Aspen’s Step Backward in the First Quarter Part of Familiar Dance

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Aspen’s Step Backward in the First Quarter Part of Familiar Dance
S. McVey - November 7, 2000

Event Summary

Aspen Technology's financial results for the first quarter ending September 30, 2000 fell short of last quarter's results but typify the vendor's cyclical business. License revenue decreased 31% to $32.6 million from the previous quarter of $47.3 million. A slight increase in service revenue softened the drop in total revenues, but these nonetheless declined 17% to $69.5 million from $83.4 million in the last quarter. Net earnings sank from a positive $4.6 million in 4Q00 to a negative $3.7 million this quarter.

Figure 1.

These are gloomy results, but a brighter and more accurate assessment of Aspen's performance emerges from comparing this quarter's results with those of the same period a year ago. This approach eliminates the effect of such cyclical factors in Aspen's business as perennially slower sales during the summer from non-U.S. sources and the timing of software license renewals. Thus, total revenues for the first quarter of fiscal 2001 increased 30% to $69.5 million, from $53.4 million reported in the same period in fiscal 2000. Software license revenues for the quarter grew 52% to $32.6 million, while services revenues rose 16% to $36.9 million. Excluding the one-time in-process research and development charge, the company reported a net loss of $0.2 million or $0.01 per share, compared with a net loss of $3.1 million or $0.11 per share in the first quarter of fiscal 2000. Excluding both the in-process research and development charge and the expense impact relating to PetroVantage, the company's wholly owned digital marketplace, net income would have been $0.5 million or $0.02 per share.

This picture explains the enthusiasm of Chairman and CEO Larry Evans as he discussed a surge in new client wins fueled by Aspen's supply chain solutions. "Our supply chain solutions were a primary driver of our growth in the first quarter, as we won a number of important deals in our target markets. In addition, we saw a strong contribution from our Aspen Engineering Suite," said Evans. "We are also continuing to gain momentum in the process industries as the only e-business software vendor with an end-to-end solution that integrates all facets of a corporation and its extended enterprise, from the digital marketplace to the plant floor."

Market Impact

In short, it is too soon to expect tangible results from Aspen's B2B marketplace initiatives. All companies that transition from traditional license revenue models to recurring revenue models experience a plateau or decline in growth as the number of new licenses drops off and transaction volume builds. In addition, Aspen is a relative newcomer to the digital marketplace industry and launched its first offering, PetroVantage, a marketplace for petroleum refiners and retail partners based partly on technology acquired from PetrolSoft, in September. Just last week the company announced Aspen Marketplace Solution, a combination of products and services that connects enterprises to public and private marketplaces.

Despite Marketplace Solution's embryonic nature, Aspen's strong position in the process industries and large customer base almost guarantees its eventual success as a broker of B2B marketplaces for its core verticals, chemicals, petroleum refining, pharmaceuticals, and petrochemicals. Pricing models for exchanges built on these solutions have not been made public, though these will likely create recurring revenue through transaction- and subscription-based fees and greatly diminish the seasonal variability characterizing Aspen today.

The success of Aspen in the B2B exchange market is also made more probable by changes in its competitive landscape. Aspen's broad product slate makes it vulnerable to competition along many fronts, but its market visibility has been improved by consolidation among its rivals. Simulation Sciences Inc. (SSI) was taken over by Invensys plc, the same software clearinghouse that bought troubled ERP vendor Baan last summer. Formerly a significant threat to Aspen, SSI's impact in the market has wavered since the Invensys acquisition and Invensys itself is now rumored to be on the auction block. Honeywell, which competed with Aspen in process control software, announced recently that it would be acquired by GE. The uncertain future of vendors like Honeywell and SSI/Invensys has had an indelible effect on user confidence, leaving Aspen virtually uncontested in the process industries.

User Recommendations

Aspen Technology should occupy a prominent role in enterprise software selections for process manufacturers, especially those who produce chemicals, pharmaceuticals, and refined oil products. For supply chain management, Aspen is the only vendor that can offer deep functionality for the process industries with the added capability to deliver process simulation and control functionality and integrate them. The main caveat is that most of Aspen's SCM applications are essentially toolkits in which desired features can be developed, not packaged solutions that can merely be configured. Thus, experienced resources are a must for implementations. That being said, Aspen is attempting to reformulate some of its more popular functionality as packaged modules and templates to speed implementations. Users should also bear in mind that Aspen's digital marketplaces such as PetroVantage and have strong potential but are largely experimental at this stage.

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