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Aspen Technology Inc. (NASDAQ:AZPN)

Investor Day

May 06, 2013 1:00 pm ET

Executives

Mark E. Fusco - Chief Executive Officer, President and Director

Antonio J. Pietri - Executive Vice President of Worldwide Field Operations

Manolis E. Kotzabasakis - Executive Vice President of Products

Mark P. Sullivan - Chief Financial officer, Principal Accounting officer and Executive Vice President

Mark E. Fusco

Good afternoon. Thanks to everyone for making the trek here to Boston this afternoon, and this morning, to hear a little bit about what we're doing around AspenTech, and thanks to all of you who are online or listening in. We appreciate your interest in AspenTech and hope this afternoon that we'll be able to give you some more information about what the company is doing, and also introduce you to the next CEO of Aspen, Antonio Pietri. This morning, just as a bit of a recap, we will try to give you some information, especially about the products a little bit later on. Manolis will do a little bit of a subset of what we saw this morning. So those of you who are here this morning, we apologize, you've seen some of this. But for those of you who are listening in, we thought it important to tell you about what your company is doing, and how we're investing the money of the shareholders and the products and what are some of the things that we are bringing to market today. And there was a new release of aspenONE software a dot -- an 8.2 release that came out. So we're really pleased to have that out today, and we hope you go to the website and look at some of the information there about some of the new things that came out today. So the agenda here today, as I mentioned, we've got 4 speakers coming up here. We'll talk it a little bit about aspenONE, but just as a recap this morning, in addition to hearing from me and Manolis, we also heard from a couple of our plenary speakers, Béla Kelemen from MOL, in Budapest, and his views of the challenges of the different parts of the world, especially around supply chain management optimization. John Kearney, from the Wood Group, who spoke quite a bit about the optimization of design from front-end engineering, all the way through maintenance. And then, we had George Stephanopoulos, who's the Chair of the AspenTech Academy, who gave a little bit of information to the shareholders and to our investors, and some of the folks in our customer base about what's going on with the Aspen Academy. What is the vision of the Academy, and what's some of the current work that we have with George and the other 5 members of the Academy, and the things that they're doing to try to help us become a better company. So again, thanks for coming, and we'll get into the presentation here. As usual, we have a little Safe Harbor statement, and you can read there. And then, we'll move on. And here's what we'll do. We will take a break at about 2:30, and then we'll come back in and we'll finish up with some Q&A at 3:45. So the key takeaway today, hopefully for those of you who were around this morning, we will have confirmed that Aspen is the leader in process optimization software in this business. We have been for many, many years. We continue to be -- we invest more money than anybody else, and we're at the top of the peer group from a percentage of revenue. This year, we'll invest north of $60 million in our products, not including what we spend for purchase of technology, and some M&A transactions that you've seen recently. We are 3.5, almost 4 years into our transition to a subscription-based revenue model, and you can really see that in the third quarter results that we released just last week. We finally start to see some of the attributes of the revenue model transition, very good visibility, nice gross margins of 84%, and you can see, you can start to see the profitability catch up with the cash flow. We always said that the cash flow of the business was a couple of years ahead of the P&L of the business, and you can see it on both fronts, with the P&L of the business, and in the cash flow as well. We are expanding usage, and we are a usage-based model, as it relates to the aspenONE licensing model, and how we put that together with how we compensate our folks and our sales force, all the way through how we go-to market. We're interested in delivering to our customers software they can use simply and easily, to generate more usage, which ultimately will generate more licensees for the company, or tokens sold, in our lingo. We think there's a great long-term opportunity. The company's grown on a double-digit license basis for many years. We think that, that will continue, and we will give you some information about fiscal '14 as we work our way forward. We've had very strong financial performance in my view, and that's a credit to the group around the world, who are helping drive the growth of the business as we moved our way forward, including Antonio and his sales team, the product guys, Manolis and his group, with great products that they deliver and then Mark Sullivan and our finance group, to help us bring you world-class financial performance. We think we are on our way there. And I guess lastly, and most importantly, this company tries to be shareholder-friendly. It is your money, at the end of the day, we -- pretty clear about the fact that if we're not using the money for something in particular, we'll return it to you, and we've been buying back more of our stock, it's our preferred way to return cash to you over a period of time, and we've been buying back more and more every quarter for about the last 2 years or so, That's not a forward-looking statement, that's just meant to say that we understand whose money it is, and we treat it with respect. And I think the other thing is, despite -- or in spite of growing double-digits, you don't see many companies that able to hold their expense line flat, or in this case, down year-over-year, through the third quarter of this fiscal year, and well I won't speak for Antonio into the future, this is a very leverageable financial model, and we continue to work on it as we go forward. So from a company perspective, we are, and some of have seen this slide before, the #1 provider of software in the space. Our view of it, we're about twice as big as the nearest competitor, from a software perspective. We are an older company, but I think that doesn't mean that we don't, that we're lacking innovation. We're very innovative in the process industries. We just happen to be 30 years old. We sell through a direct sales force around the world and we also, about 15 months ago, 16 months ago, started an inside sales force, which has been focused around small and medium-sized customers, and it's been very successful so far. We're a global business, as you can see, we've got business all over the world. Although we're primarily a dollar-denominated business, about 80% dollars in the type of contracts that we have around the world, and this is why you don't see much in the way of FX on a quarterly basis. You would remember, some of you, that we had installments receivable on our balance sheet in the past. Those have gone away through the subscription revenue transition, and we don't have that anymore. So therefore, even the FX becomes even smaller over a period of time. The core verticals that we sell through, energy, chemicals and engineering and construction, that is the core part of the process industries, that's where over 90% of our business comes from in any given period. And really, that's where the company has focused and where we continue to believe that we'll stay. We see lots of opportunity there, to continue to grow, the usage of our software. Most of our customers use some of our software, but not all. We see lots of growth in that area, and we've got well over 1,500 customers globally. And of course, our direct sales force focuses on the biggest ones, and our inside sales force focus on the smaller ones. And we think that's an efficient way to go-to market, and also the way to get the most leverage on the income statement out of the company. The business model is a subscription model. It is a usage-based model. Each one of our contracts is just about 5.5 years long, and each contract, on average, has about 2% per year growth or in pricing or escalation in each one of the deals going forward. Historically, we've had nearly 100% renewal rates, and that continues. We did call out on the call the other night. We had 1 transaction in Venezuela that did not renew, and it hurt the growth rate of the company, by just under 1% in TLCV, and just under -- just over 1% in annual spend, but in general, renewal rates continue to be the same, and we only called it out last quarter because we couldn't figure out how to explain to you the difference between TLCV growth and annual spend. Typically, they track, in this case because the Venezuelan contract were short in duration, so under 3 years. So it hit annual spend a little bit more, we couldn't explain it. Normally, we don't call it out, but we thought it was important that we tell you, and since Antonio is from Venezuela, maybe he can fix that going forward. And we are a usage-based pricing model. And that's really how the company sees itself. We're not a software-as-a-service kind of model, like some of the other customers are -- competitors in other parts of the industry are. Our customers host around software and appropriately so, given the operating environment that they have, although we do get usage data every 30 days or so from lots of our customers. So we do understand how to use the software, what opportunities that we have to up sell them or get them using more of our applications, and back to the old aspenONE licensing model, we give them all of our software, including anything that we release, say, today that's new, they'll get it in their aspenONE software, and then our job is to make them aware of it and help them use going forward. So the strategy of the company is really invest in our products. Those of you who have been around in Aspen for a little while would remember when the company had a much larger Services business. We want to see ourselves as a product company. We continue to invest a lot of money in our products and really, that's the prism by which we think about ourselves going forward. We are focusing on growing usage and really, our sales is really about adoption and enablement and awareness of the different applications and things our customers can use to help them save more money. We have had a growing subscription cash flow, and there'll be a chart later on about, from I think Mark that has a high cash flow that's changed over a period of time, from burning cash to get generating a lot of cash, and we think that cash flow is the right way to think about our company. License growth and cash flow. We have been buying back our stock, and we have been pursuing some acquisitions, really around technology. We haven't been focused on buying big companies. We're interested in technology we can put into the aspenONE suite, and then get usage from that software over a period of time. The first acquisition we did, SolidSim, the final deliverable from a technology perspective was delivered today. So Aspen Plus now has a full suite of Solid's modeling capabilities and -- so that didn't take too long, and it's something that really differentiates Aspen as we move our way forward. So I think the transition to the Aspen licensing model has been successful. We are seeing usage that has changed over a period of time. We'll show you some of that, going forward. Many, many moons ago, you would remember we were about a 59% gross margin company. Last quarter, we were 84%, so we have achieved, really, a dramatic transformation around our gross margins. Cash flow has scaled a little bit over the past couple of years, and we've done a few acquisitions, as you can see. And lastly, from me here today, I wanted to introduce Antonio. So Antonio's been here as we called out on our call the other night for 17 years as an Aspen employee, and for a few years before that, at SetPoint before, he was -- SetPoint was acquired by Aspen in the '90s. What differentiates him me, other than his -- he's a little more Latin that I am. So I have some skills and he has some skills, but he is a chemical engineer, and I think that's important and those of you who saw this morning, understand the nature of our customers, what they do, how they use our software, how technical they are, and Antonio's been instrumental in helping our sales force and getting them out there, working with our customers. He does have an MBA from the University of Houston. And I did move him to Boston to help me run the company back 6 years ago. That was done on purpose. I ran the field sales force for 2.5 years when I took the CEO job in January of '05. And in my travels and when I looked across the landscape of folks that were part of Aspen, I picked out Antonio and he was running Asia at the time, and I moved him back to take over worldwide sales. One of my jobs is to make sure I have a successor, going forward. You'll never know when and that's going to be, and as it turns out, it's going to be now. So I will be here for another 5 months or so, so I'm not going yet, but it's important for the future that Aspen has a great leader, going forward. And I just want you to keep in mind, that all the good sales performance that has been put on the board for the past 6 years has been led by Antonio. I'm just a conductor at the end of the day. He does all the real work. So that's it. Antonio? Please welcome, Antonio Pietri.

Antonio J. Pietri

Thank you, Mark. And good afternoon, everyone. First of all, I want to thank you, Mark, for putting my name forward to the board as his successor in --

[Technical Difficulty]

As I was saying, I want to thank Mark for putting my name forward as his successor in AspenTech, and kof course I also -- I want to thank the board for his selection and confirmation of me, as the next CEO of AspenTech. I consider this to be a unique opportunity. Mark has built a tremendous asset over the last 10 years, and I consider myself privileged to be able to take this asset and move it forward and improve on it. So with that said, Mark let the cat out of the bag, although my name would imply to you that I'm Italian. It is Italian heritage. I was born in Venezuela many years ago. I came to this country in 1982 to get my chemical engineering degree. And as I said, the rest is history. I became a U.S. citizen in 1999, and I'm a very proud American citizen now. So with that, let me get into my presentation here today. So you probably seen this chart in previous investor days. We have significant leadership in the 3 segments that we operate in, and in the engineering software segment, we are by far the #1 company, as you can see, 39% market share, and that's both through organic growth and expansion of the market, but also over the last few years, by taking away market share from our competition and my commitment and the commitment of the company is to continue to do so. You have seen some of the innovation that Manolis and his team are introducing into the marketplace, and I believe that will continue to position us well into the future. On the manufacturing space, according to this chart, we are #2. I believe, when you look into the details of what's accounted for, with respect to the market share, there's a lot of operator turning simulation software on the Honeywell component that we -- it's a business that we are not in, but nonetheless, we have products that are #1 and #2 in that space. IP.21 being one of them, as Manolis mentioned this morning, advanced process control and many of our products and we continue to hold a strong position in that market. I believe the introduction about the adaptive process control will also strengthen our position in this area. And then, the supply chain, again, very strong position, just barely second to SAP over the last few years, with enhanced products and solutions, and this is also part of the innovation pipeline that Manolis is working on, and that will only strengthen our position, not only on the petroleum supply chain side, but also in the chemical supply chain side, and that's one of the things so, or innovations that Manolis talked about this morning. So this is something that's been built over the last 30 years, and that I will talk about later on, when we talk about the sales model. Industry leading customers. The fact is that if you look at this slide, most of the -- or 19 out of 20 largest petroleum companies are customers of ours, we're not able to do business in the Republic of Iran, and that is the 1 petroleum company that is not our customer. On the chemical side, well, AspenTech was originally the Aspen Plus software, it was originally developed for the chemical industry, and we maintain a strong position in that space, and then engineering and construction, also very strong position and I believe we continue to expand that market space. So if you look at these customers and it's important to emphasize, we have relationships in these markets that are very high and very long tenure relationships. I've come across very large American software companies that look to AspenTech to give them access to the type of relationship that we have in these industries, and that's just a testament to the 30 years of innovation and investment in this industry that we've made since our founding. The co-verticals, this is an area that I love to talk about, and I'll try to make my comments short. We operate and go to market in what are very unique industries today. When really, the industrialization of Asia, China and India started to really accelerate in the period of 2000, 2002, 2004, that basically drove a tremendous investment in energy. We've seen oil prices go all the way up to 130 barrels -- $130 a barrel, and come down and now settling about $100. That drives tremendous investments in the energy industry, both refining and EMP, as well as now with shale gas and shale oil in the U.S., in the midstream market. We are seeing, certainly, a resurgence of refining activity in the U.S. because of shale oil and the ability of these companies to transport oil by railroad from North Dakota and the Bakken shale basin into the northeast of the United States. Alternative fuels is another area of interest that we're seeing a resurgence there. And the big money in the industry is in exploration and production. And companies are having to invest bigger money to develop fields that are further ashore, that are in harsher climates and more difficult terrain, and we continue to see that investment benefit in AspenTech. On the chemical side, this is a very interesting story, especially over the last 2, 3 years. Certainly, when I was in Asia in the period of the 2002, 2007, tremendous investment in Asia on chemicals, both in China, India and other countries. That investment continues, but with the discovery and -- not necessarily the discovery, but the actual development of frac-ing technology, shale gas has completely turned the chemical industry on its head. Three or four years ago, companies like Dow Chemicals were predicting the death of the chemical industry in the United States. That has changed completely. Dow is now bringing all their investment back into the U.S. They've announced ethylene crackers being built in the United States over the last 2, 3 years. 15% ethylene crackers have been announced downstream units, polypropylene specialty chemicals as well, and of course, there's now a resurgence of the chemical industry in this country, which also leads to engineering and construction work, because all that investment has to be built. First of all, it has to be designed, and then put into the ground and this is where AspenTech also plays a major role. So shale gas is not only a beneficial factor for us in energy, but eventually goes into chemicals, and into the engineering and construction space. And this is, at the moment, the uniqueness of these industries, while the global economy has its soft spots around the world, this industry has continued to do well. And then on the engineering and construction side, everything that I've talked about, as companies have to find oil and develop those fields, so there's a lot of engineering that goes into that, as the chemical industry in the U.S. experiences a resurgence, there's a lot of engineering construction work that goes on, and our software is very well-positioned to -- and into this these industries, and we continue to be, as we move forward. There's other interesting subverticals within these industries. Specialty chemicals being one of them, which is also benefiting from some of the shale gas investments, and industries that we're in, and we look into them as we move forward. So let me tell you, the aspenONE licensing model. I think we've talked a lot about it. It was introduced into the market in July of 2009. It has allowed, the sales organization to leverage our penetration, not only in the different geographies, but in accounts. The fact that we now make all of our products available to our customers makes it for a very easy conversation that our sales organization has with our customers, as far as -- it's not about selling them products, it's about getting them to use those products and increasing their usage as they converted to the new -- the aspenONE licensing model. It is very easy to trial these new products. They have access to the them. And if they have the tokens, they can try those products. For new customers, we have a cloud-based online evaluation software process, where they can just register with cinema key [ph] and they can test the products on the cloud, and that's become, also a very beneficial mechanism. And as customers have access to all of our products, what we see is more users use those products and the usage of those products increases as well. Manolis will talk about some of this data we'll now get into it, but it sort of creates a dynamic that, as our products become integrated through aspenONE, and based in the cloud, it will also drive an expansion of that usage. And well, I'll talk about the -- our sales model, and why we believe it's a highly leverageable sales model. From the standpoint of our products, and you heard a lot about it this morning, Manolis will talk some more about it, but they are on a 90-day product release cycle. Every 90 days, something new comes out for our customers, that keeps the engagement between the sales force and our customers and also excitement in the marketplace. And I believe this will allow us to expand our leadership position in the different markets. As you saw this morning, and you will see later, our software is becoming more and more integrated and that will also facilitate the increase in usage of our software. It's becoming increasingly easy to allowed, install, and which will make a less frictionless or a more frictionless as it's rolled out. And the objective here is to increase customer value and it's something that we're focusing on, as we bring these products together, they can be leveraged to further optimize and the tagline from this morning, reinventing optimization, I think is very applicable, because as you -- when you start leveraging your process models into your planning tools, into advanced process control, it creates synergies and gives you a better way to look at your business. So from the standpoint of the sales model, let me first say, in my role as head of global operations in the last 5.5 years, it's certainly been my responsibility to execute to our strategy. One of the important changes that we made 2 years ago was to introduce a compensation plan that fully aligned the sales organization to the objectives of the corporation, and that's proven a very positive move. Also over the last 2, 3 years, we've increasingly focused our field sales organization in our top 350 accounts, representing most of the revenue that we generate as a company. And we started to build an inside sales organization that we're leveraging into a smaller market segment, in order to drive the productivity of our sales organization, which is also allowing us to maintain or reduce our expenses in the sales organization, as you saw in our latest quarterly results. We've introduced metrics now for a few years that we use to baseline performance across the world. One of the challenges of being a software company that operates everywhere in the world is that we have people with different cultures, and different set of expectations. And by leveraging or by putting in place metrics that are common to everyone, we're able to assess the performance of our different sales account managers around the world, and make sure we have the appropriate conversations with our managers about performance and activity levels in the field, and so on, and so forth. So that's been very helpful as well. Of course, being a company, that is, I believe that one of the interesting things about AspenTech is that we are a 30-year old company. And over 30 years, we've built a tremendous installed base of software and solutions. At the same time, we built tremendous relationships in this industry. We do get access to high-level people in these organizations, and the aspenONE licensing model has also had been -- it's another factor that has made, has allowed us to leverage not only that installed base, but those relationships to increase the penetration in our customers' accounts. So it's certainly been very beneficial. Long-term contracts, as Mark said, and others, we have contracts that average 5 years or so. This allows us for some -- for stability and in those customer relationships, certainly, it also allows us to have conversations about increasing usage, without the need to get into negotiations of terms and conditions, because once those contracts are in place, we can talk about more tokens, if you will, to increase the usage of our products. And our renewal rates are high. Our software is very sticky. Once we are there, it's very hard to replace our software. And after 30 years of selling into this set of customers, let's just say, we have a very nice installed base of products. So overall, we have an ability to grow organically, without a whole lot more investment in the sales channel, which is the dynamic that you see in our P&L, in our balance sheet, and eventually into cash flow for the corporation. So with that, like I said, we were perhaps the -- a small software company with the largest coverage in the world, because we are where there's oil and chemicals, and that means everywhere. We have 30 offices around the world. We do business in very interesting places around the world, and I don't think I've been to all of them, but I have been to a lot of them. Over the last 5 years, one of the things that Mark asked me to do was to complete the -- our operations around the world, so we set up our business in Russia, and that's a very nicely growing business for us now. We terminated our relationship with our partner in the Middle East in 2009, and now we are direct in the Middle East. As you can see, we have 5 offices there, and we have a team that is now starting to gain good momentum producing growth that we didn't have before. In Latin America, in the last 2 years, we were -- we finished off our organization in Latin America. Of course, I'm very familiar with our territory and directly involved there, but that's also driving additional growth for us, and we reject the organization as we see the need to face the market in the proper way. But it is a very global business. I've had the fortune to work, live in each of these regions or be responsible for them, in that I was in South America as a [indiscernible] manager. I lived in Europe. I lived in Asia and the U.S. and was born in Latin America. So I'm very familiar with the territories, and what's going on all over the place. So now it's my focus, as a CEO, I just want to remind people that Mark is the CEO until September 30, 2013. I'm the Head of Global Operations, but I've been privileged to have a seat at the table over the last 4 years, and that I've participated in the board meetings, as the strategy for the company has been crafted and fine-tuned as we executed against it. I am fully on board with the strategy of the company. It's what I've been doing, executing to it for the last 5 years. I think it's been a successful strategy, double-digit growth is not something that is achieved without the right strategy and good execution. My focus will certainly continue to be operational excellence, and executing to that strategy as we continue to do that. The P&L, the balance sheet and the cash flow, we'll continue to do what we are supposed to do, and deliver the shareholder value that Mark and the team have delivered over the last few years. We will continue to invest in our products. Manolis is doing a tremendous job in that area. The Aspen Academy is extremely exciting for me as well. Early on in my career, I was an APC engineer. I understand very well the potential that exists from the rollout of adaptive process control. It is the 1 innovation that has taken place in that market since the multi-level, level control was introduced 25 years ago. With respect to production planning and production management, I was a program director when I lived in England, implementing what back then, we call integrated solutions. It was really band-aids and hooks and crooks, but today, it is truly integrated. The technology then really exists 15 years ago to deliver integration today, is there and it is what Manolis is showing you about. So I'm very excited about everything that I'm seeing from the product organization, and I fully support it. And the quarterly release as well, I'm glad that Manolis feels my pain every night and day, so I have to put up the numbers and he has to issue a release. So we are pretty well aligned in that regard. And managing expenses, I think there is an opportunity in this company to continue to be -- to increase our productivity, not only by selling more to the same customers, with same salespeople, but also by focusing the sales, our full sales organization, into those top 350 accounts, and driving more of our sales into the smaller market segment through the inside sales organization. It's been 18 months since we launched that organization. It's given us good results and we're now starting to grow that business as well. We're using university hires into that organization, which also improves the productivity of our sales organization.

So -- and then capital allocation, again, I've been at the table when the decisions around stock buybacks have been made. I'm fully supportive of that. I'm fully supportive of acquisitions, as long they are the right acquisitions. The size of the acquisitions will depend if it's the right acquisition or not for the company. One technology -- the technology fleet as far as acquisition and as you get into bigger acquisitions, then you have to look at the culture in those companies, their locations and other factors.

So once I become the CEO, we'll look at acquisitions through at length, but it will remain the same strategy. And we'll make sure the right fit for the company and make sure that it doesn't create any issues with our go-to market model.

So with that, believe that's it. Manolis will now on come on and talk about the products. I think the plan is good at the end of the -- so thank you, and I look over to talking to you and getting some questions later.

Manolis E. Kotzabasakis

Okay, great. Okay, good afternoon. I guess, good to see you all here in a smaller setting. It's -- I guess the majority of you here in this room, you have been in the plenary session this morning, right? So -- no? Okay. What I will do, this is the agenda that I will follow. I'm going to talk to you about the product and the list strategy, then I'm going to do a few demos and show you some of our products. And then, we're going to talk about the growth in the usage of our products and then where we're heading and what things we are working on, and what is in the pipeline.

We are 30 years old and we offer products in engineering, manufacturing and supply chain. And here's the list of the different areas that we cover. And we are the leading company across these areas. And the strategy of a company, has initially, has been to create customer value by delivering best-in-class technologies across these areas. And it, of course, increase the use of our products by making these products better and better all the time. And -- in other words, the initial strategy for the first, approximately, 15, 20 years. But then, as our customers start using our technology, they start seeing benefits of combining information and technology from one area to another. Why? Because there is significant value in doing so.

Here's the schematic of a plant -- process plant, with -- in the center, the actual facility and then storage facilities and transport and loading and so on. And you can optimize that operation using engineering. Just to clarify, engineering is the product that we use in order to design how this processes operate. It's mostly simulation, but it also has a number of other products like economic evaluation, like energy analysis, like a few other things that will go with that. And you can definitely make significant improvements by using the engineering products. The same goes for what we call the manufacturing products.

Here, this way, we have products like advanced process control and real-time information management. And the processes can be optimized along that axis as well. And finally, of course, the supply chain matching demand with supply it's very, very important because it determines how you run the plants and of course, how you design them, not just new plants, but as you also modify and you revamp, our customers revamp the plants. Now all these analysis, they give a beautiful optimization across each different length of engineering, manufacturing and supply chain. But at the end of the day of, all of them optimize the same assets, the same plant.

So decisions being made across one of those, like in engineering, affect the supply chain and the other way around. So having the ability to use these technologies in an integrated way has been of significant importance to our customers. And our customers that are encouraging us to integrate these technologies more and more, because at the end of the day, as I said, we are optimizing the same plant.

So this is what aspenONE is all about. It's about bringing together engineering with manufacturing and supply chain to enable and even better optimization of the assets of our customers and this way, drive significant additional value. And continuing on the same type of graph here, this leads to more customer value and much more usage of our products across the board. And we have many examples of our customers doing so and increasing the way that they use our products more and more.

Now, in the last couple of years, we have focused a lot in transforming our products, changing the game completely. Why? Because the way the technology has been deployed and used today has changed dramatically the last few years, with the advent of mobile computing with the new ways of collaboration between different people in the organization, because of computing platforms that have become more powerful.

So what we decided to do is to focus in taking our products to the next level, move them to the next innovation curve, still with the same vision of bringing together engineering, manufacturing, supply-chain, but using new technologies. In a way, we are really, really very fortunate because we have extremely strong fundamental technology, and we have a great new way to integrate it and deploy it to deliver much more value or enable our customers to deliver much more value by using our products.

So this has been the strategy. We continue to focus to -- in breakthrough innovations. I mentioned this morning, and you've heard it also from the Aspen Academy, from George Stephanopoulos, that we continue focusing in the core capabilities of our products to have the best optimization algorithms, to have the best physical properties, to have everything in the core technology being the best and pushing the technology to new levels. In order to continue offering best-in-class products across all our suites, but we have also focused on the new user experience.

Let me just talk for a moment regarding that. The new generation, they come into our customer base. They are used to working in a very different way. I personally have a 12-year old daughter. And for her, the concept of having manual, a manual to read, it just doesn't exist. And our customers, the new generation of engineers, they want to use products that are very intuitive, that are easy to use, easy to learn. So the user experience has to change significantly, and we focus a lot on that, not only in terms of doing innovation in our products, but also, as Mark mentioned earlier, in terms of changing our own workforce. We recruited 60 new college graduates last year. I'm recruiting another 50 in my team this year and we're bringing them together with more -- with some of our more experienced engineers in order to produce tomorrow's technologies.

And we've already seen that significant impact there. We have to make it faster and easier to deploy our technology, and we're working on that, access anywhere, anytime given the way, as I said that people use technology today, through mobile technology and the way that they deploy new products in their organization. And finally, slash down completely, really reduce significantly the implementation cost. For some of our technologies, these implementation costs have been high and we have worked very, very hard towards reducing that, and we have been very successful.

So we have been releasing products on a regular base, every quarter. That doesn't mean that we release a new release for every product, every quarter. We don't do that. Different products get released at different quarters, quarters depending on what we have and what our customers want to see. And but here's a list of key things we have delivered until today, the last 12 months as we met back in June in our offices. A new high, this is the new Aspen Plus, the concept of activation, solid simulation, online training to make it much easier for our customers to learn what they need to learn as they need it.

Plant view simulation, getting real-time data into the cost simulation Aspen Plus and HYSYS; search capability in simulation and InfoPlus.21, our historian, Aspen PIMS, the new version, PIMS Platinum, crude assets, a really great technology to fundamentally create new ways, based on molecular science, on estimating crude properties, which have a profound impact into the operation of refineries and other of their plants. The new advanced process control with adaptive modeling, new chemical supply chain, new collaboration manager. Basically, we have introduced brand-new breakthrough releases across all our products. It has been a great journey. I think we improved. I do believe we have improved our productivity. Significantly, there's much more to gain. And of course, we are working very hard in that. But I'm very proud of all the things we have done the last couple of years.

This morning, we have announced 4 key releases. The first one is the new aspenONE, for which I will do a demo in a minute. The other one is the aspenONE Exchange, introducing the concept of apps for the first time in our products and bringing together a number of different technologies to make the use of our technology even more powerful. PIMS Platinum, a significant update and as Mark and Antonio mentioned earlier, a solid update following the acquisition we did just over a year ago.

So I will now move to do a demo, a real-time demo, using my iPad. And then, what I would do is I will go back to the presentation and using a different technology, not PowerPoint, but different technology. I will try to explain a couple of our other technologies.

So here, I'm going to do a demo of the new aspenONE. And let me just connect here. I'll just make this full screen. This is the home screen of the new aspenONE. Let me just explain what we have done here. You remember the concept of aspenONE, which we released and we start creating a few years back was -- is the idea of integrating, engineering with manufacturing and supply chain and we have done a lot over the years. However, as I said earlier, we are very, very fortunate because the advancements in computing technology and mobile technology open to us a brand-new way of integrating this applications. Much more powerful, much more intuitive, much easier to use, learn and deploy in our customers' organization.

So this is the basic design of the new aspenONE. And the philosophy we have followed is make it as simple and clear as possible. For those of you have seen our applications, they're very, very powerful, but sometimes not very easy to learn and use. So we went back -- we went back to the drawing board and we decided that we wanted to create a completely new user experience. And this is the new aspenONE.

Let me just give you a scenario in order to build up for this demo. Suppose that you are a process engineer and you have been asked to address a problem, which relates to something that is unusual that is happening in your plant. In this case, the temperature rising in one of the sections of the plant. How can you answer that question if you don't have access to -- I don't know who sends me a message here, but I will ignore it. This is a powerful elaboration, by the way, with mobile devices. So if you are working in your desk and you don't have access to your desktop PC, then what you can do is access this technology on an iPad like this one here and try to address that problem. By the way, whatever we have -- what I'm going to show you here works on any device because we have developed it using HTML-5, which is browser independent. So it can work in any type of browser, Internet Explorer, Chrome or Safari, which enables us to actually deploy it on any device. And as you can see here, the design is very simple. You only have Aspen Search in all models and some other information that you might want.

Let me just go and open it up here's -- I selected all models because in order to address a problem in the plant, I need to find the latest reliable model that I have available in my organization. For this example, this customer has got 489 models. This search is extremely powerful. You can find all models in your organization. And also, it's got some really cool characteristics here. We have the taxonomy and you can go here and if I select products, this model is a 324 Aspen Plus, 165 HYSYS, you can look in model features for instance, which models are steady state, which are dynamic, which one have got column size and a few other things,

That's one way to search and try to find the right information. But in this case, I'm going to do it the other way around. I'm going to just type styrene, because this plant relates to a styrene monomer plant, and select that. And the search will reduce the number of models that you have available from 480 or 90 down to 18 models. By the way, let me also say something. What I'm showing to you here runs on the cloud. We're using Amazon Cloud just for this demo. We know that maybe most of our customers, at least today, they're not going to use public cloud. They're going to use their own private clouds in the future, or servers, which is completely compatible, with whichever way they want to deploy the technology. And -- but I just want to mention to you what you are seeing here.

So here is the 18 models. We have some little cool features here, the A+ mentions -- show several way and that's in Aspen Plus model. I can scroll through just by touching the screen and I can see information so I can see a quick preview of the model and a brief description -- excuse me, relating to that model. And if I scroll down and I try to find something that was done recently, there's a couple of models here that have been developed the last few days, May 2, that I might want to try to find a little bit more information. So I'm selecting one of them. This one, and it opens up, and gives me a bit more information.

So you can see the flow sheet a little more clearly and you see the rest of the information when -- who created, when it was last modified, what components and methods have been used to create the model for process engineers, this is very, very important information, because it reflects the accuracy of the model, how good it is. And then, on the right, you have some collaboration capabilities. You can add your name there to be notified, if you want, so you can just put your details if you want to be notified if somebody goes and changes the model in the future. You can download it with the download button or you can email it to somebody within our customer's organization.

So I see this model here. I like what I see. I like the components that have been used. So I'm going to go ahead and open it in a full flow sheet. So here it is. The design is simple and clear. No complicated menus. The philosophy we have followed is what you need, when you need it. Nothing else. Because that's the way modern technology is being used. And you can see on the main bar on the top, you only have the search capability on the left. Then you have 2 little buttons there, which relate, so I click there, to lifeline data simulation. And then, on the right, you have your personal workspace, your credentials that you need to input to access this technology. You can save your work and so on.

A couple of other things, you can see we have plus and minus here on the left -- on the right, sorry, it is because sometimes when you have a mobile device, you need to zoom in and out just by using your thumb. So we have provided for that. Of course, you can do the user things like pinching in or out and you can do the usual things that you can do with any such new technology.

So in this case, I know or I'm being told, if I focus on my problem, that I need to find out what's happening and how I can solve the problem of the temperature of the buttons of this column. So if I touch that part, a window opens up and I can move it up here to see it more clearly. And using the basic parameters that relate to that frame. So this design has been produced assuming the temperature at the buttons of the column it's about 235 degrees and you can see the rest.

Now I'm being told that it is rising. It's higher. But I don't have access yet to real-time data. So what can I do? The only thing I can do is to connect it real-time, with the actual plant. So I go here, select that part and on the top left of this diagram, there's a little tag. When I will that, a window opens up and I can now search for these parameters. I'm only interested in the temperature. So I go there and i will just type EB, which is the name of the stream. This is very, very fast search. It immediately gave me what I'm looking for in terms of tag. I have now selected that. I close my keyboard. I press tag again, and I have now established a link between the design and the real-time. But it still shows NAN, not available now. That's what we are using there.

So what do I need to do? I need to go and activate the real-time data. I haven't activated it yet, I established a link, but I haven't activated. So I will go to the top. This opens up, select live plan data and you will see that it will now immediately -- I will move this bar there, shows me what is the temperature there. Now it doesn't -- it's high now, it's actually lower than the design. I do not know what has happened. I was using this the very same demo this morning, and I guess what has happened is they start continually running the model with the higher amount, which I will show you in a minute, but please pretend for a moment that this temperature is higher than 235. If you bear with me and I will show you how we will proceed in solving this scenario that I'm trying to solve here.

Now the good thing is that I can actually go now and even plot how this temperature behaves the last few minutes or a couple of hours. And as you can see, it has actually stabilized at around 230 since I did this demo this morning in the plenary session. Now, if I want to find a way to reduce the temperature, what I need to do is run the simulation first. So I will now go and activate simulation. And in this case, I'm now running Aspen Plus. Click there, select there, Aspen Plus run and runs really, really fast. It actually runs faster than on your desktop because we're using a very powerful server.

Now, let me just talk for a moment about parking use. I have activated 2 applications so far. IP.21, which consumes tokens and Aspen Plus, which consumes tokens as well. So our customers are consuming tokens in using both products. So I just want you to mention that for you. Now what I need to do is when I run modeling, our users want to see everything that relates to every stream. What I'm going to do is I'm going to customize this stable and make it applicable to my current problem and save it and perhaps email it to somebody.

So I will go to the edit there, and deselect everything that is shown now. And the reason that the temperature should have been rising in this example, but is not, is because there is more polymer being formed at the bottom of the column. This is a real problem, by the way, study plans, as they operate by if you don't have that right amount of inhibitor in the plant, polystyrene is being formed and that is solid, the polystyrene that we use in caps and so on, what happens is that the different pieces of equipment don't operate properly, which means that there's a problem, which, by the way, eventually will lead to much more significant problems if you don't take care of it. Okay, so I'm going to select the amount of polystyrene that is being formed so I will select mass flow of polystyrene and I will select also the temperature. Finished with editing and now I have produced a customized table for me, for my own needs, that only shows the mass flow of polystyrene and the temperature of that stream.

Now I need to go and solve that problem. I will go to the feed here, and I will try to see how much inhibitor we are using. As I said earlier, the inhibitor prevents the formation of polystyrene. So if I select this, the table will open up and it will again give me all the potential parameters that I have available. I will edit this table, as I did before, and select only the amount of inhibitor that I'm using. So now I have produced a model with input output of what I just need and want for the specific application I'm working on.

So what I can do is go and change this number. Right now they're adding 1 pound per hour in the feed. I can increase that. And please observe what will happen on the mass flow of polystyrene, which is right now 177 and the temperature, which is 225, you will see that they both dropped to a lower value. So I will go there, edit that to 3 and run modeling Aspen Plus again. And by the way, as long as I keep this open, it consumes the tokens of Aspen Plus, the tokens of IP.21. So run the simulation again. It runs, as I said before, very, very fast and you will see these numbers from the right change from 177 to 44 and the temperature from 235 to 230.

What I can do next is save my work and that, will now move it to my home screen and I have the model I have done and I can use it again, send it to somebody, work and collaborate with somebody and so on. So this is the key capability of aspenONE. It's very simple to learn it, very easy to use it. It requires no training. It can be used on any device. You can collaborate with different functions in the organization, which means that you can solve problems you wouldn't be able to do before. And by the way, the idea of bringing real-time data with design data has also been around for 15, 20 years. Nobody has done it. We have done it in a cool way that is very exciting, very exciting from our customers, for those of you who were in the meeting this morning both SABIC and BP talked about it. We have a lot of our customers. Actually, we have one customer that they deployed completely by themselves. We had actually sent it out a little bit early in all of our releases. We didn't announce it, but what happened was that they found out themselves, and they did the installation, they were up and running by themselves. They just call us one day and they told us so and they're extremely happy in doing so, okay?

So I think -- we feel this is going to change the game. And it's going to take our technology to completely new users. I will give you an example. We have a lot of users of our real-time data. And of course, a lot of users of our modeling products who don't use each other's products. So suddenly, we are going to enable these group of users to use different products, which means they will be getting more value and we will be getting more usage.

Okay, so that concludes my quick demo on Aspen. What time do we break, 2:30? What I would like to do next is -- if we can go to [indiscernible], please. Here, I'm using this method of demonstrating products, which I think is a little bit easier for larger audience. What we have here to zoom in and out and show you some elements of our technology.

So we have delivered a new aspenONE, a new way of integrating our technology, but we have paid a lot of attention into our core products as well. And we have improved significantly in both dimensions, capabilities, core capabilities, core technologies capabilities, as well as usability and user experience.

So let's look first in cool new technologies we have introduced across our products. The first one is using quantum-based chemistry to be able to predict electrolyte properties, electrolyte solution properties. This is very, very important and very crucial for our customers. High-performance trends in IP.21, adaptive modeling in advanced process control, the concept of activation. Similar to what we have seen in the iPad, but in the demo that I did in aspenONE, is this concept of once it's activated, it's there and works. When you've seen, remember when you've seen the -- I activated real-time data, it will stay there all the time. It will update all the time, as the conditions of the plant change. The concept of search for many of our products and 64-bit technology to enable our customers to take advantage of file computing and solve problems, large problems they couldn't solve before.

Molecular characterization of assays and I will talk about it later. Conceptual design build there. I was talking to some of you over lunch about this boom that we have especially here in the United States on shale gas, and these helps our customers to create individual models for their operations very, very fast, really in a few minutes because we have created templates for them for the standard processes.

Rundown blending that optimize their product, the products and how gasoline and other products are required by the end user and do that very quickly in the refinery, solids modeling, we will talk about in a minute and CO2 capture. In many of these technologies we have patented and we feel really proud about what we have done here.

Here's 5 areas that we talked about in the plenary this morning for those of you who are there. For this session, I'm only going to talk about PIMS, HYSYS and Aspen Plus. Let's start with PIMS and how we have transformed PIMS into a completely new product that has really impressed our customers.

This is a screenshot from the previous version of PIMS. It is the world's best refining planning software. Why? Because it has a tremendously clever and intelligent workflow and for those of you, the comments from the MOL executive this morning, how important it is for their survival. And it also has extremely powerful optimization routines. Nobody is anywhere close to what we offer in this area. And our customers drive significant profit, $10 million to $20 million per refinery, per year is quite normal, sometimes more than that.

And by the way, we have significant market share, we -- nobody officially tracks the numbers, but we know that about 75% of the world's refineries do their planning every day using PIMS. But as being the leaders in this space, we never rest. We want to take this technology to an even higher level. And here is some opportunities to improve in order to do analysis in the previous version of PIMS. You needed to export the data to Excel and do the analysis there. We didn't have good analytics there. In order to do crude evaluation, our customers, every day, they are being faced with challenges to decide, which crude to buy when because crudes become available to them through what is called these are the spot market. People bid for them and they need to make very, very fast decisions, sometimes in minutes, if they're going to buy a specific cargo.

Today, or the people's versions, sorry, you had to input the data in a few different forms and you had to get the assays, assays, I would like to explain here, it's the properties, the physical properties of the crude. You had to go to a third party because we did not offer assays until recently. We have to get out of PIMS, get the assays wand iterate and go round and round many times.

So what if you could do all these activities within PIMS without leaving the PIMS environment, and the new release of PIMS Platinum is doing that and much, much more. And this is a screenshot from PIMS Platinum. We moved, we transform the product from spreadsheets and from data to pictures. You see the whole refinery in just one picture, and you can zoom in and out in an easy way. So the whole information, you can see it in just one picture.

Now our customers are faced with a challenge. They have hundreds and hundreds of models that they have created over the years that they want to use. So what we have done? What we have done is we have made it very easy for them to move to the new version. The only thing they can do, they need to do is take the PIMS file. We have introduced a huge intelligence into the product, and it automatically creates this flow sheet. I know it sounds a little bit incredible, but we have done it. And for those of you who were in the session this morning preferred ALON, or ALON I think they pronounced it. That they said about the experience of many of our customers are saying the same. So they can create the flowsheet automatically and then, once they do that, we can do things they could never do before. Very easily see the net profit margin easily displayed there.

But one of the most important capabilities this introduces the ability to display different data for different cases. So you can go and use the drop-down menu on the top and display the data and the data will change automatically for different cases. In this case, we have a cut [indiscernible] unit, CCU, and you're examining how the profitability changes and other things in the refinery for different capacities of the crude unit -- sorry, of the cut [indiscernible] unit. So you can select any one of them, and then you can zoom into a specific unit of the refinery, if you want to see more information. So in this case, if you can zoom on the FCC unit, you get all the data.

Let me just zoom a little bit more. Here's the schematic of the SEC unit. You can see the inputs. You can see the outputs, and you can see the operation of the other related units to the FCC unit and you can get all the information that you want as you want it to make meaningful decisions and optimize the operations. It gets even better because you can expand this and see more information. What we're showing before, we're showing flow. You can add other parameters, like sulfur content. That's very important for any refinery, sulfur contaminates the reactors, and they are not as productive as before. So running the operation with the right amount of sulfur is absolutely critical for any refinery.

So -- and you have to ability to edit these numbers. Once you edit and you change the value, you run PIMS and automatically, it updates the profit margin of that specific case. I talked earlier about analytics, we have introduced now extremely powerful analytics within PIMS. Let me just explain this for a second. We have -- every refinery has got hundreds of different cases that they need to examine and go through. And doing relative comparisons is very important. Green here means you don't violate any refining constraints, red means you are. But sometimes these constraints are not necessarily true. Some people said you cannot operate like this. So by doing this and rotating for instance, this graph in many different ways, you can examine many different scenarios. Assay management, this is perhaps the biggest breakthrough in crude oil technology for many, many years. We have patented the hell out of it because it's really, really powerful. It's based on molecular science and not statistics any other technology offering in this area is based on statistics. We're using more than 10,000 components to predict the crude properties, very reliably and very accurately and this can have an enormous feedback and enormous impact on the profit of the refinery.

And here's an example of how we use it to use spot crude evaluation, you can look in what crudes you have right now, in your case. You can add the new crude just by selecting from the menu of the assay manager, you run PIMS, it optimizes again and suggests a new operation that takes out some crudes from the original plant. And you can see the difference in objective function and so on. So this is the new PIMS Platinum.

Now, it's 230. Shall we stop at this point or -- 5 minutes? So let me just talk about HYSYS very quickly. HYSYS is by far the world's best simulator for energy. When I say energy, it's oil and gas and refining. But it can be improved even further and this is what we have done. Let me just show you opportunities. If you want to find a way to improve the energy consumption, we have it integrated. We have a great product, energy analyzer, but you need to come out from HYSYS, pass on the data and then come back and iterate over and over again. Guess what, not many of our customers do that, okay?

So the same thing goes for estimating the capital and operating costs. Similar for heat exchangers. Heat exchanger design, one piece of equipment there. What if you could do all these things within the actual flow sheet of HYSYS without needing to leave that flow sheet, and we have enabled that with a new HYSYS. How did we do that? With a new brand-new revolutionary UI, just a great UI. We started with HYSYS. We added a number of capabilities, multitask Windows. So that when you make a change, you can see the impact on another one and a much more natural and logical workflow, which enables now our customers to do things they were not able to do before.

Let me just show you one concept. This concept of activation that I talked about earlier. This relates mostly to energy and capital and operating costs. Many of our customers, given the prices of oil these days, want to reduce energy consumption because it has a profound effect on their bottom line.

What we have done is a major breakthrough, because we have introduced the concept of activation here. So when you activate energy, which is this first icon here, this window stays open, and it shows you the target, the maximum energy you can save from your existing design. There's a whole science behind this, by the way. But you don't need to know it. If you want, that's fine, but it's just there and works for you. So if you make any changes with your basic flowsheet, it automatically recalculates what are the targets. It gets even cooler, because when you select this, it gives you a number of different design alternatives that you can implement to capture some of these potential to save energy. So you can save 15% out of the 20% just by adding a new set of changes, it gives you the payback, the area and so on of that specific design modification. You can go and do it here and these numbers will update. By the way, we also have greenhouse gas emission calculations using EPA standards for the U.S., European or other country standards to estimate that.

Very similar concept for capital and operating cost. Let me actually take a moment here to highlight something, okay. By the way, this is, again, a first in our industry, it's fully automated. It's going to be very, very important for our customers.

Let's look about what it means to us, to AspenTech. If you have -- let me give you an example, Aspen Plus, which I'm showing here, requires 18 tokens to run. The energy analyzer requires, I think, approximately 20 or so, I don't remember now the number, the exact number, and the capital cost and the weighted cost, estimator, requires another 25 or so. So when a user has got these applications open, they consume the basic tokens for the simulator, tokens for this and tokens for that. So the customer gets a lot of value, but we also get the benefit because we get more token usage.

I will skip this similar concept for HYSYS changes, so you can do all that within HYSYS. So the new HYSYS is a complete new work environment for engineering, and I know for sure it's going to completely change the way that we do process engineering. Can I take 1 more minute and finish?

Aspen Plus. We have done exactly the same thing what we did in HYSYS for Aspen Plus. Aspen Plus is the world's best simulator for chemicals. HYSYS is energy, Aspen Plus is chemicals. We have exactly the same thing. You change the UI, we have the concept of activation and so. Actually, the 2 products look almost identical now. Very, very similar. You have everything that you have in HYSYS you have in Aspen Plus. But we have added something new, which is the solids capability, the ability to model chemical processes when they have solid operations. And more than 60% of the chemical processes, they have solids operations. And we couldn't do that before properly.

Let's have a quick look. Here's a potassium chloride, very typical process that's being used mostly in fertilizers, and you have a number of unit operations, crystallizing, drying and so on, that involves solids. And you can now model them properly, and you can do a lot of nice analysis such as particle size distribution, which is very important, separation efficiency, and you can also add many unit operations. And the good thing is that as you make changes in your flowsheet, this reflects right away in the analysis you have on the right, things we didn't have before.

And we have also introduced online training to make it much, much easier for our customers to learn and learn what they need when they need it. It's actually very intelligent. If you are waiting on a distillation column in Aspen Plus and you want the moment that you go and you click in select online training, it takes you to the appropriate model -- the appropriate training module so that you can learn. All of them, they have with units with voice, all computer-based training to enable our customers to get up to speed very, very fast.

With that, I think we should stop now, and then we will continue after the break, right? 2:45, so 5 minutes. 10 minutes. Let's have a 10-minute break and we'll reconvene for the second part, shorter one, of my presentation. Thank you.

[Break]

Manolis E. Kotzabasakis

We are ready to start. Can you please take your seat? Can we switch to PowerPoint? Okay, thanks. So let's now move to talk about growth, and I will first specifically to usage growth of our products. And I have some information for you here. Here's how our model -- oops, sorry, it was the other. Here's how our growth model works. Us -- the majority of our customers, especially in engineering, are now on the aspenONE licensing model, they have access to all our products. So what happens is as they use more and more of our products, because they now have access to it and because we are introducing all this new cool technologies that we have, they're using more, which means that they are hitting their limit of tokens. We give them a certain number of tokens, and they get denials. So users try to use a software and they say, "Sorry, there's not enough tokens to run your application." And of course, that leads them towards purchasing more tokens from us, which means more usage and revenue for us and more value for our customers. This graph here shows the growth in usage hours the last 3 calendar years, calendar year '10, '11 and '12.

Let me explain this. We are getting usage logs from our customers, and we can analyze them to understand how many hours they have been using our products. We don't get all usage logs. Some customers, they either forget to send it to us, so they are not in the auto upload. Some of customers, we get the data automatically. And so we don't have access to all the data, but we have a significant sample of our customers that is very representative to showing how the usage ours has changed over these 2 couple of calendar years. So in calendar year '11, we have seen approximately 17% growth in usage hours, and last year, about 15% increase in usage hours. This does not, of course, automatically relate to revenue for us, because customers do take time until they go through the purchasing process to renew their contracts with us and some, but it's a very good indicator of how things may evolve in the future.

Let me just give you an example. Last year, for those of you who were in our meeting in June, in Burlington, we show you one customer, but of course, one of our good customers, but not out of the ordinary that we see with a number of our customers. And this takes us back -- this customer has been giving us usage logs back to 2009. And we have their latest data until a month or so ago this year.

Let me explain this graph. The gray bars are the peak usage in terms of tokens. So the vertical axis is tokens. As you can see, the token has always -- the peak has always been hitting the limit. The red line is the token limit, and the blue line here in the average usage for that specific month. Some time in the beginning of 2011, this customer converted to the aspenONE licensing model. Before, they were in the old licensing model, which meant they only had some of our products. With aspenONE, they have moved to having access to all our products, and of course, at the same time, they increased the number of tokens they had. And last year, when we met, we showed this example and we said that this customer is ready to buy even more tokens. And you can see that this happened shortly after our meeting in June in Burlington last year.

This is something that we see over and over again with a number of our customers. They exceed our limit, we give them a little bit more, they buy a little bit more, they extend a month or so, and then they hit their limit again and so on and so forth. So this is the way that our customers increase their usage of our products and get more value, and that, in return, means more revenues for us.

Here's a little bit more information and breakdown for that specific customer. We have 3 columns here: the old licensing model; the new licensing model until June, when we met last time; and until a month ago, end of March or so, this year. And you can see the usage increase. Whether they were around the old licensing model, the total usage increase was 21%. When they moved to the new licensing model, the usage has increased to 85%. In this case, more than 3x -- 4x than the rate of growth compared to the old licensing model, and that rate has increased even more in the new -- recently. And this one breaks down the 21% and the other total's per user, new users and existing users. And you can see that this varies, it depends on the customer and what they do, and they -- part of this table below explains the same totals, 21%, 85%, 129%. But in terms of product type, the cost simulation, in this case, we are talking about Aspen Plus and HYSYS and the products, the peripheral products we have in the Engineering Suite. And you can see the numbers. And I'm sure we can spend an hour thinking about this, why and what. But one thing I would like to say is that we still see a huge amount of growth from our core products. And the reason is that our customers, when they use peripheral products that they did not have before, they use them through the new aspenONE and the new HYSYS. They are not getting out, so they are using both products at the same time. So as they increase, the usage of incremental products goes up, the use of core products actually accelerates even more. And this is what we see and we predict is going to happen going forward. The integration and the new capabilities we're introducing in our products leads to increase in usage of core simulation and the peripheral products.

Let's look for a moment about vision and where we are headed. As I said earlier, core products to us and the core technology is absolutely fundamental, and we are never going to surrender our leadership in all these products. So we are going to continue innovating in core technology like: pressure safety valves, following the acquisition we did back in September; acid gas modeling, very important with a boom that we see in the United States with shale gas and so on, cleaning those gases; column hydraulics, a really new technology that we have also patented to improve the modeling of columns; crystallization; dynamic flare analysis for safety; models for delayed coal came, this is varied for refinery; molecular characterization, what I said earlier, that we have patterned it the hell out of it, moving it into our modeling products; calibrating and optimizing PIMS using reactor models; scheduling of piper -- of pipeline and docs using the acquisition we did in January; and weigh-in and dispensing for batch process operations, and there's quite a lot. For those of you who were in the session this morning, we have enhanced our collaboration with leading universities around the world. We have created what we call the AspenTech Academy, where we have definitely the world's leading chemical engineering professors meeting with us and evaluating different technologies, telling us where in the world perhaps somebody is doing more research. And we feel really proud about working with the AspenTech Academy that is going to open up avenues and research that will come to AspenTech we haven't seen before.

A few minutes ago, I did a demo with the iPod, the new aspenONE, which is the way for us to bring our technologies together to integrate them. And so this is the first version of aspenONE, what we just released. The ability to bring together simulation and real-time data to a house cooperation between different functions with our -- in our customer base. And in addition to that, to be able to find solutions and do optimization our customers were not able to do before.

What are you going to do next? Show you a few minutes earlier, Platinum, PIMS Platinum, which is the new flowsheet we have developed to enable our customers to do better refinery planning. We are going to add that into the aspenONE platform. And this will bring together simulation, real-time data and planning. And this is significant, because it's not just bringing technology together. Our customers and one of our customer executives from MOL talked this morning about the importance to have a plan for your refinery, but you also have the information how is that actually transforming to reality, and what is the difference between plan and reality. That's fundamentally important, and the ability to have that on the same device, in the same type of UI, is going to be very, very, very important for our customers. And we are going to also add scheduling, so simulation, real-time data, planning and scheduling. We are going to add advanced process control. We are going to add supply chain management. So our platform of bringing our technologies together is going to be through this new aspenONE.

We're also going to do and introduce some cool apps. In this case, we show one we are currently working on, it relates to profitability. As we have been meeting with a number of our customers, we feel their words, "Can I see on my mobile device?" And this came from a CEO for one of the oil refining companies. "Can I see the profitability of my refinery every day, every moment?" And we said, we will do it for you, not only for you, but for all our customers. And this is what we have done. We haven't delivered it yet, but this is what we are working on. You can see the different sites, different plants, and open it up, and you can actually even zoom in and see the change in profitability, cumulative, hour-by-hour, day-by-day, month-by-month, quarter-by-quarter, whichever way you want. So bringing all these technologies together is the way we are going to deliver on our vision of bringing together engineering, manufacturing and supply chain. And we are, as you might have gathered, very excited about this. We have a clear path and a clear way to do it. We have our customers' support by endorsing our solutions, by endorsing the releases we are giving them and by giving us feedback on how to improve it more and more. And this is going to be the way we are going to continue delivering our technology. So with that, I would like to thank you. And who is going to be the next? Mark Sullivan. Mark Sullivan, our CFO, is going to give you his views about where we are.

Mark P. Sullivan

Okay. Thank you, Manolis. Okay, so I am either getting cleanup or going last, depending on your perspective. I choose to think that I'm getting cleanup. All right, let's start with financial highlights. So as Mark indicated, we are increasingly looking like a subscription-based revenue model company. We are in year 4 of a 6-year transition. As we've talked about the length, the reason for the length of this transition, it relates to the length of the contracts. Most of our contracts are 5 or 6 years, the average is just somewhere between 5 and 6 years. And that was how long the contracts were when we introduced the new model when we used to take revenue on an upfront basis. So even though we've been a term contract company for many years, we were taking -- we were still turning the revenue into a more of a perpetual-like model. That ceased with the introduction of the new business model and have set us down the path of having a subscription-based revenue model. So it's going to take a full 6 years to sort of work through that entire portfolio contracts, and we are in year 4 of that 6-year transition.

We're very focused on growing our installed licensed space. We have a metric that we introduced, commensurate the same time as the introduction of this licensing model called total contract value. I'll talk about that. That's a key focus for us and we do have a multiyear record of growing that in double-digit range. We now have a strong cash flow and balance sheet. It wasn't always the case if you've been with the company for a number of years, but that is the characteristic of the company today. Year-to-date and in the third quarter, we posted solid results on both GAAP and non-GAAP metrics. And we've talked about for a number of years, and it's not going to be fully visible until the revenue transition completes, but we're going to have best-in-class financials, and they will be totally visible when we finish the revenue transition in fiscal 2016. But you can already start to see them when you look at the results today.

Okay, so this is a look at total contract value. As I said, that's a metric that we introduced back in the beginning of fiscal 2010. We break it into 2 pieces. Total contract value includes the maintenance component, which now is included as part of the subscription or as part of the term contract, it is embedded in a single fee. At the end of the third quarter, we had just over $1.8 billion of contract value in place. We focused on both aspects so that the license-only piece, which is shown in blue, because that gives us a comparable measure that we look at period-over-period as a measure of how fast we're growing the term contract part of our business, and that was just under $1.6 billion at the end of the third quarter. The precise definition of this metric is disclosed in our Qs and Ks, so I invite you if you're really interested. But basically, it's a metric that measures the replacement value of all of our active contracts. And we seek to grow this. We grow it by more usage, as Manolis talked about in some detail in terms of additional usage, more token sold, price increases and also by acquiring new customers. It'll drive this metric up and translates into cash flow, et cetera.

Okay, so we have given guidance and set out to achieve despite as what we talked about our sort of early middle age of the company, double-digit growth of this metric. This growth has been organic. The acquisitions that have been described are relatively recent. They haven't had any material impact on the growth of the metric to date. We say we believe they will, going forward. But we consider this to be pretty good growth for a 30-year-old company. Obviously, last year was an exceptional year, growing at 14.5% year-over-year. And we recently given guidance that for this fiscal year, we're going to do -- we expect to do 10% to 11%. And just to be clear about this, so I think there's been a little bit of confusion, this is a sort of a bit -- a year-over-year balance sheet measure. So we take the value of TLCV, the total license contract value, as of the end of the fourth quarter and compare it to the end of the fourth quarter of the previous year. So it's a year-over-year growth number. And in this particular case, it's shown on an annual basis. Okay, so we are looking at positive growth in the fourth quarter to get to the guidance number of 10% to 11%.

Annual spend is a metric that we introduced sort of partway between when we first started down this path of P&Ls that didn't necessarily reflect the real economic ability or power of the company. And in the end of the journey, which won't be till '16, back in the first quarter of fiscal '12. And it was really introduced to help give you some insight into what normalized revenue might look like. So while TCV is sort of a -- is the total value of the contracts on a multiyear basis, this metric takes the invoice value, if you will, of year 1, or the current year of all of those active contracts. So in that respect, it's a bit of a proxy for what subscription and software revenue would be on a normalized basis. So we kind of encourage folks who try to model our business on a GAAP basis to leverage the statistics. Because if you take this number and you add some of the aspects of revenue on our P&L that were not impacted by the revenue transition, you can sort of start to get to an idea what normalized revenue would be and model that out to the future. Same measurement technique here, Q3 to Q3, so it's a year-over-year metric, this has grown approximately 11% on an annual basis. We have less data here to just introduce this measure publicly in the first quarter, about 11% on a year date. Now, as Mark indicated, we do expect annual spend and TLCV growth to kind of move on parallel planes, but we would expect TLCV to have a slightly higher growth rate because there is escalation on our contracts. And so you get the benefit of multiyear of escalation, whereas this would only get the current escalation or wouldn't have the benefit of multiyear escalation. So the growth rate should be parallel, but annual spend, generally speaking, be growing at a slightly slower rate. And that could vary from quarter-to-quarter that GAAP, as we talked about, based on exactly what's transpired in any given quarter.

So this is a graph that I think everybody likes to show. Mark referenced in the plenary, up into the right, is a good direction for certain statistics, and this would be one of them. So cash flow is obviously an important metric for any company, but particularly important for us during this transition when you really can't look to the P&L or most aspects of the P&L, certainly, profitability part of the P&L, to get a sense of how the company's doing. So we've look to cash flow as our primary output metric, and this has been a big focus for us, obviously, to leverage the growth of the business, to leverage the expense structure and the footprint, the operating footprint that we have in place, to grow cash flow, and this is sort of the bulk of what we have done so far over this period. That FY '13 bar reflects the most recent update, the guidance that we gave on the call last Tuesday, to $130 million for fiscal '13. I'll give some insight as to how '14 is looking in the upcoming slides, but this is cash flow so far -- I mean, the journey here.

Oh and just before I move on, we have talked in the past about the fact that there really had been 2 transitions going on at aspen, about the revenue one we talked about at length. The balance sheet has also been transforming. So if you go back in time, the company had a lot of debt, as I'll talk about in a minute. And one of the other things that the company did in addition to selling receivables was to offer pretty good discounts to customers to prepay their multiyear term contract. That had the effect of distorting the timing of cash flow. And what -- part of what has driven this growth is the normalization of that cycle as we've gone to annual payment terms, and nearly deemphasized that practice of letting customers prepay their multiyear contracts. So there's maybe a little bit of a tail left in that here in fiscal '13, but this is, by and large, done. So that transition is over. The revenue transition still has a couple of years to go. And going forward, it's really not going to be part of our story in the growth of cash flow.

The timing of cash flow does show some interesting patterns and consistent patterns by quarter. This is primarily driven by the timing of when contract booked, when anniversary dates of customer invoicing, so it's really a phenomenon of when invoices come due. So even though the revenue is ratable when we sort of take it on a daily basis, the cash flow is sort of ratable in that we get the annual payment upfront from the customer. So there is a bit of a quarterly seasonality, if you will, to the timing of those receipts. So as we talk about fiscal '13, your modeling, you probably don't want to draw a line from $34.5 million to $57.9 million because we do expect it to come down in the fourth quarter as it generally does. And we have the total for the year of $130 million or so, the guidance.

Okay. So this is a story that we talked about quite a bit, but I guess at least half of the story is over, if you will. As I said the company at one point had quite a bit of debt, but that debt was in the form of secured borrowings of sold receivables. It was north of $200 million, if you go back in time. But you can see it coming down here from $147 million in '08 to 0 as of the second quarter of this fiscal year. So we are debt-free as of the second quarter. No more secured borrowings or sold receivables. On

the other hand, you see cash from marketable securities going up, particularly as cash flow has expanded and, certainly, paying down debt at least of late has been a major use of cash. So we have a very strong balance sheet, no debt and quite a bit of cash to play with.

So one of the primary uses for that cash has been to buy back stock, which you could see the pattern here. We initiated the stock buyback in fiscal '11. And they're off to a modest start, but we've certainly ramped up over the period shown here. To date, since we started the program, we've spent $116 million of cash to buy back shares, and we bought back about 5.4 million. So to date, this has been the primary way or the leeway we've returned, if you will, excess cash to you, shareholders. And we have done some acquisitions, but they haven't really been significant from a cash outlay standpoint. That would be the other main use of the cash as we move forward.

So this is the chart the generally you don't want going up into the right. And we are sort of proud of these numbers. Expenses are down from 5 years ago, and they've been essentially flat for 3 years. So when we introduced the model back in fiscal '10, we talked -- one of the subplots of the secondary discussions we had is that we thought it could provide the opportunity for a lot efficiency in the business. Antonio talked a lot about how we're seeing sales productivity. Some of that is related to the fact that what we're selling is not as complicated one-off as it used to be and some other things including inside sales. But there's also been a lot of back-office efficiency. And we see opportunities to take efficiency, we take them. We're very aggressive about that. We've instituted a university hiring program, which has helped keep our cost structure down, even though headcount is actually up 4% some from this point last year. So this has been a big focus for us, and we think we've done a very good job of controlling expenses despite making investments in the business. As Mark said, R&D is going up in absolute dollars spend and certainly as a percentage of pro forma revenue, and it's going to be over $60 million or so in this fiscal year. So we're putting the money where we think it's going to have the biggest return and trying to manage cost very aggressively in other areas like G&A.

This is our non-GAAP target operating model. We expect to see and are very confident that we'll see these stewards of financial metrics once the fog of the revenue transition completes. As Mark indicated in the most recent quarter, we were already in the range on gross margins. We want to see gross margins of 83%, 85% percent. We want to see non-GAAP operating margins of 30% to 35%. And we think we're well on track to realize this type of what we to be best-in-class P&L performance. Again, once the transition is complete, we'll sort of see the whole revenue reinstated into the P&L. This is the expectation and outlook that we've had for quite some time.

So a lot of numbers here. What I'm doing is I'm showing the original '13 guidance on the left and just an update on the current guidance across all the metrics that we provide, some of which were updated or I guess all of which were updated on the call last Tuesday. So we've kind of refined at the top the license growth. We entered the year saying we expect to do the double-digit growth, where we find that to 10% to 11% for the year. And again, that's a Q4-to-Q4 comparison, so it's a full year growth expectation, TCLV versus TLCV for the full year. We've refined revenue to $305 million to $308 million. Increasingly that revenue is subscription and software. It will be north of 75% of total revenue for fiscal '13.

GAAP expenses, I talked about those. We've done better that we set out to do at the beginning of the year. We've found opportunities to keep costs down, and that's something we're going to continue to focus on. Operating income, $48 million to $50 million. Net income, $29.5 million to $30.5 million, and you can see the per share and the non-GAAP operating numbers are significantly better than the guidance, driven by the higher revenue and lower expense. And most importantly, cash flow at the bottom, $130 million from the original guidance of $115 million.

Okay. So this next section, first, let's start to get into some of the guidance for '14. And also this is the section where we try to provide a little bit of assistance to folks, who are trying to forward model our GAAP financials. So this is just a retrospective on what's happened to total revenue over the period here leading up to the '13 full year guidance numbers. and this has been driven by 2 things. One is the contracts that were taken upfront expiring are renewed. We get to start taking the revenue on those contracts anew. And there's also obviously the growth that we've generated in the business over this period baked into these numbers as well.

If we just drill down one level and decompose revenue into subscription and software and services & other, I can sort of see what's going on a little more clearly. Subscription and software since fiscal '10 is up $182 million, and services & other is down $41 million.

And there's a couple of things going on. One of the things that we had laid out at the beginning of the revenue transition was the fact that maintenance would be moving, if you will, on the face of the P&L. So maintenance, which used to be sold annually and was shown in the services & other line, is now included on the customer re-ups on the new model as part of the subscription and software revenues. We have maintenance moving down into or up thing on your perspective of the subscription and software. And that also is a phenomenon when we're able to convert customers from perpetual arrangements into term arrangements with bundled maintenance.

And the second thing that's going on, to a lesser degree, is a little bit less professional services over this time period. Manolis talked about trying to make our products easier to install. Obviously, if we can grow the business with less professional services, that's a good thing from a profitability standpoint because subscription and software is a much higher margin revenue stream, and we have had a little bit of reduction in professional services over this time period. But by and large, what's going on in services is migration to subscription and software on the maintenance line as well as growth in subscription and software.

Okay, so as we look ahead to '14, this is what we're looking for guidance for total revenue, $353 million to $363 million. Very similar and consistent pattern with what we've seen in the past, something like $50 million plus or minus, using midpoints of the guidance for each of those 2 years. And the same pattern. More subscription and soft revenue something north of 80% in fiscal '14, and the trend of the maintenance continuing to move into subscription and software as the predominant explanation for why services & other will be coming down.

So except for changing some of the numbers, I used this almost exact slide last year. The predictability of the multiyear model has been actually pretty good. And the trends, looking out to '16 when the P&L is totally normalized, really haven't changed very much. But the update here from '13 to '14 is, as I just described, $353 million to $363 million of revenue of '14, that's up from $305 million to $308 million. More than 80% of it will be in the subscription and software line, and we see a continued movement down on services & other, which is really an accounting phenomenon of moving from point A to point B.

We talked and have continued to talk to folks about using annual spend as a tool to help model the P&L. Talked about the fact last year that expect services & other revenues to settle out around $50 million by the end of '15. That was actually the same number that I gave last year. So really, the dynamics that are driving revenue really haven't changed that much. That's still the outlook as we sort of fast-forward ahead to a normal P&L. We would expect to see that sort of normalized services & other revenue after the transition has completed.

Okay, so cash flow guidance for fiscal '14 is shown here in this graph. $130 million for '13, and here are our initial guidance for next year is to expand free cash flow to $145 million to $155 million. There are some challenges to forecasting cash flow. You're in the business of predicting when your customers are going to pay you. We do have actually a tremendous amount of receivables coming due at the very end of the fourth quarter of '13, which happens to fall on a weekend. So we've done our best to forecast all of that, take it into account. But obviously, depending on how the fourth quarter closes and what we see for collections, we'll true this up, but this is the order for magnitude that we're looking at for '13 and, obviously, to expand that on a year-over-year basis into '14.

And I'll talk really slow so you could write or type all these numbers. But actually, these charts will be available almost immediately on our website after this presentation and Q&A is completed. But here's a full list of the numbers that we're guiding to here initially as we look out ahead to fiscal '14. We are looking again to persist the double-digit growth that we've seen in the license TCV metric that is again our guidance and goal for fiscal '14. I talked about the revenue numbers at some length here, $353 million to $363 million, greater than 80% of it is subscription and software.

We don't think that we can keep expenses flat forever. I mean, it's a great goal, and we've actually done a good job of that for the last 3 years. We are looking for some modest expense increase next year. I know we said that this year we actually did a bit better than we expected in terms of keeping a cap on expenses. And as I said, we saw opportunities for efficiency and productivity, and we aggressively went after those. But we are expecting to see some modest growth and expenses as we look ahead to next year.

So while Manolis and the R&D team has been on a quest to make our financials easier to use -- I think he's just started to look at this -- our financial or our products easier to use, our financial are now getting easier to use. When you look at operating and net income, we start to look like a normal company. We're not all the way there yet because we still are missing some revenue, the revenue that would come with the installed base is not 100% back in the P&L. We have to wait till fiscal '16 for that completely. But you do start to see operating income $78 million to $88 million, net income $46 million to $52 million. Those are pretty respectable numbers for most companies. And we obviously -- we're going to do a bit better than that as we move forward.

Income per share, $0.48 to $0.55, and then on a non-GAAP basis $94 million to $104 million. And non-GAAP net income per share of $0.60 to $0.66. And as I talked about free cash flow, of $145 million to $155 million.

And if everyone takes time to look at that, that's my section. I think we probably want to bring the rest of the executive team up together to answer whatever questions you have for us. That's the next step in the program.

Question-and-Answer Session

Mark E. Fusco

Okay. So I had -- I guess I'll start it off by asking my own question.

Mark P. Sullivan

Who are you going to ask it of?

Mark E. Fusco

So I had a question from my text. And the question was, who's going to replace Antonio here? And so the short answer is, so we're going to be working together here over the next couple of quarters. We've got lots of good folks in our company. We're not yet ready to announce how he's going to be replaced and what the organizational structure will be, but we will do that coming forward, and we'll be talking about that coming up. But we're not ready to go public with that yet. Other questions? Mark, they're speechless about your presentation.

Mark P. Sullivan

I think it was Manolis'.

Unknown Attendee

[indiscernible] 1 or 2. In terms of the new model, [indiscernible] when customers come along and need more tokens, whatever they [indiscernible] in the middle in [indiscernible] new relationships. So when does that happen? [indiscernible] When they do, does that become an annual affair or [indiscernible] every quarter or how do -- so in other words, how do -- is it incremental?

Mark P. Sullivan

How do incremental token purchases sort of flesh themselves into the model after they've signed their new aspenONE license agreement?

Mark E. Fusco

So the way the model works is, so we've got these long contracts, 5 or 6 years long. And in the case of the example that Manolis showed here, so you'd get a multiyear contract with a customer who just converted. And so when they need more usage or more tokens, they buy it for the remainder of their contract. So if they're in year 2 of a 5-year contract, they buy those tokens for the reminder of their contract. So we hope that they're coming back to us consistently for more tokens over a period of time. But it's not like some other SaaS-like models, where it can bounce or rattle a little bit or they do it quarterly. Our customers don't really buy that way. And so it may take them several months or several quarters, where they're hitting their limits of denial, as Manolis talked about. And then when they decide to buy more, it's typically a specified price for a token in the contract, and they'll just buy more tokens at that price.

Unknown Attendee

Is that per tokens per year in remaining -- I'm 2 years, I have 3 to go?

Mark E. Fusco

Right. If they had 100 tokens and they wanted to buy 20 more, they would buy 20 for the remainder of the contract.

Unknown Attendee

Got it. Okay. And somewhere in your data, did you share for that either typical customer or a couple of customers how that growth of 17 and 14 or something like that, how that divided more tokens versus escalation? Or I guess the tokens cover new products or more people using an existing module -- new modules or increase in usage of existing modules?

Manolis E. Kotzabasakis

[indiscernible] token and just usage increase and [indiscernible] Yes, in the example I showed, there's no increase in price. It's just pure usage hours and usage increase. And as we've seen, it's an increase for both the core products and the peripheral products.

Unknown Attendee

Okay. Last question on this sort of thread, one of the things that's so interesting about the SaaS and the multiyear model is how you compensate your salespeople. And maybe can you just give some specificity around salesperson that signs up somebody, what happens to their compensation as it relates to the transactions they do in year 1 or 2 or 3? And of course, we're all looking for how that might play out in 2015 and beyond as it relates to sales and marketing as a percentage of their revenue, right? So how that can step down? These seem to evergreen many contracts. That's the beauty of 19 out of 20, 20 out of 20. So how important are salespeople? We know they're important, but how does that come together in the second through fifth year and the renewal of these new business contracts?

Antonio J. Pietri

So let me say something. Certainly, the model is driving increased usage of tokens either through more users or more products that they're using. And while some customers do voluntarily come to us and want more token, there is an ongoing process to get customers to use more of these products. There is an ongoing engagement between the sales organization and customers. A significant number of our customers send us their usage logs -- this is in their contract -- so we get to see their usage patterns. When our sales organization sees that they're starting to hit the limit, that conversations begin about contracting for more tokens. And this is an ongoing process between creating demand, additional demand for tokens, and then engaging in conversations to do an amendment to those contract to get more tokens in. Back to your question about the sales organization, the sales organization has a yearly compensation plan that expires on June 30, at the end of our fiscal year. And then on July 1, they get a new compensation plan with our new quarter. And whatever is sold goes against that compensation plan, whether it's an existing customer, a new customer or whatever. And quotas are set with visibility into where renewals are coming, what is their expected growth by vertical and the different accounts and so on.

Mark E. Fusco

And as Antonio mentioned and we've talked about it many times, it's a growth comp plan. Meaning, it's a net growth comp plan. Just in the way that the company reports net growth on a quarterly basis, the sales comp plan is a net growth comp plan. So every salesperson, generally they have a few different accounts, and if they've got a negative in one account, they've got to get a positive result in other accounts before they start to get commissions. So it's a net growth comp plan. It's been that way for the past couple of years. We think it's driven the right behavior in the sales force.

Unknown Attendee

Mark or Antonio or Manolis, how would you guys describe the opportunity pipeline going into fiscal '14 versus fiscal '13 and kind of the puts and takes of what you see today?

Antonio J. Pietri

Yes, I do regular pipeline review calls, and one of the things that I pay attention to and worry about is maintaining the ratios of pipeline to quota. And I'm comfortable where we are for FY '14.

Unknown Attendee

And just a quick follow-up, I think we're all excited about the Middle East opportunity that we've been waiting on for a while now. Maybe just an update on just the traction there. I think you called out Kuwait a couple of times as a country that's using your software, but we haven't heard a whole lot about some of the other countries there.

Antonio J. Pietri

Look, we were away from the Middle East for about 6 years through this partner we had there. When we terminated them, we had to build an organization from scratch. We realized when we stepped into the Middle East that our customer relationships had suffered, so it's taken a while to rebuild those relationships and restart replacing some of those contracts. But we had a positive quarter out of the Middle East in Q3. Things bounce up and down depending on the quarter, but I think we are starting to have the right traction in that territory.

Unknown Attendee

You guys talked quite a bit about this conversion of some of the perpetual customers to subscription customers and the free cash flow dynamics. So I've got a couple of questions around that. The first, is the sales force incentivized differently to convert perpetual customers over? Are those targets different? I mean, could you give us some -- and maybe this is for Mark Sullivan -- some idea of the cash flow? So for example, we look at this past year, what the mix between what was driven by perpetual versus what was driven by the term guys converting or buying more?

Mark E. Fusco

So they're not in the comp plan this year and in the past years. They're not incentivized to convert perpetual contracts or customers that have perpetual licenses that are under maintenance and convert them into term. Mark, do you want to take the other one?

Mark P. Sullivan

Yes, most of the growth in license value is term to term. There is some benefit from perpetual to term. But I wouldn't describe it as really significant part of their growth. It's material but not particularly significant.

Mark E. Fusco

And last quarter, just as a reminder, and I guess, we had a couple of hundred thousand worth of perpetual, so we still sell perpetual software every now and again. Last quarter was a couple hundred thousand. And we talked a little bit about in some investor meetings and on maybe one of the calls a while ago that we, for the first time in the last 6 months or so, we stopped, or maybe a year now. Some of our new software is not available on a point product basis anymore. So if you're a perpetual customer, so adaptive process control, which we spend a little bit of time on this morning talking about, Manolis touched on it here this afternoon, that's an example of software that's not available on a point perpetual basis. You must go to the aspenONE embassy suite in order to get it. And really, we've been on this journey of term licenses for manufacturing in the supply chain for 7 or so years. It's a core way that we think about ourselves going to market and the right way. We want all of our customers to have the software in the perpetual model. If not one, we want them really perpetuate from a company perspective going forward.

Unknown Attendee

Understanding that it's still early, what percentage of your top 350 customers are using the mobile products now? And any data on what the usage in the mobile-enabled customer looks like versus that of the desktop only?

Manolis E. Kotzabasakis

We don't give this information. But as you know, aspenONE we just released today. We just released it today, so we don't have any data on that -- any significant data. And we'll see how things will shape up. I think the attempts we had before, we have had a couple of applications running on mobile devices, where [ph] really individual attempts and trying to put our toe in the water as we're preparing for this major release, the aspenONE, the new aspenONE. And actually, Mark, when you talked about the transition of perpetual customers to term customers, the new aspenONE it's only available to our term customers on the new commercial model.

Mark E. Fusco

So only in the aspenONE licensing model. And try to think about the applications that you saw today. Manolis happened to be running it on a mobile device. That's not the point. The point of the aspenONE software is to bring all the different software together so it can be run in one unified user interface and you could do many more things than you could do in the past. But it really just happens to be today on a mobile device, but we would've expect most of the usage to be fixed. But you could use it anywhere, and that's really the point of the exercise.

Unknown Attendee

So I had 2 quick questions. First of all, on the future metrics going forward, what will you give in terms of mobile or usage? Are there any new metrics that you will share with us? And then secondly, on the Venezuelan situation, if you could again share with us sort of how you plan to tackle that so we don't see that happening again?

Mark E. Fusco

I'll take the first one. We haven't decided yet what sort of data or information, if any, that we'll be giving out, which could be competitive in nature. So we'll think about it as time goes along. And we'll have my Venezuelan expert here.

Antonio J. Pietri

The Venezuelan situation. Now look, throughout the quarter in Q3 we were engaged with the customer. It was a difficult situation in Venezuela because of multiple things, including the passing of President Chavez down there and then them getting ready for the election. But now that the election is over and everyone is coming back to work and refocusing on the business, we're engaged with them, negotiating the contract. We've got an inquiry to submit proposal for the new contract as well. And my expectation is that either in Q4 or Q1 we'll get those contracts back to the company.

Mark E. Fusco

A couple of last pieces. So one, these are long-time customers. We mentioned on the call the other night, 25 years they've been customers using our software. And the second piece of it is the software does time out, meaning it shuts off. So they are without software today. And that is the way all of the contracts run. At the end of the term, it shuts off.

Unknown Attendee

This question is for Mark Sullivan. Can we just dig into the free cash flow guidance a bit? Presumably you won't get any benefit from the installment contract receivables anymore, so should we really look to accounts receivable and deferred revenue as sort of the biggest drivers of cash, i.e. collections? And then secondly related to that, what sort of cash taxes do you expect to pay in 2014?

Mark P. Sullivan

Yes, I mean, we still have some installments receivable, but I would say going forward as they completely go away, we'll look to deferred revenue. So from a -- cash flow statement perspective -- I mean the way we model it is more of a receipts and disbursements type basis. So we see is that annual spend metric driving more invoice activity, which is really we're getting more receipts and whatever we can, we'll manage from a disbursements perspective to keep disbursements or expenses down. That's really how we think about cash flow. But from a traditional standpoint, still have some installments receivable on the balance sheet. They'll continue to come down, but they will be predominantly deferred revenue. From a tax standpoint, we don't expect to pay any material taxes until into fiscal '16. So we do pay foreign taxes but because of the losses that we have, most of our earnings are in the U.S. We have substantial NOLs remaining, so we don't expect to pay any U.S. taxes until again sometime in fiscal '16.

Unknown Attendee

Got it. And then one quick question for Antonio. Could you just talk about how you look at M&A? What parts of the portfolio you could potentially bolster through M&A, et cetera?

Antonio J. Pietri

Yes, again, I've been part of the sort of framing and evolution of our company's strategy. I participated in board meetings for the last 4 years, and I'm fully aware of our M&A activity and pipeline, and I fully support it, I think. Again, we're looking at acquisitions that neatly fit into our technology offering. And the ones we've made have been small. But as we move forward, if the right opportunity comes along that is bigger, we'll do it. But I'm in full support of our current strategy on M&A.

Unknown Attendee

How much of your customer base is still not, on the aspenONE suite? I'm sure it's small.

Mark E. Fusco

Just over 80% is done.

Unknown Attendee

Okay. So I think last year was around 75%.

Mark E. Fusco

Yes, I can't remember what data -- I think we talked about the other night. I think just over 80%.

Unknown Attendee

Okay. And the 20% that's still remaining, there's probably going to be 10% or so that would just -- you wouldn't expect to convert. They would just stay in the point products or the perpetual license.

Mark E. Fusco

I think they'll convert. We'll keep working on it.

Unknown Attendee

Mark Sullivan, I just wanted to confirm, so the perpetual license -- just the big prepayments and you guys used have that, with the fiscal '13 being over, that's essentially not going to be material going forward into '15 and '14, right?

Mark P. Sullivan

Yes. We still offer prepayments sort of as a convenience to customers who are budgeted or whatever, but it's been significantly less than 10% of our receipts, total cash receipts from customers for a number of years now. And any tale in terms of that normalization of cash that we took upfront, it's pretty much over. Very little effect even in '13. And really as we look forward, it's normalized.

Unknown Attendee

I'm just curious, what percentage of your token consumption is modeling versus actual process control activities? And is that changing?

Manolis E. Kotzabasakis

Well, the data that I showed you are mostly from engineering contracts. As we know, we have 2 suites of products, engineering and manufacturing supply chain. We are in the process of analyzing -- the mechanization of the manufacturing supply chain contracts started only 2 or 3 years ago. So in the process of analyzing more and more data as we are getting, and we will be able to perhaps give you some of that information in the future.

Unknown Attendee

Is that growing faster than the engineering side, do you think?

Manolis E. Kotzabasakis

Yes, yes.

Mark E. Fusco

Yes, the growth of the manufacturing supply chain has been growing faster than in the engineering side. It has the benefit of smaller denominator. The engineering side is a lot bigger from a term license.

Unknown Attendee

Right. Because it just seems they're half to half [ph] as actually running a plant.

Mark E. Fusco

Yes, but the dynamics are different and the token pools are different. I think we only have a few customers that have a mixed token pool, where tokens can be used in all parts of the business. Most of them have one suite of tokens on engineering and another suite of token for manufacturing in the supply chain, and they don't mix. Meaning, if you're not using them over here, you can't use them over here. And the dynamics of usages is different. Once the plant is on, they're being used all the time. Whereas in engineering, they're much more dynamic in nature, sort of like checking of a book out of a library and checking it back in and somebody else can use the book. So they're bit different from a, I guess, dynamics perspective. Other questions?

Unknown Attendee

You guys put up a slide talking about the enviable position you are with 18, 19, 20 of the largest customers in each of your target markets. I was wondering how much of your future opportunities are greenfield opportunities with brand-new clients versus just deeper penetration with the existing base?

Antonio J. Pietri

Yes. So, I mean if you think about oil companies and chemicals companies, they are so many of them in the world. A lot of them are our customers. First of all, we do a white space analysis for all those top customers, and the opportunity is still significant to penetrate those customers. So we still believe there's important growth to be had in those customers, and that's why we're increasingly focusing the sales organization in our top customers. And now we've established an inside sales channel that is allowing us to go into the smaller customer segment and customers with smaller contracts to grow them via telesales.Now, it is in that segment where we're generating a lot of new logos, either small companies or also companies in adjacent markets, such as biofuels, petchem and other markets where we don't have necessarily a field organization focused on.

Unknown Attendee

Could you spend a minute on macro and global economics, maybe talking about impact if any that you see in sales cycle and more importantly usage patterns as things change be they growth rate like in China and Europe. We heard a little bit country specific, but just some comments on that if you don't mind? And then related to that is how do you feel the U.S. shale gas, North America to a degree, but U.S. particularly, is helping or might. What's going on there generally. Most of your business is outside the United States, I think. But just some comments on global economics impact with an emphasis on usage patterns and then back to U.S. North America shale gas.

Antonio J. Pietri

Look, for the global economy you, then have to break it down to oil and gas, chemicals and E&C. Like I said during my presentation, we're sort of dealing with unique industries at this moment in time. They've been sort of unique since about the early 2000, 2002 when the industrialization of Asia started to take hold. I believe that will continue certainly as the Asian economies started to grow. A lot of the chemical buildup moved to Asia at the expense of buildup in the U.S. or Europe. But this is sort of not a zero-sum game but a sum game where there's always positive growth in those industries on a global basis. So maybe Europe, the European economy is suffering from a chemical standpoint, there are other ordered parts of the world that are benefiting. And now the U.S. is starting to see significant benefit from shale gas in the chemical industry since gas is a feedstock to produce ethylene. So the U.S. is becoming one of the lowest cost producers of ethylene in the world, when 3, 4 years ago everyone was predicting that the chemical industry was going to die in this country. So that's the dynamic of shale gas. Shale gas is not only a benefit to AspenTech on the midstream sector, where we're seeing a lot of gas processing plants being built, a lot of pipelines being built. So E&C companies are using our software to design those plants. The operating companies in midstream are also buying our software to then operate those assets. But at the same time, then there's the benefit on the chemical side, which is cheap gas being produced, which is leading to a lot of new construction in the U.S. on the chemical front. So there are many benefits to shale gas in that regard. And then there's also the impact of shale gas on power, power plant and what that means down the road as well for the U.S. economy and for AspenTech.

Unknown Attendee

I know you guys are not paying taxes right now because of the NOL. But what would be your tax rate if you didn't have the NOL today and how do you think the tax rate will change come 2016?

Mark P. Sullivan

So the way we're set up now is most of our earnings occur in the U.S. So essentially we would pay the U.S. statutory rate as we are currently structured. And we have time to think about that and put some things in place. We decided that's prudent to do so, but we don't have a need to at the moment. But if we were paying taxes, it would approximate 36%, federal and state. And most of our earnings are U.S.

Mark E. Fusco

Most of our earnings are U.S. because we bring it back here. Most of our earnings are outside of the U.S., but we actually bring all the business back here because of the tax because of the fact that we were in a loss position and we don't pay any tax here.

Okay. Well, thank you very much, everyone, for coming today, and thank you to those of you who were on the phone. We really appreciate it.

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