Aspen Technology Inc (AZPN) 2011 Q4 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 fourth-quarter and fiscal year-end 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 CFO Mark Sullivan to begin.

Thank you. Good afternoon everyone. Thank you for joining us to review our fourth-quarter and fiscal-year 2011 results for the period ended June 30, 2011. I am Mark Sullivan, CFO of AspenTech. With me on the call today is Mark Fusco, President and CEO.

Before we begin, I will make the usual Safe Harbor statement that during the course of this call, we may make projections or other forward-looking statements about the financial performance of the Company that involve risks and uncertainties. The Company's actual results may differ materially from 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 of fiscal 2011 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 August 23, 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'll begin with a review of our financial results for the fourth quarter and fiscal year and then Mark will discuss some additional business highlights before we open up the call for Q&A.

Let me start with a review of the supplemental metrics that we provide, starting with our term contract value or TCV metric, which measures the renewal value of our multi-year term contracts. Growing TCV is a key focus for us and we increase the value of the metric by adding new customers, expanding product usage and increasing prices across our customer base.

Our license-only TCV was $1.28 billion at the end of the quarter, which was up 4.6% on a sequential basis and up 11.7% compared to the end of fiscal 2010. This result is above our guidance.

As a reminder, beginning in fiscal 2010, maintenance is included as part of our subscription and term contracts. Including the value of bundled maintenance, total term contract value was $1.42 billion at the end of the quarter, which was up 6.6% sequentially and 16.9% compared to the end of fiscal 2010.

We currently focus primarily on changes to license-only TCV does it provides an apples-to-apples comparison to assess the growth rate of our term license business.

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.

Bookings for the fourth quarter of fiscal 2011 were $149 million, bringing full-year fiscal 2011 bookings to $389 million which is well above our guidance range of $300 million to $325 million. As we've shared in the past, bookings is a challenging metric to predict due to the variable timing of when customers may elect to renew their contracts, particularly decisions to renew their contracts early in order to move to the new aspenONE subscription model. We're primarily focused on the growth component of bookings, which is reflected in our term contract value metrics.

During the quarter, we closed 31 customer bookings that were greater than $1 million compared to 20 in the year-ago period and we closed 50 bookings between $250,000 and $1 million, consistent with the year-ago period. The average deal size for customer bookings over $100,000 was $979,000 compared $1.1 million in the year-ago period. At our analyst meeting in May, we announced that we'll no longer provide bookings updates in fiscal 2012 due to the fact that we don't believe the metric is particularly meaningful, combined with the fact that it's no longer aligned with how we're incenting our sales organization and management team.

On our first-quarter fiscal 2012 earnings call, we'll introduce an annual spend metric which is a proxy for current annualized revenue associated with our term license business. Annual spend represents the aggregate annualized invoice value for all active term contracts. This metric should help investors calculate pro forma revenue and profitability numbers during the remainder of our revenue model transition.

Future cash collections is the sum of the Company's billings backlog, Accounts Receivables, and the undiscounted value of installments and collateralized receivables. The Company's future cash collections at the end of the fourth quarter were $791 million, an increase from $695 million at the end of last quarter and $625 million at the end of the year-ago period. The largest component of our future cash collections is billing backlog which was $641 million at the end of the quarter, an increase from $526 million at the end of last quarter and $389 million at the end of the year-ago period.

Significant growth in our billings backlog and future cash collections is driven by the transition of our business to contract terms with predominately annual customer payments as compared to upfront terms as well as the positive impact of business growth. If you consider that our total contract value is $1.4 billion and that our total future cash collections has now reached nearly $800 million, if you consider that future cash collections could never exceed the un-invoiced value of TCV at any time, it's natural to assume this metric will level off when the majority of the term contracts have converted to new model contracts with annual payment terms. After that occurs, we'd expect the future cash collections metric to grow roughly at the same rate as TCV.

Future cash collections was one of the transitory metrics introduced at the launch of our new aspenONE subscription model to help investors with increased visibility into future cash flow potential and to provide support that our cash flow would scale from the $30 million range to the $90 million range in just a few years. As our model is proving itself out, it's more likely than not that there will no longer be a need for this metric beyond the end of fiscal 2012.

Now let me turn to our financial results on a GAAP basis. Total revenue of $52.6 million was up 38% from $38.2 million in the prior-year period. Subscription revenue came in at $19.7 million for the fourth quarter, which is an increase from $5.9 million in the prior-year period. The completion of our revenue model transition alone should lead to continued steady increases in our subscription revenue for the next several years, though we're 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 $128.9 million at the end of the fourth quarter, representing a 48% increase compared to the end of the year-ago period. Software revenue is the component of our revenue that is most affected by the move to our new aspenONE licensing model at 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 for point product term arrangements has generally been recognized annually as customer payments become due, and it doesn't include the maintenance fees included in the annual fee. That's carved out and reported on our services revenue line.

Software revenue was $9 million in the fourth quarter of fiscal 2011, which compares to $8.1 million in the year-ago period and $13.4 million last quarter. During the fourth quarter, $5.3 million of our total software revenue related to the point products sold with bundled maintenance, $716,000 related to perpetual license agreements and $3.1 million related to software license fees that were recognized under the Company's prior upfront licensing model.

Finally, Services and Other revenue was $23.9 million, down slightly from $24.2 million in the year-ago period. 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 to the variable quarter-to-quarter but trend downwards as our revenue model transition completes.

Turning to profitability for the fourth quarter, gross profit was $37.5 million with a gross margin of 71.2%, which compares to $20.7 million and a gross margin of 54.2% in the prior-year period. Operating expenses for the quarter were $55.8 million.

Total GAAP costs, including costs of revenue, were $71 million, which was down $2.9 million on a year-over-year basis and up from $59.8 million last quarter. Due to solid cost management, our full-year GAAP expenses were $253 million, which is at the low end of our original guidance of $250 million to $270 million.

Operating loss was $18.3 million for the fourth quarter of fiscal 2011, an improvement compared to an operating loss of $35.6 million in the year-ago period. Net income for the quarter was $41.7 million, or $0.43 per share, compared to a net loss of $34 million or $0.37 per share in the fourth quarter of fiscal 2010. The explanation for realizing significant net income in the period despite reporting an operating loss is due to realizing a net tax benefit of $57.3 million in the fourth quarter as a result of releasing the majority of our US tax valuation allowance and reflecting our deferred tax assets on our balance sheet. We have previously indicated that the reversal of the valuation allowance was on the horizon, as we have been evaluating Aspen's financial situation against the GAAP considerations for making this determination. I'll discuss the future reporting implications of this conclusion during our guidance section, but would reiterate for now the changes in our reported taxes in no way changes the fact that we do not expect to pay meaningful cash taxes for the next several years.

Our non-GAAP operating and net losses for the fourth quarter, which exclude the impact of stock-based compensation expense and restructuring, as well as the just mentioned tax benefit, were $16.1 million and $19 million respectively, an improvement from a non-GAAP operating and net loss of $32.8 million and $31.3 million respectively in the year-ago period. Our non-GAAP loss per share was $0.20 in the fourth quarter of fiscal 2011 compared to a non-GAAP loss per share of $0.34 in the fourth quarter of fiscal 2010. A reconciliation of GAAP to non-GAAP results is provided in tables within our press release, which is also available on our website.

For the full fiscal year, revenue was $198.2 million and grew 19% year-over-year. GAAP operating loss of $54.6 million improved from $109.4 million in fiscal 2010 while non-GAAP operating loss of $45.1 million improved from $93 million in fiscal 2010. We expect continued improvement across these metrics in fiscal 2012 as we complete the third year of our five- to six-year revenue model transition.

Turning to the balance sheet and cash flow, the Company ended the fourth quarter with $150 million in cash which is down $1 million from $151 million at the end of the prior quarter. From a cash flow perspective, the Company generated $10.4 million in cash from operations during the fourth quarter and free cash flow of $9.6 million, bringing the full-year totals to $63.3 million in cash from operations and $58.5 million in free cash flow, both of which were above our expectations.

During the quarter, we used approximately $6.4 million in 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. For the full year, we've used approximately $10.5 million in cash for stock repurchases with $29.5 million remaining on the program.

The Company once again did not sell any installments receivable to raise cash during the fourth quarter of fiscal 2011 and we continue to reduce our secured borrowings balance. We ended the fourth quarter with total secured borrowings of approximately $24.9 million, which is down $30.6 million from $55.5 million at the end of the third quarter.

Please note that our balance sheet indicates a $30.6 million reduction in secured borrowings from the third quarter. However, of that amount, there is $26 million that is reported in accrued expenses and other current liabilities. This is due to the timing of a large early renewal of a previously factored contract. When an early renewal occurs, the remaining secured borrowings balance becomes due and is recorded as a current liability. Had this transaction occurred during the middle of the quarter and the receivable replaced with other installments, there would've been no impact on the presentation of our balance sheet. However, as it was at the end of the quarter and it was a sizable transaction, you see a large reduction in secured borrowings as reported. During the first quarter, we plan either to replace this receivable with a set of other receivables or to buy it back. These transactions have no impact on cash flow from operations or free cash flow in either Q4 '11 or Q1 '12 because all of the impact of the transactions is reflected in the financing section, including the change of current liabilities. In addition, there is no change regarding our expectation that the remaining secured borrowings balance will be retired by the end of fiscal 2013.

With that, let me turn it over to Mark Fusco. Mark?

Thanks Mark. Thanks to everyone for joining us today. We are very pleased with the Company's performance during the fourth quarter which was a strong finish to our fiscal year. The Company outperformed each metric that we provided guidance for on the year -- revenue, expense management, license TCV growth, total TCV growth, bookings and last but not least cash from operations and free cash flow.

We also took important actions to enhance shareholder value for the long-term. We completed the secondary offering related to asset shares, we used the Company's strong cash flow to continue reducing our secured borrowings balance, and we announced a $40 million share repurchase program.

We are delivering against what we said we were going to do and we are optimistic about the Company's future. As we continue to proceed through the Company's revenue model transition, we believe that AspenTech is well-positioned to emerge with a highly attractive financial profile characterized by significant critical mass, attractive growth, best-in-class profitability margins and strong, growing free cash flow.

Our business continues to be well-balanced across verticals, geographies, and products. From a vertical perspective, our three largest sectors, Energy, Chemicals, and Engineering and Construction, continue to represent 90% or more of the Company's bookings.

For the full year fiscal 2011, Energy represented approximately 48% of our bookings, Chemicals was 21% and Engineering and Construction was 21% as well. Our big three verticals went from 94% of our total bookings in the year-ago period to 90% in fiscal 2011 as our direct efforts in pharma and indirect efforts in non-core verticals contributed to solid growth.

From a geographic performance, we are pleased with execution in each of our major geographies. On a full-year basis, the US represented 36% of our revenue, Europe contributed 27%, and 38% came from other geographic regions, including Asia-Pacific, Canada, Latin America, and the Middle East.

Finally, from a product perspective, demand for both our Engineering and Manufacturing and Supply Chain solutions remains solid. Looking at our ten largest transactions in the quarter, it was a mix of engineering and manufacturing and supply-chain driven deals.

Customers' 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 side being the fact that our license TCV growth for the full year of fiscal 2011 exceeded the high end of our expectations.

On a full-year basis, Engineering was approximately 75% of our product bookings, while our Manufacturing and Supply Chain Solutions contributed the remaining 25% of our product bookings. Each of our major product suites grew on a year-over-year basis with manufacturing and Supply Chain increasing slightly as a percentage of our business. As we discussed at our analyst meeting in May, we are executing against plans that we believe can double the size of our business in the years ahead.

With respect to our Engineering Solutions, there is a significant opportunity to expand the number of engineers using our solution and to drive greater adoption and usage of all of our full suite of capabilities. Our efforts to put all of our software in the hands of our customers and continually enhance the user experience and integration between our products are all focused on improving the productivity of our Engineering customers. In turn, AspenTech stands to benefit from expanding relationships with our blue-chip global customer base.

We believe that AspenTech is uniquely positioned to drive increased market adoption with our engineering solutions. The strength of our technology and market position is evidenced either recent data provided by ARC, which shows continued market share gains for AspenTech. In addition, we remain focused on continuing to expand our addressable market.

On the Manufacturing and Supply Chain side, we have a detailed whitespace analysis that identifies which solutions our customers are using on a plant-by-plant basis across their global operations. We believe AspenTech is well-positioned to gain market share based on our strong relationships with customers, best-of-breed solutions and unique position as the only software vendor to deliver an integrated suite across engineering, manufacturing, and supply-chain management.

With a significant growth opportunity, we are continuing to align our organization to drive growth and maximize our potential. As discussed previously, entering fiscal 2011, we adjusted our sales compensation plans to further drive focused on the growth component of our bookings. As we enter fiscal 2012, there is a further incremental and even more meaningful change in compensation plans to focus our sales professionals on growing our relationships with customers.

Change is not just at the sales ranks. For fiscal 2012, bookings will no longer be included as part of our evaluation criteria for senior management (inaudible) compensation either. Rather our performance will be evaluated based on growth in licensed TCV as well as cash flow.

In summary, fiscal 2011 was a significant success for AspenTech. As we look ahead to fiscal 2012, we are optimistic about the Company's outlook and are targeting continued solid growth, strong cash flow generation, improvements in our balance sheet and further progress in our revenue model transition. We have a very strong franchise and are focused on continuing to expand shareholder value.

With that, let me turn it back to Mark Sullivan.

I'd like to close with some thoughts regarding our guidance for fiscal 2012. Before getting into the numbers, it makes sense to talk about our recently announced enhancement to our Software Maintenance Support, or SMS, offering, which is included as part of our term contracts. In July, we released an enhanced SMS offering to provide customers with 24x7 support, faster response times, and dedicated technical advocates. The enhanced offering will be provided to all customers with term licenses with bundled maintenance.

Since we don't have a history of selling this new SMS offering to customers on standalone basis, we cannot establish vendor specific evidence of fair value or [VISO]. As a result, beginning in July 2011, the revenue associated with point product arrangements that include the enhanced SMS offering will be recognized on a daily ratable basis which is consistent with the revenue recognition of fees from our subscription offering. There will be a relatively small amount of software revenue that will still be recognized on a lumpy ratable basis as we burn through the remaining balance of legacy arrangements that didn't qualify for upfront revenue recognition in the past. However, nothing new will be added to our lumpy ratable balance. It will become smaller each year and it will go away entirely after several years.

From a presentation perspective, beginning in fiscal 2012, revenue from all licensed agreements will run to a single subscription and software revenue line. We intend to provide additional disclosure on this revenue line item, including the level of legacy lumpy ratable and perpetual software, if and when it occurs.

Fiscal 2012, as we smooth the revenue recognition for point product arrangements over the course of annual periods as opposed to recognizing the full-year payment when due, it means that our recognized revenue in fiscal year '12 will be approximately $5 million lower than our previous guidance. This change will also accelerate the migration of maintenance revenue from the Services line to the Subscription line on the P&L because the maintenance associated with point product arrangements will no longer be carved out and reported on the Services line. The entire arrangement amount, both license and maintenance, will be included in Subscription and Software. We believe this evolution in our revenue model is a very positive development that will complete our transition to 100% daily rev rec subscription model and further simplify the presentation of our financial statements to be very similar to other subscription in SAS software vendors. We will increasingly have a P&L that consists of a significant and growing subscription revenue base that is highly predictable, along with a relatively smaller amount of professional services revenue.

With that background, let me discuss our updated guidance. We're targeting full fiscal year 2012 revenue guidance of $225 million to $235 million, which is slightly different from the $230 million to $240 million guidance provided in May.

From a business performance standpoint, our expectations remain consistent with our prior view. The adjustment to revenue guidance is due solely to the timing impact associated with moving the remainder of our software business to daily ratable revenue recognition, as I just referenced.

From a mix perspective, we currently expect our newly reported subscription and software line to be approximately 60% of our total revenue in the first quarter, increasing to approximately 70% of our total revenue in the fourth quarter and representing mid to upper 60% of our revenue for the full fiscal year of 2012. Our services and Other line will represent the remainder of our total revenue.

From an expense perspective, we continue to expect total GAAP costs and expenses of approximately $260 million to $275 million for the full year. Taken together, we currently expect a GAAP operating loss in the range of $30 million to $40 million for the full year of fiscal 2012 which is an improvement from the loss of $54.6 million in fiscal 2011. As a result of reversing the valuation allowance on our deferred tax assets during the fourth quarter of fiscal 2011, we expect to report a tax benefit in fiscal 2012 with an effective tax rate in the range of 35% to 40%. We expect to incur a GAAP net operating loss of approximately $20 million to $30 million, or $0.21 to $0.32 per share.

To reiterate, the change in our reported tax rate does not change the fact that we do not expect to pay meaningful cash taxes for the next several years. From a cash tax perspective, we assume approximately $1 million to $2 million per quarter in fiscal 2012. In addition, our ultimate tax rate several years down the road may be lower than the 35% to 40% range that we expect to report in fiscal 2012. AspenTech is a global company and in the coming years will be performing a tax planning analysis in advance of the Company's taxes increasing.

For a non-GAAP perspective, we currently expect non-GAAP operating loss in the range of $20 million to $30 million for the full year fiscal 2012, which is also $5 million different from our recent guidance as a result of the [VISO] change. This would translate to a non-GAAP loss per share in the range of $0.09 to $0.19 for the fiscal year.

Similar to our GAAP EPS, we are assuming a tax benefit in fiscal 2012 for non-GAAP reporting with an effective tax rate in the range of 35% to 40%.

While it is not our general intention to provide specific guidance on a quarterly basis, we will provide some initial direction for the first quarter of fiscal 2012, given the loss of the [VISO] and change in reporting structure. We currently expect first-quarter total revenue to be in the upper $40 million to $50 million range with a GAAP operating loss in the $14 million to $16 million range. This should help you as you proceed with the second through fourth quarters in building out your full fiscal year 2012 models.

I'd like to reiterate that the continued improvement in our P&L aside, it's 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 license contract value growth, we continue to target upper single-digit to double-digit growth over fiscal 2011, and remain optimistic about our outlook based on continued high customer interest levels as we enter the new fiscal year.

From a cash flow perspective, we currently expect cash from operations in the $80 million range and free cash flow in the mid $70 million range, both of which have an element of variability due to changes in working capital. As a reminder, for fiscal 2011, roughly 70% of our free cash flow was generated in the second half of the year and it was closer to 80%, excluding the previously discussed $8 million tax refund that occurred during the first quarter. We currently expect the seasonality of our cash flow for fiscal 2012 to be heavily weighted to the back half of the fiscal year.

It's still early as it relates to fiscal 2013, but for now we feel comfortable increasing our free cash flow target to the $100 million level, which is up from our previous guidance in the mid $90 million range.

So just to summarize, the fourth quarter and the fiscal year 2011 were strong and better than our expectations. We continue to have a very positive outlook for our business in fiscal 2012. The loss of [VISO] and completion of our move to a full subscription model is a positive development for supplying our financial statement presentation and for improving the long-term visibility and predictability of our revenue.

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

(Operator Instructions). Brendan Barnicle, Pacific Crest.

Thanks guys. I just wanted to follow up on pricing and deal size. Obviously you saw some larger deals. I know when we are altogether at the analyst day you'd shared some insights on how ASPs had tracked as we've moved to subscription. I was wondering if you could give us any update on anything you've seen there.

The ASP for the fourth quarter was roughly what it was a year ago, down about $100,000. We had several -- we have large deals in every quarter, not surprisingly in a quarter where we have large bookings like we had in the fourth quarter of $149 million. There's going to be a few larger ones in the eight figure range. We had a couple this quarter, which isn't surprising.

Overall, the business was strong across the board. Pretty much all of the geographies did quite well. We were especially strong in Asia, and we're very strong in North America as well. And that was consistent for the year. EMEA was strong. APAC was strong. We had good overall performance across the entire set of the geographies that we serve.

So overall, the business looked very consistent with what we've seen in the past, especially when we start to get some big deals.

The ASP is something that bounces around from quarter to quarter. It's not particularly meaningful depending on what you have for renewals and the sizes in any given period. But the ASP was up near $1 million and last year it was $1.1 million and it's not a surprise that we had some big deals in those quarters.

How about on Middle East and Russia? You mentioned globally the geographies were well. Middle East I know -- are you still transitioning away from that reseller agreement, and then any more color on what's been going on in the Russian market?

Yes, the Middle East we still are in transition. We are fully staffed. We've got offices in multiple countries there. We're selling direct. We're making good headway and good traction in Russia. We had a very good year in Russia. There was a lot of good growth in all parts of our business with multiple customers. It was a (inaudible) for us in growth TLCV or the license component of TCV, that along with Latin America and some other reasons, so the emerging sort of markets around the globe grew nicely, as did our indirect or non-core verticals business, that grew nicely. Pharma did nicely in growth in bookings. So it was pretty well-balanced across all the different things that we do with solid performance in the Western part of the world, and really in EMEA, which has certainly been in the news recently. We had a very strong year in EMEA and our outlook there is solid.

I know some other companies may have had some softness in their go-forward statements, but we see solid demand across the verticals that we serve and across the geographies that we serve in the past year and going forward.

Great, thank you very much.

Sterling Auty, JPMorgan.

Thanks, hi guys. A couple questions. I just wanted to start with -- I missed it if you said it, but can you give us a little color as to the contract length that you saw in the quarter?

The contract length was consistent with the contract length that we talked about at the investor day, which is just on average just over five years in duration. Nothing has changed from a duration within the portfolio.

Then on the customers that came in to kind of move over to the new licensing model maybe a little bit ahead of when they were due, can you give us a sense as to what their appetite for -- obviously we have the total growth in the license value, but just a little bit more color around the ones that are coming in early, what are they saying? What's motivating the early renewal, and what are you seeing out of the growth part of their license when they're repurchasing?

Generally, one of the things that was interesting this year to see how we would follow up with the suite component of our business after a very strong first year last year, we did about 75% of our bookings in the suite component where they've got the full suite of products and went on the subscription accounting. In the fourth quarter, it was in the mid 80% range, and for the year it was around 80%. So it was actually up 5 points year-over-year, so it was a very strong performance in the suite part of the business.

What our customers are interested in is they do want access to all of the products in a simplified contract, and there is more demand. There's more demand in usage in multiple different things that we do in both the Engineering and in the Manufacturing and Supply Chain side. So it's really both. Obviously if it's an early renewal, they don't have to renew. They can do it if they want to. So clearly they're seeing value in Aspen's products, value in having the entire suite and value in having a very simple simplified relationship with us, which is we give them all the products, they get to use them as they want, and then as their demand scales, they just add more usage along the way.

The last question would be around the seasonality of the cash flow that you talked about and collections. You had a very strong bookings quarter here in the fourth quarter. How should we think about, without maybe giving specific total cash flow guidance for the first quarter if you don't want to go there, but how should we think about the seasonality of the collections in light of that strong bookings in the fourth quarter? Were a lot of those already collected, or is the timing of those collections still skewed to the back half of the fiscal year?

This is Mark Fusco. The timing is still, as we said in the prepared remarks, skewed to the back half of the fiscal year. We have -- obviously we're going to be collecting payments in the first quarter; we collect them every quarter. We have big uses of cash in the first quarter generally around commissions and the corporate bonus plan and these sorts of things. So the first quarter is generally not a great quarter of cash flow for the Company as you would've seen that year last year, exclusive of the $8 million tax refund that you saw and that we talked about here today.

The second quarter was marginally better, and we would expect the same thing this year, but really we expect the lion's share of the cash flow to come in in Q3 and Q4, as it did in fiscal year '11. It's nothing to be concerned about. It's just the way the cash collections run, and it's how we see the business and it's been consistent over the past number of years.

Great, thank you.

Tom Ernst, Deutsche Bank.

Thank you for taking my question. So a couple of questions for you. You mentioned that sales force compensation you'd like to gear that, tilt at a little bit more towards new sales. Practically, how do you do that? Are you -- is this an accelerator program or -- in answering that, what are the risks?

We change the sales comp plan every year. I think most companies do. This one is a little different in that we're changing from a bookings -- and everybody in the past had a bookings quota of which growth was a component of their bookings quota. This year, the entire Company is lined up around the growth in license contract value. So that we think is in alignment with what the Company wants to do, what the shareholders want to do.

We have changes every year to the sales comp. So far, as we've rolled it out in the first quarter here in fiscal '12, it's gone well. We haven't seen any change really in behavior. The guys have been growing the deals and growing the business anyway, so fundamentally they're not doing anything specific that would be different.

I think the one area of focus which is going to be a benefit is we talk from time to time about having some natural renewals that don't renew during a period in the low single-digit range. I think that we'll see some very hard focus in the Company around making sure that business that we have today doesn't drop off, even if it's a small $5000 deal. Then we'll also focus on big customers and where the growth is. So, I don't see it as being a hugely material change from what they do every day. It's really just what we -- the focus on what we want to do, which is broaden our relationships and really get more usage of software, which is the Company's strategy. So there's always a risk in changing comp plans, but we do it every year. We started doing it five years ago. This has been well sort of messaged and telegraphed along the way, and I don't expect it to be any big deal.

So not to be too thick thick-skulled on this or anything, but the shift would then only be compensating them for new license acquisition on the TCV value of it, whereas the old method with bookings included renewals on the maintenance contracts, etc., right?

Not to get into the nuts and bolts of how the comp plan works, specifically they get most of their commissions, so to speak, based on the growth in the deals. We clearly want them to maintain the business and work with the customers, and there's various payments for licenses, for services, for helping us out with our training business and other things. There are accelerators and other things built into the plan. But you're right in I guess a general statement, which is as we move away from bookings at the sort of gross level, we're really breaking that into pieces and really focused more around growth now.

Is there a separate organization that's responsible then for collecting maintenance renewals and ensuring that that part of the business doesn't suffer as a result of the shift in emphasis? (multiple speakers)

There always has been a maintenance renewal group that does perpetual maintenance and term license maintenance that's not bundle. But keep in mind we are now substantially along the way to converting the portfolio of term licenses to having bundled maintenance. So we're about 60% converted now from a TCV perspective with bundled maintenance. So there's a lot less maintenance to be renewed. Those folks are doing that as well as doing a few other things, so we've really I would say derisked the maintenance business over the last several years by combining the maintenance into a subscription. 99% of the deals in the past couple of years have been sold with bundled maintenance. So there is a lot less maintenance to be renewed on a yearly basis, which is good. It's all in backlog. We're really moving along through the portfolio as we would have expected.

Last question from me. I assume this came after the quarter. I'm wondering if it had anything to do with the big move in $1 million deals, because our math suggested you are up over 50% year-on-year in $1 million transactions. If it's not sales comp driven, why do you think the big success with the big tickets?

They come from time to time. We had a renewal, a natural renewal with a big customer that got done. We had an early renewal which is the one that Mark mentioned in his prepared remarks, which is hung up on the balance sheet in -- that he talked about earlier.

Still, there's good traction clearly, and the fourth quarter is always a big quarter as sales people get close to accelerators and these sorts of things. We usually have a very strong fourth quarter anyway. First quarter is generally not as strong and is sequentially down. We would expect that to happen again this year. It's nothing to be concerned about; it's happened every year. If you remember from fiscal '10, we had $136 million or so in bookings in the fourth quarter, and then dropped to 70 and the growth went from, I don't know, 4% or so down to 1.5% percent in the first quarter of '11, and then just scaled right back up. So it happens every fourth quarter. We do a lot of deals. That's what our sales people do. I think they executed very well during fiscal year '11, and we're looking forward to fiscal '12.

Helpful. Maybe just to clarify too, because my notes suggest that you are up 50% in terms of number of $1 million deals year on year. Is that correct?

That's correct.

Okay. Thanks again.

Philip Rueppel, Wells Fargo.

Thanks very much and good afternoon. Looking back at sort of '08, '09, you weathered the recession fairly well. Kind of looking forward, have you seen any change in customer spending either by vertical or customer group, or is Q1 shaping up the way you thought it would be when we met last in May?

After the strong fourth quarter, it was nice to see that actually when we looked at the pipeline in July, when we get done with the June deals, the pipeline on a year-over-year basis in July is actually up from what it was a year ago quite nicely. There's lots of opportunity we're seeing in the verticals in all different parts of the world. We have not seen any change or any slowdown, any change in buying pattern so far in the first quarter of fiscal '12. It's early yet; we're just halfway through the quarter. But based on what we see, how the team is executing, where we see the deals and how they're growing and these sorts of things, we haven't seen any changing.

Thanks. Not to preview the annual spend metric, but just could you give some color around -- I know you're not giving bookings in the future, but is the renewal portfolio better or worse as you head into 2012? How should we think about that?

It's about the same as what it was at this time last year. So as we've said consistently over time, we really do like to do our renewals a year or so early before their natural renewal date. We don't like to drag them into the last year, but they are virtually identical at this time as we start fiscal '12 as they were in fiscal '11. So there's nothing out of the ordinary there at all.

Great, thanks.

Richard Davis, Canaccord.

Two quick questions. One, on the future collection of cash flows, so $790 million, and if the duration is 4.5 or 5.5 years, because if you get it a year in advance, and even if it's back-end loaded, I mean it seems like you're going to be getting at least $120 million in cash in year one, maybe $130 million and in the back and you'd be getting over $200 million. Am I miscalculating those numbers, or help me out with the basic level of arithmetic there.

Yes, we think it's hard to do simple math on that metric. The number that we talked about at analyst day is -- the duration is 5.3 years is on the whole TCV. So cash collections generally is the un-invoiced portion of that, so you can't really just do a simple metric like that.

Then the other thing is that's just the cash coming in, obviously. Other sources of cash that would come in or not yet committed would be from future bookings, or the renewals that Mark just talked about. Then you got to take expenses out. So that's -- that would just be the receipt portion of cash (multiple speakers)

(multiple speakers) okay, so that would be cash revenues and the fact that (multiple speakers)

Exactly.

Got it. The other kind is a minor question. So Mark, you've talked in the past, at least intentionally, about M&A and stuff. I can't remember. Maybe you've hired someone in-house. But you really haven't done anything in that area yet. Not to diminish what you're doing organically, but what are your thoughts there? Do you have a plan? Do you want to do stuff or is it just better to kind of lay low and drive the core business?

I'll take it in a couple of different pieces. First, we think we've got a great platform which can grow organically and provide great returns for the shareholders, given the breadth of the portfolio of products that we have, the investments we make in R&D every year to come out with new and interesting features, some of which you guys saw if you went to the analyst day and to the user group meeting down in Washington in May. So we think we have got lots of opportunities to grow organically. That said, we're going to be generating a bunch of cash, and we're going to be putting it to work somewhere. We started to do it a little bit with the share buyback. We'll do more of that as we move our way forward. We look at a lot of deals. We have an active group in the Company that's looking at acquisitions where, as I said in the past, looking at more smaller ones, technology focused, sort of tuck-in sort of things as opposed to transformational. You shouldn't expect that we're going to go out and do a big one because we think we've got lots of things and we don't want to get distracted around our execution.

Still, there's things that come up. We look at them. To be honest, if there's something good that fits in with one of our suites, we'll take a look at it and maybe move on it. But if there's not or if we don't think it drives the shareholder value that we want, or we can build our own product to compete in the market, then we'll likely do that. So we look at everything, but it's really likely to be more technology-based as opposed to some sort of roll-up of competitors in the space.

Got it. Thanks.

Rahul Bhangare, William Blair.

Richard Williams, Cross Research.

Thanks for taking the call. When you no longer give bookings as a metric, is that a function of shifting sales force emphasis to growth as opposed to renewals?

Yes, we've talked in the past that we think the best way to judge the Company is how its portfolio of licenses under contract rose over a period of time. As you can see from the fourth quarter that we just announced, there was obviously a lot of renewals and a lot of growth in the period. It gets a little hard to focus, to forecast from time to time.

We want our sales force focused on growing our engagements, one, and keeping the business that we already have, two. Those things will drive the best returns for the shareholders, and it's something we've been sort of transitioning and working our way to over a period of time. Clearly, if you're going to compensate people for the growth component of the booking, in the growing of the licensed TCV as opposed to just the overall booking, it wouldn't make sense that we would be giving some sort of guidance or reporting those results because they could bounce around all over the place.

At the end of the day, it's about the growth in the period and the growth in the year. This past year, it was just under 12%. Last year, it was just over 10%, so we had a little bit of an acceleration. We'll see how fiscal '12 rolls itself out, but we want to make sure everybody is in alignment from the salesperson all the way through me, and we do have that in the Company, which we think is in the best interest of the shareholders. So that's the way we want to run the Company going forward.

Do you anticipate any issues in terms of salespeople shifting focus? Just from our own experience, booking renewals is a heck of a lot different and a lot easier, I think, then going out and booking new sales.

Sure. But our sales folks have really been executing quite well. Over the past four years, we've grown our TCV by about -- TLCV by about 11%. So it's not as if we haven't been growing the business as it is. As part of that obviously we do renewals. It's really just a slight change of emphasis probably, but I think it makes sense for us in the Company's transition to move in this direction. We have a good sales force and we have a good bunch of tech sales guys that work along with them all over the world. Their job is to create value for their customers and value for Aspen at the same time. They have been doing it and I am sure they'll do it this year as well.

So really you're just looking to accelerate growth as opposed to just shift focus?

Yes. We're obviously looking to accelerate our growth always and to execute better. But really it comes -- it's more fundamental, in my view, which is work with our customers to build value for them. If we do that, it will build value for us as well around how they use the products, how many products they use, in what combination, what value they get, how we work with them, how we train them, what tools we have built into the products, how they integrate together. All these things are important. It's not just a sales issue. It's really an alignment issue across the Company, which is to provide products that are usable, that integrate with our own other products as well as others. We talked about this at the user group meeting. It's really around the broad topic of usage. That's what we got our sales folks and our tech sales guys focused on, and we think it makes the most sense.

Thanks very much and good luck.

Mark Schappel, Benchmark.

Good afternoon. Mark, if I recall correctly, your owner-operators were making up about 80% of your software usage. I was wondering if that percentage has moved one way or another over the past two quarters.

No.

Thanks. With respect to your Japanese operations, where if I recall correctly you're doing mid-single digits as a percentages of total revenue, do you see any hiccups in that business this quarter?

Clearly, coming through the tsunami that they had, it was a challenging time, and we work with our customers there both on the -- specifically around the services business in helping them get things installed or get their refineries or plants up and running after what was a challenging time. You know, it wasn't an easy quarter for them, but they had a very good third quarter. They had a pretty good fourth quarter. Asia overall did very well for us during the quarter, fourth quarter of fiscal '11 and for the year. It was really they have the biggest overage in overall bookings above plan. So the overall region was good. The Japanese team did a pretty good job, I thought, in a challenging time, and I don't think there's any long-term effects one way or the other.

Thanks. One final question -- if you could give us an update on your channel business, particularly as it relates to some of the non-core industries. Is there any major developments this quarter in that business?

Nothing major other than we've been consistent this year. They had a very good year, had nice growth. I said in my prepared remarks that the pharma and indirect group, that was about 10% of the business this year, which was up from 6% last year. There is nice growth there. The initiative that we put in place a few years ago to sell through channels provides a lot of growth, pure growth, because there's not a lot of renewals there, there's not a huge install base to work from. So it is pure growth, which is good for the Company's TCV. We're really fixated on it. They're doing a nice job and we expect to continue to expand it.

Thank you.

Peter Goldmacher, Cowen & Co.

Joe for Peter here. Thanks for taking my call. So just a quick question, since most my questions have actually been asked. I was wondering if you guys could provide color on bookings, like what percentage came in as new deals and what percentage was renewal?

Also, with regards to the raise in guidance for free cash flow in fiscal '13, what portion of it was sort of new money coming in and then what portion of it is cost savings as well? Thanks.

Yes, we really don't breakout new versus renewal on a quarterly basis. It was -- as you can see, we were up about 5% in the -- sequentially from Q3 to Q4 from an overall growth perspective. Clearly, there were a bunch of renewals that came as part of that. When you have a $140 million -- a record bookings quarter, $149 million and a record bookings year there's going to be renewals. I talked a little bit earlier that we're really about 60% of the way through the dollars of the portfolio, which is great, and we're really executing quite well there. But we don't really break it out.

As far as the cash flow goes, there's -- we've done a pretty good job at expense management over a period of time, you know, $253 million in fiscal '11 on the GAAP basis, certainly the lowest since I've been here. So it's good expense management that the team is focused on it and doing a good job. I don't think there's really anywhere to go there on a cost line anymore for a company that is our size that's in the number of countries that we're at. So anything that we do from a growth in free cash flow has got to be from growth in the business, but it won't be on the cost line.

Great, thank you. Congrats on the quarter.

I'd now like to turn the call back to management for any closing remarks.

Thanks to everyone for listening in today, and thanks for your interest in AspenTech. It was a very good year for fiscal '11, really followed on from a very good year in fiscal '10. As I said in my prepared remarks, we did the things that we set out to do this year. It's gratifying to see the plan work. We have a good plan, we think, for fiscal '12. We've got a lot of good folks here that are working real hard and we'd like to thank them for their hard work. I look forward to seeing you this quarter and in our fiscal second quarter as well on the road. Thanks.

This concludes today's conference call. You may disconnect at this time. Thank you.