Aspen Technology, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: Aspen Technology (AZPN)

Aspen Technology, Inc. (NASDAQ:AZPN)

F4Q08 Earnings Call

July 31, 2008 8:30 am ET

Executives

Brad Miller - Chief Financial Officer

Mark Fusco - President

Analysts

Richard Davis - Needham & Company

Philip Rueppel - Wachovia Securities

Dushan Batrovic - Canaccord Adams

[Mark Cabalsa]

Richard Williams - Cross Research

Operator

Welcome to the Aspen Technology Q4 fiscal 2008, selected and preliminary financial results conference call. (Operator Instructions) I would now like to turn the call over to Brad Miller, Chief Financial Officer.

Brad Miller

I am Brad Miller, CFO of Aspen Tech and with me on the call today is Mark Fusco, President and CEO: I would like to welcome you to our call, to discuss our selected preliminary financial results for the fourth quarter and fiscal year 2008, ended June 30, 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 in our most recent Form 10-K and 10-Q 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, July 31, 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 provide a brief update on our filing status, then an overview of our bookings performance in the just completed fourth quarter and fiscal year 2008 and some perspective on our financial position at the end of the fiscal year. After I am finished, Mark will provide some additional remarks and an overview of the Company's operational performance. We will then open up the call for Q&A.

To update you on the progress related to bringing our financial statements current, we are currently working on the quarterly report on Form 10-Q for the second and third quarters of fiscal 2008. These are being reviewed by our new independent auditing firm KPMG. These are the first financial filings being reviewed by KPMG as our previously filed annual report on Form 10-K for fiscal 2007 and quarterly report on Form 10-Q for the first quarter of fiscal 2008 were audited and reviewed respectively by Deloitte & Touché. As you might appreciate, a lot of work has been completed over the last three months in order to help bring a new auditing firm up to speed. In connection with reviewing the second and third quarters, there has also been extensive testing of the Company's accounting policies and procedures.

It has been a long process over the past year to finish our restatement this past April and now to bring the Company's financial statements current. It is difficult to put specific time frames on such matters, but we believe we are in the final stages of completing our work on the second and third quarter 10-Qs. We currently expect to file these with the SEC in the next several weeks and when we do so, we will host a follow-up call with investors. At that time, we will also provide you with our best estimate as to the process for completing the 10-K for fiscal 2008. I would like to thank our investors for their patience in the meantime as we bring this process to a conclusion.

I will now provide a summary level overview of selected preliminary financial metrics relative to our just completed fourth quarter, fiscal 2008, ending June 30. This was a strong finish to a record year for Aspen Tech. License bookings in our fourth quarter were approximately $70 million. We were pleased with our performance in the quarter, which was consistent with our expectations and capped off a highly successful fiscal year in which our license bookings grew over 15% on a year over year basis.

With respect to larger transactions, we had 13 licensed bookings that were greater than $1 million during the fourth quarter as compared to 18 in the year ago period. We had 37 licensed bookings between $250,000 and $1 million, compared to 27 in the year ago period. Finally, our license bookings ASP for licenses over 100K was $681,000 in the fourth quarter, compared to $625,000 in the year ago quarter.

We ended the June quarter with $135 million in cash, as compared to approximately $136 million at the end of the third quarter, and approximately $133 million at the end of fiscal 2007. While our ending cash position is relatively flat on a year-over-year and sequential basis, let me add some color to highlight the strong cash generation of the Company and the manner in which we have significantly improved our balance sheet over the course of fiscal 2008.

First, we used positive cash from operations to reduce our secured borrowing balance by over $50 million. Second, with a strong cash position already in place, the Company was able to reduce the level of installments receivable sales by over $90 million, in fiscal 2008, as compared to the prior year. Moreover, we did not sell any installments receivables during the just completed fourth quarter.

As we have paid off our securitized pool requirements with financing partners such as Key Banc and Guggenheim, and reduced or eliminated the sale of our installments receivable we were able to grow our total current and long-term receivables balance by over $140 million during fiscal 2008, thus providing Aspen Tech with substantially greater future cash flows as these customer payments are collected.

It is worth noting that we are now down to financing relationships with two banks as opposed to five which has improved our capital structure flexibility, simplified our operations and customer relations and enhanced our ability to provide for the long term, while maintaining our cash balance in the targeted range of 125 million to $150 million. We were pleased to be able to use the Company's strong cash flow generation to make significant progress in improving the Company's long-term financial position.

By reducing or eliminating the sale of installments receivable, using customer collections to pay down our secured borrowings account, and growing the Company-owned balance of installments receivable, we are putting in place the financial model that will be characterized by better visibility in the future cash flows, and profitability enhanced by greater interest income and lower interest expense.

I would like to finish with an update on the status of our S1. Yesterday we withdrew the registration statement on Form S1 that we originally filed with the SEC in March of 2007. The registration statement had been filed pursuant to demand registration rights of Advent International. It was determined that given that all that has transpired since the original filing over a year ago, as well as the status of our SEC periodic filings it was appropriate to withdraw the filing. Advent continues to have registration rights and we will fulfill our obligation to file a new registration statement to assist our largest shareholder in achieving liquidity when we are in a position to do so, including being fully current on our financial statement filings.

In summary, as you can tell from the selected financial results and what Mark will share with you in a moment, our business momentum remains strong throughout fiscal 2008. A significant amount of work has been completed relative to bringing our financials current and we expect to file our quarterly report on Form 10-Q, for the second and third quarters of fiscal 2008 at some point in the next several weeks. With that, let me turn it over to Mark for some additional remarks on Aspen Tech's performance and outlook. Mark?

Mark Fusco

Thanks again to our shareholders for your patience as we complete the process of bringing our financials current. 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 of long term benefit to our shareholders. As pleased as I will be when we have brought this matter to conclusion, I am equally pleased to share with you that the company continues to execute at a high level and deliver solid operating results. The fourth quarter was a strong performance and finished a record year that was at or above our expectations across each of the key metrics we managed to.

Our engineering solutions were particularly strong during the quarter, as was the engineering and construction vertical, which represented three of four of our largest deals booked in the quarter. The combination of ENC's energy and chemicals continue to represent approximately 90% of the Company's licensed bookings in the quarter.

From a full year perspective, we achieved our growth target with licensed bookings up over 15% for the full year, leading to a record annual bookings performance. We also continue to operate at a high efficiency level. Our headcount at the end of the fiscal year was approximately 1340 people compared to approximately 1330 at the end of last quarter, and 1300 at the beginning of year.

Virtually all of net head count growth in the quarter and the year was in China, where we have been increasing our R&D capacity in a low-cost manner in order to continue expanding and enhancing our product offering. Our ability to drive sales growth with minimal head count increases is a key factor that is driving our cash flow, in addition to the fact that the majority of our business is tied to recurring contracts with annual customer payments.

Our business was solid across vertical markets, major product lines, aspenONE, geographies, and large deals during both the quarter and full year. We believe we are still in the early stages of our adoption of aspenONE solutions which we expect to be a significant growth driver to our business for the foreseeable future.

Our strategies are working and our growth is a reflection of Aspen Tech's industry leading technology, domain expertise, and blue chip customer base, as well as continued strength and market demand. It is also a reflection of the hard work and high level of execution of our worldwide organization.

I feel very good about Aspen Tech's fundamental position and strategic direction as we enter fiscal 2009. We are coming off a strong year of growth, and our sales pipeline and business momentum remain solid. In addition, we have significantly improved the Company's financial profile and we believe that our actions will enable us to continue to do so moving forward.

The reduced level of installments receivable financing that we have discussed will have a number of positive impacts on the company from a long-term perspective. These include the ability to reduce interest expense and over time capture approximately 50% of the net present value of the cash flows associated with multi year term-based contracts that we have previously forgone in exchange for the benefit of receiving up front cash.

Aspen Tech no longer requires as much incremental up front cash as a result of our increased cash balance and ability to continue to generate strong cash flows from operations. We believe these are all positive developments that we are still in the early stages of realizing.

These benefits are expected to come to Aspen Tech over the course of the next several years predicated on the fact that we continue to execute well against our growth strategies. To that end, we are focused on continuing to expand our presence in our core verticals in addition to pursuing underpenetrated geographies, the pharmaceutical vertical and indirect channels. We are pleased with the early traction we have seen in these areas but there's much progress to be made.

We believe Aspen Tech is uniquely positioned to meet the needs of the process manufacturers as they face new and pre-existing challenges to their business, despite the recent high prices for oil and chemical products, optimization of expense and fixed assets and volatile feed stocks continues to be a critical issue for our customers and this is driving demand for our solutions.

From a technology perspective, customers are looking for software that enables them to integrate their manufacturing operations to the supply chain and they are looking for software that is easy to use, install and maintain. Our aspenONE solutions provide a vertical specific integrated suite of modules across engineering, manufacturing and supply chain. We are the only venture to deliver an end to end integrated suite and aspenONE is considered best of breed in each major product category.

In summary, our business continued to perform at a high level throughout fiscal 2008, as our financial organization worked diligently on bringing our financial statements current. We just finished a record year from a bookings perspective and we continue to be optimistic about our outlook. From a longer term perspective, we are executing against a strategy that has the potential to significantly improve Aspen Tech's financial profile as we gain increased visibility into a larger subscription-like cash flow stream and increase bottom line leverage as we use customer collections to pay down the remaining of our secured borrowing obligations.

We will take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Davis - Needham.

Richard Davis - Needham & Company

Question is, what new modules or upgrades have you added to aspenONE over the past year and can you talk about what you are doing over the next year at least at a high level because it will be useful to hear that.

Mark Fusco

Over the past year or so, we have been continuing and have spent a lot of our money on continuing the integration of all the different point products that we have and pulling them into an integrated suite. We have got several new releases of software that are coming out for both the engineering and the manufacturing and supply chain solutions over the next six months or so. They come out with substantial new functionality, and ability to be installed virtually and a new, integrated way and look and feel from a business process perspective in the way the customers use the software. So we have really made the transition over the past several years from an idea about what aspenONE is, to the reality of delivering it, and making it better over a period of time. Over the next six months or so, when we owe all of our customers and the public a look at the new aspenONE software, which will be coming out and we will do that shortly.

Richard Davis - Needham & Company

And then this is maybe a more philosophical question, maybe harder, so if you are doing these term licenses and you are creating long-term receivables, fundamentally, isn't that a loan to your buyers in the sense that you are stretching out payments or a discount one way or another? And I know it does create future predictability, but it would also, I think, increase DSO. So talk to us why you need to do the business model that way. Or is that just something that you have just been doing it so long, it makes the most sense or how do you think of the pluses and minuses of different models in terms of the selling.

Brad Miller

The main difference you see in the company today, as compared to say a year or more ago. Is that the company has always had a business model of selling term-based licenses to our customers, and often our customers select to pay either up front or over time and the more common would be over time. The main difference that you see in the company today is that we have elected to retain those cash flows in the future for ourselves, rather than factoring the receivables to banks as we have been doing over the past several years.

So there is really no change in the way that we interface with our customers or the nature of the licenses that we sell them from a payment perspective. The big difference is that our balance sheet is sufficiently strong now that we do not have to sell those various cash flow streams up front. As a result, that gives us long-term visibility into the future cash flows that we are going to have for our benefit.

We will be able to capture the interest income associated with those cash flows as well, and then I would close out by saying that our strong cash flows from operations are allowing us to do this. There is no change in the rest of the way that we do business, either in the way that we're engaged with the customers or in the way that we are recognizing the associated revenue associated with those licensed contracts.

Operator

Your next question comes from Philip Rueppel - Wachovia Securities.

Philip Rueppel - Wachovia Securities

Yes, thanks very much. Could you give us a little more color on the makeup of the business in this past Q4? I know you mentioned that the number of million dollar deals was down year-over-year, but as I recall a year ago, you had some very large deals. Was there any kind of change in terms of sort of the size of deals and/or the kind of business momentum? And along those lines, were there any change in the sort of the number or percent of deals that you had started to recognize as ratable?

Mark Fusco

There was no change fundamentally in the way we saw the business in the quarter, or in the fiscal year. The pipelines remain strong, all the way throughout the fiscal year. The closure rates remained what we wanted them to be. As you know, we have big deals in every quarter, sometimes they close, and sometimes they do not. But in a quarter like this one, where we are doing a substantial amount of license revenue, we always close a number of multi million dollars deals, in this quarter, we happened to have more that was in the 250,000 to $1 million range, as opposed to the $1 million plus. As you can see in the ASP, which was up 5% or so from what it was a year ago, it was a very solid quarter for us. The outlook for the Company a year ago and the outlook for the Company today continue to be the same. We still see solid pipeline and solid coverage ratios and today we were really here talking about bookings. We expect that we will give you the full break out of the regional and horizontal makeup of the revenue when we do the call forward of K.

Philip Rueppel - Wachovia Securities

And then could you kind of update us on some of the operational things that you have been doing. I know from a financial perspective you had that you put in a new ERP system, is that up and running? And is that part of the order process today? And then secondly, any update on kind of what you have done in the services business, and/or any changes going forward to the makeup of the sales force or quotas, anything that could give us an outlook as to what you are doing in 2009?

Mark Fusco

Yes. On the call in April, we did talk about a new ERP system going live, which would have been a couple of weeks later, it did go live. We did process the orders in the fourth quarter on our expanded Oracle ERP system. It did work quite well. We use it now for running the business from, “all the way through shipping and invoicing.” So it did work well. It wasn't without, as usual, some teething problems along the way but it did not impede the company's ability to operate during the quarter and we are very pleased with where we are at. I think it finally gives us a foundation from which we can build on and a way that we have everything in Oracle, which in the future will help us close our books quicker and do the things we want to do and all the things that are important to our investors.

From the services perspective, I mentioned on the call, the last call in April that also we were not pleased with how some of our services business was operating. We did decide during the fourth quarter to reorganize our professional services business and pull it into a global group, which we did early in the fourth quarter. We promoted someone to run that business. It was an existing Aspen employee and the results have been very positive over the past several months. Where we were missing our delivery milestones several months ago, we are now making our delivery milestones.

The ongoing percentages have improved, and the business is running quite well. We continue to see solid demand for the services business and the bookings around that are consistent with what we would have expected. But I feel confident that we are in the right direction and we have the right organizational structure right now. It's something that could have been done a year or two ago, but as I mentioned in the past, my job here was to start to get the licensed part of the business moving first and foremost, which we have proven that we have done. Now we have got to clean up and finish off our profession a services group and I think we have a very good start.

As far as headcount and hiring and where some of the initiatives are, we are and have continued to invest in our sales force. I think you will see we will hire some new salespeople as we try to penetrate some of the new geographies and round out the teams in various parts of the word. It is not a substantial amount of focus on a percentage basis, but I think you will see us hire some new customer-facing folks. The rest of the organization is in good shape.

I think you see the average sales per employee and that has roughly gone up about 50% since I have been here. It is now into a comfortable range and if we are going to continue to grow from where we were to continue to grow this business, we need to continue to invest. So we have been running sort of mid 250s for the folks in the customer-facing roles, the sales and tech sales. I think we will see that go up 5 or 10% here during the year but it is not material over the long term, but it is indicative of continued demand and our believing that we can compete better in all parts of the world and in all parts of the verticals and we need to continue to invest.

Operator

Your next question comes from Dushan Batrovic - Canaccord Adams.

Dushan Batrovic - Canaccord Adams

I just wonder if you can provide a little more insight into the timing of the withdrawals of the S1 secondary registration. It is, I mean, you have been delinquent for a couple of quarters now. Is there anything in particular about timing right now as to why it was pulled?

Brad Miller

The timing there is really what I was referring to in my remarks. We looked at the fact that we do have stale financials. We knew we needed to get those updated and we have had a change in auditors. We thought it was important to get that pulled down. There is really nothing beyond that. It's just the timing thing to get it pulled down and be in a position that we can talk to you all about it, so really nothing significant beyond that.

Dushan Batrovic - Canaccord Adams

And so could we assume then that once you get fully filed and compliant with the accounting side that the S1 will be filed again?

Brad Miller

What I would expect there, Dushan is that we do need to get our filings caught up all the way, and then at that time, we will be in a position to talk to both our major shareholder, as well as to you and the public about what the expected next steps would be at that time.

Mark Fusco

I would add despite us taking down the S1, Advent has not changed, I guess, taken back the letter that they sent us sometime ago, exercising one of their demand rights. So nothing has changed on that front. It is just we had a stale document up there, and it needs to be updated.

Dushan Batrovic - Canaccord Adams

And more on the fundamental side, you had touched on this a little bit but hoping you will provide a bit more insight. All of the macro noise out there right now as far as the volatility and the commodities and credit crunch and inflation, the emerging markets, and mature markets, could you drive down a little bit deeper into how that is impacting your various verticals right now? Are you seeing any particular noteworthy impacts, either externally or more domestically?

Mark Fusco

We have not seen a real change in coverage ratios or what the pipeline looks like by vertical or by geography, over the past year or so continuing into the current environment. I do note that other parts of the economy, certainly other parts of the world are slowing down and we see it in the results of other companies that are in different sector, and also with technology companies, software companies that sell into different verticals. We have not seen it. That does not mean it will not happen on a go forward basis, but as of today, when I look at what we had going into the fourth quarter, and what we have going in the first quarter, for business momentum and coverage ratios, we just have not seen the change.

Operator

Your next question comes from [Mark Cabalsa]

[Mark Cabalsa]

I wonder if you could comment on the competitive environment in general and also what you see in terms of competition with respect to new modules you will be coming out with. Are those Greenfield open environments or do you start bringing in new competitors that are ancillary spaces?

Mark Fusco

No, the competitive environment has not changed either. In the engineering space we compete primarily with Honeywell and Aventis. That is the same as it has been for the last three, four years or so. Nothing has really changed in that dynamic and in the manufacturing and supply chain space, we compete with all of the hardware manufacturers and then SAP and occasionally Oracle as well. That has not changed either.

I think as we look at our solution portfolio, I think what has changed is we will be bringing to market ever better software that is highly differentiated on a point product basis, but even further differentiated on a solution basis, and I think competitively it puts us in a much better position as we provide a road map and a vision about how manufacturing operations and supply chain operations ought to work, which is better than it has ever been. I think, and if you look at our R&D spend, we continued to invest in R&D over the past several years since I have been here in the sort of 13% range, and I think would you have seen in the last documents that are filed. And that is very solid, R&D expense, but I think the difference is if you go back over the last four to five years is we now do a lot of it in China. We have a third more head count in R&D than we did when I started here. We are getting a lot more work done, and I think that gives us competitive differentiation over time.

So I think the company is well positioned with its work force. It is very well positioned with its products. It is well positioned with aspenONE, and our job is an execution job to go out and tell our story and I think our products get more differentiated because of our R&D spend, frankly. We are the only one that competes this way. We are the biggest company in the space on a global basis. And we could afford to invest and I think we are doing it much more efficiently which gives us opportunity over everybody else.

Operator

Your next question comes from Richard Williams - Cross Research.

Richard Williams - Cross Research

Good, I wonder if you could tell us what the implicit interest rate, or effective interest rate is on the installment receivables and if that effectively becomes a competitive advantage relative to the peers that have to reinvest their cash at low interest rates now.

Brad Miller

The rates that we have been using, both to put the receivables on the books if the first place and recognize them over time have not changed and that has been in the neighborhood of 8%. So that's a consistent rate that we have used for a period of time.

Richard Williams - Cross Research

And also, can you help us understand how the change in oil prices is impacting your chemical and energy customers?

Mark Fusco

Yes. Since I have been here, oil has gone from $40 a barrel to up near $140 and been bouncing around recently. We are clearly tied to verticals that have been stronger than maybe some others over the past several years. It has been consistent in that I do not think we are directly tied to the price of oil one way or the other, other than to say our customers are in a good vertical. Some of them have pricing power, some of them don't. If you get into each one of the verticals, the competitors have different dynamics and things hit them. I think we will probably see today that the big oils had very good earnings but the refining component of their business, as an example, had lower margins because of feedstock prices. So we address all of those different parts of their business. So it is really who the customers are and what are their issues? In general, it's good to be in verticals that are active and doing well and that clearly helps our Company but I do not think, the oil price specifically is the driver ever what's going on in our business.

Richard Williams - Cross Research

And also, is it fair to interpret that of the large deals, there was only one supply chain deal, and the other three were engineering suites?

Mark Fusco

Yes, from quarter to quarter, we tend to look at our business on a six-month basis and things come into the quarters and things go out of the quarters and several quarters ago, we probably would have said that we had very strong supply chain and manufacturing business, it just depends on the timing of when the deals close. I would not read into any one quarter as being stronger or weaker. The pipelines are good on both parts of the business, manufacturing, supply chain and engineering and we have seen consistent performance during the year. We saw very good growth in both parts of the business this year. I would expect a similar performance next year.

Operator

There are no further questions.

Mark Fusco

Again, I would like to thank everybody for their time this morning. I would like to especially thank our shareholders for their patience as we bring things to close. Our group is working very hard to do that with our new auditor. I think we are making good progress as Brad mentioned, it is hard to handicap all the time what the dates are going to be, but, we are working our way through it and we are making good progress. I would also to thank our employees for their performance in fiscal 2008 and we look forward to a great 2009. We will be back to you shortly, we hope with a new call to get through the second and third quarter Qs and move our way forward. Thanks.

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