Aspen Technology, Inc.
Q4 2007 Earnings Call Transcript

Published: 14 Apr 2008

[Operator:]

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

[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:]

(Operator Instructions) Your first question comes from the line of Philip Rueppel.

[Phil Rueppel:]

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:]

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.

[Operator:]

Your next question comes from the line of Richard Williams.

[Richard Williams:]

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:]

(Operator Instructions) Your next question comes from the line of Mark Balsar.

[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.

[Mark Balsar:]

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.

[Mark Balsar:]

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.

[Mark Balsar:]

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.

[Operator:]

Your next question comes from the line of David Pine.

[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.

[Operator:]

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.

[Operator:]

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