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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended December 31, 2013

 

or

 

 

For the transition period from              to              

 

Commission file number: 0-24786

 

ASPEN TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(781) 221-6400

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes  o  No  x

 

As of January 23, 2014, there were 92,504,829 shares of the registrant’s common stock (par value $0.10 per share) outstanding.

 

 

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TABLE OF CONTENTS

 

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 5.	Other Information	44
Item 6.	Exhibits	45
	SIGNATURES

 

AspenOne is one of our registered trademarks. All other trade names, including Premier Plus, trademarks and service marks appearing in this Form 10-Q are the property of their respective owners.

 

Our fiscal year ends on June 30, and references to a specific fiscal year are the twelve months ended June 30 of such year (for example, “fiscal 2014” refers to the year ended June 30, 2014).

 

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PART I - FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

Consolidated Financial Statements (unaudited)

 

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2013			2012			2013			2012
		(Dollars in Thousands, Except per Share Data)
Revenue:
Subscription and software		$	88,924		$	69,037		$	167,607		$	132,800
Services and other		9,845			8,272			18,727			15,966
Total revenue		98,769			77,309			186,334			148,766
Cost of revenue:
Subscription and software		5,022			5,118			9,642			10,246
Services and other		7,421			7,255			14,879			14,465
Total cost of revenue		12,443			12,373			24,521			24,711
Gross profit		86,326			64,936			161,813			124,055
Operating expenses:
Selling and marketing		24,178			23,303			47,109			44,894
Research and development		15,016			15,039			30,850			30,805
General and administrative		11,013			11,671			22,889			24,439
Restructuring charges		7			(6		)	4			34
Total operating expenses		50,214			50,007			100,852			100,172
Income from operations		36,112			14,929			60,961			23,883
Interest income		307			955			694			2,054
Interest expense		(8		)	(116		)	(26		)	(373		)
Other income (expense), net		(531		)	(57		)	(1,335		)	(334		)
Income before provision for income taxes		35,880			15,711			60,294			25,230
Provision for income taxes		12,617			5,774			22,032			10,880
Net income		$	23,263		$	9,937		$	38,262		$	14,350
Net income per common share:
Basic		$	0.25		$	0.11		$	0.41		$	0.15
Diluted		$	0.25		$	0.10		$	0.41		$	0.15
Weighted average shares outstanding:
Basic		92,839			93,512			93,124			93,470
Diluted		93,816			95,463			94,137			95,541

 

See accompanying Notes to these unaudited consolidated financial statements.

 

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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2013			2012			2013			2012
		(Dollars in Thousands)
Net income		$	23,263		$	9,937		$	38,262		$	14,350
Other comprehensive income (loss):
Net unrealized gains on available for sale securities, net of tax effects of $6 and $47 for the three and six months ended December 31, 2013		11			—			88			—
Foreign currency translation adjustments		(3		)	(361		)	1,333			607
Total other comprehensive income (loss)		8			(361		)	1,421			607
Comprehensive income		$	23,271		$	9,576		$	39,683		$	14,957

 

See accompanying Notes to these unaudited consolidated financial statements.

 

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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		December 31,			June 30,
		2013			2013
		(Dollars in Thousands, Except Share Data)
ASSETS
Current assets:
Cash and cash equivalents		$	137,477		$	132,432
Short-term marketable securities		81,173			57,015
Accounts receivable, net		30,043			36,988
Current portion of installments receivable, net		5,617			13,769
Unbilled services		782			1,965
Prepaid expenses and other current assets		9,422			9,665
Prepaid income taxes		273			288
Current deferred tax assets		26,422			33,229
Total current assets		291,209			285,351
Long-term marketable securities		17,057			35,353
Non-current installments receivable, net		992			963
Property, equipment and leasehold improvements, net		7,123			7,829
Computer software development costs, net		1,733			1,742
Goodwill		19,199			19,132
Non-current deferred tax assets		15,130			25,250
Other non-current assets		6,468			7,128
Total assets		$	358,911		$	382,748
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,133		$	846
Accrued expenses and other current liabilities		29,042			34,421
Income taxes payable		1,767			1,697
Current deferred revenue		181,072			178,341
Current deferred tax liabilities		156			156
Total current liabilities		213,170			215,461
Non-current deferred revenue		43,695			53,012
Other non-current liabilities		11,571			12,377
Commitments and contingencies (Note 11)
Series D redeemable convertible preferred stock, $0.10 par value—Authorized— 3,636 shares as of December 31, 2013 and June 30, 2013 Issued and outstanding— none as of December 31, 2013 and June 30, 2013		—			—
Stockholders’ equity:
Common stock, $0.10 par value— Authorized—210,000,000 shares Issued— 100,549,498 shares at December 31, 2013 and 99,945,545 shares at June 30, 2013 Outstanding— 92,617,481 shares at December 31, 2013 and 93,683,769 shares at June 30, 2013		10,055			9,995
Additional paid-in capital		583,523			575,770
Accumulated deficit		(311,555		)	(349,817		)
Accumulated other comprehensive income		8,684			7,263
Treasury stock, at cost—7,932,017 shares of common stock at December 31, 2013 and 6,261,776 shares of common stock at June 30, 2013		(200,232		)	(141,313		)
Total stockholders’ equity		90,475			101,898
Total liabilities and stockholders’ equity		$	358,911		$	382,748

 

See accompanying Notes to these unaudited consolidated financial statements.

 

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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		December 31,
		2013			2012
		(Dollars in Thousands)
Cash flows from operating activities:
Net income		$	38,262		$	14,350
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,479			2,687
Net foreign currency loss (gain)		1,079			(304		)
Stock-based compensation		7,538			7,768
Deferred income taxes		16,791			9,858
Provision for bad debts		786			162
Excess tax benefits from stock-based compensation		(83		)	—
Other non-cash operating activities		896			28
Changes in assets and liabilities:
Accounts receivable		6,494			(7,957		)
Unbilled services		1,171			606
Prepaid expenses, prepaid income taxes, and other assets		1,536			5,905
Installment receivables		8,345			25,101
Accounts payable, accrued expenses, and other liabilities		(5,568		)	(8,503		)
Deferred revenue		(7,470		)	4,439
Net cash provided by operating activities		72,256			54,140
Cash flows from investing activities:
Purchase of marketable securities		(18,992		)	—
Maturities of marketable securities		12,424			—
Purchase of property, equipment and leasehold improvements		(1,724		)	(2,567		)
Insurance proceeds		—			2,222
Purchase of technology intangibles		—			(527		)
Capitalized computer software development costs		(504		)	(435		)
Net cash used in investing activities		(8,796		)	(1,307		)
Cash flows from financing activities:
Exercise of stock options		4,430			9,120
Repayments of secured borrowings		—			(11,010		)
Repurchases of common stock		(58,919		)	(36,852		)
Payment of tax withholding obligations related to restricted stock		(4,237		)	(4,288		)
Excess tax benefits from stock-based compensation		83			—
Net cash used in financing activities		(58,643		)	(43,030		)
Effect of exchange rate changes on cash and cash equivalents		228			179
Increase in cash and cash equivalents		5,045			9,982
Cash and cash equivalents, beginning of period		132,432			165,242
Cash and cash equivalents, end of period		$	137,477		$	175,224
Supplemental disclosure of cash flow information:
Income tax paid, net		$	5,045		$	1,812
Interest paid		26			373

 

See accompanying Notes to these unaudited consolidated financial statements.

 

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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Interim Unaudited Consolidated Financial Statements

 

The accompanying interim unaudited consolidated financial statements of Aspen Technology, Inc. and its subsidiaries have been prepared on the same basis as our annual consolidated financial statements.  We have omitted certain information and footnote disclosures normally included in our annual consolidated financial statements.  Such interim unaudited consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (GAAP), as defined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 270,  Interim Reporting , for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2013, which are contained in our Annual Report on Form 10-K, as previously filed with the U.S. Securities and Exchange Commission (SEC). In the opinion of management, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair presentation of the financial position, results of operations, and cash flows at the dates and for the periods presented have been included and all intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended December 31, 2013 are not necessarily indicative of the results to be expected for the subsequent quarter or for the full fiscal year.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Unless the context requires otherwise, references to we, our and us refer to Aspen Technology, Inc. and its subsidiaries.

 

Reclassifications

 

Certain line items in prior period financial statements have been reclassified to conform to currently reported presentations.

 

2.  Significant Accounting Policies

 

(a)          Overview of Licensing Model Changes

 

Transition to the aspenONE Licensing Model

 

Prior to fiscal 2010, we offered term or perpetual licenses to specific products, or specifically defined sets of products, which we refer to as point products. The majority of our license revenue was recognized under an “upfront revenue model,” in which the net present value of the aggregate license fees was recognized as revenue upon shipment of the point products. Customers typically received one year of post-contract software maintenance and support, or SMS, with their license agreements and then could elect to renew SMS annually. Revenue from SMS was recognized ratably over the period in which the SMS was delivered.

 

In fiscal 2010, we introduced the following changes to our licensing model:

 

(i)    We began offering our software on a subscription basis, allowing our customers access to all products within a licensed suite (aspenONE Engineering or aspenONE Manufacturing and Supply Chain). SMS is included for the entire term of the arrangement and customers are entitled to any software products or updates introduced into the licensed suite. We refer to this license arrangement as our aspenONE licensing model.

 

(ii)   We began to include SMS for the entire term on our point product term arrangements.

 

Revenue related to our aspenONE licensing model is recognized over the term of the arrangement on a ratable basis. During fiscal 2010 and 2011, license revenue related to our point product arrangements with SMS included for the entire term of the arrangement was generally recognized on the due date of each annual installment, provided all revenue recognition criteria were met. Beginning in fiscal 2012, with the introduction of our Premier Plus SMS offering, we were unable to establish evidence of the fair value for the SMS component, and revenue from these arrangements is now recognized on a ratable basis.

 

The changes to our licensing model introduced in fiscal 2010 did not change the method or timing of customer billings or cash collections. Since the introduction of these changes, our net cash provided by operating activities has increased in each annual period from $33.0 million in fiscal 2009 to $146.6 million in fiscal 2013. During these periods we have realized steadily improving cash flow due to growth of our portfolio of term license contracts, as well as from the renewal of customer contracts,

 

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on an installment basis, that were previously paid upfront.

 

Impact of Licensing Model Changes

 

The principal accounting implications of the changes to our licensing model in fiscal 2010 are as follows:

 

·                   Prior to fiscal 2010, the majority of our license revenue was recognized on an upfront basis. Since the upfront model resulted in the net present value of multiple years of future installments being recognized at the time of shipment, the changes to our licensing model resulted in a reduction in our software license revenue for fiscal 2010, 2011 and 2012 as compared to the fiscal years preceding our licensing model changes. These changes did not impact the incurrence or timing of our expenses, and there was no corresponding expense reduction to offset the lower revenue, resulting in operating losses for fiscal 2010, 2011 and 2012.  By fiscal 2013, a sufficient number of license arrangements had been renewed on the aspenONE licensing model to generate ratable revenue sufficient to support an operating profit.

 

·                   Since fiscal 2010, the SMS component of our services and other revenue (“legacy SMS revenue”) has decreased, and been offset by a corresponding increase in subscription and software revenue as customers have transitioned to our aspenONE licensing model. Under our aspenONE licensing model and for point product arrangements with Premier Plus SMS included for the full contract term, the entire arrangement fee, including the SMS component, is included within subscription and software revenue.

 

Legacy SMS revenue is no longer significant in relation to our total revenue due to the number of our term license arrangements that have been converted to the aspenONE licensing model. As a result, beginning with the first quarter of fiscal 2014, legacy SMS revenue is included within subscription and software revenue in our unaudited consolidated statements of operations. Prior to fiscal 2014, legacy SMS revenue was included within services and other revenue in our unaudited consolidated statements of operations.  For further information, please refer to the “Revenue Reclassification” section below.

 

·                   Installment payments from aspenONE agreements and from point product arrangements with SMS included for the contract term are not considered fixed or determinable, and as a result, are not included in installments receivable. Accordingly, our installments receivable balance has decreased as licenses previously executed under our upfront revenue model reached the end of their terms.

 

·                   The amount of our deferred revenue has increased as more revenue from our term license portfolio has been recognized on a ratable basis.

 

Introduction of our Premier Plus SMS Offering

 

Beginning in fiscal 2012, we introduced our Premier Plus SMS offering to provide more value to our customers. As part of this offering, customers receive 24x7 support, faster response times, dedicated technical advocates and access to web-based training modules. The Premier Plus SMS offering is only provided to customers that commit to SMS for the entire term of the arrangement.  Our annually renewable legacy SMS offering continues to be available to customers with legacy term and perpetual license agreements.

 

The introduction of our Premier Plus SMS offering in fiscal 2012 resulted in a change to the revenue recognition of point product arrangements that include Premier Plus SMS for the term of the arrangement.  Since we do not have vendor-specific objective evidence of fair value, or VSOE, for our Premier Plus SMS offering, the SMS element of our point product arrangements is not separable, resulting in revenue being recognized ratably over the term of the arrangement, once the other revenue recognition criteria have been met.  Prior to fiscal 2012, license revenue was recognized on the due date of each annual installment, provided all revenue recognition criteria were met.  The introduction of our Premier Plus SMS offering did not change the revenue recognition for our aspenONE licensing arrangements.

 

(b)          Revenue Recognition

 

We generate revenue from the following sources: (1) licensing software products; (2) providing SMS and training; and (3) providing professional services. We sell our software products to end users under fixed-term and perpetual licenses. As a standard business practice, we offer extended payment term options for our fixed-term license arrangements, which are generally payable on an annual basis. Certain of our fixed-term license agreements include product mixing rights that allow customers the flexibility to change or alternate the use of multiple products included in the license arrangement after those products are delivered to the customer. We refer to these arrangements as token arrangements. Tokens are fixed units of measure. The amount of software usage is limited by the number of tokens purchased by the customer.

 

Four basic criteria must be satisfied before software license revenue can be recognized: persuasive evidence of an

 

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arrangement between us and an end user; delivery of our product has occurred; the fee for the product is fixed or determinable; and collection of the fee is probable.

 

Persuasive evidence of an arrangement —We use a signed contract as evidence of an arrangement for software licenses and SMS. For professional services we use a signed contract and a work proposal to evidence an arrangement. In cases where both a signed contract and a purchase order are required by the customer, we consider both taken together as evidence of the arrangement.

 

Delivery of our product —Software and the corresponding access keys are generally delivered to customers electronically or via disk media with standard shipping terms of FOB Origin. Our software license agreements do not contain conditions for acceptance.

 

Fee is fixed or determinable —We assess whether a fee is fixed or determinable at the outset of the arrangement. Significant judgment is involved in making this assessment.

 

Under our upfront revenue model, we are able to demonstrate that the fees are fixed or determinable for all arrangements, including those for our term licenses that contain extended payment terms. We have an established history of collecting under the terms of these contracts without providing concessions to customers. In addition, we also assess whether a contract modification to an existing term arrangement constitutes a concession. In making this assessment, significant analysis is performed to ensure that no concessions are given. Our software license agreements do not include a right of return or exchange. For license arrangements executed under the upfront revenue model, we recognize license revenue upon delivery of the software product, provided all other revenue recognition requirements are met.

 

We cannot assert that the fees under our aspenONE licensing model and point product arrangements with Premier Plus SMS are fixed or determinable because the rights provided to customers, and the economics of the arrangements, are not comparable to our transactions with other customers under the upfront revenue model. As a result, the amount of revenue recognized for these arrangements is limited by the amount of customer payments that become due.

 

Collection of fee is probable —We assess the probability of collecting from each customer at the outset of the arrangement based on a number of factors, including the customer’s payment history, its current creditworthiness, economic conditions in the customer’s industry and geographic location, and general economic conditions. If in our judgment collection of a fee is not probable, revenue is recognized as cash is collected, provided all other conditions for revenue recognition have been met.

 

Vendor-Specific Objective Evidence of Fair Value

 

We have established VSOE for certain SMS offerings, professional services, and training, but not for our software products or our Premier Plus SMS offering. We assess VSOE for SMS, professional services, and training, based on an analysis of standalone sales of the offerings using the bell-shaped curve approach. During fiscal 2011, we used optional renewals of SMS on our legacy term license arrangements to support VSOE for SMS included in our fixed term point product arrangements which include SMS for the term of the arrangement. We do not have a history of selling our Premier Plus SMS offering to customers on a standalone basis, and as a result are unable to establish VSOE for this deliverable.

 

We allocate the arrangement consideration among the elements included in our multi-element arrangements using the residual method. Under the residual method, the VSOE of the undelivered elements is deferred and the remaining portion of the arrangement fee for perpetual and term licenses is recognized as revenue upon delivery of the software, assuming all other revenue recognition criteria are met. If VSOE does not exist for an undelivered element in an arrangement, revenue is deferred until such evidence does exist for the undelivered elements, or until all elements are delivered, whichever is earlier.  Under the upfront revenue model, the residual license fee is recognized upon delivery of the software provided all other revenue recognition criteria were met. Arrangements that qualify for upfront recognition include sales of perpetual licenses, amendments to existing legacy term arrangements and renewals of legacy term arrangements.

 

Subscription and Software Revenue

 

Subscription and software revenue consists of product and related revenue from our (i) aspenONE licensing model, including Premier Plus SMS; (ii) point product arrangements with our Premier Plus SMS offering included for the contract term; (iii) legacy arrangements including (a) amendments to existing legacy term arrangements, (b) renewals of legacy term arrangements and (c) legacy arrangements that are being recognized over time as a result of not previously meeting one or more of the requirements for recognition under the upfront revenue model; (iv) legacy SMS arrangements; and (v) perpetual arrangements.

 

When a customer elects to license our products under our aspenONE licensing model, our Premier Plus SMS offering is included for the entire term of the arrangement and the customer receives, for the term of the arrangement, the right to any new unspecified future software products and updates that may be introduced into the licensed aspenONE software suite. Due to our obligation to provide unspecified future software products and updates, we are required to recognize revenue ratably over the term of the arrangement, once the other revenue recognition criteria noted above have been met.

 

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Our point product arrangements with Premier Plus SMS include SMS for the term of the arrangement. Since we do not have VSOE for our Premier Plus SMS offering, the SMS element of our point product arrangements is not separable. As a result, revenue associated with point product arrangements with Premier Plus SMS included for the contract term is recognized ratably over the term of the arrangement, once the other revenue recognition criteria have been met.

 

Perpetual license and legacy arrangements do not include the same rights as those provided to customers under the aspenONE licensing model and point product arrangements with Premier Plus SMS.  We continue to have VSOE for the legacy SMS offering provided in support of these license arrangements and can therefore separate the undelivered elements.  Accordingly, the license fees for perpetual licenses and legacy arrangements continue to be recognized upon delivery of the software products using the residual method, provided all other revenue recognition requirements have been met.

 

Legacy SMS revenue includes revenue from our SMS offering provided in support of perpetual and legacy term license arrangements. Customers typically received SMS for one year and then could elect to renew SMS annually. We continue to have VSOE of fair value for the undelivered SMS component, which is deferred and subsequently amortized into revenue ratably over the contractual term of the SMS arrangement.

 

Revenue Reclassification

 

Prior to fiscal 2014, legacy SMS revenue was classified within services and other revenue in our consolidated statements of operations. Cost of legacy SMS revenue was included within cost of services and other revenue. Beginning with the first quarter of fiscal 2014, legacy SMS revenue is included within subscription and software revenue in our unaudited consolidated statements of operations. We reclassified legacy SMS revenue into subscription and software revenue in our unaudited consolidated statements of operations based on the following rationale:

 

i)                  Since fiscal 2010, legacy SMS revenue has decreased, and been offset by a corresponding increase in subscription and software revenue as customers have transitioned to our aspenONE licensing model and to point product arrangements with Premier Plus SMS.

 

ii)               Legacy SMS revenue is no longer significant in relation to our total revenue due to the number of our term license arrangements that have been converted to the aspenONE licensing model.

 

iii)            Legacy SMS revenue will continue to decrease as expiring license arrangements are renewed on the aspenONE licensing model.

 

iv)           We manage legacy SMS as a part of our broader software licensing business. The distinction between legacy SMS revenue and revenue from aspenONE licensing and point product arrangements with Premier Plus SMS included for the full contract term no longer represents a meaningful difference from a line of business standpoint since we assess business performance on a combined basis.

 

v)              Legacy SMS revenue and revenue from our aspenONE license arrangements share the same revenue recognition methodology and are both recognized on a ratable basis.

 

The following table summarizes the impact of revenue and cost of revenue reclassifications for the three and six months ended December 31, 2013 and 2012:

 

		Classification in Unaudited Consolidated Statements of Operations for the Three and Six Months Ended December 31,				Three Months Ended December 31,						Six Months Ended December 31,
		2013		2012		2013			2012			2013			2012
						(Dollars in Thousands)
Legacy SMS revenue		Subscription and software		Services and other		$	7,765		$	9,580		$	15,211		$	19,263
Cost of Legacy SMS revenue		Subscription and software		Services and other		$	1,445		$	2,018		$	2,726		$	3,956

 

Prior to fiscal 2014, services and other revenue included revenue related to professional services, training, legacy SMS and other revenue. Beginning with the first quarter of fiscal 2014, legacy SMS revenue is included within subscription and software revenue in our unaudited consolidated statements of operations.

 

The following tables summarize the impact of legacy SMS revenue and cost of revenue reclassification on our previously presented unaudited consolidated statements of operations for the three and six months ended December 31, 2012:

 

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		Impact on Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2012
		As Previously Reported			Reclassifications			As Currently Reported
	(Dollars in Thousands)
Subscription and software revenue:
Legacy SMS		$	—		$	9,580		$	9,580
Subscription and software		59,457			—			59,457
		$	59,457		$	9,580		$	69,037
Services and other revenue:
Legacy SMS		$	—		$	(9,580	)	$	(9,580	)
Professional services, training and other		17,852			—			17,852
		$	17,852		$	(9,580	)	$	8,272
Cost of subscription and software revenue:
Cost of legacy SMS revenue		$	—		$	2,018		$	2,018
Cost of subscription and software revenue		3,100			—			3,100
		$	3,100		$	2,018		$	5,118
Cost of services and other revenue:
Cost of legacy SMS revenue		$	—		$	(2,018	)	$	(2,018	)
Cost of professional services, training and other revenue		9,273			—			9,273
		$	9,273		$	(2,018	)	$	7,255

 

		Impact on Unaudited Consolidated Statements of Operations for the Six Months Ended December 31, 2012
		As Previously Reported			Reclassifications			As Currently Reported
		(Dollars in Thousands)
Subscription and software revenue:
Legacy SMS		$	—		$	19,263		$	19,263
Subscription and software		113,537			—			113,537
		$	113,537		$	19,263		$	132,800
Services and other revenue:
Legacy SMS		$	—		$	(19,263	)	$	(19,263	)
Professional services, training and other		35,229			—			35,229
		$	35,229		$	(19,263	)	$	15,966
Cost of subscription and software revenue:
Cost of legacy SMS revenue		$	—		$	3,956		$	3,956
Cost of subscription and software revenue		6,290			—			6,290
		$	6,290		$	3,956		$	10,246
Cost of services and other revenue:
Cost of legacy SMS revenue		$	—		$	(3,956	)	$	(3,956	)
Cost of professional services, training and other revenue		18,421			—			18,421
		$	18,421		$	(3,956	)	$	14,465

 

Services and Other

 

Professional Services Revenue

 

Professional services are provided to customers on a time-and-materials (T&M) or fixed-price basis. We recognize professional services fees for our T&M contracts based upon hours worked and contractually agreed-upon hourly rates. Revenue from fixed-price engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs. Project costs are typically expensed as incurred. The use of the proportional performance method is dependent upon our ability to reliably estimate the costs to complete a project. We use historical experience as a basis for future estimates to complete current projects. Additionally, we believe that costs are the best available measure of performance. Out-of-pocket expenses which are reimbursed by customers are recorded as revenue.

 

In certain circumstances, professional services revenue may be recognized over a longer time period than the period over which the services are performed.  If the costs to complete a project are not estimable or the completion is uncertain, the revenue is recognized upon completion of the services. In circumstances in which professional services are sold as a single arrangement with, or in contemplation of, a new aspenONE license or point product arrangement with Premier Plus SMS, revenue is deferred

 

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and recognized on a ratable basis over the longer of (i) the period the services are performed or (ii) the license term.  When we provide professional services considered essential to the functionality of the software, we recognize the combined revenue from the sale of the software and related services using the completed contract or percentage-of-completion method.

 

We have occasionally been required to commit unanticipated additional resources to complete projects, which resulted in losses on those contracts. Provisions for estimated losses on contracts are made during the period in which such losses become probable and can be reasonably estimated.

 

Training Revenue

 

We provide training services to our customers, including on-site, Internet-based and customized training. Revenue is recognized in the period in which the services are performed.

 

Deferred Revenue

 

Deferred revenue includes amounts billed or collected in advance of revenue recognition, including arrangements under the aspenONE licensing model, point product arrangements with Premier Plus SMS, legacy SMS arrangements, professional services, and training.  Under the aspenONE licensing model and for point product arrangements with Premier Plus SMS, VSOE does not exist for the undelivered elements, and as a result the arrangement fees are recognized ratably (i.e., on a subscription basis) over the term of the license. Deferred revenue is recorded as each invoice becomes due.

 

For arrangements under the upfront revenue model, a portion of the arrangement fee is generally recorded as deferred revenue due to the inclusion of an undelivered element, typically our legacy SMS offering or professional services. The amount of revenue allocated to undelivered elements is based on the VSOE for those elements using the residual method, and is earned and recognized as revenue as each element is delivered.

 

(c)  Installments Receivable

 

Installments receivable resulting from product sales under the upfront revenue model are discounted to present value at prevailing market rates at the date the contract is signed, taking into consideration the customer’s credit rating. The finance element is recognized using the effective interest method over the relevant license term and is classified as interest income. Installments receivable are classified as current and non-current in our unaudited consolidated balance sheets based on the maturity date of the related installment. Non-current installments receivable consist of receivables with a due date greater than one year from the period-end date. Current installments receivable consist of invoices with a due date of less than one year but greater than 45 days from the period-end date. Once an installments receivable invoice becomes due within 45 days, it is reclassified as a trade accounts receivable in our unaudited consolidated balance sheets. As a result, we did not have any past due installments receivable as of December 31, 2013.

 

Our non-current installments receivable are within the scope of Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses . As our portfolio of financing receivables arises from the sale of our software licenses, the methodology for determining our allowance for doubtful accounts is based on the collective population of receivables and is not stratified by class or portfolio segment. We consider factors such as existing economic conditions, country risk, customers’ credit rating and past payment history in determining our allowance for doubtful accounts. We reserve against our installments receivable when the related trade accounts receivable have been past due for over a year, or when there is a specific risk of uncollectability. Our specific reserve reflects the full value of the related installments receivable for which collection has been deemed uncertain. Our specific reserve represented 98% and 96% of our total installments receivable allowance for doubtful accounts at December 31, 2013 and June 30, 2013, respectively. In instances when an installment receivable that is reserved for ages into a trade account receivable, the related reserve is transferred to our trade accounts receivable allowance.

 

We write-off receivables when they are considered uncollectable based on our judgment. In instances when we write-off specific customers’ trade accounts receivable, we also write off any related current and non-current installments receivable balances.

 

As of December 31, 2013, our gross current and non-current installments receivable of $5.9 million and $1.1 million are presented net of unamortized discounts of $0.1 million each and net of allowance for doubtful accounts of $0.2 million and less than $0.1 million, respectively.

 

As of June 30, 2013, our gross current and non-current installments receivable of $14.4 million and $1.1 million are presented net of unamortized discounts of $0.6 million and $0.1 million and net of allowance for doubtful accounts of $0.1 million each, respectively.

 

Provisions for bad debts, receivables write offs, transfers to allowance for doubtful accounts related to trade accounts

 

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receivable and recoveries of receivables previously written off were not significant during the three and six months ended December 31, 2013 and fiscal 2013, respectively. Our allowance for doubtful accounts for current and non-current installments receivable was $0.2 million and less than $0.1 million as of June 30, 2012.

 

Under the aspenONE licensing model and for point product arrangements with Premier Plus SMS included for the contract term, the installment payments are not considered fixed or determinable and, as a result, are not included as installments receivable on our unaudited consolidated balance sheet.

 

(d)         Loss Contingencies

 

We accrue estimated liabilities for loss contingencies arising from claims, assessments, litigation and other sources when it is probable that a liability has been incurred and the amount of the claim, assessment or damages can be reasonably estimated. We believe that we have sufficient accruals to cover any obligations resulting from claims, assessments or litigation that have met these criteria. Please refer to Note 11 for a discussion of these matters and related liability accruals.

 

(e)           Foreign Currency Transactions

 

Foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our subsidiaries are recognized in our results of operations as incurred as a component of other income (expense), net. Net foreign currency losses were $0.5 million and $1.3 million during the three and six months ended December 31, 2013, and $0.1 million and $0.4 million during the three and six months ended December 31, 2012, respectively.

 

(f)             Other

 

For further information with regard to our “Significant Accounting Policies,” please refer to Note 2 of our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

3.  Marketable Securities

 

The following table summarizes the fair value, the amortized cost and unrealized holding gains (losses) on our marketable securities as of December 31, 2013 and June 30, 2013:

 

		Fair Value			Cost			Unrealized Gains			Unrealized Losses
		(Dollars in Thousands)
December 31, 2013:
U.S. corporate bonds		$	81,173		$	81,127		$	53		$	(7	)
Total short-term marketable securities		$	81,173		$	81,127		$	53		$	(7	)
U.S. corporate bonds		$	17,057		$	17,048		$	16		$	(7	)
Total long-term marketable securities		$	17,057		$	17,048		$	16		$	(7	)
June 30, 2013:
U.S. corporate bonds		$	57,015		$	57,046		$	8		$	(39	)
Total short-term marketable securities		$	57,015		$	57,046		$	8		$	(39	)
U.S. corporate bonds		$	35,353		$	35,402		$	—		$	(49	)
Total long-term marketable securities		$	35,353		$	35,402		$	—		$	(49	)

 

Our marketable securities are classified as available-for-sale and reported at fair value on the unaudited consolidated balance sheets. Net unrealized gains (losses) are reported as a separate component of accumulated other comprehensive income, net of tax. Realized gains and losses on investments are recognized in earnings as incurred. Our investments consist primarily of investment grade fixed income corporate debt securities with maturity dates ranging from January 2014 through September 2015.

 

We review our marketable securities for impairment at each reporting period to determine if any of our securities have experienced an other-than-temporary decline in fair value in accordance with the provisions of ASC Topic 320,  Investments- Debt and Equity Securities . We consider factors, such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of its amortized cost basis. If we believe that other-than-temporary decline

 

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in fair value has occurred, we write down investments to fair value and recognize credit losses in earnings and other impairment losses in accumulated other comprehensive income. During the three and six months ended December 31, 2013, our marketable securities were not considered other-than-temporarily impaired and, as such, we did not recognize impairment losses during the periods then ended. Unrealized losses are attributable to changes in interest rates.

 

4. Goodwill

 

During the first quarter of fiscal 2014, we re-aligned our reporting units to reflect our revised operating and reportable segment structure (refer to Note 12). As a result of this re-alignment, we reassigned the carrying amount of goodwill of $15.4 million to our subscription and software reporting unit.

 

The changes in the carrying amount of goodwill by reporting unit for the six months ended December 31, 2013 are as follows:

 

		Reporting Unit
Asset Class		Subscription and software			Services			Total
		(Dollars in Thousands)
Balance as of June 30, 2013
Goodwill		$	84,701		$	5,102		$	89,803
Accumulated impairment losses		(65,569		)	(5,102		)	(70,671		)
		$	19,132		$	—		$	19,132
Effect of currency translation		67			—			67
Balance as of December 31, 2013
Goodwill		$	84,768		$	5,102		$	89,870
Accumulated impairment losses		(65,569		)	(5,102		)	(70,671		)
		$	19,199		$	—		$	19,199

 

We test goodwill for impairment annually (or more often if impairment indicators arise), at the reporting unit level. We first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine based on this assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform the two-step goodwill impairment test. The first step requires us to determine the fair value of the reporting unit and compare it to the carrying amount, including goodwill, of such reporting unit. If the fair value exceeds the carrying amount, no impairment loss is recognized. However, if the carrying amount of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount of impairment, if any, is measured based upon the implied fair value of goodwill at the valuation date.

 

Fair value of a reporting unit is determined using a combined weighted average of a market-based approach (utilizing fair value multiples of comparable publicly traded companies) and an income-based approach (utilizing discounted projected cash flows). In applying the income-based approach, we would be required to make assumptions about the amount and timing of future expected cash flows, growth rates and appropriate discount rates. The amount and timing of future cash flows would be based on our most recent long-term financial projections. The discount rate we would utilize would be determined using estimates of market participant risk-adjusted weighted-average costs of capital and reflect the risks associated with achieving future cash flows.

 

We have elected December 31 st  as the annual impairment assessment date and perform additional impairment tests if triggering events occur.  We performed our annual impairment test for the subscription and software reporting unit as of December 31, 2013, and, based upon the results of our qualitative assessment, determined that it was not likely that its fair value was less than its carrying amount. As such, we did not perform the two-step goodwill impairment test and did not recognize impairment losses as a result of our analysis. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests.

 

5.  Income Taxes

 

The effective tax rate for the periods presented is primarily the result of income earned in the U.S., taxed at U.S. federal and state statutory income tax rates, income earned in foreign tax jurisdictions taxed at the applicable rates, as well as the impact of permanent differences between book and tax income.

 

Our effective tax rate for the three months ended December 31, 2013 was 35.2% as compared to 36.8% for the corresponding

 

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period of the prior fiscal year. Our effective tax rate for the six months ended December 31, 2013 was 36.5% as compared to 43.1% for the corresponding period of the prior fiscal year. During the three and six months ended December 31, 2013 and 2012, our income tax expense was driven primarily by pre-tax profitability in our domestic and foreign operations and the impact of permanent items, including non-deductible stock-based compensation expense, partially offset by a U.S. domestic production activity deduction in fiscal 2014. There was no such deduction in fiscal 2013. Our effective tax rate for the three and six months ended December 31, 2013 and 2012 differs from the U.S. federal statutory income tax rate primarily as a result of the impact of the permanent items.

 

Deferred income taxes are recognized based on temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the statutory tax rates and laws expected to apply to taxable income in the years in which the temporary differences are expected to reverse. Valuation allowances are provided against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the timing of the temporary differences becoming deductible.  Management considers, among other available information, scheduled reversals of deferred tax liabilities, projected future taxable income, limitations of availability of net operating loss carryforwards, and other matters in making this assessment.

 

We do not provide deferred taxes on unremitted earnings of foreign subsidiaries since we intend to indefinitely reinvest those earnings either currently or sometime in the foreseeable future. Unrecognized provisions for taxes on undistributed earnings of foreign subsidiaries, which are considered indefinitely reinvested, are not material to our consolidated financial position or results of operations.

 

6.  Fair Value

 

We determine fair value by utilizing a fair value hierarchy that ranks the quality and reliability of the information used in its determination. Fair values determined using “Level 1 inputs” utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Fair values determined using “Level 2 inputs” utilize data points that are observable, such as quoted prices, interest rates and yield curves for similar assets and liabilities.

 

Cash equivalents of $106.3 million and $117.0 million as of December 31, 2013 and June 30, 2013, respectively, are reported at fair value utilizing Level 1 inputs. Our cash equivalents consist of short-term, highly liquid investments with remaining maturities of three months or less when purchased.

 

Marketable securities of $98.2 million and $92.4 million as of December 31, 2013 and June 30, 2013, are reported at fair value calculated in accordance with the market approach, utilizing market consensus pricing models with quoted prices that are directly or indirectly observable, or “Level 2 inputs.”

 

Financial instruments not measured or recorded at fair value in the accompanying unaudited consolidated financial statements consist of accounts receivable, installments receivable and accounts payable. The estimated fair value of these financial instruments approximates their carrying value.

 

7.  Supplementary Balance Sheet Information

 

The following table summarizes our accounts receivable, net of the related allowance for doubtful accounts, as of December 31, 2013 and June 30, 2013. Refer to Note 2(c) for a summary of our installments receivable balances.

 

		Gross			Allowance			Net
		(Dollars in Thousands)
December 31, 2013:
Accounts Receivable		$	32,407		$	2,364		$	30,043
		$	32,407		$	2,364		$	30,043
June 30, 2013:
Accounts Receivable		$	38,603		$	1,615		$	36,988
		$	38,603		$	1,615		$	36,988

 

As of December 31, 2013, one customer’s receivable balance represented approximately 13% of our total receivables.

 

Accrued expenses and other current liabilities in the accompanying unaudited consolidated balance sheets consist of the following:

 

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		December 31, 2013			June 30, 2013
		(Dollars in Thousands)
Royalties and outside commissions		$	4,369		$	4,312
Payroll and payroll-related		15,201			18,702
Other		9,472			11,407
Total accrued expenses and other current liabilities		$	29,042		$	34,421

 

Other non-current liabilities in the accompanying unaudited consolidated balance sheets consist of the following:

 

		December 31, 2013			June 30, 2013
		(Dollars in Thousands)
Deferred rent		$	578		$	862
Other*		10,993			11,515
Total other non-current liabilities		$	11,571		$	12,377

 

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*                                          Other is comprised primarily of our reserve for uncertain tax liabilities of $10.0 million and $10.4 million as of December 31, 2013 and June 30, 2013, respectively.

 

8.  Stock-Based Compensation

 

General Award Terms

 

We issue stock options and restricted stock units (RSUs) to our employees and outside directors, pursuant to stockholder-approved equity compensation plans. Option awards are granted with an exercise price equal to the market closing price of our stock on the trading day prior to the date of grant; those options generally vest over four years and expire within 7 or 10 years of grant. RSUs generally vest over four years. Historically, our practice has been to settle stock option exercises and RSU vesting through newly-issued shares.

 

Stock Compensation Accounting

 

Our stock-based compensation is principally accounted for as awards of equity instruments. Our policy is to issue new shares upon the exercise of stock awards. We adopted the simplified method related to accounting for the tax effects of share-based payment awards to employees under ASC Topic 718, Compensation—Stock Compensation (ASC 718). We use the “with-and-without” approach for determining if excess tax benefits are realized under ASC 718.

 

We utilize the Black-Scholes option valuation model for estimating the fair value of options granted. The Black-Scholes option valuation model incorporates assumptions regarding expected stock price volatility, the expected life of the option, the risk-free interest rate, dividend yield and the market value of our common stock. The expected stock price volatility is determined based on our stock’s historic prices over a period commensurate with the expected life of the award. The expected life of an option represents the period for which options are expected to be outstanding as determined by historic option exercises and cancellations. The risk-free interest rate is based on the U.S. Treasury yield curve for notes with terms approximating the expected life of the options granted. The expected dividend yield is zero, based on our history and expectation of not paying dividends on common shares. We recognize compensation costs on a straight-line basis, net of estimated forfeitures, over the requisite service period for time-vested awards.

 

The weighted average estimated fair value of option awards granted during the three months ended December 31, 2013 and 2012 was $10.86 and $9.83, respectively. The weighted average estimated fair value of option awards granted during the six months ended December 31, 2013 and 2012 was $11.33 and $9.76, respectively.

 

We utilized the Black-Scholes option valuation model with the following weighted average assumptions:

 

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		Six Months Ended
		December 31,
		2013		2012
Risk-free interest rate		1.3	%	0.6	%
Expected dividend yield		0.0	%	0.0	%
Expected life (in years)		4.6		4.8
Expected volatility factor		39.3	%	48.9	%

 

The stock-based compensation expense and its classification in the unaudited consolidated statements of operations for the three and six months ended December 31, 2013 and 2012 are as follows:

 

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2013			2012			2013			2012
		(Dollars in Thousands)
Recorded as expenses:
Cost of services and other		$	327		$	316		$	628		$	659
Selling and marketing		710			972			1,821			1,949
Research and development		889			742			1,745			1,483
General and administrative		1,225			1,423			3,344			3,677
Total stock-based compensation		$	3,151		$	3,453		$	7,538		$	7,768

 

A summary of stock option and RSU activity under all equity plans for the six months ended December 31, 2013 is as follows:

 

		Stock Options										Restricted Stock Units
		Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in 000’s)			Shares		Weighted Average Grant Date Fair Value
Outstanding at June 30, 2013		1,852,118		$	14.68							1,030,839		$	17.69
Granted		338,413		32.61								398,679		32.61
Settled (RSUs)		—		—								(337,374	)	17.97
Exercised		(383,585	)	11.55								—		—
Cancelled / Forfeited		(178,444	)	18.95								(202,221	)	19.48
Outstanding at December 31, 2013		1,628,502		$	18.67		7.09		$	37,664		889,923		$	23.87
Vested and exercisable at December 31, 2013		857,705		$	14.48		5.93		$	23,431		—		—
Vested and expected to vest as of December 31, 2013		1,495,621		$	18.28		6.79		$	35,174		744,965		$	23.93

 

The weighted average grant-date fair value of RSUs granted during the three and six months ended December 30, 2013 was $38.10 and $32.61, respectively, and during the three and six months ended December 31, 2012 was $25.84 and $23.40, respectively. During the three months ended December 31, 2013 and 2012, the total fair value of shares vested from RSU grants was $5.0 million and $6.8 million, respectively, and during the six months ended December 31, 2013 and 2012 was $12.2 million and $13.1 million, respectively.

 

At December 31, 2013, the total future unrecognized compensation cost related to stock options and RSUs was $5.9 million and $18.3 million, respectively, and is expected to be recorded over a weighted average period of 2.6 years and 2.8 years, respectively.

 

The total intrinsic value of options exercised during the three months ended December 31, 2013 and 2012 was $2.7 million and $12.5 million, respectively. The total intrinsic value of options exercised during the six months ended December 31, 2013 and 2012 was $9.2 million and $23.2 million, respectively. We received $4.4 million and $9.1 million in cash proceeds from option exercises during the six months ended December 31, 2013 and 2012, respectively.  We paid $4.2 million and $4.3 million for withholding taxes on vested RSUs during the six months ended December 31, 2013 and 2012, respectively.

 

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