Aspen Technology Inc (AZPN) 2011 Q3 法說會逐字稿

Good afternoon. My name is Patrick, and I will be your conference operator today. At this time, I would like to welcome everyone to the AspenTech third-quarter 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) I would now like to turn the call over to AspenTech CFO Mark Sullivan to begin.

Thank you. Good afternoon, everyone. Thank you for joining us to review our third-quarter fiscal year 2011 results, the period ended March 31, 2011.

I'm 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 statements. 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 such projections or statements. Factors that might cause such differences include, but are not limited to those discussed in today's call, and in our Form 10-Q for the third quarter 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, May 3, 2011. 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, and then Mark will discuss some additional business highlights before we open up the call for our Q&A.

Let me start with a view with a supplemental metrics that we provide as we believe they are the most meaningful indicators of our financial performance during our revenue model transition. As a reminder, fiscal 2011 represents the second year of a 5- to 6-year transition. We believe the metric that provides the most meaningful measure of the Company's growth is total contract value.

TCV 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, expanding product usage, as well as increasing prices across the customer base.

In the third quarter our license TCV grew by approximately 1.5% on a sequential basis. As a reminder, beginning in fiscal 2010, maintenance that is bundled with our subscription and term contracts is now a component of our total contract value. Including the value of bundled maintenance, TCV grew approximately 2.4% sequentially during the third quarter. Our total contract value was greater than $1.3 billion as of March 31.

Bookings are a measure of business closed during the fiscal period, and represent the combination of license and maintenance fees that are included as part of our contracts. Bookings include the value of contract renewals as well as growth, particularly focused on the growth portion of bookings because the growth component increases TCV and drives higher future revenue and cash flow. Bookings for the third-quarter fiscal 2011 were approximately $79 million, bringing year-to-date bookings to approximately $240 million.

We believe a solid pipeline of opportunities for the fourth quarter positions us well to achieve our guidance of $300 million - $325 million in bookings for the full fiscal year 2011. However, to reiterate from prior calls, 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 16 customer bookings that were greater than $1 million during the quarter compared to 21 in the year-ago period, and we closed 47 bookings between $250,000 and $1 million compared to 39 in the year ago period. The average deal size for customer bookings over $100,000 was approximately $609,000 compared to approximately $807,000 in the year-ago period.

Future cash collections is the sum of the Company's billings backlog, accounts receivable, and the undiscounted value of installments and 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 third quarter was $695 million, an increase from $688 million at the end of last quarter, and $537 million at the end of the year- ago period.

The largest component of our future cash collections is billings backlog which was $526 million at the end of the quarter, and increased from the $490 million level at the end of last quarter, and $270 million at the end of the year-ago period. Keep in mind that our future cash collections does not include the value of maintenance associated with our legacy contracts as maintenance was not contractually committed on a multi-year basis, though it is highly predictable given our mid 90% annual renewal rates. The value of multi-year maintenance does get included as customers migrate to the new licensing model.

Now, let me turn to our financial results on a GAAP basis. Total revenue of $52.6 million was up 15% from $45.6 million in the prior-year period. Subscription revenue came in at $17.2 million which is an increase from $4 million in the prior-year period. There has been a steady progression in our subscription revenue over the first 3 quarters of fiscal 2011 going from approximately $10 million - $12 million and up to over $17 million in the third quarter.

The completion of our revenue model transition alone should lead to continued steady increases in our subscription revenue for at least the next several years, though we are clearly also focused on driving underlying growth in the business, which is reflected by our growth in total contract value. Our growing subscription business positively impacts our deferred revenue balance, which was $122.6 million at the end of the third quarter, representing a 43% increase compared to the end of the year-ago period.

Software revenue is the component of revenue that is most impacted by the move to our new aspenONE licensing model as of the beginning of fiscal 2010. Software revenue includes new perpetual license contracts, term-based license contracts for point products with bundled maintenance, as well as the annual invoice value for legacy software license fees that were deferred from prior fiscal year periods.

Software revenue per term arrangements is generally recognized annually as customer payments become due, and while not recognized on a daily subscription basis, it is another source of recurring revenue.

Software resident doesn't include maintenance fees that are bundled as part of our term contracts for point solutions. This is carved out and reported within our services revenue line. Software revenue was $13.4 million in the third quarter of fiscal 2011, which compares to $14.7 million in the year-ago period and $13.5 million last quarter. As discussed on prior calls, we expect that software revenue will be variable on quarter-to-quarter basis.

During the third quarter, $5.2 million of our total software revenue related to point products sold with bundled maintenance. $400,000 related to perpetual license agreements, and $7.8 million related to software fees that were recognized under the Company's prior licensing model.

Finally, services and other revenue was $21.9 million, down from $26.9 million in the year-ago period. This decline in our services and other revenue run rate is due to two primary factors. First, a growing portion of our professional services engagements are being bundled as part of subscription-based software transactions. As a result, the associated services revenue is recognized ratably over the license contract term.

Second, consistent with our previous commentary, maintenance revenue is increasingly being reported within the subscription revenue line as more contracts are converted to the new aspenONE licensing model. As a result, we continue to expect the run rate in our services and other revenue line will be variable quarter to quarter, but trend downward as our revenue model transition completes.

Turning to profitability, gross profit was $42.2 million with a gross margin of 80.2%, which compares to $30.9 million and a gross margin of 67.8% in the prior-year period. You'll notice that we reported a negative cost of subscription and software during the quarter which is a result of reversing a previously accrued liability.

This one-time adjustment, which was related to the expiration of a technology vendor relationship, benefited our gross profit by approximately $4 million or 800 basis points. As our revenue normalizes over the next 4 to 5 years, we expect gross margins in the 77% - 80% range.

Operating expenses for the quarter were $49.5 million, total GAAP costs including cost of revenue were $59.8 million, which was down $5.4 million on year-over-year basis, and up slightly from $59.1 million last quarter. Based on solid execution by the team related to management expenses, we currently expect full year GAAP expenses of approximately $255 million, which is in the lower half of our original guidance of $250 million - $270 million. We are particularly pleased with our expense management considering the fact that the growth of our business will likely be at the high end of our expectations.

Operating loss was $7.2 million for the third quarter of fiscal 2011, an improvement compared to an operating loss of $19.6 million in the year-ago period. Net loss of $5.7 million, or $0.06 per share, in the third quarter fiscal 2011 compared to net loss of $21.8 million, or $0.24 per share, in the third quarter of fiscal 2010.

Our non-GAAP operating and net loss for the third quarter, which excludes the impact of stock-based compensation expense and restructuring, were $5.2 million and $3.8 million, respectively, an improvement from a non-GAAP operating and net loss of $17.9 million and $20.1 million, respectively, in the year-ago period.

Our non-GAAP loss per share was $0.04 in the third quarter of fiscal 2011 compared to a non-GAAP loss per share of $0.22 in the third-quarter 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 third quarter with $151 million in cash, which was up $19.4 million from $131.6 million at the end of the prior quarter. From a cash flow perspective, the Company generated $31.7 million in cash from operations during the third quarter and free cash flow of $30 million, which was an increase from $19.4 million and $18.7 million, respectively, in the year-ago period.

During the quarter, we used approximately $2.9 million of cash to buy back stock as part of the $40 million share repurchase program we announced at the time of our first-quarter earnings call. The Company once again did not sell any installments receivable to raise cash during the third quarter of fiscal 2011, and we continue to reduce our secured borrowings balance, which was down by $11.3 million from the end of the second quarter of fiscal 2011, ending the third quarter at $55.5 million.

As a reminder, our secured borrowings are fully collateralized. Our collateralized receivables and 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 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 continue to be pleased with the Company's level of execution, which is delivering consistent growth and expanding free cash flow. Our goal over the next several years is to emerge as one of the best positioned overall software companies, one with a very strong competitive differentiation and a high various to entry, scale, growth, best-in class margins, strong cash flow and a recurring revenue model. The third quarter was another positive step to an AspenTech achieving this goal.

From a growth perspective, another solid performance enabled AspenTech to finish the first 9 months of the fiscal year with license TCV growth of approximately 7%, already achieving our full-year growth objective in only 9 months. With a solid pipeline of opportunities and continued high interest levels, we believe we are well-positioned to achieve at least the high end of our TCV growth guidance, which was double digit growth.

From a cash flow perspective, we finished the first 9 months of fiscal 2011 with cash from operations of nearly $53 million, and free cash flow that was just under $49 million, both of which are up 120% or better on a year-over-year basis. We feel very good about the Company's position to achieve our full-year objective of $60 million in cash from operations, and free cash flow in the mid-$50 million range.

The Company's execution continues to be well balanced across verticals, geographies as well as products. From a vertical perspective, our 3 largest sectors, energy, chemical, and engineering and construction, continue to represent 90% or more the Company's bookings with energy again representing the largest single contributor to our results. Though, engineering and construction was not far behind, and chemicals also had a solid quarter.

From a geographic performance, we are pleased with the execution in each of our major geographies, North America, Europe, and Asia-Pacific, and our business continues to be well diversified on a global basis. It is worth noting that are Japanese operations which contribute approximately mid-single digits as a percentage of our total business had a solid third quarter. This was a great achievement considering the aftermath of the major earthquakes that occurred during the quarter.

Finally, from a product perspective, demand for both our engineering and manufacturing and supply chain solutions remained solid. Looking at our 10 largest transactions in the quarter, it was an equal mix of engineering and manufacturing supply chain driven deals.

Customer response to our subscription-based aspenONE licensing model continues to be favorable, and we believe our strategy of putting all of our software in the hands of our customers to drive increased usage is working. With the best sign being the fact that our total contract value growth is tracking to the high end of our objectives for fiscal 2011.

We believe that AspenTech's market opportunity continues to be large and under-penetrated. We already count most of the world's energy, chemicals, and engineering and construction companies as our customers, and there is a significant opportunity to bring our full suite of solutions to these customers on a global scale.

Our engineering customers are under-penetrated with respect to our value-add modules that improve engineer productivity, and significantly reduce the cost of operating plants. Many of our engineering customers have also not yet optimized the manufacturing and supply chain processes. We believe AspenTech is well positioned to gain market share based on our strong relationships, best-of-breed solutions and unique position as the only software vendor to deliver an integrated suite across engineering, manufacturing and supply chain management.

As I finish my prepared remarks, I want to remind investors that during the transition phase of our revenue model, we continue to believe that the license portion of our total contract value represents the most relevant metric for understanding the underlying growth of our business. It is equally important to understand that our bookings metric is not a meaningful metric for estimating growth, which is heavily influenced by the timing of renewals.

Keep in mind, we continue to expect our 2011 bookings to decline by approximately 10% - 15%, compared to fiscal 2010 due to the timing of renewals. However, we are targeting to grow to license portion of our total contract value by approximately 10% for fiscal 2011.

Our bookings metric was more relevant when AspenTech had an up-front revenue recognition model because bookings approximated license revenue; however, the relevancy of our bookings metric has decreased significantly as we have transitioned our licensing model. We also continue to increase our sales organization's focus on delivering value to our customers, and continually identifying ways to expand our customer relationships, as opposed to just renewing business. Renewals are important, but we have a multi-decade history of best-in-class renewal rates, and we expect that to continue.

As we close our fiscal 2011 and reset sales compensation plans at the beginning of our next fiscal year, which is common practice in the software industry, we will again increase the winning of new business. We have great customers. We have best-in-class solutions that are highly differentiated, and we have an under-penetrated market opportunity. As such, we are focused on continuing to drive solid growth in our contract value. This is what will drive our cash flow and profitability.

In summary, we are pleased with the Company's execution. We are delivering against the Company's financial commitments, and we believe there remains a significant opportunity to build shareholder value as the Company completes it revenue model transition and our cash flow scales to the $1.00 per share and above level in the years ahead.

With that, I will turn it back to Mark for some final comments.

I'd like to close with some thoughts regarding our guidance starting with the P&L. Given the Company's performance in the first 9 months of the fiscal year, we currently expect full fiscal year 2011 revenue to be at the high end of our previous guidance range of $185 million - $190 million. This assumes that during the fourth quarter, subscription revenue continues to grow sequentially, and services and other revenues expected to be roughly flat, sequentially.

Software revenue is expected to decline on a sequential basis, which is not an indication of business activity levels, rather it is based solely on the timing of when invoices are due on point product sales with bundled maintenance, and when cash is collected on certain contracts. As stated earlier and on prior calls, our software revenue line has material quarter-to-quarter variability.

From an expense perspective, I commented earlier that we now expect total GAAP costs and expenses of approximately $255 million for the full year, which is in the lower half of our original guidance of $250 million - $270 million. Taken together, we currently expect a GAAP operating loss of approximately $65 million for the full fiscal year 2011, which is an improvement from last quarter when we said that we expected operating loss to be at the lower end of our original guidance for operating loss of $70 million - $80 million.

Notwithstanding these refinements to our P&L guidance, I'd like to reiterate that our P&L is still not a meaningful indicator of our business performance, and it won't be until our revenue model transition is complete. With respect to total contract value growth, bookings and free cash flow, we are comfortable with the ranges that we provided for each of these metrics based on where we finished the first 9 months of the year, and our outlook for the fourth quarter.

License contract value has grown approximately 7% since the end of fiscal 2010, which already has the Company within our guidance range of upper-single digits to double-digit growth. We are optimistic about our outlook based on continued high customer interest levels as we enter our seasonally stronger fourth quarter.

Booking of $240 million after 9 months compares to our full year target of $300 million - $325 million, and free cash flow of $49 million for the first 9 months of the fiscal year compares to our full-year target of mid $50 million. As we shared previously, the second half of the year is seasonably stronger than the first half from a cash flow perspective, and we saw that strength during the third quarter, which is by far the seasonally strongest quarter of our fiscal year. We also remain confident with our longer-term free cash flow target of the mid $90 million for fiscal 2013, which we have discussed on previous calls.

With that, we are now happy to take your questions. Operator, let's begin the Q&A.

(Operator Instructions).

Rich Davis, Canaccord.

Just a simple question, kind of tactical. To get to your guidance level, you have to assume some pretty good slow down year over year, cash flow in the mid 50s, that means you only do $5 million and stuff like that. I just want to be sure that this is not any kind of signal because I know I'm going to get this question from investors. Any kind of signaling that there's any change in the competitive environment because the best I can tell - - Infosys just changed their CEO; Honeywell is a good company, but not focused on the space; SAP is doing other stuff, et cetera, et cetera. So, I just want to make sure that your - - you can kind however you want or make commentary, I just want to make sure we are not missing anything.

I think if you go back and look at the pattern of cash flow by quarter in fiscal 2010, you will see a similar pattern to this. I also remind you we did have some fairly sizable, relative to the overall size of the cash flow, tax refunds in a couple of this quarters. So, this year follows a similar pattern to that. So, if you go back and you normalize the fourth quarter, last year, we had to high Q3 from a cash flow perspective, and a lower Q4, and we expect a similar pattern. It is really being driven by the portfolio of contracts, and when collections become due. So, third quarter just happens to be, based on history, when we have a tremendous amount of customer receipts scheduled, and that's really what's driving the seasonality.

Richard, from a competitive perspective, we're not seeing anything in particular that's changing in the competitive dynamic. It's just the seasonal nature of how the cash flow goes. The execution was good in the quarter. We're on track for all the different metrics that we gave out at the beginning of the year for our guidance. So, the fourth-quarter cash flow numbers, or implied cash flow number, is within our expectations for the year, and it is up substantially on a year-over-year basis. We're right where we expected to be. The third quarter was great from a cash flow perspective. We reiterated 13, so we don't expect anything to change. And clearly, when we are ready to give fiscal '12 guidance and the like, we will certainly update all those different things, but nothing material. We are right on track with what we said we'd do.

Got it, that's what I figured. I just wanted to make sure. Thanks very much.

(Operator Instructions).

Philip Rueppel, Wells Fargo Securities.

Great, thanks for taking my question. Qualitatively, the increase in total contract value, was that really just driven by your greater upsells on renewals, or are you starting to see any signs of new customers or new facilities keeping in the economic rebound?

I think there's a few different things as we talked on prior calls. We do have a lot of these customers, and we said in our prepared remarks, we have most of the major customers in the core verticals that we serve. And, clearly, we're doing well in working with them and expanding our relationships. We've also said some things on prior calls about our channels business, and our fiber business, and those continue to plug along and do quite well. The same could be said for emerging markets. So, I think overall, the growth is right on track with what we would expect it to be. It changes quarter to quarter, and can bounce around a little bit, but it's right on track to what we would have expected. And, we're seeing additional usage from the core customers set, and we are clearly seeing some new customers, especially in emerging markets and especially in some of the channels business that we have. So, overall, pretty well-balanced.

Great. And, you commented specifically on Japan, and that was good news, but could you talk a little bit about the Middle East? Is the uncertainty and turmoil there affecting your business at all? And, how are things going with the Middle East business going direct? And, any update on legal actions there would be appreciated.

In Japan, the team did a great job not only in closing a bunch of bookings in the third quarter, but in also working with a bunch of the customers in helping our own employees. It was quite a challenging time and they really did a nice job across the board. It is not a big part of our business from a materiality perspective, but clearly, an important place that we sell. And, we were pleased to see that, in spite of all the mess at the end of March, things came through actually quite well.

From a Middle East perspective, we are new there still. It is going well. We haven't had a huge impact in the Middle East because of some of the unrest that we've seen there because it has been limited really to countries that we don't do a whole lot of business. Although, we are headquartered in Bahrain in the Middle East, and there was a little hiccup, most of our staff, or a bunch of our staff stayed certainly during that period of time.

We continue to monitor the situation, and believe that things will settle down and it won't impact our business all that much, but again, it's relatively small percentage of the overall. At this point, move the needle tremendously one quarter or the other. But, in the longer term, we are pleased that we are direct there. We have a good team there, and we think that it was the right thing to go direct there at the end of the day, and we'll be rewarded for it.

Great. And, finally, for you Mark Sullivan, the big deal metrics were softer than we've seen. Even -- I know it's seasonally a tough quarter, but was there anything unusual there? Anything unexpected, or is that also just a function of the real portfolio?

No, there was really nothing unexpected. Those numbers will really be driven by whether there's, let's call it a megadeal, and it was a quarter without really a megadeal in it. So, that's what really drove the averages down. (multiple speakers) quarter to quarter.

Okay. Great. That's it for me. Thanks very much.

Sterling Auty, JPMorgan.

So, can you talk to us on two fronts. First, on the contracts that you see coming up for renewal, what's the discussion in terms of the size of the increase? Are the contracts renewing similar in size? Are they being increased, with the increase just purely on number of seats, or are they taking down additional products, broadening out the subscription maybe into both suites? Just a little bit of color around what you're seeing in those renewals?

It's hard to generalize because we do a lot of contracts on a quarterly basis. And, it bounces around a little bit from customer to customer, but, from a general demand perspective, there was good demand. Things did close more or less as we had anticipated. Most of the deals come through with reasonable growth rates associated with them. That's why you can see on a quarterly basis the license component of our TCV go up. We are continuing to convert legacy customers from the old style of license model to the subscription, or all products license model. That continues to go well, and it is something that we are clearly focused on and continue to do. We had very little perpetual business this quarter. Virtually all of it was sold multi-years with bundled maintenance associated with it. So, it continues to go well in the rollout with the customers.

We are seeing added token usage and growth in various contracts that come up from a time of renewal, and we're also starting to see, in between contract renewal times, additional tokens being sold. So, it's a bit all over the map here, but generally, it's consistent with prior periods and we are seeing consistent demand. And, as I've said on prior calls, we don't seem to get the high highs or the low lows. We're plugging along and doing the things that we can do with our customers. Adoption rates are what they are, and we are working with our customers to convert the portfolio that we have which is about $1.3 billion at the moment, and get those things converted to the aspenONE licensing model. Hopefully, with growth at the time of conversion, but over time, we expect them to continue to grow.

All right, great. And, then one other question. You mentioned about engineering and construction, but I missed that unless you said it in your prepared remarks, usually given commentary around where the price of oil is, you had a teeter totter whether price of oil is 80 or 100, middle of the range, you see different demand dynamics, but what starts to push much higher, you start to see a little bit of a change. Can you talk about the dynamics around whether it be in engineering and construction piece, and the E&P part of the supply chain in your customer base, given where the price of oil is?

Yes, the price of oil has historically not affected overall demand at least in the six years or plus that I've been here. It's been high; it's been lower; it is back higher again. I think we are more generally impacted by the global economy, and how people see it, or their perception of the future, and whether it is positive or negative. We don't see a huge change.

We have large customers that drive AspenTech's business, and certainly drive the industry's overall spend rate, and they really don't change their spending dynamics quarter to quarter. They're just too big in the things that we change. That said, this quarter, engineering and construction bookings were higher on an average basis than they are in the normal quarter. But, if you look at it on a year-to-date basis, it's basically in the range. So, all things -- nine months into this fiscal year, the metrics are more or less the same as what they've been for the prior six years from a bookings perspective and from an overall business perspective, but we would expect that the larger customers continue to do well. The results of our customers are generally pretty good across the world, and we see consistent demand for the kind of services and software that we sell. And, we are pretty pleased with the general outlook of the industry, and our role in it. So, we think -- we're pretty positive about where we are today and where we are going.

All right, thank you.

Tom Ernst, Deutsche Bank.

So, we know that as the model transition's happening, we are losing services revenue to the subscription contracts and there's been a pretty significant change here quarter on quarter. Looking through that, what's happening to the overall volume of your pro-services business? And, as we look out over the next couple quarters, would you expect to continue to see services revenues transition to subscription? Thanks.

So, there's a few things going on in the services line. Obviously, as we have said in a prepared remarks for multiple quarters the maintenance business is transitioning up to the subscription line, and you can see that relatively readily. We continue to have very high renewal rates on maintenance every year, so nothing's changed in the maintenance business. It's just moving and it's optically in a different place now. On a professional services, there's been a gradual decline in the professional services business over a period of time. It's, I believe, stabilized more or less now, and will start to flatten out and it may trend up a little bit.

As Mark said in his prepared remarks, it was affected this quarter especially in this fiscal year with bundling, with license arrangement. So, there's no professional services revenue recognized in the periods. It will be recognized sometime in the future as those projects wind up. So, we would expect to see some revenue come in and periods down several periods out. So, there's clearly a major impact in this fiscal year in the bundling of services revenue, which is optically making the professional services business look worse than it really is. And, that's just the way the accounting treatment works. There's a little bit this year of year-over-year draw down in the services line, but I expect it to, given the bookings that we've had in the last year or so, I would expect those things to flatten out as we go forward.

We said in the prepared remarks, from Q3 to Q4, that the overall services line would be roughly flat, but in the longer term as the maintenance line moves up, and the subscription is going to draw down going forward. But, the services line, clearly, it's something we're watching. It's a business that we need for installation of our software. It is something that's important to the Company. The revenue levels that it's at are okay. We certainly want to make it better, but this year, especially, we've been dramatically impacted by bundling, which is accounting as opposed to business volume.

Okay, that makes sense. So, it sounds like we are largely stable in terms of the overall, or as you are delivering to customers. And, I know the margins don't make sense during model transitions as well, but what do you use in terms of metrics on the efficiency of that business, maybe utilization rates, or anything like that? How is the business performing as you track it?

Utilization rates, they are generally okay. They could always be a little bit better. The overall margin in the business is okay. Again, it could always be better, but the GAAP results are skewed because of the bundling. The non-GAAP results that we track internally which keep track of who's working on which job, and whether they are fully employed and what the overall non-GAAP margins are substantially better, and better reflect how the operations of the business, but we live in GAAP land externally, and that's the way it is going to be.

But, clearly, we are focused on our software business in the long-term, and if you look at what's gone on on the income statement over a period of time, really, the Company's transition to become a much bigger software business than it ever was. And, that's where we spend most of our time thinking about the growth in the business, and that's why at least from my perspective, why people should want to own the stock and shareholders should be interested in what we do. Years ago, we had $100 million software -- I'm sorry -- in services revenue, and we will never have that amount of services revenue again I'm sure, but we want to be much bigger software business, which we are.

Okay, one more follow-up if you permit it, and then I will turn it over. Now that we've had a bit of time post the business model change to the customer, do you feel that you've got more pricing power opportunity looking forward? You've been relatively conservative looking backwards.

We have, on our term license arrangements, we sell 5- to 6-year term licenses generally to all of our customers, and normally we have escalation in the deals of 2%, or so, compounded in all of our deals. It is clearly not every deal, but generally, that's how we sell and that's what it looks. From time to time, there may be pricing increases here or there, or as we've said on prior calls, less discounting than maybe there would've been in the past. But, Aspen is a high-value, high cost supplier of software, generally.

And, so, as I think about the transition over the past number of years, we really transition materially from huge discounting to a lot less discounting, and I think we're pretty comfortable with our pricing. That doesn't mean we won't change some things, or tweak things here or there about how we go to market, give or take. But, generally, we are comfortable with the pricing, and we do get annual price increases in the deals. I think you can see from the margins that we have, even at reduced revenue level, we have quite a high margin business, and we are moving in the right direction. So, I don't think the pricing is the biggest issue. It is possible that we will in the future, but so far, we will keep doing what we are doing.

All right. Thank you again.

Brendan Barnicle, Pacific Crest.

Most of my questions have been asked, but I wanted to check on some of the other international markets, on Japan and the Middle East. Anything new out of Russia, or out of the other BRIC countries?

There's actually been quite busy. It was a -- it's been a good fiscal year for emerging geographies. This is clearly a focus of the Company, to be much more active. One of the benefits that we have as we are open in all the different geographies, so Brazil, Russia, Eastern Europe, Middle East now. We're more mature in some markets than in others, but we've done well in Russia and the CIS countries. We're having a good year in Latin America as well.

Clearly those parts of the world are growing substantially faster, and this has driven the overall growth rate of the Company in prior periods, including this one, at about double the rate of growth that the rest of the world is growing at. We expect fiscal '11 in the future to be the same or better given what we see for demand. It is clearly as the Company evolves, we'll be spending more time in emerging markets. We'll probably be -- if there's going to be growth in staff levels for sales or tech sales in the future, it will probably be in the emerging markets where there's just demand. So, we see demand there. It's been a good year for us, and our teams continue to perform well there, and we are positive about our positioning there. Although, we certainly have more to do, and we are focused on it.

Any progress outside of the core markets in the emerging markets other than oil and gas, chemical, anything new there?

You mean in the channel business?

Yes.

The channel business has actually been quite good as well. We didn't bring it up in the prepared remarks, but our channel business had another good quarter. We've had a good year in the channel business. Was it a couple years ago, we really started to get serious about it, and we are starting to get the benefits of it. It is clearly helping the growth rate of the Company as we move our way forward. I would expect it to continue. It's something we are investing in, and we've got a good team there, and they're doing a good job.

Great. Thanks a lot.

Mark Schappel, Benchmark.

Mark, could you let us know if we can expect any additional restructuring charges in the fiscal Q4?

We don't usually give forecasts for restructuring, but we haven't had a lot of that activity of late. So, we don't anticipate anything material.

Okay, and then, with respect to foreign exchange in the quarter, could you give us a sense of how that played out, specifically as it relates to revenue?

Well, most of our contracts are denominated in dollars. So, we're largely inoculated from a revenue perspective from an FX standpoint. And, in the countries where we actually do business in local currency, it was generally a favorable trend as the dollar weakened. That was reflected both reclassification of our receivables on the income statement down other income expense as well as on the revenue line a little bit. But, most of our business is done in US dollars. I think last time I looked, only about 15% or so, or less, of our business is done in local currencies, and is largely done in just four currencies, which we talk about in the Q.

Thank you.

Richard Williams, Cross Research.

Could you give us some color on the supply chain trends? It seems like the supply chain deals picked up in the quarter?

The manufacturing supply chain had a pretty good quarter. It does bounce around a little bit. It is a bigger market than the engineering market overall that we sell into. It does have bigger competitors like Honeywell and SAP and the like, but it was a good quarter.

We see continued demand, and I think, as we really fixate on the growth of both our engineering business, which is getting more users using more software, and getting more installations as we start to think about growth and how we're going to compensate the sales force, and run the business going forward. Clearly, this is a big market that we want to do better in. We expect to hold our market share and in some cases gain, which we've been doing in the supply chain over the past several years. So, we'll see how we do.

Clearly, services revenue which is primarily where we do all of our services revenue in the manufacturing supply chain space. In the draw down to the services revenue, certainly dings our market share overall, but our software license business has scaled nicely over the past several years. So, we're are fixated on the software business, and we are really focused on bringing software to market that's easier to install and easier to use, which will help our installs as well in MFE. So, overall, it was a good quarter, relatively in line with historical averages of two-thirds and one-third and we are pretty pleased with where it came out.

Can you give any color on the geographies for the supply chain business, and did it change any?

No, we don't really break it out on a quarterly basis or even on a yearly basis. It can jump around here to there, but, overall, we had demand in all parts of the world as we usually do because we are all in these markets everyday to a greater or lesser extent in any given quarter.

Okay, thanks very much, guys. Good luck. Good luck.

At this time, I would now like to turn the call back over to Management for closing remarks.

Okay, thanks everyone for joining the call here today. I really appreciate people on the call. We are pleased with our third-quarter performance. It was another step in our direction of revenue model changeover. It was highlighted by continued consistent growth in our license contract value, and very strong cash flow. We are optimistic about where we are, and the outlook for the Company to achieve all the targets that we set out to you at the beginning of the fiscal year. We look forward to speaking with you at our Investor Day, which is coming up in a few weeks, and at a number of different events that are coming up in the quarter, as well. So, thanks again to everyone for joining the call. Have a nice day.

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