Bradley T. Miller - Chief Financial Officer & Senior Vice President, Finance
Mark E. Fusco – President, Chief Executive Officer & Director
Phil Rueppel – Wachovia Securities
Richard Williams – Garban Equity Partners
Aspen Technology, Inc. (AZPN) F4Q07 Earnings Call April 14, 2008 8:00 AM ET
Good morning. My name is Stacy and I will be your conference operator today. At this time I would like to welcome everyone to the financial results update conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Mr. Miller, you may begin your conference.
Bradley T. Miller
Good morning everyone. I’m Brad Miller, CFO of AspenTech and with me on the call today is Mark Fusco, President and CEO. I’d like to welcome you to our call to discuss the completion of our fiscal 2007 annual report on Form 10K for the year ended June 30, 2007 including the restatement of previously reported results. Our first quarter fiscal 2008 quarterly report on Form 10Q for the quarter ended September 30, 2007 as well as selected preliminary results for our recently completed third quarter fiscal 2008.
Before we begin I will make the usual Safe Harbor Statement that during the course of this call we may make projections or other forward-looking statements about the financial performance of the company that involve risks and uncertainties. The company’s actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today’s call and on our most recent Form 10K and 10Q on file with the SEC. Also please note that the following information is related to our current business conditions and our outlook as of today, April 14, 2008. Consistent with our prior practice we expressly disclaim any current intention to update this information.
The structure of today’s call will be as follows: first I will begin with a review of the restatement of our prior period results. I will then discuss our fourth quarter and full year fiscal 2007 results at a summary level followed by a similar discussion of our first quarter fiscal 2008 results. After I’m finished, Mark will provide some concluding remarks and a high level overview of the company’s operational bookings performance and the just completed third quarter fiscal 2008. We will then open up the call for Q&A. With that, let me begin.
In our fiscal 2007 Form 10K you will find that we have restated our financial statements for fiscal years ended June 30, 2006, 2005 in addition to the first three quarters of the year ended June 30, 2007. As you’ll recall from our announcement last June 11, we had identified errors relating to the accounting for sales and installments receivable. As background the majority of the company’s software sales are based on multi-year contracts with annual payment terms. These sales generate multi-year installments receivable from our customers and AspenTech has historically sold those receivables directly to financial institutions at the time a transaction is signed by the customer. AspenTech previously reported these transactions as sales and receivables. The accounting framework was such that the transactions met the criteria for true sale accounting at both the time the receivable is sold as well as throughout the years that any portion of the receivable remained outstanding. The related reporting was that the installment receivable was removed from the balance sheet upon receipt of proceeds from the financing institution. We have had some of these facilities in place dating back to 1990.
During a detailed review of our financial controls and processes in June of 2007, we determined that certain sold installments receivable did not meet criteria for true sale accounting on an ongoing basis. We concluded that we effectively retain control of the transferred receivables for accounting purposes as a result of engaging in new transactions with our customers to sell additional software and/or extend the terms of existing license arrangements and thus modified remaining outstanding installments receivable. The amount and/or method of modification of these receivables did not meet the requirements to achieve and maintain sale accounting treatment under FAS 140. Importantly as we have discussed on previous conference calls this accounting conclusion does not alter the arrangements we have had with our customers and it has not changed our economic relationship with the financial institutions including the recourse they have that is limited to the transfer of receivables.
It is equally important to understand that our ending cash balance is not affected by the restatement for any time period. The accounting conclusion resulted in change in presentation whereby the entire value of the collateralized receivable balance must be reflected on the balance sheet with a corresponding secured liability payable to that financing institution. As a result we created two new balance sheet accounts, collateralized receivables and the related secured borrowing liability. We view this newly reported liability as self funding with collections of collateralized receivables servicing the liability and recourse generally limited to the sole receivables as we have said in the past. In addition it is worth noting that in all periods reported and restated the balance that you now see for these two accounts reflect the total value of collateralized receivables and secured borrowings. There are no amounts remaining off balance sheet.
An additional result of our previous accounting treatment for the sale of installments receivable was that in special situations where we sold a pool of receivables rather than individual customer accounts we immediately recognized any gains and losses upon the transfer of assets and then recorded a retained interest in sold receivables for our continuing interest in the pool. The retained interest served as excess collateral for the financing institution. This excess would come back to AspenTech over time in the form of cash flow as the liability was retired with the financing institution. Guggenheim and Key Bank transactions which originally closed in June, 2005 and September, 2006 were examples of this and were fully paid off in December, 2007 and March, 2008 respectively. Our previously reported retained interest in sold receivables was subject to periodic accretion of interest income through the term of the respective arrangement. As a result of the restatement the retained interest is now collapsed back into installments receivable.
Following the restatement and moving forward there are no longer gains and losses recognized upon the transfer of these assets and any costs incurred have now been recorded as debt issuance costs. All receivable balances, both collateralized and standard trade, are now subject to reserves through the bad debt allowance and interest income is accrued on the outstanding installments receivable including those which service collateral on the secured borrowings. To re-emphasize there is no change in the limited recourse the financial institutions have back to the company as a result of the restatement.
As a result there are two things to keep in mind. First, you will note that our June 30, 2007 balance for collateralized receivables represents an over-collateralization of our secured borrowings. Second, we expect to recognize materially greater level of gross interest income and expense moving forward with the net impact being the difference between the discount rate we are paying to financing institutions and the discount rate we charge our customers for the multi-year payments.
In addition to correcting the accounting for installments receivable we also identified other errors in our previously reported financial statements in the course of preparing the consolidated financial statements for the year ended June 30, 2007 that I’d like to point out. These errors relate to the timing and revenue recognition, corrections to our income tax accounting and certain other items. Errors in the timing of revenue recognition primarily relate to transactions involving bundled software licenses with consulting services. As I’ll discus in a moment, changes in this error are inconsequential to our annual revenue performance in all periods that were restated. As we previously disclosed the area we were focused on which led us to request additional time from NASDAQ to file our financials the last of which was not granted was income taxes for which I’ll provide additional detail.
Certain international tax obligations primarily arising from transactions among our consolidated subsidiaries including those denominated in foreign currencies were not historically calculated correctly. The adjusted tax provisions for these potential obligations total approximately $20 million across all periods presented which is consistent with our previously disclosed estimate and includes estimates for interest and penalties. In addition in the calculation and disclosure of deferred tax balances errors were identified for the book or tax accounting treatment for certain items. These errors resulted in the incorrect disclosure of components of our deferred taxes and the related offsetting valuation allowance within the income tax footnote and accordingly have been restated as of June 30, 2006. As these net deferred tax assets had and continue to have a full valuation allowance the adjustments to deferred tax assets has no impact on our consolidated balance sheet, statements of operations or cash flows.
I’d now like to provide you with some of the summary level financial impacts related to the restated items that I just mentioned. You can find these along with all financial statement results on a previously reported and as restated basis in our Form 10K that is now on file. We encourage all investors to read this document in full. We have restated our consolidated balance sheet as of June 30, 2006 primarily to reflect a) the recording of $211 million in collateralized receivable; b) the related recording of $182 million in secured borrowings supported by this collateral; and c) the elimination of the $19 million in retained interest in sold receivables. The following adjustments to the P&L and cash flow statements relate to the just mentioned change in accounting for installments receivable: additional interest income related to the collateralized receivables of $12.8 million in the year ended June 30, 2005 and $14.9 million in the year ended June 30, 2006.
Second, additional interest expense related to the secured borrowings of $12.6 million in the year ended June 30, 2005 and $18.5 million in the year ended June 30, 2006. Third, decreases in losses on sales and disposal of assets of $14.4 million in the year ended June 30, 2005 and $600,000 in the year ended June 30, 2006 related to the elimination of losses previously recorded from the transfer of installments and accounts receivable accounted for as a sale. Fourth, additional provisions for bad debt associated with the collateralized receivables of $2.6 million in the year ended June 30, 2005 and $1.8 million in the year ended June 30, 2006.
Finally you will notice that our cash balance at the end of each period is not affected by the restatement. What is different is the presentation of the cash flow statement. The net proceeds from the sale of installments receivable were previously classified as part of cash from operations. On a restated and go forward basis these same net proceeds are classified as cash from financing activities when the initial proceeds come from a bank. Subsequent collections from customers are reflected in operating activities and the related pay down of the secured borrowing liability is reflected as a financing activity. As part of the restatement process our cash flow from operations was reduced by nearly $30 million from +$25.9 million to a -$3.8 million in fiscal 2005 while our cash flow from operations increased by more than $30 million from $19.9 million to $50.6 million in fiscal 2006. In each of these situations there was an offsetting increase and decrease respectively in cash from financing activities and no change in the ending cash balances for any period presented.
At the end of my prepared remarks, I will provide thoughts on our current financial profile and expectations for the level of installments receivable sales moving forward to assist in analyzing our future cash flow statements and financial performance. In addition to changes made as a result of the change in accounting for installments receivable, the other summary level impacts for the restatement are as follows: a net decrease in revenue of $900,000 in the year ended June 30, 2005 and an increase of $1.3 million in the year ended June 30, 2006 due to timing of recognizing revenue on bundled arrangements. Second, additional provisions for income taxes of $6.8 million in the year ended June 30, 2005 and $3.2 million in the year ended June 30, 2006. We also accrued $4.6 million for income taxes as an adjustment to opening retained earnings.
To summarize this was the high level view of the restatement work we just completed. Further details are set forth in the 10K. It is a very comprehensive process executed by the company, our audit committee, independent auditing firm and third party financial advisors to review in detail the company’s accounting policies and financial statements. As we have stated numerous times since this process began, we believe the economic standing of AspenTech is no different before or after the restatement and that our operational performance and execution has continued to improve. We believe we have put in place a much stronger foundation from a business process and financial statement presentation perspective moving forward.
In addition in several weeks we are going live with a substantially enhanced oracle ERP system and we have made related process changes to further improve our efficiency and effectiveness of our operations. This process including audit and other professional fees over and above the normal run rate is expected to cost the company approximately $10 million in total with the majority in the first half of this fiscal year. These expenses relate to our work with Deloitte & Touche who as a reminder is no longer the company’s independent auditing firm following the completion of the work covered in today’s announcement as well as other world class experts in specific areas of accounting and tax complexity including some remedial income tax work through the end of the fiscal year. Beginning with the review of our second quarter fiscal 2008 results KPMG will be the company’s independent auditing firm going forward.
Now I would like to move to a summary level review of our fourth quarter and full year fiscal 2007 financial results for the year ended June 30, 2007. I will then do the same for our first quarter fiscal 2008 results for the quarter ended September 30, 2007. Total revenues for the fourth quarter of fiscal 2007 were $101.4 million representing growth of approximately 27% on a year-over-year basis well ahead of our original revenue guidance of $85 to $89 million. The strength of our business was very well balanced in the fourth quarter of fiscal 2007. We had strong big deal flow but we had equally strong business in small and mid-size deals. Our license revenue was strong across each key geography, vertical and product line. Software licenses came in at $68 million in Q4 of fiscal 07 while services revenue came in at $33.4 million. Software license revenues increased 52% on a year-over-year basis representing the highest quarterly year-over-year growth in software license revenues in five years.
During the fourth quarter services revenue declined 4% on a year-over-year basis including $17.9 million of maintenance revenue and $15.6 million of professional services revenue. In the fourth quarter of fiscal 2007 our maintenance revenue increased 1.2% on a year-over-year basis driven by the growth of our installed base while lower professional services revenues resulted in lower total services revenue. Our services margin came in at 47% on a GAAP basis for the quarter. From an overall perspective we continue to view consulting services as an enabler to grow our license revenue and the success of our customers. We closed 18 transactions in excess of $1 million during the fourth quarter of fiscal 2007 compared to 14 in the same quarter of fiscal 2006. In addition we closed 24 transactions between $250,000 and $1 million during the quarter as compared to 13 in the prior year’s fourth quarter. Our average sales price this quarter based on transactions above $100,000 was approximately $642,000 compared to $490,000 in the year ago quarter.
Of note there may be differences between these metrics which are presented on recognized license revenues and those reported back on September 12th, 2007 which were based on license bookings. As a reminder the criteria for recognizing revenue under GAAP may result in timing differences relative to the closing of a license contract. Both our reported license bookings and license revenue are measured at the total net present value of the applicable arrangement.
Turning to profitability from a high level perspective we continue to demonstrate solid cost control over our costs and expenses in the fourth quarter of fiscal 2007. GAAP total costs and expenses were $77.4 million in the fiscal fourth quarter an increase from $72.6 million in the third quarter of fiscal 2007 and $71.9 million in the fourth quarter of fiscal 06. The sequential increase in spending from the third quarter was driven by variable costs associated with the significant increase in license revenue during the quarter including the fact that during the fourth quarter certain sales reps that over performed for the fiscal year hit accelerators in their commission plans. In addition our G&A expense increased $3.6 million from the prior quarter primarily due to increases in professional fees.
Our operating expenses in the fourth quarter of fiscal 07 included $3.1 million of non-cash stock-based compensation, $1.3 million of non-cash amortization of intangibles associated with previous acquisitions and $1 million in restructuring charges as well as $800,000 in incremental professional fees associated with the financial restatement. Including all of these expenses AspenTech delivered a record quarterly GAAP operating profit of $24 million in the fourth quarter of fiscal 07. On a year-over-year basis and representing a record GAAP operating margin of 23.7% compared to 9% in the prior year period during the fourth quarter our operating margin performance was reduced by approximately 6 percentage points due to the previously mentioned non-recurring and non-cash items while our operating margin in the prior year period was reduced by approximately 8 percentage points due to non-recurring and non-cash.
It has been a while so to remind investors the midpoint of our original guidance for operating income in the fourth quarter of fiscal 07 was approximately $16 million which we exceeded by approximately 50% due to the significantly better than expected license revenue performance in the quarter. Pre-tax income was $21.6 million in the fourth quarter of fiscal 07 and income tax expense was $3.7 million in the fourth quarter of fiscal 07 driven primarily by earnings outside the US as well as $1.2 million for income tax contingencies identified in connection with the financial restatement. Net income applicable to common shareholders was $17.9 million in the fourth quarter of fiscal 07 or $0.20 per diluted share a significant increase from break even net income per diluted share in the year ago period. There was a $0.07 net negative impact on our reported EPS in the fourth quarter of fiscal 07 due to non-recurring and non-cash items. In the prior year period non-recurring and non-cash items had a negative impact of $0.10 per share.
Our diluted earnings per share calculation in the fourth quarter of fiscal 07 is based on 93.3 million weighted common shares outstanding compared to 58.6 million in the same period of fiscal 06 due to the conversion of our preferred shares in fiscal 07. As a result of the company's strong operating performance in fiscal 07 as well as the conversion of the preferred shares we now have a positive book value of $137 million and have eliminated $18 million in annual preferred dividend expenses.
Turning to our fiscal 07 results on a full year basis total revenue was $341 million an increase of 16% on a year-over-year basis. The driver to revenue growth was license revenues which grew 30% during fiscal 07 to $200 million. From a profitability perspective GAAP operating income was a record $55.4 million in fiscal 07 representing a GAAP operating margin of 16.2% and increase of approximately 3 times compared to $18.8 million in fiscal 06 demonstrating the profitability leverage of our operating model. Note that our full year fiscal 07 operating income includes $11.1 million of non-cash stock-bases comp, $6.5 million in non-cash amortization of intangibles associated with previous acquisitions and $4.6 million in restructuring charges. These items impacted our fiscal 07 operating margin by 7 percentage points.
Turning to the balance sheet we ended Q4 with $132.3 million in cash up from $86.3 million at the end of the third quarter of fiscal 07. The increase in cash was driven primarily by the strong growth in license revenue during the quarter including sales and receivables in the ordinary course of business. AR at June 30, 07 was $48.3 million relatively flat with $47.2 million at June, 2006. Total deferred revenue ended the fourth quarter at $67.1 million an increase of 12% compared to the ending balance for fiscal 2006 due to timing differences between the closing of a license sale and meeting revenue recognition criteria. I will also point out again the change in balance sheet presentation. You will note that we now have now $104.5 million in current collateralized receivables and $140.6 million in long term for a total balance of $245 million at the end of fiscal 07.
On the liability side we ended fiscal 07 with $101 million in current secured borrowings and $104 million in long term for a total of $206.1 million at the end of fiscal 07 in secured borrowings. As I discussed at the outset these are the two new balance sheet accounts created to account for the value of installments receivable that we sell to a financing institution. The current portion of each balance represents amounts expected to settle within a year. In both the current and non-current portions the secured borrowings are over-collateralized by installments receivable due to previously described retained interest on the two securitization transactions.
Now I’d like to move to the summary review of our first quarter fiscal 2008 results which as a reminder is a seasonally weaker quarter compared to the fourth quarter of our fiscal year. Total revenues for the first quarter of fiscal 08 were $64.8 million compared to $64.2 million on an as restated basis in the year ago period. The seasonality of the first quarter was in line with our expectations and on a relative basis our license revenue was strong across each key geography, vertical and product line. Software licenses came in at $31.1 million in Q1 of fiscal 07 while services revenue came in at $33.7 million. Software license revenues increased 11% compared to license revenue of $28.1 million in Q1 of fiscal 07. As a reminder we previously announced that license bookings were approximately $36 million during the first fiscal quarter 2008 an increase of 50% compared to license bookings of approximately $24 million in the first quarter of fiscal 2007.
License revenue was less than bookings during the first quarter of this fiscal year due primarily to $5 million in license bookings closed in the quarter that will be recognized ratably over the course of the contract due to the specific terms in these contracts. In the comparable year ago period recognized license revenue was actually higher than bookings due the recognition of revenue from bookings from prior periods. During the first quarter services revenue declined 6% on a year-over-year basis while it increased 1% on a sequential basis. The sequential increase was driven by our growing maintenance revenue partially offset by lower project reimbursable costs. We closed two transactions in excess of $1 million during the first quarter of fiscal 2008 compared to three in the same quarter of fiscal 2007. In addition we recognized revenue on 18 transactions between $250,000 and $1 million during the quarter as opposed to 13 in the prior year’s first quarter. Our average sales price this quarter based on transactions above $100,000 was approximately $360,000 compared to $250,000 in the year ago quarter.
Turning to profitability GAAP total costs and expenses were $73.2 million in the fiscal first quarter a decrease from $77.4 million in the fourth quarter of fiscal 2007 and an increase of $9 million compared to $64.2 million in the first quarter of fiscal 2007. There are a number of moving parts so let me walk through this to put these figures in a comparable form that might be helpful to analysts that have modeled AspenTech starting with the first quarter of fiscal 2008 which had GAAP costs and expenses of $73.2 million. This included $2.5 million in stock compensation and $7.2 million in restructuring charges which relates to the previously disclosed corporate headquarters relocation. This would lead to a non-GAAP total costs and expenses of $63.5 million under the method we believe many analysts are using.
On a comparable basis the $64.2 million in GAAP expenses in the fiscal first quarter 2007 included $1.7 million in stock compensation charges, $1.9 million in amortization of intangibles and $1.4 million in restructuring charges. This would lead to an equivalent non-GAAP number of $59.2 million. It is important to understand however that in the first quarter of fiscal 07 the company capitalized $2.8 million of R&D expenses whereas in the first quarter of fiscal 08 we recognized all R&D expenses as incurred. Secondly, in fiscal 07 we did not begin accruing annual performance incentive expense until the second quarter because that is when we had visibility into achieving the annual target whereas we recognized $2 million of our anticipated fiscal 08 annual performance incentive expense in the first quarter of fiscal 08.
Netting all of these factors one can see that our apples to apples spending run rate was $63.5 million in the first quarter of fiscal 08 compared to $64 million in the comparable year ago period. We continue to be satisfied with the control of our expense structure and the related leverage we are demonstrating in the business. To this point we have grown our license revenue bookings 25% during the first nine months of fiscal 2008. However our headcount over this period of time has stayed relatively flat at just over 1,300 employees.
Moving back to the first quarter of fiscal 08 the company generated a GAAP operating loss of $8.4 million compared to a loss from operations of $17,000 in the first quarter of fiscal 07. Net loss applicable to common shareholders was $9 million in the first quarter of fiscal 08 leading to a net loss per share of $0.10 which was consistent with the GAAP loss per share in the first quarter of fiscal 07. Our diluted earnings per share calculation in the first quarter of fiscal 08 is based on 89 million weighted common shares outstanding compared to 52.8 million in the same period of fiscal 07 due to the conversion of our preferred shares later in fiscal 07. We have approximately an additional 5 million common stock equivalents which were excluded in Q1 of fiscal 08 because they were anti-diluted.
Turning to the balance sheet and cash flow we ended the first quarter of fiscal 08 with $129.5 million in cash and equivalents which was a decrease from $132 million at the end of the fourth quarter of fiscal 07 due to cash payments related to incentive compensation following the company’s record fiscal 07 results. Total collateralized receivables were $223 million at the end of the first quarter of fiscal 08 a decrease from $245 million at the end of the fourth quarter of fiscal 07. The decrease in the balance of collateralized receivables resulting from collections was a primary driver to the strong cash flow from operations in the quarter which came in at $22.3 million compared to cash flow from operations of $1.7 million in the prior year quarter. You will note that cash used in financing activities in the first quarter included $43.4 million in repayments on secured borrowings compared to proceeds of $20.7 million in the first quarter of fiscal 08 or a net pay down of $23 million in secured borrowings. This was the result of reduced sales of installments receivable consistent with our strategy.
I’d now like to finish my prepared remarks with some perspective regarding how we are thinking about the sale of installments receivable on a go forward basis as well as how our strengthening financial profile will affect the level at which we plan to utilize these facilities. We have made the decision to simply our banking relationships and decided to pay off the outstanding balances to the two securitization facilities with Guggenheim and Key Banc. These two facilities were by far the most complex and expensive to operate as well as the least flexible for our current needs. We have concentrated our positions with GE Capital and Silicon Valley Bank to continue to have full access to our credit facilities with these banks.
AspenTech historically used these receivables facilities to meet working capital and strategic requirements. However the new management team that began at the beginning of calendar 2005 has driven a significant improvement in the financial profile of the company. During this timeframe we have eliminated over $100 million in convertible debt, paid off all remaining obligations to preferred shareholders and converted the shares to common stock and increased the company’s operating profitability and cash flow to record and best in class levels. In the future we are targeting a cash balance in the range of $125 to $150 million. This is more than we need from a working capital perspective and provides us with a cushion if the markets we serve take a downturn and it provides us with ample opportunity to evaluate the fund’s strategic investments.
Other things being equal with our cash balance in this type of range it is likely that we would continue to sell fewer installments receivable than in the past. In the first nine months of fiscal 2008 we sold 80% fewer accounts for total proceeds of approximately $65 million compared to proceeds of approximately $120 million through March of 07. If this were to remain consistent there are several factors to keep in mind in evaluating the presentation of our financial statements. First, our newly created collateralized receivable and secured borrowing accounts would continue to decline over the course of the next few years. Our installments receivable balance, i.e., the accounts historically not sold, would correspondingly increase. Second, while our revenue recognition policy has not changed meaning we continue to recognize revenue for the net present value of term licenses at the time of the sale. We will in effect create a subscription cash flow for the company as customers pay over the license term.
Third, in the short term as we reduce the amount of installments receivable selling our cash balance would likely not grow at the rate it has in the past two years. Our cash flow from operations would continue to be strong as we collect customer payments by reducing our collateralized receivables balance and this would be offset by reducing our long term liabilities by paying down the secured debt as a financing activity. Our cash flow from operations would resemble a subscription based company. Importantly the company’s cash flow would be greater over the long term when we reduce the sales of installments receivable because we will eliminate paying a roughly 8% per year fee which currently goes to the banks in the form of interest expense.
Finally to put in perspective the negative impact of financing receivables our fiscal 2007 profitability was negatively impacted by approximately $17.5 million of interest expense on the sold receivables or $0.19 in EPS. As we eliminate or reduce the level of installments receivable that we sell we would capture that value. We will evaluate the sale of receivables as the normal course of evaluating the best way to finance our operations. As I just reviewed however now that we have a cash balance in the $125 to $150 million range we expect the volume to decline.
With that, let me turn it over to Mark for some brief concluding remarks.
Mark E. Fusco
Thank you to our shareholders for your patience as we completed this process. As we stated at the outset, our goal was to complete this as soon as possible but our overriding objective was to be comprehensive as we believe this will ultimately be a long term benefit to our shareholders. As we bring our financials up to date, we look forward to having discussions focused on our business because our end markets remain strong, the company is executing at the highest level in its history, we have a world class customer base, a best in class product portfolio and a strong market leadership position.
As evidence we recently completed another strong quarter. License bookings in our third fiscal quarter ending March 31, 2008 were approximately $63 million or an increase of approximately 31% on a year-over-year basis. Our business was strong across several fronts during the quarter, vertical markets, major product lines, aspenONE and large deals. In particular the energy vertical continued to represent the largest contributor to our license bookings followed by chemicals which had the most customers present in our top 10 deals booked in the quarter. And finally engineering and construction made another strong contribution. These three verticals combined represented over 90% of our license bookings in the quarter. With respect to larger transactions we had eight license bookings that were greater than $1 million during the quarter which was double the level of the year ago period. We had 20 license bookings between $250,000 and $1 million compared to 25 in the year ago period. However the larger size deals closed in the current quarter led to a year-over-year increase in our license bookings ASB from $391,000 in the year ago period to $670,000 in the just completed March quarter.
From a product perspective each of our major solution categories made a strong contribution in the quarter including our flagship engineering solutions as well as our manufacturing and supply chain solutions. Equally as important our aspenONE suite contributed 55% of our license bookings during the quarter and it has represented over 50% of our license bookings during the first nine months of fiscal 2008. We believe we are still in the early stages of adoption of our aspenONE solutions however we are also continue to be excited about the high level of interest our customers have in our offering. We are not resting however. We continue to invest in enhancing our end-to-end suite to drive expanded usage of our solutions across our customer base that numbers over 1,500 of the world’s leading process manufacturers. To this point we are currently planning to ship a significant new release of aspenONE this summer which will focus primarily on the engineering solutions within aspenONE.
Highlights of the planned release include an integrated user interface across all of our solutions for the first time greatly ease of use and productivity for our end users. We plan to further improve the integration between modules and also include an iso-standards based interface to detailed designed software packages which we believe will improve our customers’ work flow and further improve the productivity of their engineers.
Finally we plan to launch a usage management system to enable our customers to monitor their usage of our overall suite and compare how they are using our solutions to benchmark and improve their business compared to industry best practices. We believe this will be of significant value to our customers and it will help to further expand usage of our solutions. The combination of these capabilities being introduced in our next aspenONE release will be a step function advancement in the engineering solutions marketplace further solidifying AspenTech’s already strong market position. After the July release of aspenONE our customers can look forward to another significant release in early calendar 2009 in which we will provide significant enhancements to our overall suite including our manufacturing and supply chain solutions. We will have more to share on that over the course of this year.
aspenONE is clearly a significant growth driver for our business and we expect that to remain the case for the foreseeable future. We are also pleased to see the early signs of progress in several other growth initiatives that we outlined at the beginning of the year, namely we are starting to see improvement in the reseller program that we have been investing in for our non-core verticals, health and paper, metals and mining, power and utilities and consumer products.
Additionally we are making good progress in establishing and expanding our presence in Russia and saw the first material direct license booking in the just completed third quarter. Finally we have been organizing our resources and finalizing our plans for our pharmaceutical business unit which will be operational in the first quarter of fiscal 2009. Our strategies are working and our growth is a reflection of AspenTech’s industry leading technology, domain expertise and blue chip customer base as well as continued strength in market demand. It is also a reflection of the hard work and high level of execution our worldwide organization is delivering. The combination of these factors has led to license bookings growth of 25% during the first nine months of fiscal 2008 and we believe that we will deliver on our stated target of mid-teens license growth for the year which takes into consideration that our upcoming quarter has a difficult compare against the strong fourth quarter in fiscal 2007 that we covered in detail on this call.
An operational area that I believe we can improve our execution in is professional services. As we have stated on prior calls our top priority is growing license revenue and leveraging our services organization is one way to do so. While our overall services business is operating in our targeted margin range I have not been satisfied with the execution of this part of our business. We originally targeted services revenue growth in the low single digit range for the year; however we believe this number is most likely going to be flat to down on a year-over-year basis. I am confident that we can grow our services business at a modest rate while helping the overall company achieve its goals and I will be spending some of my time in this area in the coming quarters.
In summary getting our fiscal 07 10K and first quarter of 08 10Q completed was a major step in bringing our financials current. In addition we believe the comprehensive review of our historical financials and accounting processes and policies in addition to the enhanced ERP system we are going live with next week should increase shareholder confidence that we are putting in place a strong foundation to help grow the business from a long term perspective. We are highly focused on completing our work with our new independent auditing firm, KPMG, as soon as possible, becoming current and becoming re-listed on the major US Stock Exchange.
In the meantime the strong growth of our license bookings in the third quarter and first nine months of fiscal 2008 is evidence that the momentum of our business remains strong. In addition we remain pleased with our management of ongoing costs and expenses which we believe will enable the company to expand its GAAP and non-GAAP operating margin by a couple of points during fiscal 2008. I would like to thank all of our shareholders, customers and employees for their tremendous patience while we worked through this process. There is more work to be done. We are focused on getting it done quickly after the effort we have already put in and we remain focused on continuing to execute on customer facing operations at a high level as we have done during the first nine months of this year.
With that, I will take some questions. Operator.
(Operator Instructions) Your first question comes from the line of Philip Rueppel.
Phil Rueppel – Wachovia Securities
Thank you very much for all the information. Couple of things, just on sort of how 2008 is played out from a fundamental perspective, is there any reason that seasonality should be any different in 08 than it has been in the past where you’ve had strong June and December quarters and then realizing your comment about the tough compare could you give us any sort of color on as you enter the June quarter about the pipeline, big deals, any sort of anything that could cause the quarter to be either weaker or stronger than we might expect?
Mark E. Fusco
There’s really no change to the seasonality of our business. If you look at over the past couple of years we’ve had stronger and weaker quarters. Clearly the first quarter is always the most challenging. I think we were pleased a year ago with the third quarter and we’re clearly pleased with the third quarter license bookings numbers that we gave you here today. As far as the pipeline goes and the big deals that still remain really the pipeline is in the best shape and I think the best managed of any time since I’ve been here so it’s the largest and I think we have the best visibility we’ve had in quite some time. There are large deals in the pipeline as we have from quarter to quarter, they can skew the numbers one way or the other but I think we’ve been successful in bringing those large deals into the revenue line over a period of time as you would have seen in the June quarter last year which we just announced today. We continue to see demand across all the verticals, demand across all the geographies that we’re in and we continue to service that demand as best and as quickly as we can. So the business is strong, there is some seasonality to it from time to time but we’re very pleased with the growth that we’ve seen in the licenses in the first part of this year, the first nine months, it’s been a very strong year for us so far and we look forward to more good quarters as we go forward.
Phil Rueppel – Wachovia Securities
And then from an accounting perspective now that Deloitte & Touche are finished off was there anything that they found sort of in the last month or so that would cause your new auditor to take longer than you initially expected or I mean could you give us any idea of sort of the timeframe in which you might be able to get current with your numbers?
Bradley T. Miller
I think the process with Deloitte certainly took longer than we had expected and in the meantime you saw that several weeks ago we announced that KPMG had started and so they are hitting the ground running. It’s still a little bit premature to say exactly what the timeframe is going to be with them but it is fair to say that we’re looking to get caught up with all of our outstanding quarters including both Q’s 2 and 3 just as quickly as we can and in the meantime we’ll be ramping up KPMG further in the most expeditious way as we can. They also completed a fairly extensive diligence process in coming on board so it’s fair to say that they also started with a little bit of traction before ever entering the building. So we’re hopeful that that will allow them to move quickly on that front.
Your next question comes from the line of Richard Williams.
Richard Williams – Garban Equity Partners
I wonder if you could talk a little bit about the competitive environment? Also if you’re seeing any impact on the credit crisis as it relates to some of your non-petroleum related customers?
Mark E. Fusco
The competitive environment remains the same as it’s been really over the past couple years, certainly since I’ve been here and I think we are competing well in the marketplace. I made some remarks in this call this morning about some of the new software that we’re bringing to the market here which I think differentiates us dramatically from the rest of the competitors in all the different things that we do. We continue to do those things, we continue to invest I believe the most money in R&D in the business. So we’re not seeing any change in the competitive environment. I think Aspen is competing well in all parts of the world. As usual we win some and we lose some but we think we’re doing the things that we should do. We think we are taking market share in the software part of this business in the process space and as you know we don’t sell into some of the verticals that are challenged at the moment from a credit perspective so we’re not seeing any change in demand in our process manufacturing customers really across the board.
(Operator Instructions) Your next question comes from the line of Mark Balsar.
Am I correct, didn’t you have a user conference last week?
Mark E. Fusco
We did, that’s correct. We had our North American User Conference in Houston, yes.
Can you comment perhaps on attendance versus last year and what the focus was, if you were introducing this summer release concept?
Mark E. Fusco
The demand and the attendance was actually up strongly from what it was a couple years ago when we ran the User Conference. We did outline all the new pieces of software that we were bringing to the market. We also had around 35 or so customers, 40 customers that were presenting papers with how they’re using our suites. I was there for a day last week and I would say the customers are very enthusiastic about what Aspen has done, very pleased that the financial profile of the company has improved despite the fact that at the time we weren’t filed with our K. I think they were very pleased with the customer service they were getting from our North American sales and services team. So I think overall it was a very good meeting. People are bullish on their individual businesses and I think they’re very pleased with Aspen with the things we’re doing with the products, with the commercial model around aspenONE and selling term license software in a tokenized way which we’ve outlined in the past. So I thought it was a very good meeting and very bullish for our company and very bullish for theirs as well.
I don’t know if you can hazard a guess, but back two, three years ago – well one, two years ago – with oil trading at $60, the big oil companies were probably really using a $20 or $30 oil target to figure out whether they wanted to do new infrastructure projects. Where would you say your customers are thinking about oil in terms of whether to go ahead with new projects?
Mark E. Fusco
I think you have to look at it, we have a very diverse customer base across verticals so on the front end of the cycle we have engineering and construction firms that are clearly cyclical from time to time but they are very busy and 18 of the 20 largest E&Cs on the planet have standardized on our engineering software and it’s being used to build all of the new plans in Asia, the Middle East and in other places. And then when you look at some of the other parts of our business the refining and marketing companies, you really have to break down the super majors who are in exploration as well and then we’ve got companies like Valero and Sunoco that are refiners and marketers. Each one of them has different dynamics in their business and Aspen is unique in that we serve all of them. There’s really no other company that has a software suite that really goes from the beginning and to the end of the cycle including if you’re buying gasoline at Exxon the distribution software is Aspen Retail. So it really depends on who it is you’re talking about and where they sit in the value chain. But we’re seeing consistent demand from the super majors to the refiners to the chemical companies to the E&Cs. It’s been consistent over time, it does vary from quarter to quarter. It can be up and down percentage points but in general there’s been consistent demand in the past and the pipeline as I mentioned in my prepared remarks is the best that we’ve seen it since I’ve been here and I think the best managed with the best visibility. So overall we’re seeing people interested in Aspen, interested in things we do and in the strong economic backdrop.
And my only other question relates to I guess the restatement process is more exciting on Wall Street than your customers and perhaps your employees but how has turnover been in finance, sales, engineering? Has it been similar to previous years during this process or has there been an impact?
Mark E. Fusco
Since I’ve been here a little over three years now there’s been quite a large turnover in the staff over a period of time and I think that that’s been both selective on their part and formulaic on my part as we turn the company around and change the business around and there are clearly people who decided that this wasn’t a place they wanted to be but conversely we’ve got a lot of new folks in the business over the past several years. Turnover ratios around the world depending on the function are actually down where they were a year ago so we’re starting to see some of the change in the employee base start to level off a little bit. It’s still a little higher than we’d like it to be, in the sort of mid to high teens range but it is dropping and we feel comfortable where we are.
Your next question comes from the line of David Pine.
I was hoping you could talk a little bit more about the process surrounding the re-listing and less from a timing perspective but more on what remains to be done on your end and then what the next steps are from there?
Bradley T. Miller
The process is one that with the filing where up until now we had not been on file with any financials. We can now be much more focused in applying for a re-listing. As a reminder we are looking at being on a major US exchange going forward. By being on file we can commence that process. We are also focused simultaneously on getting current with all of our filings which include the second and third fiscal quarters for the year and we’ll be doing that all in parallel and looking to get on file with those financials and re-listed just as quickly as we can but the process really includes those couple of things.
At this time there are no further questions.
Mark E. Fusco
I’d like to thank you all again for being on the call this morning and especially to our shareholders for your patience as we move through the filing. This has been a long process for the company. I also want to thank our finance organization, our employees for their hard work during this period time. We’re not done. We just finished the first step in getting the K and the Q filed. Now we’ve got two more Qs to file as quickly as we can and we are certainly focused on bringing our financials current as quickly as we possibly can. We are highly focused on completing this task. In the meantime our business is strong. We’ve been performing I think above really what the expectations of the company would have been several years ago and I think we’re pleased with the license growth that we’ve seen over the past several years and the strong cost control during that period of time. We are optimistic that we’re going to bring this process from our financial filings to a close quickly and that we’ll be back on file and back on a major exchange as quickly as we possibly can. Thanks again for your attendance and we look forward to talking to you soon.
Thank you. This concludes today’s conference. You may now disconnect.
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