Edgar Filing: ASPEN TECHNOLOGY INC /DE/

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 000-24786

ASPEN TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		04-2739697 (I.R.S. Employer Identification No.)

200 Wheeler Road Burlington, Massachusetts (Address of principal executive offices)		01803 (Zip Code)
(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 ¨

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.

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting companyo

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

As of October 24, 2011, there were 93,909,310 shares of the registrant's common stock (par value $0.10 per share) outstanding.

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.	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	44
Item 4.	Controls and Procedures.	45
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	46
Item 1A.	Risk Factors.	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	55
Item 6.	Exhibits.	56
SIGNATURES

Our registered trademarks include aspenONE, ASPEN PLUS, ASPENTECH, the AspenTech logo, DMCPLUS, HTFS, HYSYS and INFOPLUS.21.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Condensed Consolidated Financial Statements (unaudited)

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share data)

	Three Months Ended
	September 30,
	2011			2010
Revenue:
Subscription and software	$	31,910		$	18,967
Services and other		19,315			24,133
Total revenue		51,225			43,100
Cost of revenue:
Subscription and software		2,724			2,122
Services and other		11,097			11,126
Total cost of revenue		13,821			13,248
Gross profit		37,404			29,852
Operating expenses:
Selling and marketing		23,446			20,351
Research and development		13,769			12,575
General and administrative		15,887			16,557
Restructuring charges		(73	)		77
Total operating expenses		53,029			49,560
Loss from operations		(15,625	)		(19,708	)
Interest income		2,231			3,702
Interest expense		(1,092	)		(1,244	)
Other (expense) income, net		(2,032	)		2,664
Loss before income taxes		(16,518	)		(14,586	)
(Benefit from) provision for income taxes		(4,782	)		882
Net loss	$	(11,736	)	$	(15,468	)
Loss per common share:
Basic	$	(0.12	)	$	(0.17	)
Diluted	$	(0.12	)	$	(0.17	)
Weighted average shares outstanding:
Basic		94,065			92,689
Diluted		94,065			92,689

See accompanying notes to these unaudited condensed consolidated financial statements.

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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share data)

	September 30,			June 30,
	2011			2011
ASSETS
Current assets:
Cash and cash equivalents	$	145,356		$	149,985
Accounts receivable, net		21,998			27,866
Current portion of installments receivable, net		38,199			38,703
Current portion of collateralized receivables, net		16,165			15,748
Unbilled services		1,716			2,319
Prepaid expenses and other current assets		9,259			10,819
Prepaid income taxes		1,155			1,151
Deferred income taxes- current		7,271			7,272
Total current assets		241,119			253,863
Non-current installments receivable, net		40,566			47,773
Non-current collateralized receivables, net		7,604			9,291
Property, equipment and leasehold improvements, net		6,205			6,730
Computer software development costs, net		2,489			2,813
Goodwill		17,791			18,624
Deferred income taxes- non-current		74,426			69,242
Other non-current assets		3,857			3,639
Total assets	$	394,057		$	411,975

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of secured borrowings	$	16,615		$	15,756
Accounts payable		4,789			2,099
Accrued expenses and other current liabilities		54,886			64,467
Income taxes payable		483			672
Deferred revenue		97,036			90,681
Total current liabilities		173,809			173,675
Long-term secured borrowings		8,194			9,157
Long-term deferred revenue		38,783			38,262
Other non-current liabilities		31,816			33,078
Commitments and contingencies (Note 11)
Series D redeemable convertible preferred stock, $0.10 par value—
Authorized— 3,636 shares at September 30, 2011 and June 30, 2011
Issued and outstanding— none at September 30, 2011 and June 30, 2011		-			-
Stockholders’ equity:
Common stock, $0.10 par value— Authorized—210,000,000 shares
Issued— 95,356,577 shares at September 30, 2011 and 94,939,400 shares at June 30, 2011
Outstanding— 94,068,547 shares at September 30, 2011 and 94,238,370 shares at June 30, 2011		9,536			9,494
Additional paid-in capital		535,707			530,996
Accumulated deficit		(393,007	)		(381,271	)
Accumulated other comprehensive income		8,922			9,115
Treasury stock, at cost—1,288,030 shares of common stock at September 30, 2011 and 701,030 at June 30, 2011		(19,703	)		(10,531	)
Total stockholders’ equity		141,455			157,803
Total liabilities and stockholders' equity	$	394,057		$	411,975

See accompanying notes to these unaudited condensed consolidated financial statements.

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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

	Three Months Ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(11,736	)	$	(15,468	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,412			1,361
Net foreign currency loss (gain)		1,275			(2,179	)
Stock-based compensation		3,708			2,697
Deferred income taxes		(5,354	)		46
Provision for bad debts		150			717
Other non-cash activities		13			-
Changes in assets and liabilities:
Accounts receivable		5,594			5,241
Unbilled services		611			(287	)
Prepaid expenses, prepaid income taxes, and other assets		1,187			4,791
Installments and collateralized receivables		8,329			11,901
Accounts payable, accrued expenses, and other liabilities		(6,898	)		(16,438	)
Deferred revenue		6,982			14,006
Net cash provided by operating activities		5,273			6,388
Cash flows from investing activities:
Purchase of property, equipment and leasehold improvements		(386	)		(588	)
Capitalized computer software development costs		(200	)		(176	)
Net cash used in investing activities		(586	)		(764	)
Cash flows from financing activities:
Exercise of stock options and warrants		2,232			137
Proceeds from secured borrowings		1,408			1,924
Repayments of secured borrowings		(2,232	)		(9,341	)
Repurchases of common stock		(9,172	)		-
Payment of tax withholding obligations related to restricted stock		(1,187	)		(796	)
Net cash used in financing activities		(8,951	)		(8,076	)
Effects of exchange rate changes on cash and cash equivalents		(365	)		668
Decrease in cash and cash equivalents		(4,629	)		(1,784	)
Cash and cash equivalents, beginning of period		149,985			124,945
Cash and cash equivalents, end of period	$	145,356		$	123,161

Supplemental disclosure of cash flow information:
Interest paid	$	1,092		$	1,581
Income tax paid (refunded), net		631			(6,496	)

See accompanying notes to these unaudited condensed consolidated financial statements.

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ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Interim Unaudited Condensed Consolidated Financial Statements

The accompanying interim unaudited condensed consolidated financial statements (Interim Financial Statements) of Aspen Technology, Inc. and its subsidiaries have been prepared on the same basis as our annual consolidated financial statements. We condensed or omitted certain information and footnote disclosures normally included in our annual consolidated financial statements. Such Interim 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 Interim Financial Statements be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2011, 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 months ended September 30, 2011 are not necessarily indicative of the results to be expected for subsequent quarters 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 our subsidiaries.

2. Significant Accounting Policies

Overview of Licensing Model Changes

Transition to the aspenONE Subscription Offering

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 support, or SMS, with their license agreements and then could elect to renew SMS annually. Revenue from SMS was recognized ratably over the period which the SMS was delivered.

In fiscal 2010 we began offering our aspenONE software as a subscription model, which allows our customers access to all products within a licensed suite (aspenONE Engineering or aspenONE Manufacturing and Supply Chain). SMS is included for the entire arrangement and customers are entitled to any software products or updates introduced into the licensed suite. Revenue is recognized over the term of a license agreement on a subscription, or ratable basis. We also continued to offer customers the ability to license point products, but since fiscal 2010, have included SMS for the term of the agreement. In fiscal 2010 and 2011, revenue from point product arrangements was generally recognized on the due date of each annual installment, provided all other revenue recognition requirements were met.

Introduction of our Enhanced SMS Offering

In July 2011, we introduced an enhanced 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 enhanced SMS offering is being provided to new and existing customers of both our aspenONE subscription offering and customers who have licensed point products with SMS included for the term of the arrangement. Our legacy annually renewable SMS offering continues to be available to customers with term or perpetual license agreements signed prior to fiscal 2010.

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The introduction of our enhanced SMS offering has resulted in a change to the revenue recognition of point product arrangements that include SMS for the term of the arrangement. Beginning in fiscal 2012, the revenue associated with point product arrangements that include the enhanced SMS offering is being recognized on a ratable basis, whereas prior to fiscal 2012, revenue was recognized under the residual method, as payments became due. The introduction of our enhanced SMS offering did not change the revenue recognition for our aspenONE subscription arrangements.

Impact of Licensing Model Changes

The principal accounting implications of our licensing model changes are as follows:

The majority of our license revenue is no longer 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, we do not expect to recognize levels of revenue comparable to our pre-transition levels until a significant majority of license agreements executed under our upfront revenue model (i) reach the end of their original terms and (ii) are renewed. Accordingly, our product-related revenue for fiscal 2010, 2011 and the three months ended September 30, 2011 was significantly less than the level achieved in the fiscal years preceding our licensing model change.

Because the timing of our incurrence of operating costs has not changed, the lower levels of revenue expected over the next few years may result in operating losses.

Over the next several years, we expect substantially all of our customers to transition to term arrangements which include SMS for the contract term. During this transition period, we may continue to have arrangements where the software element will be recognized upfront, including perpetual licenses and amendments to existing legacy term arrangements. However, we do not expect revenue related to these sources to be significant in relation to our total revenue.

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 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 contract signed by the customer as evidence of an arrangement for software licenses and SMS. For professional services we use a signed contract and a statement of work 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 via disk media with standard shipping terms of Free Carrier, Aspen Technology’s warehouse (i.e., FCA, named place). 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.

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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 contract modifications to an existing term arrangement constitute a concession. In making this assessment, significant analysis is performed to ensure that no concessions are given. Our software license agreements do not include 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.

With the introduction of our aspenONE subscription offering and the changes to the licensing terms of our point products arrangements sold on a fixed-term basis, we cannot assert that the fees in these new arrangements are fixed or determinable because the rights provided to customers and the economics of the arrangements are not comparable to our historical 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. For our term arrangements sold with SMS included for the term of the arrangement, this generally results in the fees being recognized ratably over the contract term.

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 vendor-specific objective evidence of fair value, or VSOE, for certain SMS offerings and for professional services, but not for our software products or our new enhanced SMS offering. We assess VSOE of fair value for SMS and professional services based on an analysis of standalone sales of SMS and professional services, using the bell-shaped curve approach. We do not have a history of selling our enhanced SMS offering to customers on a stand-alone basis, and as a result are unable to establish VSOE of fair value for this new 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 upfront upon delivery of the software provided all other revenue recognition criteria were met. Arrangements that qualify for upfront recognition include sales of perpetual licenses and amendments to existing legacy term arrangements.

Subscription and Software Revenue

Subscription and software revenue consists of product and related revenue from the following sources:

(i)

aspenONE subscription arrangements;

(ii)

fixed-term arrangements for point product licenses with our enhanced SMS offering included for the contract term (refered to as point product arrangements with enhanced SMS);

(iii)

upfront amendments to legacy term arrangements (refered to as upfront legacy amendments) and 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 (referred to as legacy arrangements); and,

(iv)

perpetual arrangements.

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When a customer elects to license our products under our aspenONE subscription offering, our enhanced 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. These agreements combine the right to use all software products within a given product suite with SMS for the term of the arrangement. Due to our obligation to provide unspecified future software products and updates, we are required to recognize the total revenue ratably over the term of the license, once the four revenue recognition criteria noted above are met.

Our point product arrangements with enhanced SMS also include SMS for the term of the arrangement. Since we do not have VSOE for our enhanced SMS offering, the SMS element of our point product arrangements is not separable. As a result, the total revenue is also recognized ratably over the term of the arrangement, once the four revenue recognition criteria are met.

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

Results of Operations Classification - Subscription and Software Revenue

Prior to fiscal 2012, subscription and software revenue were each classified separately on our statements of operations, because each type of revenue had different revenue recognition characteristics, and the amount of revenue attributable to each was material in relation to our total revenues. Additionally, we were able to separate the residual amount of software revenue related to the software component of our point product arrangements which included SMS for the contract term, based on the VSOE of fair value for the SMS element.

As a result of the introduction of our enhanced SMS offering in fiscal 2012, the majority of our product-related revenue is now recognized on a ratable basis, over the term of the arrangement. Additionally, we do not expect residual revenue from upfront legacy amendments, legacy arrangements and perpetual arrangements to represent a material portion of our revenue during fiscal 2012 and beyond. Since the distinction between subscription and point product ratable revenue does not represent a meaningfully difference from either a line of business or revenue recognition perspective, we have combined our subscription and software revenue into a single line item on our statements of operations beginning in the first quarter of fiscal 2012.

The following table summarizes the changes to our revenue classifications and the timing of revenue recognition of subscription and software revenue for fiscal 2012 compared to fiscal 2011 and fiscal 2010. Ratable revenue refers to product revenue that is recognized evenly over the term of the related agreement, beginning when the first payment becomes due. The residual method refers to the recognition of the difference between the total arrangement fee and the undiscounted VSOE of fair value for the undelivered element, assuming all other revenue recognition requirements have been met.

	Revenue Classification in Income Statement		Revenue Recognition Methodology
	Fiscal 2012	Fiscal 2011 and 2010	Fiscal 2012	Fiscal 2011 and 2010
Type of Revenue:
aspenONE subscription	Subscription and software	Subscription	Ratable	Ratable
Point products
- Software	Subscription and software	Software	Ratable	Residual method
- Bundled SMS	Subscription and software	Services and other	Ratable	Ratable
Other
- Upfront legacy amendments and legacy arrangements	Subscription and software	Software	Residual method	Residual method
- Perpetual arrangements	Subscription and software	Software	Residual method	Residual method

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The following table reconciles the amount of revenue recognized for the first quarter of fiscal 2012 and 2011, based on the revenue recognition methodology. As illustrated below, the introduction of our enhanced SMS offering in fiscal 2012 has resulted in a substantial majority of our subscription and software revenue being recognized on a ratable basis in fiscal 2012.

	Three Months Ended September 30,				Three Months Ended September 30,
	2011		2010		2011			2010
	(Dollars in thousands)				% of Total
Subscription and software revenue:
Ratable (1)	$	28,455	$	9,656		89.2	%		50.9	%
Residual method (2)		3,455		9,311		10.8			49.1
Total subscription and software revenue	$	31,910	$	18,967		100.0	%		100.0	%

(1) In the first quarter of fiscal 2011, the fair value of the SMS element of point product arrangements totaled $0.4 million and was presented in the statements of operations as services and other revenue. For fiscal 2012, the fee attributable to the SMS in point product arrangements is no longer separable, because we are unable to establish VSOE of fair value, and as a result, is included within ratable revenue.

(2) Residual method revenue detail	Three Months Ended September 30,
	2011		2010
	(Dollars in thousands)
Residual method revenue:
Point products - Software		*	$	5,611
Upfront legacy amendments and legacy arrangements		3,115		2,831
Perpetual arrangements		340		869
Total residual method revenue	$	3,455	$	9,311

* In fiscal 2012, the total combined arrangement fee (which includes the fee attributable to SMS) for point product arrangements with enhanced SMS is recognized on a ratable basis.

Services and Other

SMS Revenue

SMS revenue includes the maintenance revenue recognized from arrangements for which we continue to have VSOE for the undelivered SMS offering. For arrangements sold with our legacy SMS offering, SMS renewals are at the option of the customer, and the fair value of SMS is deferred and subsequently amortized into services and other revenue in the consolidated statement of operations over the contractual term of the SMS arrangement.

For arrangements executed under the aspenONE subscription offering and for point product arrangements with enhanced SMS, we have not established VSOE for the SMS deliverable. As a result, the revenue related to the SMS element of these transactions is reported in subscription and software revenue in the consolidated statements of operations.

Professional Services

Professional services are provided to customers on a time-and-materials (T&M) or fixed-price basis. We allocate the fair value of our professional services that are bundled with non-aspenONE subscription arrangements, and generally recognize the related revenue as the services are performed, assuming all other revenue recognition criteria have been met. 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. Professional services revenue is recognized within services and other revenue in the statement of operations. Project costs are based on standard rates, which vary by the consultant’s professional level, plus all direct expenses incurred to complete the engagement that are not reimbursed by the client. 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 have been reimbursed by customers are recorded as revenue.

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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 those circumstances in which committed professional services arrangements are sold as a single arrangement with, or in contemplation of, a new license agreement, revenue is deferred and recognized on a ratable basis over the longer of the period the services are performed or the license term. We have occasionally been required to commit unanticipated additional resources to complete projects, which resulted in lower than anticipated income or 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.

Occasionally, 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 percentage-of-completion method. When these professional services are combined with, and essential to, the functionality of an aspenONE subscription transaction, the amount of combined revenue will be recognized over the longer of the subscription term or the period the professional services are provided.

Deferred Revenue

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. The amount of revenue allocated to undelivered elements is based on the VSOE of fair value for those elements using the residual method and is earned and recognized as revenue as each element is delivered. Deferred revenue related to these transactions generally consists of SMS and represents payments received in advance of services rendered as of the balance sheet dates.

For arrangements under the aspenONE subscription offering and for point product arrangements with enhanced SMS, VSOE of fair value does not exist for the undelivered elements, and as a result, we are required to recognize the arrangement fees ratably (i.e., on a subscription basis) over the term of the license. Therefore, deferred revenue is recorded as each payment comes due and revenue is recognized ratably over the associated license period.

Installments Receivable

Installments receivable resulting from product sales under the upfront revenue model are discounted to present value at prevailing market rates (generally 8% to 9%) at the date the contract is signed, based on the customers’ credit rating. Finance fees are recognized using the effective interest method over the relevant license term and are classified as interest income. Installments receivable are split between current and non-current in our condensed 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 on our condensed consolidated balance sheet. As a result, we did not have any past due installments receivable as of September 30, 2011.

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 arise from the sale of our software licenses, the methodology for determining our allowance for doubtful accounts is based on the collective population and is not stratified by class or portfolio segment. We consider factors such as existing economic conditions, country risk, and customers’ 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 93% and 92% of our total installments receivable allowance for doubtful accounts at September 30, 2011 and June 30, 2011, respectively. In instances when an installment receivable that is reserved against ages into trade accounts receivable, the related reserve is transferred to our trade accounts receivable allowance.

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We write-off receivables when they have been deemed 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. Any incremental interest income for installments receivable that has been reserved against is offset by an additional provision to the allowance for doubtful accounts.

The following table summarizes our net current and non-current installments receivable, net of related unamortized discount and allowance for doubtful accounts balances at September 30, 2011 and June 30, 2011 (dollars in thousands) :

	Current			Non-current			Total
September 30, 2011
Installments receivable, gross	$	40,523		$	46,533		$	87,056
Less: Unamortized discount		(1,664	)		(5,896	)		(7,560	)
Less: Allowance for doubtful accounts		(660	)		(71	)		(731	)
Installments receivable, net	$	38,199		$	40,566		$	78,765

June 30, 2011
Installments receivable, gross	$	41,407		$	55,277		$	96,684
Less: Unamortized discount		(1,937	)		(7,383	)		(9,320	)
Less: Allowance for doubtful accounts		(767	)		(121	)		(888	)
Installments receivable, net	$	38,703		$	47,773		$	86,476

The following table shows a rollforward of our current and non-current allowance for doubtful accounts for the installments receivable balances during the periods ending September 30, 2011 and 2010, respectively (dollars in thousands):

	Current			Non-current			Total

September 30, 2011
Balance at June 30, 2011	$	767		$	121		$	888
Transfers to trade accounts receivable		(41	)		-			(41	)
Transfers from non-current to current		-			-			-
Write-offs		(19	)		(21	)		(40	)
Recoveries of previous write-offs		-			-			-
Provision for bad debts		(47	)		(29	)		(76	)
Balance at September 30, 2011	$	660		$	71		$	731


September 30, 2010
Balance at June 30, 2010	$	1,119		$	1,196		$	2,315
Transfers to trade accounts receivable		(70	)		-			(70	)
Transfers from non-current to current		26			(26	)		-
Write-offs		-			-			-
Recoveries of previous write-offs		-			-			-
Provision for bad debts		91			26			117
Balance at September 30, 2010	$	1,166		$	1,196		$	2,362

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Our installments receivable balance will continue to decrease over time, as licensing agreements previously executed under our upfront revenue model reach the end of their terms and are renewed under our new licensing model. Under the aspenONE subscription offering and for point product arrangements with enhanced SMS, payment amounts under extended payment term arrangements are not presented in the condensed consolidated balance sheets as the related arrangement fees are not fixed or determinable. Accordingly, future installments under our new licensing model are not considered financing receivables.

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.

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, 2011.

3. Goodwill

The changes in the carrying amount of goodwill by reporting unit for the three months ended September 30, 2011 were as follows (dollars in thousands):

	Reporting Unit
				Professional			Maintenance
Asset Class	License			Services			and Training			Total
Balance as of June 30, 2011
Goodwill	$	68,049		$	5,102		$	16,144		$	89,295
Accumulated impairment losses		(65,569	)		(5,102	)		-			(70,671	)
	$	2,480		$	-		$	16,144		$	18,624

Effect of changes in currency translation		(7	)		-			(826	)		(833	)

Balance as of September 30, 2011
Goodwill	$	68,042		$	5,102		$	15,318		$	88,462
Accumulated impairment losses		(65,569	)		(5,102	)		-			(70,671	)
	$	2,473		$	-		$	15,318		$	17,791

We test goodwill for impairment annually (or more often if impairment indicators arise), at the reporting unit level using a fair value- based approach in accordance with the provisions of ASC 350, Intangibles—Goodwill and Other. We have elected December 31st as the annual impairment assessment date and perform additional impairment tests if triggering events occur. The initial step requires us to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such reporting unit. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value 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 (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 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 are based on our most recent long-term financial projections. The discount rate is determined using estimates of market participant risk-adjusted weighted-average costs of capital and reflects the risks associated with achieving future cash flows.

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We performed our annual impairment test for each reporting unit as of December 31, 2010 and determined that their estimated fair values substantially exceeded the carrying values. As such, no impairment losses were recognized as a result of the 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. No triggering events indicating goodwill impairment occurred during the three months ended September 30, 2011.

4. Income Taxes

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 future generation of future taxable income, the ability to utilize tax credits, 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 carry-forwards, and other matters in making this assessment.

Based on our evaluation of the realizability of our deferred tax assets in future years, a significant portion of the U.S. valuation allowance was reversed during the year ended June 30, 2011 due to our projection of future taxable income. A valuation allowance has been retained in the U.S. for certain R&D credits that are anticipated to expire unused and for a deferred tax asset on unrealized capital losses. A valuation allowance has also been retained on certain foreign subsidiary net operating loss (“NOL”) carryfowards because it is more likely than not that a benefit will not be realized. At September 30, 2011 and June 30, 2011, our total valuation allowance was $8.3 million and $8.0 million, respectively.

We do not provide deferred taxes on unremitted earnings of foreign subsidiaries since we intend to indefinitely reinvest such earnings either currently or sometime in the foreseeable future. The unrecognized provision 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.

We are continuously subject to examination by the IRS, as well as various state and foreign jurisdictions. The IRS and other taxing authorities may challenge certain deductions and credits reported by us on our income tax returns. We account for uncertain tax positions pursuant to FIN 48, Accounting for Uncertain Tax Positions, (currently included as provisions of ASC Topic 740, Income Taxes), which clarifies the criteria for recognition and measurement of benefits from uncertain tax positions. Under this guidance, an entity should recognize a tax benefit when it is more-likely-than-not, based on the technical merits, that the position would be sustained upon examination by a taxing authority. The amount to be recognized, if the more-likely-than-not threshold is passed, should be measured as the largest amount of tax benefit that is greater than 50 percent likely to be realized upon the ultimate settlement with a taxing authority that has full knowledge of all relevant information. Furthermore, any change in the recognition, de-recognition or measurement of a tax position should be recorded in the period in which the change occurs. We account for interest and penalties related to uncertain tax positions as part of the provision for income taxes.

5. Fair Value Measurements

We determine fair value 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.

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Cash equivalents of $128.0 million and $139.0 million as of September 30, 2011, and June 30, 2011, respectively, are reported at fair value utilizing quoted market prices in identical markets, or Level 1 inputs. Our cash equivalents consist of short-term, highly liquid investments with remaining maturities of three months or less when purchased.

Financial instruments not measured or recorded at fair value in the accompanying financial statements consist of accounts receivable, installments receivable, collateralized receivables, accounts payable and secured borrowings. The estimated fair value of accounts receivable, installments receivable, collateralized receivables and accounts payable approximates their carrying value. The estimated fair value of secured borrowings exceeds the carrying value by $0.7 million and $1.1 million as of September 30, 2011 and June 30, 2011, respectively. The fair value of secured borrowings was calculated using the market approach, utilizing interest rates that were indirectly observable in markets for similar liabilities, or Level 2 inputs.

6. Supplementary Balance Sheet Information

The following table summarizes our accounts receivable and collateralized receivables balances, net of the related allowance for doubtful accounts and unamortized discount, as of September 30, 2011 and June 30, 2011 (dollars in thousands). Refer to Note 2 for a summary of our installments receivable balances. Collateralized receivables are presented on the consolidated balance sheet and in the table below, net of discounts for future interest established at inception of the installment arrangement and carry terms of up to five years.

			Unamortized
	Gross		Discounts		Allowance		Net

September 30, 2011
Accounts Receivable	$	23,855	$	-	$	1,857	$	21,998

Collateralized Receivable
Current		16,627		462		-		16,165
Non-current		8,340		736		-		7,604
	$	24,967	$	1,198	$	-	$	23,769

June 30, 2011
Accounts Receivable	$	29,750	$	-	$	1,884	$	27,866

Collateralized Receivable
Current		16,371		623		-		15,748
Non-current		10,320		1,029		-		9,291
	$	26,691	$	1,652	$	-	$	25,039

Accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets consist of the following (dollars in thousands):

	September 30, 2011		June 30, 2011
Royalties and outside commissions	$	2,859	$	3,158
Payroll and payroll-related		10,843		20,510
Restructuring accruals		3,217		3,259
Amounts due to financing institutions		25,297		26,038
Other		12,670		11,502
Accrued expenses and other current liabilities	$	54,886	$	64,467

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Current liabilities for amounts due to financing institutions totaled $25.3 million at September 30, 2011 and $26.0 million at June 30, 2011. The balance is primarily attributable to amounts due to a financing institution for a large previously financed arrangement, which was superseded by the customer in fiscal 2011. The arrangement has not yet been repaid or replaced to the financing institution.

Other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets consist of the following (dollars in thousands):

	September 30, 2011		June 30, 2011
Restructuring accruals	$	106	$	942
Deferred rent		2,070		2,139
Royalties and outside commissions		454		603
Other *		29,186		29,394
Total other non-current liabilities	$	31,816	$	33,078

*	Other is comprised primarily of our reserve for uncertain tax liabilities (including accrued interest and penalties) of $28.1 million and $28.3 million as of September 30, 2011 and June 30, 2011, respectively.

7. Stock-Based Compensation

General Award Terms

We issue stock options and restricted stock units to our employees and outside directors, pursuant to stockholder approved stock option plans. Option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant; those options generally vest over four years and have 7 or 10-year contractual terms. Restricted stock units (RSUs) generally vest over four years. Historically, our practice has been to settle stock option exercises and restricted stock vesting through newly- issued shares.

Stock-Based 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 over the requisite service period for time-vested awards.

The weighted average estimated fair value of awards granted during the three months ended September 30, 2011 and 2010 was $6.46 and $4.83, respectively. We utilized the Black-Scholes option valuation model with the following weighted average assumptions:

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	Three Months Ended September 30,
	2011			2010
Risk-free interest rate		1.2	%		1.4	%
Expected dividend yield		0.0	%		0.0	%
Expected life (in years)		4.6			4.5
Expected volatility factor		49.6	%		52.9	%

The stock-based compensation expense and its classification (dollars in thousands) in the condensed consolidated statements of operations for the three months ended September 30, 2011 and 2010 were as follows:

	Three Months Ended September 30,
Recorded as expense:	2011		2010
Cost of service and other	$	303	$	253
Selling and marketing		1,170		896
Research and development		348		289
General and administrative		1,887		1,259
Total stock-based compensation	$	3,708	$	2,697

A summary of stock option and RSU activity under all equity plans for the three months ended September 30, 2011 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, 2011		4,724,305		$	7.64			$	45,058		1,338,376		$	10.19
Granted		751,072			15.50						893,107			15.50
Settled(RSUs)		-			-						(248,703	)		11.78
Exercised		(243,024	)		9.17						-
Cancelled/Forfeited		(24,309	)		10.28						(37,552	)		10.73
Outstanding at September 30, 2011		5,208,044		$	8.69		5.5	$	34,434		1,945,228		$	12.41

Exercisable at September 30, 2011		3,872,167		$	7.07		4.2	$	31,775		-			-

Vested and expected to vest as of September 30, 2011		5,035,652		$	8.53		5.3	$	34,091		1,684,334		$	12.42

The weighted average grant-date fair value of RSUs granted during the three months ended September 30, 2011 and 2010 was $15.50 and $10.93, respectively. During the three months ended September 30, 2011 and 2010, the total fair value of shares vested from RSU grants was $3.8 million and $2.4 million, respectively.

At September 30, 2011, the total future unrecognized compensation cost related to stock options and RSUs was $6.7 million and $20.9 million, respectively, and is expected to be recorded over a weighted average period of 3.3 years and 3.0 years, respectively.

The total intrinsic value of options exercised during the three months ended September 30, 2011 and 2010 was $1.8 million and $0.1 million, respectively. We received $2.2 million and $0.1 million in cash proceeds from option exercises during the three months ended September 30, 2011 and 2010, respectively. We paid $1.2 million and $0.8 million for withholding taxes on vested RSUs during the three months ended September 30, 2011 and 2010, respectively.

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At September 30, 2011, common stock reserved for future issuance or settlement under equity compensation plans was 13.1 million shares.

8. Common Stock

On October 29, 2010, our Board of Directors approved a stock repurchase program for up to $40 million worth of our common stock. The timing and amount of any shares repurchased are determined based on management’s evaluation of market conditions and other factors. All share repurchases of our common stock have been recorded as treasury stock under the cost method. We repurchased 587,000 shares of our common stock for $9.2 million during the three months ended September 30, 2011. As of September 30, 2011, the remaining dollar value under the stock repurchase program approved by our Board of Directors on October 29, 2010 was $20.3 million.

9. Net Loss per Common Share

Basic loss per share is determined by dividing the loss by the weighted average common shares outstanding during the period. Diluted loss per share is determined by dividing the loss by diluted weighted average shares outstanding during the period. Diluted weighted average shares reflect the dilutive effect, if any, of potential common shares. To the extent their effect is dilutive, employee equity awards and other commitments to be settled in common stock are included in the calculation of diluted earnings (or income) per share based on the treasury stock method.

For the three months ended September 30, 2011 and 2010, all potential common shares were anti-dilutive due to the net loss. The calculations of basic and diluted loss per share and basic and diluted weighted average shares outstanding are as follows (dollars and shares in thousands, except per share data):

	Three Months Ended
	September 30,
	2011			2010

Net loss	$	(11,736	)	$	(15,468	)

Weighted average shares outstanding		94,065			92,689
Dilutive impact from:
Share-based payment awards		-			-
Warrants		-			-
Dilutive weighted average shares outstanding		94,065			92,689

Loss per share
Basic	$	(0.12	)	$	(0.17	)
Dilutive	$	(0.12	)	$	(0.17	)

Historically, we issued warrants to purchase 7,267,286 shares of common stock in connection with various financing activities. These warrants provided for net equity settlement and were accounted for in equity. Prior to fiscal 2011, 6,636,646 warrants were exercised in a cashless exercise resulting in the issuance of 4,869,539 shares of common stock. During fiscal 2011, the remaining 630,640 warrants were exercised in a cashless exercise resulting in the issuance of 424,753 shares of common stock. There were no warrants outstanding at September 30, 2011 or June 30, 2011.

The following potential common shares were excluded from the calculation of diluted weighted average shares outstanding because their inclusion would be anti-dilutive at the balance sheet date due to the net loss (shares in thousands):

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	Three Months Ended
	September 30,
	2011		2010
Employee equity awards		7,013		8,246

10. Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive loss for the three months ended September 30, 2011 and 2010 were as follows (dollars in thousands):

	Three Months Ended
	September 30,
	2011			2010
Net loss	$	(11,736	)	$	(15,468	)
Foreign currency translation adjustments		(193	)		429
Total comprehensive loss	$	(11,929	)	$	(15,039	)

11. Commitments and Contingencies

(a)	ATME arbitration

Prior to October 6, 2009, we had an exclusive reseller relationship covering certain countries in the Middle East with AspenTech Middle East W.L.L., a Kuwaiti corporation (now known as Advanced Technology Middle East W.L.L.) that we refer to below as ATME. Under the reseller agreement, we had the right to terminate for a material breach in the event of ATME’s willful misconduct or fraud. Effective October 6, 2009, we terminated the reseller relationship for material breach by ATME based on certain actions of ATME.

On November 2, 2009, ATME commenced an action in the Queen’s Bench Division (Commercial Court) of the High Court of Justice (England & Wales) captioned In The Matter Of An Intended Arbitration Between AspenTech Middle East W.L.L. and Aspen Technology, Inc., 2009 Folio 1436, seeking preliminary injunctive relief restraining us from taking any steps to impede ATME from serving as our exclusive reseller in the countries covered by the reseller agreement with ATME. We filed evidence in opposition to that request for relief on November 12, 2009. At a hearing on November 13, 2009, the court dismissed ATME’s application for preliminary injunctive relief. The court sealed an Order to this effect on November 23, 2009, and further ordered that ATME pay our costs of claim.

Relatedly, on November 11, 2009, we filed a request for arbitration against ATME in the International Court of Arbitration of the International Chamber of Commerce, captioned Aspen Technology, Inc. v. AspenTech Middle East W.L.L., Case No. 16732/VRO. Our request for arbitration asserted claims against ATME seeking a declaration that ATME committed a material breach of our agreement and that our termination of our agreement was lawful, and seeking damages for ATME’s willful misconduct in connection with the reseller relationship. On November 18, 2009, ATME filed its answer to that request for arbitration and asserted counterclaims against us seeking a declaratory judgment that we unlawfully terminated our agreement with ATME and seeking damages for breach of contract by reason of our purported unlawful termination of our agreement. Our reply to those counterclaims was filed on December 18, 2009. Pursuant to a procedural order issued by the arbitral tribunal, a hearing was conducted between January 24, 2011 and February 2, 2011, and a supplemental hearing took place in June 2011.

We expect a determination to be made in the first half of fiscal 2012 with respect to the pending arbitration. However, we can provide no assurance as to the actual timing or outcome of the arbitration. In general, there is no provision for either party to appeal the determination reached. The reseller agreement with ATME contained a provision whereby we could be liable for a termination fee if the agreement were terminated other than for material breach. This fee is to be calculated based on a formula contained in the reseller agreement that we believe was originally developed based on certain assumptions about the future financial performance of ATME, as well as ATME’s actual financial performance. Based on the formula and the financial information provided to us by ATME, which we have not verified independently, a calculation based on the formula would result in a termination fee of between $60 million and $77 million. Under the terminated reseller agreement, no termination fee is owed on termination for material breach. If we are found to have breached the terms of our agreement with ATME, we could be liable for damages including the termination fee, the amount of which may be greater or less than the number indicated above.

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On March 11, 2010, a Kuwaiti entity (known as ATME Group and affiliated with ATME) filed a lawsuit in a Kuwaiti court naming as defendants ATME, us and a reseller newly appointed by us in Kuwait. In this lawsuit, ATME Group claims that it was an exclusive reseller for ATME in Kuwait and, as such, is entitled to damages resulting from purported customer contracts in Kuwait. We intend to defend this action vigorously.

(b)	Class action and opt-out claims

In March 2006, we settled class action litigation, including related derivative claims, arising out of our originally filed consolidated financial statements for fiscal 2000 through 2004, the accounting for which we restated in March 2005. Certain members of the class (representing 1,457,969 shares of common stock (or less than 1% of the shares putatively purchased during the class action period)) opted out of the settlement and had the right to bring their own state or federal law claims against us, referred to as “opt-out” claims. Opt-out claims were filed on behalf of the holders of approximately 1.1 million of such shares. All but one of these actions were settled and/or dismissed. The remaining action is discussed below.

380544 Canada, Inc., et al. v. Aspen Technology, Inc., was filed on February 15, 2007 in the federal district court for the Southern District of New York and docketed as Civ. A. No. 1:07-cv-01204-JFK in that court. The claims in this action include claims against us and one or more of our former officers alleging securities and common law fraud, breach of contract, deceptive practices and/or rescissory damages liability, based on the restated results of one or more fiscal periods included in our restated consolidated financial statements referenced in the class action. This action was brought by persons who purchased 566,665 shares of our common stock in a private placement. Certain motions to dismiss filed by other defendants were resolved on May 5, 2009. On July 26, 2010, the plaintiff moved for leave to file a second amended complaint, and the motion was denied on September 14, 2011. Fact discovery is scheduled to close on February 24, 2012. The claims in the 380544 Canada action are for damages totaling at least $4.0 million, not including claims for attorneys’ fees. We plan to defend the 380544 Canada action vigorously.

(c)

Other

In the ordinary course of business, we are also from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation, including proceedings we have instituted to enforce our intellectual property rights, and other intellection property, commercial and miscellaneous matters. These matters include an April 2004 claim by a customer for approximately $5.0 million that certain of our software products and implementation services failed to meet the customer’s expectations.

The results of litigation and claims cannot be predicted with certainty, and unfavorable resolutions are possible and could materially affect our results of operations, cash flows or financial position. In addition, regardless of the outcome, litigation could have an adverse impact on us because of litigation fees and costs, diversion of management resources and other factors.

While the outcome of the proceedings and claims identified above cannot be predicted with certainty, there are no other such matters, as of September 30, 2011, that, in the opinion of management, might have a material adverse effect on our financial position, results of operations or cash flows.

12. Segment and Geographic Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer.

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We have three operating segments: license, maintenance and training, and professional services. The chief operating decision maker assesses financial performance and allocates resources based upon the three lines of business.

The license line of business is engaged in the development and licensing of software. The maintenance and training line of business provides customers with a wide range of support services that include on-site support, telephone support, software updates and various forms of training on how to use our products. The professional services line of business offers implementation, advanced process control, real-time optimization and other professional services in order to provide its customers with complete solutions.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (refer to Note 2). We do not track assets or capital expenditures by operating segments. Consequently, it is not practical to show assets, capital expenditures, depreciation or amortization by operating segments.

The following table presents a summary of operating segments (dollars in thousands):

			Maintenance,
			Training		Professional
	License		and Other		Services			Total
Three Months Ended September 30, 2011
Segment revenue	$	31,910	$	14,167	$	5,148		$	51,225
Segment expenses		16,552		2,692		6,398			25,642
Segment operating profit (1)	$	15,358	$	11,475	$	(1,250	)	$	25,583
Three Months Ended September 30, 2010
Segment revenue	$	18,967	$	17,470	$	6,663		$	43,100
Segment expenses		14,393		3,137		5,940			23,470
Segment operating profit (1)	$	4,574	$	14,333	$	723		$	19,630

(1)

The Segment operating profits reported reflect only the direct expenses of the operating segment and do not contain an allocation for selling and marketing, general and administrative, development, restructuring and other corporate expenses incurred in support of the segments.

Reconciliation to Loss Before Provision for Taxes

The following table presents a reconciliation of total segment operating profit to loss before income taxes for the three months ended September 30, 2011 and 2010 (dollars in thousands):

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	Three Months Ended
	September 30,
	2011			2010
Total segment operating profit for reportable segments	$	25,583		$	19,630
Cost of license		(2,724	)		(2,122	)
Selling and marketing		(3,868	)		(3,237	)
Research and development		(11,573	)		(10,349	)
General and administrative and overhead		(19,408	)		(20,856	)
Stock-based compensation		(3,708	)		(2,697	)
Restructuring charges		73			(77	)
Other (expense) income, net		(2,032	)		2,664
Interest income (net)		1,139			2,458
Loss before income taxes	$	(16,518	)	$	(14,586	)

13. Subsequent Events

We evaluated events occurring between September 30, 2011 and the date the financial statements were issued. There were no subsequent events to be disclosed based on this evaluation.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements and related notes beginning on page 3. In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties. You should read "Item 1A. Risk Factors,” for a discussion of important factors that could cause our actual results to differ materially from our expectations.

Our fiscal year ends on June 30, and references in this Quarterly Report to a specific fiscal year are the twelve months ended June 30 of such year (for example, "fiscal 2012" refers to the year ending June 30, 2012).

Business Overview

We are a leading global provider of mission-critical process optimization software solutions, which are designed to manage and optimize plant and process design, operational performance, and supply chain planning. Our aspenONE software and related services have been developed for companies in the process industries. Customers use our solutions to improve their competitiveness and profitability by increasing throughput and productivity, reducing operating costs, enhancing capital efficiency, and decreasing working capital requirements.

We have more than 1,500 customers globally. Our customers include manufacturers and firms in process industries such as energy, chemicals, engineering and construction, and pharmaceuticals, as well as consumer packaged goods, power, metals and mining, pulp and paper, and biofuels. As of June 30, 2011, our installed base included 19 of the 20 largest petroleum companies, all of the 20 largest chemical companies, and 15 of the 20 largest pharmaceutical companies.

Transition to the aspenONE Subscription Offering

In fiscal 2010 we began offering our aspenONE software as a subscription model, which allows our customers access to all products within a licensed suite (aspenONE Engineering or aspenONE Manufacturing and Supply Chain). During the license term, a customer is entitled to receive post-contract support, which we refer to as SMS, and is entitled to any software products introduced into the licensed suite. Revenue is recognized over the term of a license agreement on a subscription, or ratable basis. We typically issue invoices annually and record each invoiced payment as deferred revenue. We then recognize revenue from the invoice due date over the applicable period. We also offer our customers the ability to license specifically defined sets of aspenONE products, referred to as point products, which in July 2009, we began licensing with SMS included for the entire term. In fiscal 2010 and 2011, revenue from point product arrangements was generally recognized on the due date of each annual installment, provided all other revenue recognition requirements were met.

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, without SMS included for the entire term of the arrangement. 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. We typically invoiced customers annually and recorded the net present value of uninvoiced payments as installments receivable. Customers typically received one year of SMS with their license agreements and then could elect to renew SMS annually. Revenue from SMS was recognized ratably over the period which the SMS was delivered.

The principal accounting implications of the change in our licensing model are as follows:

Because the timing of our incurrence of operating costs has not changed, the lower levels of revenue expected over the next few years may result in operating losses.

Our aspenONE subscription offering and the inclusion of SMS for the term of our point product arrangements have not changed the method or timing of our customer billings or cash collections and our net cash provided by operating activities has increased since the license model change.

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The amount of our deferred revenue will continue to increase over time, as installments for license transactions executed under our subscription-based licensing model are deferred and recognized on a ratable basis.

For additional information about the recognition of revenue under the upfront revenue model and our new licensing models, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Revenue” contained in Part II, Item 7 of our Form 10-K for our fiscal year ended June 30, 2011. Because of the accounting implications of our aspenONE subscription offering and the inclusion of enhanced SMS for the entire term of our point product arrangements, we believe that, for the next several years, a number of performance indicators based on U.S. generally accepted accounting principles, or GAAP, will be of limited value in assessing our performance, growth and financial condition. Accordingly, we are focusing on a number of other business metrics, including those described below under “—Key Business Metrics.”

Introduction of our Enhanced SMS Offering

Revenue

We generate revenue primarily from the following sources:

•

Software licenses. We provide integrated process optimization software solutions designed specifically for the process industries. We license our software products, together with SMS, primarily on a term basis, and we offer extended payment options for our term license agreements that generally require annual payments, which we also refer to as installments.

•

SMS and other. Our SMS business consists primarily of providing customer technical support and access to software fixes and updates. We provide customer technical support services throughout the world from our three global call centers as well as via email and through our support website. Our training business provides customers with a variety of training solutions, including on-site, Internet-based and customized training.

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•

Professional services. We offer professional services that include implementing and integrating our technology with customers’ existing systems in order to improve their plant performance and gain better operational data. Customers who use our professional services typically engage us to provide those services over periods of up to 24 months. We charge customers for professional services on a time-and-materials or fixed-price basis.

Key Components of Operations

Revenue

Subscription and Software Revenue. Subscription and software revenue consists of product and related revenue from our (i) aspenONE subscription arrangements; (ii) fixed-term arrangements for point product licenses with our enhanced SMS offering included for the contract term (referred to as point product arrangements with enhanced SMS); (iii) upfront amendments to legacy term arrangements (referred to as upfront legacy amendments) and 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 (referred to as legacy arrangements); and, (iv) perpetual arrangements.

Our point product arrangements with enhanced SMS also include SMS for the term of the arrangement. Since we do not have vendor-specific objective evidence of fair value, or VOSE, for our enhanced SMS offering, the SMS element of our point product arrangements is not separable. As a result, the total revenue is also recognized ratably over the term of the arrangement, once the four revenue recognition criteria are met.

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

Results of Operations Classification - Subscription and Software Revenue

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	Revenue Classification in Income Statement		Revenue Recognition Methodology
	Fiscal 2012	Fiscal 2011 and 2010	Fiscal 2012	Fiscal 2011 and 2010
Type of Revenue:
aspenONE subscription	Subscription and software	Subscription	Ratable	Ratable
Point products
- Software	Subscription and software	Software	Ratable	Residual method
- Bundled SMS	Subscription and software	Services and other	Ratable	Ratable
Other
- Upfront legacy amendments and legacy arrangements	Subscription and software	Software	Residual method	Residual method
- Perpetual arrangements	Subscription and software	Software	Residual method	Residual method

Services and Other Revenue. Our services and other revenue consist primarily of revenue related to professional services, standalone renewals of our legacy SMS offering and training. The amount and timing of this revenue depend on a number of factors, including:

•

whether the professional services arrangement was sold as a single arrangement with, or in contemplation of, a new aspenONE licensing transaction;

•

the number, value and rate per hour of service transactions booked during the current and preceding periods;

•

the number and availability of service resources actively engaged on billable projects;

•

the timing of milestone acceptance for engagements contractually requiring customer sign-off;

•

the timing of negotiating and signing maintenance renewals;

•

the timing of collection of cash payments when collectability is uncertain; and

•

the size of the installed base of license contracts.

Cost of Revenue

Cost of Subscription and Software. The cost of subscription and software revenue consists of royalties, amortization of capitalized software costs, distribution fees, the costs of providing SMS on arrangements where the related revenue is recorded as subscription and software revenue, and costs related to delivery of software.

Cost of Services and Other. Our cost of services and other revenue consists primarily of personnel-related and external consultant costs associated with providing professional services, SMS on arrangements for which we have VSOE for the SMS element and training to customers.

Operating Expenses

Selling and Marketing Expense. Selling expenses consist primarily of the personnel and travel expenses related to the effort expended to license our products and services to current and potential customers, as well as for overall management of customer relationships. Marketing expenses include expenses needed to promote our company and our products and to acquire market research and measure customer opinions to help us better understand our customers and their business needs.

Research and Development Expense. Research and development expenses primarily consist of personnel and external consultant expenses related to the creation of new products and to enhancements and engineering changes to existing products.

General and Administrative Expense. General and administrative expenses include the costs of corporate and support functions, such as executive leadership and administration groups, finance, legal, human resources and corporate communications, and other costs such as outside professional and consultant fees and provision for bad debts.

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Restructuring Charges. Restructuring charges result from the closure or consolidation of our facilities, or from qualifying reductions in headcount.

Other Income and Expenses

Interest Income. Interest income is recorded for the accretion of interest on the installment payments of our term software license contracts when revenue is recognized upfront at net present value, and to a lesser extent from the investment of cash balances in short-term instruments.

Interest Expense. Interest expense consists of charges primarily related to our secured borrowings. Secured borrowings are derived from our borrowing arrangements with unrelated financial institutions.

Other Income (Expense), Net. Other income (expense), net is comprised primarily of foreign currency exchange gains (losses) generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units. We may enter into foreign currency forward contracts to attempt to minimize the adverse impact related to unfavorable exchange rate movements, although we have not done so since fiscal 2008. Historically, our foreign currency forward contracts have not been designated as hedging instruments and, therefore, do not qualify for fair value or cash flow hedge treatment under the criteria of Accounting Standards Codification, or ASC, Topic 815, Derivatives and Hedging. Therefore, any unrealized gains and losses on the foreign currency forward contracts, as well as the underlying transactions we are attempting to shield from exchange rate movements, would be recognized as a component of other income (expense), net.

(Benefit from) provision for Income Taxes. The benefit from, or provision for, income taxes is comprised of the deferred benefit for tax deductions and credits that we expect to utilize in the future taxes. The provision for income taxes relates to any taxes currently payable as a result of domestic and foreign operations. We record interest and penalties related to income tax matters as income tax expense. We expect the amount of income tax expense, if any, to vary each reporting period depending upon fluctuations in our taxable income by jurisdiction.

Key Business Metrics

Background

With the adoption of our subscription-based licensing model, our revenue for fiscal 2010, 2011 and the three months ended September 30, 2011 was significantly less than in the years preceding our model change. Since the upfront model resulted in the net present value of multiple years of future installments being recognized at the time of shipment, we do not expect to recognize levels of revenue comparable to our pre-transition levels until a significant majority of license agreements executed under our upfront revenue model (i) reach the end of their original terms and (ii) are renewed. As a result, we believe that, for the next few years, a number of our performance indicators based on U.S. generally accepted accounting principles or GAAP, including revenue, gross profit, operating income (loss) and net income (loss), will be of limited value in assessing our performance, growth and financial condition. Accordingly, we instead are focusing on certain non-GAAP and other business metrics, including the key metrics set forth below, to track our business performance. None of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with GAAP.

To supplement our statements of cash flows presented on a GAAP basis, we use the non-GAAP measure of free cash flow to analyze cash flows generated from our operations. Management believes that this financial measure is useful to investors because it permits investors to view our performance using the same tools that management uses to gauge progress in achieving our goals. We believe this measure is also useful to investors because it is an indication of cash flow that may be available to fund investments in future growth initiatives and it is also useful as a basis for comparing our performance with that of our competitors. To supplement our presentation of total cost of revenue and total operating costs presented on a GAAP basis, we use a non-GAAP measure of adjusted total costs, which excludes certain non-cash and non-recurring expenses. Management believes that this financial measure is useful to investors because it demonstrates the cash operating costs of the business. The presentation of these non-GAAP measures is not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity or as an alternative to total cost of revenue and total operating costs as a measure of our total costs.

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Total Term Contract Value

Total term contract value, or TCV, is an estimate of the renewal value, as of a specific date, of our active portfolio of term license agreements. TCV is calculated by multiplying the terminal annual payment for each active term license agreement by the original length of the existing license term, and then aggregating this amount for all active term license agreements. Accordingly, TCV represents the full renewal value of all of our current term license agreements under the hypothetical assumption that all of those agreements are simultaneously renewed for the identical license terms and at the same terminal annual payment amounts. TCV includes the value of SMS for any multi-year license agreements for which SMS is committed for the entire license term. TCV does not include any amounts for perpetual licenses, professional services, training or standalone renewal SMS. TCV is calculated using constant currency assumptions for agreements denominated in currencies other than U.S. dollars in order to remove the impact of currency fluctuations between comparison dates.

We also estimate a license-only TCV, which we refer to as TLCV, by removing the SMS portion of TCV using our historic estimated selling price for SMS. Our portfolio of active license agreements currently reflects a mix of (a) license agreements that include SMS for the entire license term and (b) legacy license agreements that do not include SMS. TLCV provides a consistent basis for assessing growth, particularly while customers are continuing to transition to arrangements that include SMS for the term of the arrangement.

We believe TCV and TLCV are useful metrics for analyzing our business performance, particularly while we are transitioning to our aspenONE subscription offering and revenue comparisons between fiscal periods do not reflect the actual growth rate of our business. Comparing TCV and TLCV for different dates provides insight into the growth and retention rate of our business during the period between those dates.

TCV and TLCV increase as the result of:

•

new term license agreements with new or existing customers;

•

renewals or modifications of existing license agreements that result in higher license fees due to price escalation or an increase in the number of tokens (units of software usage) or products licensed; and

•

renewals of existing license agreements that increase the length of the license term.

The renewal of an existing license agreement will not increase TCV and TLCV unless the renewal results in higher license fees or a longer license term. TCV and TLCV are adversely affected by customer non-renewals and by renewals that result in lower license fees or a shorter license term. Our standard license term historically has been between five and six years, and we do not expect this standard term to change in the future. Many of our contracts have escalating annual payments throughout the term of the arrangement. By calculating TCV and TLCV based on the terminal year annual payment, we are typically using the highest annual fee from the existing arrangement to calculate the hypothetical renewal value of our portfolio of term arrangements.

We estimate that TLCV grew by approximately 2.2% to $1.31 billion in the first quarter of fiscal 2012, from $1.28 billion at June 30, 2011, principally as the result of an increase in the number of tokens or products licensed. We estimate that TCV grew 2.7% to $1.46 billion in the first quarter of fiscal 2012, from $1.42 billion at June 30, 2011.

Future Cash Collections and Billings Backlog

Future cash collections is the sum of billings backlog, accounts receivable, undiscounted installments receivable and undiscounted collateralized receivables. Billings backlog represents the aggregate value of uninvoiced bookings from prior and current periods that is not reflected on our consolidated balance sheets.

Prior to fiscal 2010, the majority of bookings was recognized as revenue in the period booked and reflected on our balance sheet as installments receivable, or if sold, as collateralized receivables. Installments receivable and collateralized receivables were discounted to net present value at prevailing market rates at the time of the transaction. Amounts collected for collateralized receivables are applied to pay the related secured borrowings and are not available for any other expenditures.

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Under our aspenONE subscription offering and point product arrangements with enhanced SMS, extended contractual payments are not considered fixed or determinable and, as a result, are not included in installments receivable or collateralized receivables. These future payments are included in billings backlog, which is not reflected on our consolidated balance sheets. We believe future cash collections is a useful metric because it provides insight into the cash generation capability of our business. Under the upfront revenue model, we did not previously monitor billings backlog or future cash collections since we believed that accounts receivable, installments receivable, collateralized receivables and certain other measures were appropriate indicators of estimated cash generation at that time.

Since a substantial majority of our future bookings will reflect arrangements which include SMS for the term of the arrangement, we expect billings backlog to grow over time and expect installments receivable and collateralized receivables to decline. To the extent customers have transitioned to arrangements which include SMS for the term of the arrangement, our future cash collections will include the contractually committed sources of cash associated with our licensing and SMS business. The only sources of cash that will continue to be excluded from future cash collections will be amounts attributable to professional services, training and any remaining standalone SMS.

The following table provides our future cash collections as of the dates presented (dollars in thosands):

	September 30, 2011		June 30, 2011
Billings backlog	$	661,759	$	640,988
Accounts receivable, net		21,998		27,866
Installments receivable, undiscounted (non-GAAP) (1)		86,325		95,796
Collateralized receivables, undiscounted (non-GAAP) (1)		24,967		26,691
Future cash collections	$	795,049	$	791,341

______________________

(1)	Excludes unamortized discount.

The growth in billings backlog for the quarter ended September 30, 2011 reflected our customers’ continued adoption of our subscription- based licensing model. As customers continue to convert to our subscription-based licensing model, the aggregate value of uninvoiced bookings will become part of billings backlog and future cash collections. We expect the future cash collections metric to level-off when most of our term contracts have converted to term arrangements with annual payment terms.

We are providing the following table for the periods presented to reconcile undiscounted installment and collateralized receivables, as included in our future cash collections metric, with GAAP installment receivables, net and GAAP collateralized receivables, net (dollars in thousands):

	September 30, 2011			June 30, 2011
Installments receivable, undiscounted (non-GAAP)	$	86,325		$	95,796
Unamortized discount		(7,560	)		(9,320	)
Installments receivable, net	$	78,765		$	86,476

Collateralized receivables, undiscounted (non-GAAP)	$	24,967		$	26,691
Unamortized discount		(1,198	)		(1,652	)
Collateralized receivables, net	$	23,769		$	25,039

Installments and collateralized receivables are shown at net present value on our consolidated balance sheets. Future cash collections excludes the unamortized discount on installment and collateralized receivables. Amounts collected for collateralized receivables are applied to pay the related secured borrowings and are not available for any other expenditures.

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Adjusted Total Costs

The following table presents our total cost of revenue and total operating expenses, as adjusted for stock-based compensation expense, for the indicated periods (dollars in thousands):

	Three Months Ended September 30,						Period-to-Period Change
	2011			2010			$			%
Total cost of revenue	$	13,821		$	13,248		$	573		4.3	%
Total operating expenses		53,029			49,560			3,469		7.0
Total expenses	$	66,850		$	62,808		$	4,042		6.4
Less:
Stock-based compensation	$	(3,708	)	$	(2,697	)	$	(1,011	)	37.5
Adjusted total costs (non-GAAP)	$	63,142		$	60,111		$	3,031		5.0

Total expenses increased $4.0 million for the three months ended September 30, 2011 compared to the same period of the prior fiscal year. Adjusted total costs, which consist of total cost of revenue and total operating expenses, adjusted to exclude stock-based compensation, increased by $3.0 million for the three months ended September 30, 2011, respectively, compared to the same periods in the prior fiscal year.

Stock- Based Compensation Expense

The increase in stock-based compensation expense for the periods presented primarily relates to the incremental expense associated with the August 2011 annual grant, which had a higher valuation than the prior year annual grant. The higher grant valuation is primarily attributable to a higher grant date stock price of our common stock and the mix of granted awards being slightly more weighted to RSUs. RSUs result in more expense than options, as the gross stock-based compensation expense (prior to the effect of forfeitures) is based on the grant date stock price. Under the Black-Scholes option valuation model, options have a lesser valuation than the grant date share price. Also contributing to the period-over-period increase in total stock-based compensation expense was the immediate vesting of our board of director awards and the increase of the equity component of director’s compensation in fiscal 2012, which resulted in $0.5 million of incremental expense compared to the prior year period.

Comparison of the Three Months Ended September 30, 2011 and 2010

Adjusted total costs increased $3.0 million period-over-period, predominantly due to higher compensation and related costs. Please refer to the “- Results of Operations” section below for additional information on period-over-period expense fluctuations.

Free Cash Flow

Free cash flow is calculated as net cash provided by operating activities less the sum of (a) purchase of property, equipment and leasehold improvements and (b) capitalized computer software development costs.

Customer collections and, consequently, cash flow from operating activities and free cash flow are primarily driven by license and services billings, rather than recognized revenue. As a result, our changes in revenue recognition due to the introduction of our aspenONE subscription offering will not have an adverse impact on cash receipts. Until existing license contracts are renewed and license related revenue returns to prior year levels, we believe free cash flow is a more relevant measure of our financial performance than income statement profitability measures such as total revenue, gross profit, operating profit and net income. Additionally, we also believe that free cash flow is often used by security analysts, investors and other interested parties in the evaluation of software companies.

The following table provides a reconciliation of net cash flow to free cash flow provided by operating activities for the periods presented (dollars in thousands):

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	Three Months Ended September 30,
	2011			2010
Net cash provided by operating activities	$	5,273		$	6,388
Purchase of property, equipment and leasehold improvements		(386	)		(588	)
Capitalized computer software development costs		(200	)		(176	)
Free cash flow (non-GAAP)	$	4,687		$	5,624

Our cash receipts are historically seasonal in nature, and are typically highest in the second half of the fiscal year. We expect this trend to continue throughout fiscal 2012, with our cash flows from operating activities to be more heavily weighted to the second half of the year.

We believe we will realize improved free cash flow due to the continued growth of our portfolio of term license contracts and as customers continue to renew contracts that were previously paid upfront. As part of our historical arrangements, customers could elect to pay for their term licenses upfront, at a discount, rather than annually over the contract term. The timing of upfront payments resulted in increased cash flow variability, both in the period of the payment, and the subsequent years of the contract term. We have reduced the incentive for customers to pay up front and we expect our free cash flow to benefit as these arrangements reach the end of their terms and are renewed.

Critical Accounting Estimates and Judgments

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the assumptions and estimates associated with the following critical accounting policies have the greatest potential impact on our consolidated financial statements:

•

revenue recognition;

•

accounting for income taxes; and

•

loss contingencies.

Revenue Recognition

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 contract modifications to an existing term arrangement constitute a concession. In making this assessment, significant analysis is performed to ensure that no concessions are given. Our software license agreements do not include right of return or exchange. For license arrangements executed under the upfront revenue model, we recognize license revenue upon shipment of the software product, provided all other revenue recognition requirements are met.

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With the introduction of our aspenONE subscription offering and the changes to the licensing terms of our point products arrangements sold on a fixed-term basis, we cannot assert that the fees in these new arrangements are fixed or determinable because the rights provided to customers and the economics of the arrangements are not comparable to our historical 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. For our term arrangements sold with SMS included for the term of the arrangement this generally results in the fees being recognized ratably over the contract term.

Vendor-Specific Objective Evidence of Fair Value

Professional Services Revenue

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Please refer to Management’s Discussion and Analysis of Financial Condition and Result of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended June 30, 2011 for a discussion of our critical accounting policies and estimates related to accounting for income taxes and loss contingencies.

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Results of Operations

Comparison of the Three Months Ended September 30, 2011 and 2010

The following table sets forth the results of operations, percentage of net revenue and the period-to- period percentage change in certain financial data for the three months ended September 30, 2011 and 2010 (dollars in thousands):

	Three Months Ended
	September 30,
	2011					2010					% Change
Revenue:
Subscription and software	$	31,910		62.3	%	$	18,967		44.0	%		68.2	%
Services and other		19,315		37.7			24,133		56.0			(20.0	)
Total revenue		51,225		100.0			43,100		100.0			18.9
Cost of revenue:
Subscription and software		2,724		5.3			2,122		4.9			28.4
Services and other		11,097		21.7			11,126		25.8			(0.3	)
Total cost of revenue		13,821		27.0			13,248		30.7			4.3
Gross profit		37,404		73.0			29,852		69.3			25.3
Operating expenses:
Selling and marketing		23,446		45.8			20,351		47.2			15.2
Research and development		13,769		26.9			12,575		29.2			9.5
General and administrative		15,887		31.0			16,557		38.4			(4.0	)
Restructuring charges		(73	)	(0.1	)		77		0.2			*
Total operating expenses		53,029		103.5			49,560		115.0			7.0
Loss from operations		(15,625	)	(30.5	)		(19,708	)	(45.7	)		(20.7	)
Interest income		2,231		4.4			3,702		8.6			(39.7	)
Interest expense		(1,092	)	(2.1	)		(1,244	)	(2.9	)		(12.2	)
Other (expense) income, net		(2,032	)	(4.0	)		2,664		6.2			*
Loss before income taxes		(16,518	)	(32.2	)		(14,586	)	(33.8	)		13.2
(Benefit from) provision for income taxes		(4,782	)	(9.3	)		882		2.0			*
Net loss	$	(11,736	)	(22.9	) %	$	(15,468	)	(35.9	) %		(24.1	) %

* Not meaningful.

Revenue

Total revenue in the first quarter of fiscal 2012 increased by $8.1 million compared to the corresponding period of the prior year and was comprised of increased subscription and software revenue of $12.9 million, partially offset by decreased services and other revenue of $4.8 million.

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Subscription and Software Revenue

	Three Months Ended
	September 30,						Period-to-Period Change
	2011			2010			$		%
				(Dollars in thousands)
Subscription and software revenue	$	31,910		$	18,967		$	12,943	68.2	%
As a percent of revenue		62.3	%		44.0	%

The increase in subscription and software revenue in the first quarter of fiscal 2012 is a result of a larger base of aspenONE subscription arrangements from previous quarters being recognized as revenue on a ratable basis in the current quarter. We expect subscription and software revenue to continue to increase as customers renew existing contracts under our subscription-based licensing model and arrangements with ratable recognition become a more significant portion of our term license portfolio.

As discussed above in “– Results of Operations Classification - Subscription and Software Revenue,” we have combined subscription and software revenues on our results of operations. The following table reconciles the amount of revenue recognized for the first quarter of fiscal 2012 and 2011, based on the respective revenue recognition methodology. As illustrated below, the introduction of our enhanced SMS offering in fiscal 2012 has resulted in a substantial majority of our subscription and software revenue being recognized on a ratable basis in fiscal 2012.

	Three Months Ended September 30,				Three Months Ended September 30,
	2011		2010		2011			2010
	(Dollars in thousands)				% of Total
Subscription and software revenue:
Ratable (1)	$	28,455	$	9,656		89.2	%		50.9	%
Residual method (2)		3,455		9,311		10.8			49.1
Subscription and software revenue	$	31,910	$	18,967		100.0	%		100.0	%

(1) In the first quarter of fiscal 2011, the fair value of the SMS element of point product arrangements totaled $0.4 million and was presented in the statements of operations as services and other revenue. For fiscal 2012, the fee attributable to SMS in point product arrangements is no longer separable because we are unable to establish VSOE of fair value, and as a result, is included within ratable revenue.

(2) Residual method revenue detail	Three Months Ended September 30,
	2011		2010
	(Dollars in thousands)
Residual method revenue:
Point products - Software		*	$	5,611
Upfront legacy amendments and legacy arrangements		3,115		2,831
Perpetual arrangements		340		869
Total residual method revenue	$	3,455	$	9,311

* In fiscal 2012, the total combined arrangement fee (which includes the fee attributable to SMS) for point product arrangements with enhanced SMS is recognized on a ratable basis.

We expect residual method revenue from legacy arrangements to continue to decrease and be replaced with term-based licensing agreements that are recognized on a ratable basis. We do not expect revenue related to point products licensed on a perpetual basis to be a significant source of revenue in fiscal 2012.

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Services and Other Revenue

	Three Months Ended
	September 30,							Period-to-Period Change
	2011			2010				$			%
				(Dollars in thousands)
Professional services revenue	$	5,148		$	6,664			$	(1,516	)	(22.7	) %
SMS and other revenue		14,167			17,469				(3,302	)	(18.9	) %
Services and other revenue	$	19,315		$	24,133			$	(4,818	)	(20.0	) %
As a percent of revenue		37.7	%		56.0	%	<