Aspen Technology Inc (AZPN) 2012 Q1 法說會逐字稿

Good afternoon. My name is Susan and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter fiscal 2012 financial results conference call. (Operator Instructions). Thank you, Mr. Mark Sullivan, Chief Financial Officer, you may begin your conference.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review our first quarter of fiscal 2012 results for the period ended September 30, 2011. I am Mark Sullivan, CFO of AspenTech and with me on the call today is Mark Fusco, President and CEO.

Before we begin I will make the usual Safe Harbor statement 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 our form 10-Q for the first quarter of fiscal 2012, which is now on file with the SEC. Also please note that the following information is related to our current business conditions and our outlook as of today, November 1, 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 first quarter, 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 $1.31 billion at the end of the quarter which was up 2.2% on a sequential basis and up 12.3% compared to the first quarter of fiscal 2011. As a reminder, beginning in fiscal 2010, maintenance is included as part of our subscription and term contracts. We include the value of bundled maintenance.

Total term contract value was $1.46 billion at the end of the quarter which was up 2. 7% sequentially and 17% compared to the prior year period. A new metric that we are introducing is our annual spend metric which is a proxy for the value of our recurring term license business at the end of each time period. Specifically the annualized value of our term license and maintenance revenue. For the first quarter of fiscal 2012, our annual spend was approximately $274 million which is an increase of approximately 10% on a year-over-year basis.

It is worth noting that the growth of our annual spend metric should naturally be slightly lower than the growth of our license TCV metric. The reason for this is that license TCV is calculated using each contract's terminal year annual payment and therefore takes into consideration the total price escalation over the course of the multi year time period whereas the annual spend only takes into consideration the current year's level of spend. We will continue to provide both contract value and annual spend metrics, as we believe each provides insight to the health and growth rate of our term license business and the size of our key renewable assets.

Moving on to additional metrics, future cash collections, the sum of the Company's billings backlog, accounts receivable and the undiscounted value of installment and collateralized receivables. The future cash collections at the end of the first quarter were $795 million compared to $791 million at the end of last quarter and $653 million at the end of the year-ago period. The largest component of our future cash collections is billings backlog which was $662 million at the end of the quarter compared to $641 million at the end of last quarter and $436 million at the end of the year-ago period. As we discussed last quarter future cash collections was one of the transitory metrics introduced at the launch of our new aspenONE subscription model. To help provide investors with increased visibility into future cash flow potential and to provide support that our cash flow has scaled from the $30 million range to the $90 million in just a few years.

Since that point in time we not only have scaled our cash flow, but we increased our fiscal 2013 free cash flow target to $100 million on our last call. As such, 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 was $51.2 million. Which was up 19% from $43.1 million in the prior year period. This compared favorably to our guidance of revenue in the upper $40 million to $50 million range. Looking at the details of our P&L, I would like to remind you about the updated presentation of our revenue which we discussed last quarter. Revenue associated with point product arrangements that include our new enhanced software maintenance support or SMS is now recognized on a daily ratable basis due to the fact that we cannot establish [VIS] for the new SMS offer in the first quarter.

This ratable revenue recognition is consistent with our subscription license offering. We still have a relatively small amount of software revenue that will be recognized on an as-due, or lumpy ratable basis that is related to certain legacy license arrangements that didn't qualify for up front revenue recognition in the past. The amount of revenue associated with legacy arrangements will be smaller each year and will go away entirely after several years. Beginning in the first quarter revenue from all license arrangements is displayed in a single subscription and software revenue line.

We believe this is a positive that simplifies the presentation of our income statement which is more comparable to other subscription and SAS software vendors. Longer term we will have a P&L that consists of a significant revenue base that is highly predictable along with a relatively smaller amount of professional services revenue. Subscription and software revenue was $31.9 million for the first quarter which is an increase from $19 million in the prior year period and $28.7 million last quarter.

Completion of our revenue model transition alone should lead to continued steady increases in our subscription revenue for the next several years. In order to provide further transparency into our consolidated subscription and software line we provide additional details on a few of the components of subscription and software revenue that have quarter to quarter variability. During the first quarter we had $340,000 of subscription and software revenue that was related to perpetual licenses, and we had $3.1 million that was related to legacy term licenses that were not recognized on a daily ratable basis.

Our growing subscription business positively impacts our deferred revenue balance which was $135.8 million at the end of the first quarter representing a 34% increase on the year-over-year basis. Finally, services and other revenue was $19.3 million, down from $24.1 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 be variable quarter to quarter, but trend downward as our revenue model transition completes. Another factor impacting our afforded -- services revenue is that we have an increasing amount of services business that is bundled with term license.

As a result the services revenue is being deferred and then recognized ratably over the license term rather than as the service is being delivered. Turning to profitability, gross profit was $37.4 million with a gross margin of 73% which compares to $29.9 million and a gross margin of 69.3% in the prior year period. Operating expenses for the quarter were $53 million.

Total GAAP costs, including cost of revenue were$ 66.8 million which was up $4 million on a year over year basis and down from $71 million from last quarter. Operating loss was $15.6 million for the first quarter of fiscal 2012, consistent with our guidance and an improvement compared to an operating loss of $19.7 million in the year-ago period. Net loss for the quarter was $11.7 million or $0.12 per share, an improvement compared to a net loss of $15.5 million or $0.17 per share in the first quarter of fiscal 2011.

Our non-GAAP operating and net losses for the first quarter, which exclude the impact of stock-based compensation expense and restructuring, were $12 million and $19.2 million respectively, an improvement from a non-GAAP operating and net loss of $16.9 million and $12.8 million respectively in the year ago period. Our non-GAAP loss per share was $0.09 in the first quarter of 2012 compared to a non-GAAP loss per share of $0.14 in the first quarter of fiscal 2011. Reconciliation of GAAP and non-GAAP results is provided in tables within our press release which is also available on our website.

Turn to the balance sheet and cash flow, the Company ended the first quarter with $145.4 million in cash which is down $4.6 million from $150 million at the end of the prior quarter due to the fact that we used approximately $9.2 million in cash to buy back stock. From a cash flow perspective, the Company generated $5.3 million in cash from operations during the first quarter and free cash flow of $4.7 million. This compares to free cash flow of $5.6 million in the first quarter of last year. However, as we reminded everyone on last quarter's call, free cash flow in the first quarter of fiscal 2011 included tax refunds of approximately $8 million without which we would have used cash in what is a seasonally weak cash flow quarter.

We continue to expect our cash flow to be heavily weighted to the second half of the fiscal year based on the timing of customer invoicing and the related collections. The Company once again did not sell any installments receivable to raise cash during the first quarter of fiscal 2012. And we ended the first quarter with total secured borrowings of approximately $24.8 million, which is roughly flat compared to $24.9 million at the end of the fourth quarter due to the fact that we did not have much in the way of previously financed receivables coming due.

As a reminder we have approximately $25 million secured borrowings that is currently being reported in our accrued expense balance line. That is consistent with last quarter. We continue to evaluate whether we will replace the underlying receivables with other receivables or buy them back. Depending on our final decision, the $25 million will either move back to our secured borrowings balance or be paid off. Similar to our commentary last quarter, there is no change to our expectation that secured borrowings will be retired by the end of fiscal 2013, and it will go down by relatively equal amounts in fiscal 2012 and 2013.

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

Thanks, Mark. And thanks to everyone for joining us today. We are very pleased with the Company's performance during the quarter. We delivered against each of our key objectives, we remain on track for our full year plans and we are optimistic about the Company's future. This is further evidenced by today's announcement that we have significantly expanded the Company's stock repurchase program. We had approximately $20 million of capacity remaining in our previously announced $40 million buy back program at the end of the first quarter. This has been replaced with a new $100 million share buy back program approved by our board of directors.

Clearly the number one topic on most investors' minds is the global economy and whether it is or is not impacting technology vendors. While no company is immune to macroeconomic pressures, our first quarter performance is evidence that AspenTech did not see a material impact in the September quarter. We have shared in the past that our business does not typically experience a material increase or decrease due solely to changes in the macroeconomic growth which is a result of the combination of our strong market position, long-term contracts, mission critical applications and blue chip customer base. Our multi year license TCV compound growth is approximately 11%, and we are targeting another year of solid upper single digit to double-digit license TCV growth in fiscal 2012 as well.

We are off to a good start in this regard with license TCV growth of 2.2% in the first quarter which is higher than our first quarter growth in any recent year. We believe one of the primary drivers to the strong growth performance in the first quarter is the incremental change and focus that we put in place with our sales organization at the start of fiscal 2012.

Our sales reps are fully aligned with the goals of our Company to add value to our customers, to expand their usage of our products and to make sure we retain all of our customers. Clearly one quarter does not make a trend. We are still early in the fiscal year. We are only moving into the second quarter under the new sales compensation plan, and the economic environment remains uncertain. That said, our pipeline of opportunities remains strong. We are delivering tremendous value to our customers, and we continue to improve the alignment of our business model and go to market strategies to optimize AspenTech's long-term financial performance.

Looking at our first quarter performance our business remains strong in our big three verticals and across our major product line. Energy, chemicals and engineering and construction continue to represent 90% or more of the Company's total bookings with the energy vertical representing our largest vertical contributor. From a geographic perspective, we do not get overly focused on quarterly results because our detailed metrics vary quarter to quarter based on the timing of a relatively small number of sizable transactions. That said, I can share that our business momentum remains solid on a global basis. Looking at our ten largest transactions in the quarter there was again a mix of engineering and manufacturing and 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. We have a significant opportunity for growth in both our engineering business, where we are several times the size of our largest, closest competitor, as well as in the manufacturing and supply chain business where AspenTech is well positioned to leverage our process manufacturing domain expertise and industry leading engineering customer base. AspenTech can compete on a best of breed basis in both of these sectors, and we are the only vender to deliver an integrated suite of best of breed solutions that spans the original construction of plants, on going process changes to optimize plants and the day-to-day scheduling of manufacturing process and supply chain management.

In summary, AspenTech is putting together a solid track record of delivering against its commitments. In fiscal 2011 we achieved or exceeded each financial target shared at the beginning of the year, and we are off to a similar start in fiscal 2012. We are still early in the fiscal year, and we remain confident in our full year plans. From a long-term perspective, we believe AspenTech is very well positioned from a fundamental position and we believe that will translate into strong profitability margins and consistent growing free cash flow with best in class margins. Today's announcement that we have put in place $100 million share buy back program is further evidence that we intend to use our cash flow in ways to enhance shareholder value. It is also a reflection of our confidence in AspenTech's long-term prospects. With that I will turn it back to Mark.

I would like to close with some quick thoughts regarding our guidance for fiscal 2012. Based on a solid first quarter performance and continued customer demand we are reiterating our P&L and growth related guidance we previously shared for the full year fiscal 2012. We are targeting revenue of $225 million to $235 million with subscription and software revenue representing mid to upper 60% of our revenue for the full fiscal year 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 GAAP operating loss is expected to be in the range of $30 million to $40 million which is an improvement from a loss of $54.6 million in fiscal 2011. As we mentioned last quarter, as a result of reversing the valuation allowance on our deferred tax assets during the fourth quarter of 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 loss of approximately $20 million to $30 million or $0.21 to $0.32 loss per share. From a non-GAAP perspective we continue to expect a non-GAAP operating loss in the range of $20 million to $30 million for the full fiscal 2012 which translates 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%. Our current focus remains on providing full year P&L guidance and direction from a quarterly perspective. We will provide an added level of detail for the second quarter due to specific timing events that can create variability. We are comfortable with a revenue range of approximately $52 million to $53.5 million for the second quarter. It is important to understand that this does not include $3 million to $4 million dollars of potential additional contribution from legacy contracts in which revenue is recognized on a cash basis. The annual cash payments related to these contracts are due at the end of the second quarter.

Though it is always possible collection could move to the third quarter considering the Q2 holiday season. How this plays out will make no difference to our underlying business, but will impact our reported revenue and cash flow depending on which quarter the collection is made. This is just one of the many examples why our GAAP P&L is not particularly meaningful until we complete our revenue model transition.

Based on $52 million to $53.5 million in revenue, we would expect a GAAP operating loss of approximately $10 million to $11.5 million for the second quarter. On a non-GAAP basis, that would translate to a non-GAAP operating loss of approximately $7 million to $8.5 million. With respect to total license and contract value growth, we continue to target upper single digit to double-digit growth for fiscal 2012 as compared to fiscal 2011 and we're off to a good start with 2.2% growth in the first quarter, which is typically one of our seasonally weaker quarters. From a cash flow perspective, we continue to expect cash from operations in the $80 million range and free cash flow in the mid $70 million range for the full year fiscal 2012.

Similar to our discussion last quarter I will reiterate that we expect our cash flow to be heavily weighted to the second half of the fiscal year which is primarily due to the timing of invoices on existing contracts. Finally we continue to feel comfortable with our free cash flow target of $100 million for fiscal 2013. With that, we are now happy to take questions. Operator, let's begin the Q&A.

(Operator Instructions). Your first question comes from the line of Sterling Auty with JPMorgan.

Yes, thanks, hi, guys. A couple questions, first looking at the quarter, looking at the sales and marketing expenses, they are actually a little bit higher than what we expected, and we were wondering how much of that is hiring? How much of that might be variable expenses associated with better than expected bookings? How much might be other discretionary spending?

It is primarily the second, Sterling, which is just variable expenses around compensation and commissions in the second quarter, and maybe a little bit of stock compensation as well based on the grant that was given out -- the annual grant in August. So it is primarily compensation expense, as far as head count goes it is relatively stable.

Okay. On the tax benefit as we kind of lay it out for the year. It looked like for the first quarter the tax benefit was a little bit less than we expected? Wondering how that should kind of fall out through the year.

Yes, the effective tax rate we are talking about going into the year 35% to 40% range could end up actually trending closer to 30% but we will see. There is some intricacies associated with being in a loss position that may make that end up being a little lower. Right now, given that we are one quarter in, we are still talking about an effective tax rate kind of in the 35% to 40% range.

Okay, and last question and I will jump back in the queue. Can you give us a little bit more color geographically -- you mentioned macro-wise you're not seeing much of an impact, but are there any regions that are particularly either stronger or sluggish relative to what you saw given some of the macro pressures?

From a geographic perspective it was pretty balanced. Everybody was on or around plan. We had some overages in a couple regions from a growth perspective. And again, as I mentioned in my comments it does bounce around a little bit from quarter to quarter depending on how the business goes. As it relates to Europe, they were on plan, actually a little above plan, and things came in relatively solidly. Asia was the same and North America and Latin America was strong. It really was a pretty good performance geographically. We really didn't see any particular weakness anywhere in the world. We are certainly watching the macro events and trying to discern any evidence in either the pipeline or in any of the business we had that would lead us to a conclusion that different from the one we are operating on. But we didn't see it. We have a good pipeline -- we had a good pipeline going into the first quarter off of a really strong fiscal year 2011. We have a good pipeline for the second quarter as well, and what we think for the remainder of the year, although it is a little early yet. So far, so good. Nothing that we would speak to that the environment for us has changed. I think a lot of it is to how we sell and how we execute and how we work with our customers. Many of our customers are doing well despite the headlines, on a daily basis. We didn't see anything yet that would cause us to have any sort of concerns or make any statements to that effect.

All right. Thank you.

Your next question comes from the line of Richard Davis from Canaccord.

The question I had was two parts, one is product and one is numbers. I guess we will do numbers first. Mark, on the annual spend of $274 what add backs would you use if you were trying from the outside to kind of get to normalized revenues, and what are they? Are they services or things like that or -- I wasn't quite clear as to -- let's say had you done this five or six or seven years ago? That's what I was trying to get at, so we can calculate kind of normalized current margins.

The annual spend number is a proxy for the revenue associated with our term business. So what we have done is we have taken in effect the contract database that we use to calculate total contract value. But instead of taking the full contract value we are just taking the annualized invoicing value of all of the contracts. To that we are adding the piece of -- the portion of maintenance that's still on the legacy arrangements. So we have part of the business that has been converted to new commercial model offerings so that the maintenance is bundled and we have some of the portfolio that is on legacy agreement so people are still buying maintenance on an annual basis. That's what annual spend is. To that you would have to add the professional service and training business as well as the portion of our maintenance business that is still related to our legacy perpetual business. If you added those things together you could kind of get to a proxy of what revenue will be.

That number feels like it's -- I think it's $330 million or something like that? Does that feel roughly right? Have you run those numbers?

Richard this is Mark, the other Mark. We haven't run it that way. What we are trying to do with this annual spend number is give you -- we haven't sold perpetual licenses in a material way since 2007 --

for ages. Yes.

The end of fiscal 2007. So that maintenance business continues to plug along. We have losses here and there, and as we have said in the past, sort of overall we are in the mid-nineties for a renewal rate. We have multiple transitions going on here. Clearly the income statement is in transition. The business model is a bit in transition. We are trying to get with the annual spend number, a view for you on what is going on with the term business. Because at the end of the day, that's what is going to drive the returns of the business over time. That's what we bake into really our forecast when we think about cash flow and out year periods and how we give guidance for fiscal 2012 or 2013. And so it is a little -- it is not as simple as you probably want it to be, but it is the best measure that we can give you on actually what is going on in the part of the business that we are trying to sell, so to speak.

Got it. Sort of the focus part. And the follow-up would be, I think aspenONE was introduced, I don't know, like in 2004 or something like that, and I know have you a lot of new versions on that. Should we think of it, as outsiders, is there an aspenTWO coming in the future? Or is it just aspenONE version 7, 8, 9, 10, 12 and that kind of thing? Is there any step function that you would foresee in the platform?

No, I think it's versioning. Because remember when we announced the change in our business model back a couple years ago, anybody who converts to the aspenONE commercial model gets all products we have, all upgrades and any future products we develop. It is all under the aspenONE brand name. I think the change you see from Aspen around its products is we are going to a strategy of releasing material amounts of functionality on a quarterly basis which we have been doing. We had one in the summer. You should expect one shortly, and we will continue to do that really on a quarterly basis with lots of new functionality which will go out to the customer base in the form of upgrades as opposed to sort of a big bang. And that really gets to how they deploy technology and how they use technology. They have a very difficult time rolling out a new release. It is a lot easier for them to roll out an upgrade to a release. So what we are trying to do with our product and our product cycle is get lots of new technology out into the market place as quickly as we can. And you should expect to see in the release that's coming up that will be announced shortly, material changes to some of the products, make them easier to use and easier to install and new user interfaces. Some of the technology that you would have seen at the user conference in May, all of those things, many of them are coming out in the next several quarters quite quickly. And it is important that we get new functionality into everybody's hands. So I don't think you'll see an aspenTWO, but you will see aspenONE 7.2, 7.3, et cetera.

And that drives token usage, correct?

We think that it will. As we release new applications that use tokens, which will provide value to our customers as we make the products easier to use. As we deploy in the software on-line training modules and these sort of things which will help the user right at his desk top be able to use the products out of the box so to speak as opposed to going to a training class. All of those things are part of the product road map and the things we are getting out as quickly as we can which we think will provide value for the customer and the users and at the end of the day benefit Aspen as well.

Thank you.

Your next question comes from the line of Tom Ernst with Deutsche Bank.

Hi, guys it is Stan Zlotsky sitting in for Tom Ernst.

Hi, Stan.

Thank you for taking my question. Just a couple of very simple ones. The second quarter of the new sales comp plan, how have sales guys reacted to it? On the surface it is not a big change but as far as how they sell and how they approach the process, it could be a little bit more severe. Have you seen -- has there been some natural attrition? Was there an increase in that attrition rate?

We were just in the second quarter now. After one quarter and I said in my remarks one quarter is not a trend in anything. But I think it was well messaged out and worked on with sales leadership around the world for nearly a year before we implemented the plan. So everybody was aware of it and understood what was coming at them starting July 1. It should not be a change in how they sell necessarily, but it certainly is a change in how they are compensated for doing that. And the important parts of the change are really the alignment for the shareholder all the way to the salesperson in front of the customer which is, are we meeting our customers' expectations? Are we delivering value? Are we helping them use our technology better every day? And are we seeing increases in usage through those activities? The answer to that is yes. We gave some information in May, at the user conference, at the shareholder meeting, the investor meeting we had, about usage rates for customers that had converted to the new model.

Those usage rates have continued and accelerated. So we are seeing more users, more users using more product, more usage intensity during the quarter, more user hours and these sorts of things we get off the usage logs. And that helps the sales person as well. This is not just a change from a sales comp perspective. It is a real change for many other groups in the Company including the product management team and the R&D team to build products that are more easily deployed, more easily used so that we can help our customers use more of our applications over time. So far we haven't seen any material change in attrition rates or other things. What we have seen behaviorally is people really focused on growth and on getting our customers using more of our software, and we have also seen much more attention to detail around losses.

That is also an important part of the growth in the business. If you can keep the customers you have and the annual spend you have with your customers and grow off of that and lose less every quarter you will have a higher growth rate as well. It is one quarter in. It is a success, but it is certainly not a trend, and it is not anything to declare victory on, but I guess that said I will finish by saying it was the right thing to do. It is important that we get an alignment and it is the natural evolution of how we want to go to market in all the different customer segments. The good news is it worked for the first quarter. We'll see how we do for the remainder of the year. But so far so good.

Just to clarify, when you say more detail around losses, you mean customer attrition?

Well, we have contracts that don't renew every quarter, as you would expect. We said in the past it is not very much on a quarterly basis. But the way the comp plan works each sales person has a portfolio of contracts with an annual spend value associated with them. And in order for them to receive compensation on new things they sell, they have to maintain the business that they have. So in a way, we at the Company level reported 2.2% net growth for the quarter. A sales person has a net growth number from which he or she is given commission on a quarterly basis so we are all in alignment.

All right, great. And you already sort of hit on it, but I just wanted to see if you had any more metrics around it, is the extra usage. I believe during in May you mentioned that it was around 20% increase?

Yes, I think you are alluding to we said when a customer renews an engagement we would have 20% or so growth in a -- in the new deal or that we did with the customer. We are not giving that out on a quarterly basis. It bounces around here or there, but I think it's fair to say that we continue to get growth at renewal time. As you know we always renew deals, or we try to, a year to two years early. We don't like to run them to the natural expiration date, and we have clearly, now that we are more north of 60% of the way converted through the portfolio, ahead of the natural schedule of when these things renew. So it has gone well. We continue to see growth in a bunch of different areas, but we are not planning to give out a metric every quarter on what was the growth in renewals in any given periods.

Great, thank you very much, guys.

Sure.

Your next question comes from the line of Philip Rueppel with Wells Fargo Security.

Great, thanks very much. Good afternoon, guys.

Hi, Philip.

Question around big deals, ASP's, you didn't really throw out any metrics. Any qualitative change in the -- I know it is Q1 which is seasonally soft, and then sort of as you look to Q2, do you have sort of a normal pipeline of large deals in your sales funnel?

Yes. We didn't give out any ASP or deal-related information because we are not doing, as you realize here, bookings in the way we have done it in the past. That said, we did have a deal that we would consider large from a growth perspective exclusive of the bookings, shall we say, which would have been materially larger. And we continue to have a lot of large deals in the first quarter. We've got large deals in the second quarter. But we are thinking of them a little bit differently now which is, is the growth a large deal? Is the growth component of it, we always had $5 million or $10 million deals, but do we have deals that are growing, $1 million, $2 million, $5 million over the prior deal? So we are thinking about it a little bit differently, and that's what drives the growth metric. And I think it is a good thing. Whether or not we will give any more visibility into it, we are sort of one quarter into this, and we will think about it, but we didn't think it made sense to give out any sort of ASP because it is meaningless.

Okay. Great. Thanks. And then on the verticals, you mentioned that the three largest remain the three largest and energy is still the biggest. I don't think there is much concern around energy, but I just keep hearing more concern around just the general outlook for the chemical industry and the E and C business. Did you see any material changes in those verticals, or is it sort of quarterly noise in terms of your own business with those companies?

I would say it is quarterly noise. We didn't see anything.

Okay, great. And then finally, any update on the Mideast transition? Are you continuing to be able to see growth deals there because of the in house distribution?

Yes, I think we are starting to get some traction. We had a pretty good quarter in the Middle East. I would say our first quarter that we were pleased with the progress that we made. We get incrementally better every day. We've certainly got a full team there on the ground, and I guess part B of your question is did we see anything incrementally, or do we have any change to our little lawsuit in the Middle East or arbitration, and the answer is no.

Okay, that's it for me. Great. Thanks very much.

Thanks, Philip.

Your next question comes from the line of Brendan Barnicle with Pacific Crest Securities.

Hi, guys, this is Ben Werner on for Brendan. Thanks for taking my call.

Yes.

Following up on that last question about different verticals, can you give commentary on movement into new verticals such as pharma or any others? And also, kind of been asked, but if you can give any additional color as to if you saw any changes in the pace of business at the end of the quarter? Thanks.

No change in the pace of business. I would say if anything we are a little less back end loaded than we have been I would say over the past year or so. I don't know if that is a trend that will continue or it will revert back. I'm not exactly sure. But we didn't really see any change in buying behavior or anything that surprised us in any of the months of the quarter along the way. Things sort of closed the way we expected them to. As far as the other verticals, the set of smaller verticals, our channels business had another pretty good quarter, and that continues to grow, and we did reasonably well. Pharma did not have a great quarter this quarter. They have done -- they had a very good year last year. So we will give them a break here and there, but it wasn't a great quarter in pharma, but we are hopeful that our second quarter will be better.

Great. Thank you.

Your next question comes from the line of Bhavan Suri with William Blair & Company.

You commented on the Middle East, Mark, obviously Russia is a big market, just any update there on how things are progressing?

Russia, we are doing very well in Russia. We are getting lots of nice growth and lots of new opportunities in pipeline. In Russia I have talked in the past that it is a relative green field from a technology perspective. They have a very good foot hold there with some really good customers and we are doing well there. We have a good team there. They are executing well. We bundled Russia in our European business which is Western Europe, Central Europe and Russia. And they are doing quite well. We are very pleased with what has gone on there over the past year or so and I would expect we'll continue to do well.

Great, and then sort of just from a competitive perspective, have you seen any movement by the folks at [Advansys] to integrate the product or even from SAP to sort of try and encroach on your market share at all?

We compete with them all the time. And -- SAP in the supply chain.

Right.

I don't think they are really focused on the part of the business that we operate in from a -- certainly not in a manufacturing or engineering way it is really just petroleum supply chain and a little bit of the chemical supply chain. As far as Advansys goes, we see them from time to time, clearly we compete with them in the engineering business.

Right.

And they've got -- [wonder wear] offerings in the plant. We compete with them. The competitive dynamic in the business has not changed. I would say generally the company that we see the most is Honeywell. They are a big, strong company, and we compete with them in the plant and in the engineering space. But really the competitive dynamic hasn't changed.

Okay. And then when you look at macro environment, folks have asked about the energy space and I guess on the construction and engineering space, obviously the usage there is very much based on the growth in that business. I guess in a macro I see construction and sort of that sort of engineering slow down. Is that the right way to think of it, or how would you think of that in sort of a more of a macroeconomic slow down?

Maybe we will see it in out periods, but we are seeing some of our big engineering and construction companies hitting their usage levels and are using a lot of our products. We have not seen a change in the buying behavior, nor have we seen a change for the worse in the usage patterns. So far those guys are really busy. There is a lot of new projects around the core downstream business, the midstream for gas. There are all sorts of things going on. Our customers have been busy. So we haven't seen it yet.

Great, thanks for taking my questions, guys.

Your next question comes from the line of Richard Williams with Cross Research.

Thanks, guys, for taking my question. Wondered if you could give a little more color on the supply chain business and what changes, if any you might expect from the new compensation package.

I think, Richard -- I don't think it will change much. Clearly we have been in a growth mode in supply chain for quite some time. It is one of our core strengths. We are making material changes to some of our supply chain products and those changes will come out shortly which would be good for the customers and certainly for our sales force. I think the overall comp plan is in alignment with what the Company wants to do and how we are going to monetize the opportunity in the market. It will be -- it won't -- I think the comp plan change certainly won't hurt. I think it will help overall and this is just a general statement around the entire product line. The focus around usage growth and how our sales force is compensated for that is a good thing, and really in alignment with the shareholders. I think it will be a good thing overall. It worked out well in the first quarter, and we will see how it goes later in the year.

Okay, actually all my other questions have been asked, so thanks very much and good luck.

Okay. Thanks.

And your final question comes from the line of Mark Chappelle with Benchmark.

Hi, good evening. Most of my questions have been answered. Just one question here, Mark. Over the past year if I recall correctly you released a couple of mobile applications around the aspenONE suite. Granted I realize it is still a little bit early, but I was wondering if you could just give us some details how your customers are using those apps and what you are seeing as far as demand potential could be for the mobile process simulation tools.

Actually the usage is scaling reasonably well. We just released them, so it is a little early yet to again declare victory anywhere. But we are seeing nice growth in downloads of those particular applications. They do draw usage so to speak on the -- on their company's overall token pool. It is a little early yet, but I think the mobile apps are going to be important for us over time, but it is early, but so far so good.

Thank you.

And you have no further questions at this time.

Okay. Thank you, operator, and thank you to everyone for joining us here today. It was just in summary a real good quarter for the Company. We are very pleased with how our team executed across the world. There was good growth in most of the things that we did, and it was nice to have some accelerated growth in the first quarter for TLCV growth versus last year and prior periods. So we are off to a good start for fiscal 2012 and we look forward to seeing you in various places. Thanks, have a nice evening.

This does conclude today's conference call. You may now disconnect.