Aspen Technology Inc (AZPN) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter 2012 earnings 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 conference over to Mr. Mark Sullivan, Chief Financial Officer. Sir, you may begin your conference.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review our fourth quarter and full-year year 2012 results for the period ended June 30, 2012. I'm Mark Sullivan, CFO of AspenTech, and with me on the call today is Mark Fusco, President and CEO.

Before we begin, I will make the usual Safe Harbor statement that during the course of this call, we may make projections or other forward 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-K for the fiscal year 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, August 21, 2012. Consistent with our prior practice, we expressly disclaim any obligation to update this information.

The structure of today's call will be as follows. I will begin with a review of our financial results for the fourth quarter and fiscal year, and then Mark will discuss some additional business highlights before we open up the call to Q&A.

Let me begin by reviewing 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 customers, expanding product usage and increasing prices across our customer base.

Our license-only TCV was $1.46 billion at the end of the quarter, which was up 14.5% compared to the end of fiscal 2011 and up 4.6% on a sequential basis. As a reminder, beginning in fiscal 2010 maintenance is generally included as part of our subscription and term contracts. Including the value of bundled maintenance, total term contract value was $1.68 billion at the end of the quarter, which was up 17.7% compared to the end of fiscal 2011 and up 5.4% sequentially. Our annual spend, which is a proxy for the value of our recurring term license business at the end of each period, specifically the annualized value of our term license and maintenance revenue, was approximately $304 million at the end of the quarter, which is an increase of approximately 12.7% on a year-over-year basis and 4.4% sequentially.

As a reminder, the growth of our annual spend metric should be slightly lower than the growth of our licensed TCV metric. Licensed TCV is calculated using each contract's terminal year annual payment and therefore takes into consideration the total price escalation over the course of a multi-year time period, whereas the annual spend only takes into consideration the current year's level of spend.

Future cash collections is the sum of the Company's billings backlog, accounts receivable and the undiscounted value of installments and collateralized receivables. The Company's future cash collections at the end of the fourth quarter were $888 million, an increase from $841 million at the end of last quarter and $791 million at the end of the year-ago period. The largest component of our future cash collections is billings backlog, which was $799 million at the end of the quarter, an increase from the $739 million level at the end of last quarter and $641 million at the end of the year-ago period.

We've shared for the past year that billings backlog and future cash collections were transitory metrics introduced at the launch of our new aspenONE subscription model to help provide investors with increased visibility into our future cash flow potential and to provide support that we could scale our cash flow from the $30 million to the mid-$90 million range in just a few years. As I will review in greater detail in a few minutes, our fiscal year 2012 free cash flow was $100 million. As such and consistent with our disclosure for the past year, there's no longer a need to provide billings backlog in future cash collections starting with the first quarter of fiscal 2013.

Now let me turn to our financial results on a GAAP basis. Total revenue of $64 million was up 22% from $52.6 million in the prior-year period and exceeded the high end of our guidance range. Looking at revenue by line item, subscription and software revenue was $45.8 million for the fourth quarter, which as an increase from $28.7 million in the prior-year period and $42.4 million last quarter. In order to provide further transparency into our consolidated subscription and software line, we provide additional details on the components within subscription and software that will have quarter-to-quarter variability. During the fourth quarter, we had $2.1 million of revenue related to legacy term license arrangements not recognized on a daily basis and approximately $100,000 related to perpetual license agreements.

Our growing subscription business positively impacts our deferred revenue balance, which was $187.2 million at the end of the fourth quarter, representing a 45% increase compared to the end of the year-ago period. Finally, services and other revenue was $18.2 million compared to $23.9 million in the year-ago period and $18.9 million last quarter. Consistent with our previous commentary, maintenance revenue is increasingly being reported within the subscription revenue line and as more contracts are converted to the 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.

Turning to profitability, gross profit was $50.9 million in the quarter with a gross margin of 80%, which compares to $37.5 million and a gross margin of 71.2% in the prior-year period. Operating expenses for the quarter were $54.5 million. Total GAAP costs including cost of revenue were $67.6 million, which was down from $71 million in the year-ago period. Expenses were up from $64.2 million last quarter due to typical expense seasonality at the end of the fiscal year, including increased sales compensation.

For the year, total operating expenses were $258.1 million, which was below the low end of our guidance range. We have a long history of solid expense management and it's something that we will remain focused on moving forward.

Operating loss was $3.6 million for the fourth quarter of fiscal 2012, an improvement compared to an operating loss of $18.3 million in the year-ago period. Net loss for the quarter was $5.4 million or $0.06 per share compared to a net income of $41.7 million or $0.43 per share in the fourth quarter of fiscal 2011. However, recall that our fourth quarter of fiscal 2011 net income was positively impacted by a $57.3 million net tax benefit related to the reversal of a valuation allowance against our deferred tax assets.

Turning to non-GAAP results, excluding the impact of stock-based compensation expense, restructuring charges and amortization of intangibles associated with acquisitions, we reported a non-GAAP operating loss for the fourth quarter of $859,000 and a non-GAAP net loss of $3.5 million. This represents an improvement from non-GAAP operating and net loss of $16.1 million and $19 million, respectively, in the year-ago period. Our non-GAAP loss per share was $0.04 in the fourth quarter of fiscal 2012, based on 93.6 million basic shares outstanding compared to a non-GAAP loss per share of $0.20 based on 96.6 million diluted shares outstanding in the fourth quarter of fiscal 2011. The difference in shares on a year-over-year basis was due to the fact that we reported a GAAP profit in the fourth quarter last year, and therefore, we used fully diluted share count. A reconciliation of GAAP to non-GAAP results is provided in the tables within our press release, which is also available on our website.

For the full fiscal year, revenue was $243.1 million. It was 23% higher on a year-over-year basis. GAAP operating loss of $15 million improved from a loss of $54.6 million in fiscal 2011, while non-GAAP operating loss of $2.8 million improved from $45.1 million in fiscal 2011. We expect continued improvement across these metrics in fiscal 2013 as we complete the fourth 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 $165.2 million in cash, a decrease of $17.3 million from the end of the prior quarter. We used $14 million of cash to repurchase common shares during the fourth quarter and continue to reduce our secured borrowings balance, as I will detail in a moment.

From a cash flow perspective, the Company generated $21.7 million in cash from operations during the fourth quarter and $18.6 million of free cash flow, bringing the full-year total to $104.6 million in cash from operations and approximately $100 million in free cash flow, both of which were above our guidance. Free cash flow grew from $58.5 million in fiscal 2011.

The Company once again did not sell any receivables to raise cash during the fourth quarter of fiscal 2012, and we ended the quarter with total secured borrowings of approximately $11 million, which was down $22.6 million compared to the end of the third quarter. We expect that we will fully retire our secured borrowings during fiscal 2013, which will be another milestone event highlighting the successful transformation of the Company's business model.

Finally, I'd like to mention that, as you know, a few weeks ago we issued a press release announcing the favorable resolution of our arbitration with ATME, our former reseller in the Middle East. We were pleased to receive the news that the arbitrators not only found that AspenTech rightfully terminated the reseller agreement, but also that our former reseller owed AspenTech $25 million in damages and interest. We have not recorded any amount associated with this settlement in our financial statements and do not plan to do so until we receive a payment. Currently, we do not have any visibility into when that might happen. Most significant is that this process is now behind us and we can enhance our focus on running the business, serving our customers and gaining market share in this region of the world.

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

Thanks, Mark, and thanks to everyone for joining us today. The fourth quarter was a strong finish to a record year for AspenTech. We outperformed across each metric that we guided to, for fiscal 2012. Revenue, expense management, total license contract value growth and free cash flow. In the three years since we introduced our new licensing model, we have successfully transform the Company into one with a highly attractive financial profile that is characterized by recurring revenue, attractive growth rates and very strong free cash flow generation. In addition, when our revenue model transition is completed, we expect our P&L to display best-in-class profit margins as well.

During fiscal 2012, our free cash flow reached $100 million for the first time in the Company's history and it represented more than $1 per share. This is a full year ahead of our original goal.

We are also very pleased with the trends we're seeing in total license contract value. While we have not guided to accelerating growth in our business historically and we did not when we established guidance for fiscal 2013, the fact is total license contract value growth increased from 10% in fiscal 2010 to 12% in fiscal 2011 and up to 14.5% in fiscal 2012.

Our performance in the fourth quarter and fiscal 2012 is particularly impressive in light of the increasing global economic headwinds we have all read about. While no company is immune to macroeconomic pressures, our fourth-quarter results are evidence that we have not seen a negative impact on our business to this point. We have shared in the past that our business does not typically experience the material increase or decrease in demand due solely to changes in economic growth. This is due to a combination of our long-term contracts, mission-critical and highly sticky applications as well as our strong market position.

Our business remains strong in our big three verticals and across our major product lines. Energy, chemicals and engineering and construction continued to represent 90% or more of the Company's business during the third quarter with the engineering and construction vertical representing our largest vertical contributor, followed closely by energy. At the end of fiscal year 2012, energy represented 39% of total license contract value, chemicals represented 27% and engineering and construction represented 28% of our TLCV.

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. At the end of fiscal 2012, North America represented 43% of total license contract value, Europe represented 33% and other international regions represented 24% of our TLCV, which further illustrates the global distribution of our business. In addition, considering the volatility in global exchange rates, it is worth pointing out that while over half of our business comes from outside the US, nearly 80% of our business is based in US dollars.

Looking at our 10 largest transactions in the quarter, there was again a mix of engineering and manufacturing and supply chain driven deals. Demand was solid across our major products for both the quarter and the fiscal year with our suite of engineering solutions representing 71% of our total license contract value and our suite of manufacturing and supply chain solutions representing 29% of our TLCV at the end of 2012. This mix is influenced by the fact that we have had our manufacturing and supply chain solutions on a term model for a shorter period of time as compared to our engineering solutions. If we looked at the total license contract value close during fiscal 2012, the mix was 60% engineering and 40% manufacturing and supply chain, which again is a strong performance on both sides of the business.

As we presented in detail in our analyst day in June, customers are embracing our aspenONE subscription licensing model, which offers customers access to all of our software modules within our product suites. We have made it simpler for our customers to adopt our market-leading solutions and to discover for themselves how our products can make their business more efficient. It makes our job simpler as well, as the customers already have access to all of our products. Our focus is then making them aware of the breadth of capabilities they have in their hands, what they aren't using that others are and how we can drive improved business performance with enhanced levels of product usage. We have a growing number of examples where customers have increased their usage level at the time of moving to our new subscription licensing model and then come back shortly afterward to pay for a higher level of usage because they are using more products within the suite and also have more users accessing our software. We still have a significant under penetrated opportunity within our installed base of customers and we are highly focused on continuing to make our software even easier to use to integrate work flows and business processes even better across our end-to-end suite and to deliver new functionality and capabilities, all of which contribute to increased usage among our customers.

We believe that we have an attractive runway for growth and can do so in a responsible and scalable manner. In fiscal 2012, we were able to generate mid-teens TLCV growth on what was essentially a flat expense base. We expect modest expense growth in fiscal 2013 and believe that the combination of our vertical market focus, long-term contracts and new subscription model will enable us to continue running our business at a high efficiency level. With room for some additional gross margin expansion as we complete the licensing model transition, an opportunity for improved productivity in our sales force, we believe that we are well positioned to deliver non-GAAP operating margin in the 30% to 35% range when our revenue model transition is completed. This is consistent with our increased long-term model that we shared at our analyst day.

We're also in an excellent position to use our significant and growing free cash flow to enhance shareholder value (technical difficulty) capital returns. We repurchased nearly $50 million of AspenTech's common stock during fiscal 2012, which was up from $10.5 million of share repurchases in fiscal 2011. We are mindful that the cash we generate ultimately belongs to our shareholders and we are committed to utilizing it in ways that we believe will maximize shareholder returns.

With that, I'll turn it back to Mark.

Okay, I'd like to close with some additional thoughts regarding our financial outlook for fiscal 2013, which we initially provided at our analyst day this past June.

We're continuing to target full-year fiscal 2013 revenue of $280 million to $290 million. From a mix perspective, we continue to expect the subscription and software line to be in the mid-to upper 70% range of our total revenue for the full fiscal year of 2013 with our services and other line representing the remainder of our total revenue. From an expense perspective, we continue to expect to total GAAP costs and expenses of approximately $265 million to $280 million for the full year. Taken together, we expect GAAP operating income in the range of $5 million to $15 million for fiscal 2013, which is an improvement from the loss of $15 million reported for fiscal 2012.

We currently expect GAAP net income of approximately $5 million to $10 million or $0.05 to $0.10 per share. From a non-GAAP perspective, we currently expect non-GAAP operating income in the range of $20 million to $30 million for full-year fiscal 2013. This will lead to non-GAAP earnings per share in the range of $0.16 to $0.21 for the full fiscal year.

Although we are now past the halfway point of our revenue model transition, I would like to reiterate that our P&L is still not a meaningful indicator of our business performance and it won't be until our revenue model transition is completed in fiscal 2015. With respect to total license contract value growth in fiscal 2013, we continue to target double-digit growth rate over fiscal 2012 and remain optimistic upon our outlook, based on continuous high customer interest levels as we enter the new fiscal year.

From a cash flow perspective, we continue to target free cash flow of $115 million, which we communicated at our analyst day. Our cash flow continues to be positively impacted by the underlying momentum in our business along with our focus on expense and working capital management. We expect the same type of seasonality to our cash flow that we have seen in prior years, including fiscal 2012. We expect our free cash flow to be heavily weighted to the back half of the fiscal year with the third quarter being the largest contributor to free cash flow. This is due to the timing of when the invoice customers and their annual payments become do.

As it relates to the first quarter, we expect revenue in the range of $64 million to $66 million, non-GAAP operating income of $4 million to $6 million and non-GAAP EPS of $0.01 to $0.02. On a GAAP basis, we expect operating income of negative $500,000 to positive $1.5 million and a loss per share of $0.01 to $0.02.

To summarize, we are pleased with the underlying momentum in our business and the improving profitability and cash flow generating characteristics of the family. With that, we are now happy to take your questions. Operator, let's begin the Q&A.

(Operator instructions) Tom Ernst, Deutsche Bank.

Good afternoon. It's actually Stan Zlotsky sitting in for Tom. So this was the first year -- first of all, thank you for taking the question. This is the first year of the big sales force change in their incentive structure, and obviously it went very well. Any plans for any other kind of reshuffling going into fiscal 2013, or is it more of a steady as she goes?

No, it's fundamentally the same. Last year at the beginning of fiscal 2012, we did change the sales force compensation to a heavy growth component of the comp plan for commission purposes, and it will remain the same going forward, at least for fiscal 2013.

Okay, and you mentioned there's the macro headlines, and obviously you guys are not immune it. But you certainly did a pretty good job of navigating around it. One of the worries is China slows and Asia had really -- sort of takes it on the header. What are -- the companies you are working with, what are they seeing out of Asia? And the reason I'm asking you, because the component of your revenue base that's coming from the rest of the world -- it looks to me like it declined a little bit from last year as a proportion of overall revenue, so I'm just trying to figure out what's happening there.

Yes, the metric is a little bit different from what we've given out in the past. In the past, we've given out revenue metrics and bookings metrics and things. This is the first year that we've really been fixated in giving out pure growth numbers an annual spend numbers. So the number that we gave out this year was what is the overall percentage of the total license contract value. So that's the $1.46 billion worth of licenses that are in force. And what percentage of the business came from non-North America or Europe? So it's a bit of a different metric, so it's not an apples to apples comparison.

That said, we had very good performances in all parts of the world in fiscal 2012, and so far, we are part way through the first quarter, we haven't seen any particular change in demand levels. It was a solid year across all the different geographies. We are not seeing any particular change by vertical or by the horizontal suites. So, so far, so good in the business. It does bounce around quarter to quarter, as we said in our prepared remarks. But we haven't seen any buying pattern change as of yet.

Great, thank you very much.

Brendan Barnicle, Pacific Crest Securities.

Mark, you guys had shared some ASP data at the analyst day. Now that the fiscal year's over, did you have any additional color you could share on how -- you mentioned some of it in your prepared remarks, but any additional metrics you could share on that ASP lift or change you're seeing from the move to aspenONE?

Yes. We really, although we do track things internally, it's not -- and it was a very good bookings year. We don't give out the number anymore. The ASP has become a bit meaningless, and we really don't keep track of it. We do keep track of how much software is sold on average by each salesperson, new business metrics and those sorts of things. We thought about, as we started fiscal 2012, whether we would be giving out number of deals over $1 million and that sort of thing, and it really -- that would drag us back into the bookings part of the world, and I don't think it really makes that much sense. So we think the metrics that we give you, Brendan, are the right ones. And as you can see from the expense line that we have, we are growing nicely with basically a flat expense structure for the past several years. And we are committed to being mindful of our expense structure and making sure that we're getting leverage across the business while we are continuing to invest in different parts of the world where we see more opportunity. So we don't give you the ASP data. I don't think it's particularly meaningful, given that we don't give out bookings.

Just a follow-up, you mentioned the strength you had seen -- or you hadn't seen any change in geos or in verticals. Any color you could give us about how pharma did this quarter, and then Middle East, particularly post the settlement?

Yes, Middle East -- post the settlement -- that's only a couple weeks old, so that one is relatively a new one. Pharma did okay in the year. It's still a real small part of our overall business. It won't impact the financials of the business meaningfully one way or the other on a quarter-to-quarter basis. We are committed to it and we think we're going to do well in it over time. But we continue to focus on the core verticals that we serve.

From a geographic perspective as it relates to the Middle East, we did pretty well. The growth wasn't as good as we wanted it to be, as we've built our team and really fully staffed out over the past year to 18 months or so. I expect that we'll start to see some accelerated growth there over time. But the rest of the verticals did well and our inside sales did well additionally.

So overall, it was very broad-based performance across the world. And I kept looking for softness in different parts of the world as I read the headlines, like everybody else. But we didn't see it.

Great, thanks, guys.

Richard Davis, Canaccord.

It's actually [DJ] on the line for Richard. When we talk to our energy guys, they talk about a huge nat gas infrastructure build out driven by the shale opportunity in the US. So how does Aspen play into this? Is that a meaningful opportunity? Any color you can give us there?

I think, clearly, over the past couple of years our North American guys have seen an uptick in the business that they are doing with the natural gas companies. We are not a sub-surface company; we're a surface company. So we get the benefit as there's more drilling there will be more need for our software to model out, gathering networks and things.

That said, we start to see -- and I can see the rig counts start to drop in nat gas. We've seen a huge drop in natural gas prices over the past several years. It has now bounced back into the almost $3, I guess, now. I think we will see continued demand and I think it will depend on some of the politics in some the country as to how this gets built out over a period of time. Our belief is that there will be demand also potentially from LNG terminals as our customers decide to try to export LNG to other parts of the world to take advantage of our cost advantage here in the United States and profit opportunity, and there will be engineering and construction business and lots of other things.

So I think, clearly, we are getting the benefit of lots of interest in energy. Oil prices are pretty high, natural gas prices are low but people believe they will come back. And we've had major investments over the past few years in some of our customers in nat gas. So we think there will be opportunity for us there and we are clearly getting some benefit from that over the past several years.

Got it. And I guess you always talk about the business within the existing accounts being meaningfully under-penetrated. When you step back and think about as the software becomes easier to use, you can sell it to more people within the organization, how big does it feel like from a revenue standpoint -- how big could it get just within the existing customers? Is it a $700 million business? Is it a $1 billion -- how do you back into that math?

Not putting too fine a point on it, a number of years ago we thought we could double our business and we still think we can do with our business with the applications that we have and the verticals that we serve. So we think we've got a good runway of business here to go after in the core markets that we serve. We'll clearly be looking at some other things and maybe expanding the footprint of things that we do with our own R&D folks and investment there and through -- potentially through some tuck-in small acquisitions as well. So we think there's lots of opportunity to get more users using more software in the core business that we have. We think we can get lots of runway.

Okay, great, thanks, guys.

Bhavan Suri, William Blair & Co.

Just one for you, Mark, to start off with. Could you provide just some color on the new customer wins as we look at the growth in TCV? What is being driven by new customers that you are seeing in Asia in some of these emerging markets versus the existing base?

As is normal with Aspen, and in all the different presentations we've done, we've got most of the big companies for customers, and they do use some of our software. We continue to work to penetrate them. There are JVs and other things in different parts of the world, Middle East and Asia, that we are working to penetrate as well. So most of the growth of the Company comes from big customers that we have and the penetration that we have with them. We certainly get the benefit as oil prices are high and the energy business is strong. Our E&C customers benefit to a greater or lesser extent. So we are really focused around the core things that we do provide and the core customers that we serve. We see lots of open white space there to go after and lots of additional application use in the engineering space as well.

So this is where we are focused, and all the different R&D and investment that we make we are making the products easier to use, making them available, building new applications and bringing them to market quickly. And I think you have seen us release software on a quarter basis and a material amount of functionality has come out. We're going to continue to release software on a quarterly basis to get new apps into the hands of our customers. And we just did our first little acquisition a few months ago. We are currently working hard to integrate that into our product line and get that out to the customer set. So we are really focused around the core customers that we serve in the verticals, and we think there's lots of opportunity there.

Great, and then sort of to piggyback nicely into my second question, which is, obviously, with SolidSim, have you seen any greater traction in pharma with that acquisition, given how much solid cross-manufacturing they do? And then is it applicable to the core business, too, or is it largely in pharma?

No, it's really more of a specialty chemicals and specialty chemicals focus. It's not released yet in the Aspen suite, so it's out there and there's 20-plus customers that are using the old SolidSim technology. We are not selling it at the moment. We want to sell it in the Aspen suite and have it integrated into our products. We have not given a release date, but it will be soon. And we want to then get that out to all of our core chemical customers and specialty chemical customers, for their use. We are in the midst of it, and it's going quite well. We expect to release it soon, but it will be important as we -- to the core chemical business. We will sell it, of course, in pharma as well, but it's really a chemical -- specialty chemical play.

That's helpful. And then someone touched on this earlier about the sales comp structure. If I recall, you changed this fiscal 2011, fiscal 2012. Just as you look at fiscal 2013 and re-driven those targets to drive more growth and incentives, is this something where you feel you are hitting a cap or a wall, or do you think this is something you can fine-tune a little bit each year to further enhance behavior?

Well, we change comp plans every year a little bit. Last year, beginning of fiscal 2012, was a bigger comp plan change because we went away from bookings and went to pure growth. So that was a material change to the comp. We didn't modify it too much this year. We changed things here or there, but we think we have it right. We think we have our folks in the entire Company focused on growing the business, creating value and extra profit for our customers through the use of our applications. And that's the way our customers get the benefit and the salespeople get the benefit, and ultimately the Company and the shareholders get the benefit.

So I think we are in alignment about how we go to market and how we compensate folks, and -- so we did modify it but not too much.

That's great, thanks for taking my question, guys.

Peter Goldmacher, Cowen and Company.

High, guys, [Joe Ferfida] here, thanks for taking our call. So, Mark, you reversed the trend towards flat expenses for next year. What are you investing in? Can we get some color on that?

As I mentioned earlier, you can't grow forever without some sort of increase in expenses over a period of time. That said, if you look back over a period of time, our expenses are down materially from what they were five or six years ago and we are really modeling out modest increases in expenses. We are adding folks to the staff for the first time in -- I don't remember. It certainly predates me. We had a university hiring program and we hired a bunch of undergrad chemis, computer science guys. We also hired some masters and PhDs to supplement our staff. The Company as it has transitioned over the last few years, we really are now starting to think about in the long-term what we want the demographics of the business to look like from an employee perspective. And we thought it was the right time to start to invest in some folks out of school, change the Company up a little bit. All that stuff is baked into the guidance. You would have seen probably a press release out that we opened up or are about to open up a new facility about 20 miles from here in New Hampshire. That's, of course, baked into the guidance and it's not all new hires. But we are keeping an eye on our expense structure, Joe. But clearly, if you're going to continue to grow and you're going to bring more and more new products, new applications to market, it takes folks to do that. And we want to make sure that we have the right people in the right place and make sure we are investing appropriately. But, it's all baked into the guidance.

Great, thank you so much.

Sterling Auty, JP Morgan.

Hi, guys, it's [Sackett] here for Sterling. Just first, Mark Sullivan, non-GAAP taxes came in a little bit higher than what we were expecting. I know that can bounce around a little bit, but can you just talk about anything that happened during the quarter and how we should model non-GAAP taxes going forward?

I think it's going to be hard to model for a while. Our effective tax rate is not going to be that meaningful because, as you say, it does bounce around. The primary driver is at the moment we are very close to breakeven, so the normalized tax rate to get applied to income or loss represents a very small expense or benefit, depending on which side of breakeven you're on. And then you just get -- we have these small, relatively small permanent and temporary differences, things like FIN 48 and other things that sort of bounce through there that are relatively small, discrete items, but it can cause variability on a quarter-to-quarter basis. So it's going to be very hard to -- the underlying tax rate in our business -- we're predominantly US -- will be 35% or so, but it will vary around based on discrete items.

And there wasn't a dollar amount that maybe we should think about as a minimum for 2013 and 2014, was there?

No, we haven't given out anything that precise. We continue to talk about the fact that our cash taxes are still relatively small number, in the single-digit millions, predominantly foreign. And we are not going to pay any cash taxes for another couple of years. But the reported tax rate, tax number is a bit hard to model and we haven't given out specific numbers.

Got it, got it, okay. And as we start to model out the completion of the model transition in fiscal 2015, do you expect revenue to grow linearly to your normalized level? Or, do you think there are going to be any years, whether it's 2013, 2014 or 2015, that that should grow faster because of renewals or any timing issues as such?

Well, the revenue will be a function of when we get to start taking revenue on renewed contracts. But I would say that, in general, it would be, broadly speaking, linear. It's not going to be precise, but there's nothing really unusual if you look at the history that's going to cause big discontinuities.

Okay. Lastly, just to clarify, the target for non-GAAP operating margin of 30% to 35%, is it feasible to reach that in the first year, where you hit normalized revenue? Or do you think you need more scale beyond that to hit that target?

Yes, I think we've pretty much said that when the revenue normalizes, we expect to be achieving those types of numbers. So that's going to be fiscal 2015 when pretty much all the remnants of the revenue transition are behind us.

Got it, that's it for me, thanks.

Mark Schappel, The Benchmark Company.

Mark, at the June analyst day, you touched on a relatively new sales initiative at the Company that, I believe, targeted small to medium-sized customers. I was wondering if you would just fill us in on a few of the details around this initiative, such as what these customers might look at or what they might look like as far as size and characteristics.

Yes, we've got a bunch of -- we've got 300-plus big companies that drive the overall business on a quarter-to-quarter basis. We always say, we've got about 1500 customers, so that implies we've got over 1000 sort of little ones. And they are small engineering and construction shops, or small, little owner-operators. And it's primarily what we are focused on selling there is our engineering suite, and we do it through a tele-salesforce, which is new for us this year. We just started it part way through the year. They had a very good year, or a very good half-year. We got it kicked off around January. So it's really just the small, little guys. And it's really an attempt to do two things -- one, service them through telesales, which will be a lower cost structure and a bit more scalable. We also have an aspenONE for small companies, which is a little bit different from what the big guys get. They don't need all the products, etc. So we do things a little bit differently in that space, but it was a good first start and we are very pleased with how it went, and we believe we were right in doing it. But we are still early days.

Thank you.

Richard Williamson, Cross Research.

Thanks for taking my call and nice quarter. Could you guys give us a little color on which parts of your footprint you would be investing in, as opposed to making tuck-in acquisitions?

Really, part of it depends on what's available. We look at a whole bunch of companies and we've said we are focused on smaller tuck-in technology acquisitions like the SolidSim one that we did, which fits nicely with us. There may or may not be a company available to be purchased. We certainly look at a whole bunch of them and talk to lots of folks. And then there are some other things that, in all parts of the suite, whether it's the engineering suite or the manufacturing and supply chain suite, where there are things that we don't do that other companies do that we may want to include in our suite, and we will build it ourselves if we think it's the right thing to do.

So I guess it's partly opportunistic and partly strategic, depending on what we feel the investment will be on either side, how quickly we want to take it to market, etc. So we are a bit opportunistic about it, but I guess we would say we generally have a bias to build as opposed to buy. But there are going to be some things that we don't have knowledge of and folks that we're interested in being part of our Company, like we did with SolidSim. So it really just depends.

Okay, also can you provide a little color on the supply chain business around the geographies?

Yes, we had a very good year this year, as I mentioned in my prepared remarks. About 40% of what we sold this year was manufacturing and supply chain. We are fixated on this, and it really was broad-based. We are selling it all over the world, and we are making big investments in our R&D in both parts of the business, but especially in some of the manufacturing and supply chain applications, and there will be lots of new things coming out in the future.

So it's very broad-based. We compete well in this space. I think you'll see us be more and more fixated and focused on this in developing out and getting as much of the white space of our customers as possible. And this is why we are continuing to focus and convert legacy perpetual customers to term applications, to get them access to all of the aspenONE suites for manufacturing and supply chain.

So it was a good year for us, one of the best ones that I can remember. But I think it's clear that the sales force is focused on it. There's been lots of talk on the call here about sales calls. I'm sure that has something to do with it because it is pure growth and we will continue to stay focused on it.

All right, thanks a lot, good luck.

This concludes today's Q&A session. I will now turn the floor back over to Mr. Fusco for any closing remarks.

Thank you, operator. Thanks to everyone for joining us on the call. I want to thank the AspenTech folks around the world for all the hard work and great fiscal year. But we are not done. There's always more to do, but I should be proud of what the Company is accomplished. I will also want to thank our investors who have been with us. I look forward to seeing you in my travels and we will do our best to continue to serve you well. Have a nice evening. Thank you.

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