as the Middle East goes, it's Ramadan in the summer quarter in the September quarter so there's not much that goes on in the Middle East during that period. But we are direct, as you mentioned in your question, and we expect to do quite well in the Middle East over a period of time, as we've got in our Q and in our K, lots of information about ATME and the lawsuit there. That will clearly play itself out in the calendar 2011 and if we have something to say about it we will clearly make a public statement.

Great

Is still I think part of your question might have been with respect to the comments we made about revenue. So as to clarify, software revenue, that line can be very variable basically what were doing their it's recognition when the invoice becomes due, we recognize the entire annual revenue at that point in time, so you take a relatively small population of contracts out of backlog and if you change the timing around you could get quite different results from a quarter to quarter basis. So that commentary was really more in the timing of things coming out of backlog than it was with respect to the seasonality of bookings which Mark addressed.

Great that's helpful, thanks very much.

Your next question is from Sterling Auty of JPMorgan.

Good morning, guys. First as you mentioned, you had strong bookings deals over $1 million. Can you give us a little bit more color in terms of, especially in some of those larger deals, what are the types of projects that they were supporting, or was it expansion to cover more headcount, what is the trends that you see in those larger deals in terms of the driving factor behind the purchasing?

Yes it was a combination of both, we actually had strong bookings in our engineering and our MSC business. We had good growth on both sides of the business as well. It's not crystal clear all the time in the engineering business especially, what projects specifically people are working on either in an owner operator or a DMC. We know a little bit more sometimes about what goes on in that manufacturing and supply chain space, they're billing out a new plant or a retrofit of the plant, but it was overall good interest in the Company's solutions I think there's also a little tailwind from the revenue model change that was announced 15 months ago, which has been a positive for the Company from a bookings perspective.

But overall it was a solid quarter and we saw good demand on a global basis, it wasn't skewed in any particular direction geographically or vertically, this is really a normal more normal distribution I would say from a geographic perspective or a vertical perspective. The one change this year is we are now through the first full year of our Pharma business unit and we are starting to get the benefits of that. We had a very strong bookings quarter in the September quarter for Pharma so it does take a little bit of time for things to start to scale up and I think they've done a nice job in engaging with our customers. And clearly this is an important part of our business, Pharma is a big vertical, we want to be much more active there and increase the market share that we have there.

And just as a reminder, these are horizontal products that we sell and are very common with some of the other products that we sell and chemicals and specialty chemicals as well. So it was a good performance across the board and we had a lot of good interest, but we were especially pleased with how we started the fiscal year and happy about the Pharma business unit having its first good quarter as its own business unit.

And as a follow up on the comment on a tailwind from the model change, can you give us a qualitative comments in terms of early renewals or extensions?

We had obviously a solid renewal quarter as we've had in the past year to 15 months or so since the model change really got rolling. I expect we will have some of that this year as well. Every year that we have coming towards us has a larger renewal pipeline of opportunities because of the size of the Company's business and how it's changed over the past four or five years or so. I would expect this year to be a decent renewals year, and we took that certainly into our account when we gave our guidance, but as Mark mentioned in his comments, we believe whether we renew a deal in December quarter or March quarter we are going to get the renewal, it's really a timing issue. The real key concern that we have is what sort of again do we have with our customers are we growing those relationships, are they getting the value that they should out of the software and we can we help them do more things with our software to create the value for them. So I think we are moving along at a nice pace and pleased with the quarter and we'll see how the remainder of the year goes.

All right thank you

You're welcome

The next question is from Richard Davis of Canaccord.

Thanks very much. So first one is with regards to aspenONE because I was trying to remember, I think that was launched in October of 2004. I know you had subsequent kind of versions, I can't remember if you're on seven or eight right now, but the point is that something where you do you need a big architectural refresh because I remember back then it was a completely a .NET re-architected thing? Or is this more about terms of when you're kind of grow the business adding incremental functions and features to penetrate the different verticals? So in other words I'm trying to figure your thought process with regards target texture an upgrade cycle there?

So aspenONE you're right Richard it was announced October of 2004 so that's just prior to my tenure here. There really wasn't a whole lot behind at that time but we did spend the last five years or so continuing to innovate, integrate and update the software from all the different individual best in class apps that we have. We continue to do that. So I think of innovation in a few different ways. One, that there's pure innovation, of which we have patented and commercialized some innovation around CO2 capture and our engineering software.

So we do have lots of innovation going here. There's integration and that's to allow the different modules to work better together in a more integration, and that's clearly an evolution over a period of time. That can be all the way to data integration and data model integration in the engineering business or just things being able to be passed back and forth between engineering suite on some apps and the manufacturing suite.

And then there's the refresh an upgrade where we are clearly interested in always remaining ahead. We went to allow for example cloud computing in the future which we are working on today. We've got lots of initiatives in this area to refresh and make sure that things are as easy to use as they possibly could be and they're also easy to install easy to upgrade and really improve the user experience. I think we mentioned on past calls that we now localize our software in nine different languages. That's important from a user in the usability perspective so we are doing that obviously that will help us get more users over a period of time.

And then I guess lastly, there are new apps that we are building, we announced inventory management a few years ago, we're finally now getting some traction in all parts of the world on that. And the same goes with some of our scheduling software which we rolled out in the past year or two. So there's lots of innovation across the aspenONE suite and it comes in all different flavors but we continue to invest, we think it's the right thing to do. And we want to expand our lead in this space and continue to bring great value to our customers.

Got it and then the follow-up question would be, could you just talk briefly about the balance the way you think of it between share repurchases and your M&A aspirations. Obviously in the last few years you didn't do it, but prior to the, let's just say, accounting excitement, Aspen used to make some acquisitions on it path to building out the business. So how do you think about using money for M&A versus using money for share repurchase?

Yes I think we are going to do both, as I mentioned in my comments we will clearly do some acquisition to around out some product portfolio of things that were interested in and the core markets that we serve. And there are clearly some things we are interested in, we haven't done any M&A for a while, for lots of different reasons. But as the Company learns and we clearly will do some M&A, there will be smaller as opposed to bigger and the short-term we have excess cash.

We thought it was the right thing to do to return some of that to the shareholders. And in this rate and environment, we are getting zero on the cash at the moment and we think we are going to generate lots of cash here going forward and anything that we would do from an M&A perspective, will not be impacted by the share repurchase given that we are going to generate lots of cash here going forward. So we thought it was a good use of our money and an important inflexion point for the company where we are going to return some cash to shareholders and it won't impact our ability to do M&A at all.

Perfect. Thank you so much

Sure

Your next question is from Tom Ernst of Deutsche Bank

Good morning, gentlemen. Thank you for taking my question

Sure

So Mark, you're into the token model being available across the full suite, I'm curious if it's not too early to begin seeing any usage patterns where people are shifting their tokens are beginning to experiment with parts of the suite that they didn't use before? Are you seeing that?

We do have some data to suggest that there is some user change based on the model switch. So to clarify, they may have had a certain amount of products in their old token pool and now that they have them all we are starting to see some usage patterns change. I think it's early still yet, Tom, to say that it's the model change or to be able to point specifically and make sure that we have enough data to support the supposition that this will happen. But we clearly have seen a little bit of change and we are actively looking at our usage logs and the token usage models and we will bring some of the stuff out in the coming quarters. But we want to make sure that were right but clearly some of the contracts that have changed, we're seeing the usage pattern changes and we'll talk about a little bit later as we really believe that it is about the model and access to the products as opposed to something else.

Okay very helpful, and maybe to shifting gears for follow-up. How about selling capacity do you feel that you need to expand the sales force here and how fast you want to hire to support growth as you look forward? Thank you.

We think we are adequately sized overall from a head count perspective. We are just under 1,300 total employees, which is roughly what it's been for the past several quarters. We continue to optimize a little bit under the covers here and move things around a little bit. We think are adequately staffed on the sales side. We did build out the Middle East sales force in the past year or so and we will incrementally add various groups it could be sales or other over a period of time.

But clearly we've taken into our consideration our hiring plans and our guidance for overall expenses, but we think are adequately staffed, but as the business grows, we also expect to get more productivity out of the company as people renew their contracts and go to the new model, they probably won't renew those deals again in the short-term will be looking to grow them along the way. So there are clearly some things that are going to change here and are under change but we think we are adequately staffed.

Thank you again

Sure

Your next question is from Peter Goldmacher of Cowen and Company.

Hey guys, good morning, just wanted to make sure you watch the baseball game last night, because the San Francisco Giants won the World Series. Can you talk a little bit about the competitive environment. You guys have made some pretty profound changes both to the product and the distribution and the price. What are your typical competitors doing to respond to that? You're not talking about guys that are totally focused on software, they're big conglomerates they have a lot of things going on. So what are they doing and if you had to handicap sort of a lead that you have on them and all the things you're doing particularly around distribution, is that a six-month lead or 12 month lead or they not even paying attention? I'd love your assessment on that.

I think the competitors generally, and you characterized it correctly we have lots of different competitors, we have large industrial companies that don't do software exclusively. We've got large software companies that do software exclusively that aren't real specialists in the process business. And then there's the smaller companies that compete with us on point products here and there. Generally our competitors, come out from a discounting perspective, we rarely see or lose where we are the same price as somebody else.

So we generally, that's consistent and has been consistent over the past six years or so, since I've been here. People try to come at us at discount because we do come to the market with a very broad and deep suite of software and we think we are bringing the value proposition that's better from a point product perspective and from an integrated perspective. As far as an overall lead goes it's hard to say exactly we do have our internal view of what our competitors are doing.

And while we don't control it, we do control what we spend our own money on from an R&D perspective, and we will continue to spend $50 million or so in R&D building out refreshing enhancing building new IP products to sustain and enhance our lead over our competitors, but we think we are in good competitive position, the competitive environment hasn't changed. We want to make sure that Aspen compete globally in all of its different places and competes hard because we are interested in all of our customers' business, not just some of it.

Okay thanks, Mark.

The next question is from Brendan Barnicle of Pacific Crest Securities.

Thanks guys, I have just two quick ones, one is, if we're expecting the December revenue to be up sequentially and see our typical seasonal pattern, should we be modeling a sequential decline from that December to March quarter?

Sorry, Brendan, would you mind repeating that?

Yes sure so you've got it that we should see a sequential increase from September to December in revs, and that we'll see typical seasonal patterns so would we expect that we see then the revs to decline from the December to March quarters?

Well I think we talked about, Mark talked about the fact that two concepts here bookings at first of all that we expect bookings to sort of follow the normal seasonal pattern although with the caveat that the first quarter here was a bit stronger than it typically is. But our strongest seasonal quarters are usually Q2, which is December, and Q4 which is June from of bookings perspective. The commentary the additional commentary he gave really was just specific the next quarter was talking about revenue and was talking about the timing of mostly software revenue coming out of our backlog and the variability associated with the timing of customer invoice due dates as well as in certain cases, we actually have deals we haven't collected cash before we can start to take the revenue take the entire revenues amounts. We didn't go beyond that, as we said were not really given quarterly guidance, but we did just want to give just a little bit of an outlook into Q2 revenue.

Okay and Mark, you guys this week announced a big win at Petrofac, and was wondering if you could give us a little more color on how you win a deal like that, how long does that sit in the pipeline, and the circumstances around it, just give us a little more color on how these big deals gets closed out and taken care of.

Yes that was a deal that was closed several quarters ago, it was a fiscal 2010 deal, sometimes there's a little black between contract signature and when we get approval to really something above the deal. So Petrofac deal was the second deal I believe the first or second deal that we did in the middle east on our own. Last year after we terminated our reseller arrangement.

It was a good contract, it certainly it wasn't something that was in the pipeline for a long time because it would have been in the pipeline coming through the reseller over a period of time but clearly there were a user of software in the past. But this is really I think a validation of Aspen in the Middle East and it was an important contract for us to sign. There was lots of good usage of all the different apps and we've actually seen Petrofac change their usage of their software after they've switched to the aspenONE subscription offering, they're using many more products in a much broader way now that they are using prior to that deal.

So overall it's a great deal and it was one of the first ones out of the blocks here in the Middle East as a direct channel. And we clearly seen nice adoption of different applications in engineering suite that we didn't see prior to them changing. So this is one of those ones that we are looking at, there was an earlier question about are we seeing usage change. We see it here at Petrofac a little bit and we'll see how other ones change over a period of time but it's something that were watching.

Terrific, thanks so much guys.

Your next question is from Laura Lederman of William Blair & Company.

Thanks, guys for taking my questions. You mentioned briefly that you had some clouding issues. Could you talk a little bit about what those are? What specifically you're building there. And also do you see as an expansion or a change in the market at all? Or ability to reach different types of companies you didn't reach before or are existing customers going to use that and in what way?

We are just playing around with it at the moment. Historically our customers have posted all of their own software behind the firewall. So clearly if we do it out of the cloud, this will be something that will be outside the firewall, we also could do internally and host things differently at the customer site. So we are looking at it there are some installability and upgradability issues which may be easier if we do it this way, and they are also could be a way to reach a different customer set in a different way. And historically, our smaller users of software are more point product driven as opposed to engineering suite driven. And this could be a way to give them access to all the suite without some of the overhead of hosting all the different software on their network internally. So I think it's a combination of issues but more generally, Aspen wants to lead in all the things that it does.

We want to be out there with mobile computing apps, you'll feel see that coming out as well so that you can use any handheld anywhere in the world if you are in operator of a plant and see how your plant is doing at any time. So there's lots of different things that Aspen's going to be coming to the market with, cloud computing is just one but it's something that we are interested in and we want to lead.

Any thoughts on timeframe for mobile and cloud, just even rough timeframes?

I think you'll see mobile in the next six months or so. But cloud will probably be in the next major release of software, which will be out a little bit. But at our user group meeting last May, we had some demos in the general session of the mobile apps but I think you'll see them sometime soon.

Final question from me, which is building out of Pharma, what does that entail? Is that adding more salespeople? Adding functionality? What is it you're doing to further expand that opportunity?

So a few years ago we decided that we wanted to be we did have some Pharma customers at some Pharma business but we wanted to be more serious about it. So we did a few things.

The first is we decided to pull all the folks sales tax sales into marketing, into its own group so they could focus specifically on the Pharma customers. Second, we took a look at the applications that we sell into this market and started to spend some money to make them a little more Pharma specific. And that continues today, and we're certainly still interested in continuing to do that. And then third, we wanted consistency of really message and emphasis in the marketplace, so that our customers they always liked our software, but they thought it may have been not specific enough to Pharma.

And Aspen was in and out of this market it wasn't too serious about it so we want to be much more consistent it takes a little while for things to coalesce and we are now 15 months into this group being its own business unit. And they finally started to have some good performance and we're patient over time. This is a good market for us to be in, we're number eight or so in this market. So we are down and we have a place to go would like to be much higher in the market share here and we are going to stay at it until we get there but we think it can be a good part of our business and certainly the fourth leg to the vertical revenue stool, and we think that's important.

Thank you

Your next question is from Richard Williams of Cross Research.

Thanks guys, for taking my question. Could you rank for us the verticals by strength and also talk about geographic strength?

Yes, we don't break them out quarterly Richard. But the verticals were I guess more normalized, where we usually see, in a normal year, we'd see energy sort of 40% of the business, chemicals 30% of the business, engineering and construction sort of 20% of the business, and then other being 10%. This was a little lighter in the E&C space which was plugged up by the additional bookings that we got out of Pharma the so it was very much a normal quarter, and we saw really a general distribution, which is what we expect to see from the past.

From a geographic perspective, we would expect that we would have consistency, sometimes in the summer months, we don't see a lot of business in Europe, actually we had a strong quarter in Europe, and North America's pretty good we don't see a lot of business out of our global accounts or out of the Middle East and that was consistent again this quarter, they tend to be seasonally a bit different. We had a good quarter in Asia. So overall it came in as we expected, bookings were clearly overall a little stronger than we've seen in prior periods, but overall it was a good quarter and were happy with our performance.

Thanks very much, guys.

The next question is from Mark Schappel of Benchmark.

Hi, good morning. Mark could you do speak a little bit more provides more details on your supply chain business and how that performed in the quarter?

Well supply chain is an important part of our business. We are number one in the world and supply chain in the process industries. And have been for quite some time. We continue to develop those products and sell them on a global basis, and we have been successful at it in the past. I would say Aspen is renewed in its supply chain business, we've seen lots of demand in supply chain in Pharma and chemicals, and then of course our petroleum supply chain as well. But this is something we are after. We want to extend our lead in supply chain. Our competitors come out us in this space as well on a price point basis, and Aspen, we have, we still believe, the best software in the world and all the different things that we do here. But we are after this, and we had a good supply chain quarter and we expect to have a good supply chain fiscal year as well.

Thanks, and one final question. Over the past several quarters, you've been noting that customers were expanding their usage of your product as they gained access to the entire suite. I was wondering if you could just give us an example of which modules your customers seem to be adopting increasingly.

Yes, so at one of the super major oil companies, they started out using primarily one of our modeling products called Hysys but over a period of time, and more specifically in the last year or so, we started to see lots more usage in our costing software, so that's the software where as you're doing the modeling, you can turn on the costing software and it will tell you how much the plant is to build that you're modeling out.

This is something that our sales team and our tech sales team did a great job in the last several years, working with this customer. They have their own internal software that they used to use. We've now got them using Aspen in this area.

And so that's an example of what were trying to do at all the different operating companies and at the engineering and construction companies, is to get them using our modeling software and our costing software or our workflow software, but that super major drove a huge amount of usage of tokens, and they did a deal not to long ago to increase their token use, because they were running out of tokens. So that's one example and there's lots of others, but we are clearly after now integrated usage of software now that the model is in alignment and all the new deals that we do, the customers have all the software.

Thank you

The final question is a follow-up question from Sterling Auty of JPMorgan.

Yes, hi guys. Just one follow up, in terms of the term that's lumpy, where you wait for cash collection before you actually recognize it in the quarter. Can you give us any sense of the magnitude either of the number of contracts, number of customers, or how we should think about, it's going to bounce around. Either a sense for fiscal 2011 in terms of quantitatively or any other metric that you can get, just so we can wrap our arms around it a little bit better.

Yes it's really hard to model, Sterling, without having access to the details. It's not so much that there are a ton of these agreements, but it really swings with the big ones. We actually have some of our largest customers on that basis, Where one case it is what we call cash basis, the cash has to come in, we know the due date of the invoice, they don't pay us right on time, we have to wait until we get the cash in. So it's more that there are several large customers that back in the 2008-2009 timeframe, when we were on the legacy model, the deals didn't score for upfront revenue, and therefore they were deferred for rev rec reasons. It's really, really hard to predict, because it's very much swung by these individual invoices.

Okay, thanks

And then the other thing just to keep in mind. If we are pursuing some of those customers and if they were to convert to the aspenONE subscription offering, that would change the timing as well. So we would be able to take the revenue, because there wasn't an up front model deal, but it would change the timing of the revenue in the fiscal period. So there are a variety of variables, it's hard to forecast, even as an internal person.

And I think this case, Sterling, where you've got cash basis deals, it's hard to forecast on a quarterly basis cash flow, anyway. But this one several years ago, we signed a large contract with a company that subsequently went Chapter 11 and then they're now out of Chapter 11 but they're still in cash basis, and of course, they paid all their bills. So it's not a concern that we're going to get the money, they always pay because of the strategic nature of the software, it's just a question of are we going to get it right before Christmas, or is it going to spill into January, that's going to affect the GAAP results and the cash flow results. But it's a week's worth of time, it's irrelevant in the broader grander scheme of things, but it makes it a little bit harder to model for you and it makes it harder to model for us.

Got it. Thanks guys

There are no further questions at this time. I would like to turn the floor back over to Management for any closing remarks.

Okay, thank you, operator. Thanks, everyone, for joining us here today, we got a good start here in our first quarter, we are pleased with the Company's performance, and thanks to all of the employees for the hard work over the summer. As we got our way through the Advent secondary and into the new fiscal year, we think we're on track for our growth in our cash flow for fiscal year 2011, and we are glad we could announce the share repurchase program, and it does reflect the confidence that we have in the business in the longer term. It will not affect our ability to do M&A in the short term either. But we think it's important as we move forward that we can act like a normal company as we continue our progression and we do look forward to seeing you, this quarter we will be out on the road in several different places, including next week at Wells Fargo's investor day in New York, so we look forward to seeing you then. And thanks to everyone, have a nice day.

Thank you, this concludes today's conference. You may now disconnect.