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 March 31, 2012
 
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
 
04-2739697
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
200 Wheeler Road
   
Burlington, Massachusetts
 
01803
(Address of principal executive offices)
 
(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 company      o
 
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 April 24, 2012, there were 93,573,589 shares of the registrant's common stock (par value $0.10 per share) outstanding.
 


 
1

 
 
TABLE OF CONTENTS

     
Page
PART I - FINANCIAL INFORMATION
   
Item 1.
 
3
Item 2.
 
22
Item 3.
 
41
Item 4.
 
43
       
PART II - OTHER INFORMATION
 
Item 1.
 
44
Item 1A.
 
44
Item 2.
 
52
Item 6.
 
53
SIGNATURES

Our registered trademarks include aspenONE, ASPEN PLUS, ASPENTECH, the AspenTech logo, DMCPLUS, HTFS, HYSYS and INFOPLUS.21.
 
 
2

 
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
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue:
                       
Subscription and software
  $ 42,444     $ 30,655     $ 120,856     $ 74,955  
Services and other
    18,893       21,946       58,261       70,554  
Total revenue
    61,337       52,601       179,117       145,509  
Cost of revenue:
                               
Subscription and software
    2,717       (1,725 )     8,063       2,369  
Services and other
    9,713       12,117       31,113       34,826  
Total cost of revenue
    12,430       10,392       39,176       37,195  
Gross profit
    48,907       42,209       139,941       108,314  
Operating expenses:
                               
Selling and marketing
    24,279       22,922       70,043       63,227  
Research and development
    14,423       12,331       40,959       37,002  
General and administrative
    13,103       14,515       40,480       44,497  
Restructuring charges
    (84 )     (315 )     (143 )     (160 )
Total operating expenses
    51,721       49,453       151,339       144,566  
Loss from operations
    (2,814 )     (7,244 )     (11,398 )     (36,252 )
Interest income
    1,776       3,093       6,041       10,329  
Interest expense
    (611 )     (1,182 )     (2,718 )     (4,079 )
Other (expense) income, net
    (26 )     7       (2,483 )     1,936  
Loss before income taxes
    (1,675 )     (5,326 )     (10,558 )     (28,066 )
(Benefit from) provision for income taxes
    (1,155 )     361       (2,138 )     3,358  
Net loss
  $ (520 )   $ (5,687 )   $ (8,420 )   $ (31,424 )
Net loss per common share:
                               
Basic
  $ (0.01 )   $ (0.06 )   $ (0.09 )   $ (0.34 )
Diluted
  $ (0.01 )   $ (0.06 )   $ (0.09 )   $ (0.34 )
Weighted average shares outstanding:
                               
Basic
    93,583       93,862       93,851       93,298  
Diluted
    93,583       93,862       93,851       93,298  
 
See accompanying Notes to these unaudited condensed consolidated financial statements.
 
 
3

 
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share data)
 
   
March 31,
   
June 30,
 
   
2012
   
2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 182,564     $ 149,985  
Accounts receivable, net
    27,864       27,866  
Current portion of installments receivable, net
    36,321       38,703  
Current portion of collateralized receivables, net
    11,144       15,748  
Unbilled services
    1,132       2,319  
Prepaid expenses and other current assets
    9,009       10,819  
Prepaid income taxes
    1,152       1,151  
Deferred income taxes- current
    7,352       7,272  
Total current assets
    276,538       253,863  
Non-current installments receivable, net
    20,597       47,773  
Non-current collateralized receivables, net
    333       9,291  
Property, equipment and leasehold improvements, net
    5,337       6,730  
Computer software development costs, net
    1,946       2,813  
Goodwill
    19,812       18,624  
Deferred income taxes- non-current
    72,711       69,242  
Other non-current assets
    6,720       3,639  
Total assets
  $ 403,994     $ 411,975  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of secured borrowings
  $ 15,095     $ 15,756  
Accounts payable
    2,389       2,099  
Accrued expenses and other current liabilities
    49,414       64,467  
Income taxes payable
    1,029       672  
Deferred revenue
    130,397       90,681  
Total current liabilities
    198,324       173,675  
Long-term secured borrowings
    335       9,157  
Long-term deferred revenue
    44,603       38,262  
Other non-current liabilities
    30,842       33,078  
Commitments and contingencies (Note 11)
               
Series D redeemable convertible preferred stock, $0.10 par value—
               
    Authorized— 3,636 shares at March 31, 2012 and June 30, 2011                
Issued and outstanding— none at March 31, 2012 and June 30, 2011
    -       -  
Stockholders’ equity:
               
Common stock, $0.10 par value— Authorized—210,000,000 shares
               
 Issued—  96,196,001 shares at March 31, 2012 and 94,939,400 shares at June 30, 2011
               
 Outstanding—  93,657,576 shares at March 31, 2012 and 94,238,370 shares at June 30, 2011
    9,620       9,494  
Additional paid-in capital
    543,930       530,996  
Accumulated deficit
    (389,691 )     (381,271 )
Accumulated other comprehensive income
    8,681       9,115  
Treasury stock, at cost—2,538,425 shares of common stock at March   31, 2012 and 701,030 at June 30, 2011
    (42,650 )     (10,531 )
Total stockholders’ equity
    129,890       157,803  
Total liabilities and stockholders' equity
  $ 403,994     $ 411,975  
                 
 
See accompanying Notes to these unaudited condensed consolidated financial statements.
 
 
4

 
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

   
Nine Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (8,420 )   $ (31,424 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    3,984       3,925  
Net foreign currency loss (gain)
    784       (2,281 )
Stock-based compensation
    9,604       7,398  
Deferred income taxes
    (3,665 )     44  
Provision for bad debts
    104       (927 )
Write-down of investment
    -       600  
Other non-cash operating activities
    486       427  
Changes in assets and liabilities:
               
Accounts receivable
    (391 )     5,316  
Unbilled services
    1,197       165  
Prepaid expenses, prepaid income taxes, and other assets
    (70 )     3,695  
Installments and collateralized receivables
    42,510       55,196  
Accounts payable, accrued expenses, and other liabilities
    (9,209 )     (24,313 )
Deferred revenue
    46,056       35,077  
Net cash provided by operating activities
    82,970       52,898  
Cash flows from investing activities:
               
Purchase of property, equipment and leasehold improvements
    (1,175 )     (2,322 )
Payments for acquisitions, net of cash acquired
    (2,617 )     -  
Capitalized computer software development costs
    (487 )     (1,667 )
Net cash used in investing activities
    (4,279 )     (3,989 )
Cash flows from financing activities:
               
Exercise of stock options and warrants
    6,581       7,704  
Proceeds from secured borrowings
    4,982       2,500  
Repayments of secured borrowings
    (22,270 )     (26,664 )
Repurchases of common stock
    (32,119 )     (4,163 )
Payment of tax withholding obligations related to restricted stock
    (3,125 )     (2,733 )
Net cash used in financing activities
    (45,951 )     (23,356 )
Effects of exchange rate changes on cash and cash equivalents
    (161 )     540  
Increase in cash and cash equivalents
    32,579       26,093  
Cash and cash equivalents, beginning of period
    149,985       124,945  
Cash and cash equivalents, end of period
  $ 182,564     $ 151,038  
                 
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 2,718     $ 4,415  
Income tax paid (refunded), net
    1,599       (2,988 )

See accompanying Notes to these unaudited condensed consolidated financial statements.
 
 
5

 
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 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 unaudited condensed consolidated 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 and nine months ended March 31, 2012 are not necessarily indicative of the results to be expected for the subsequent quarter or for the full fiscal year.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Unless the context requires otherwise, references to we, our and us refer to Aspen Technology, Inc. and our subsidiaries.

Reclassifications
 
Certain line items in the prior period financial statements have been reclassified to conform to currently reported presentations.
 
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 in 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 subscription term and customers are entitled to any software products or updates introduced into the licensed suite. Revenue is recognized over the term of the subscription on a ratable basis. We also continue 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, license revenue from point product arrangements was generally recognized on the due date of each annual installment, provided all revenue recognition criteria were met, including evidence of fair value for the SMS component. Revenue from SMS was recognized ratably over the period in which the SMS was delivered.
 
As of July 2011, we are unable to establish evidence of the fair value for the SMS component included in our point product arrangements, and revenue from these arrangements is now recognized on a ratable basis.
 
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. Since the adoption of the new licensing model, our net cash provided by operating activities has increased from $33.0 million in fiscal 2009 to $38.6 million in fiscal 2010 and $63.3 million in fiscal 2011, respectively. During these periods we have realized steadily improving free cash flow due to the continued growth of our portfolio of term license contracts as well as the renewal of customer contracts on an installment basis that were previously paid upfront.
 
Impact of Licensing Model Changes
 
The principal accounting implications of the change in our licensing model are as follows:
 
 
6


 
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 first nine months of fiscal 2012 was significantly less than the level achieved in the fiscal years preceding our licensing model change.

 
The introduction of our new licensing model resulted in operating losses for fiscal 2010, 2011 and the first nine months of fiscal 2012. The change to our licensing model did not impact the incurrence or timing of our expenses, and there was no corresponding expense reduction to offset the lower revenue.  As a portion of the license agreements executed under our upfront revenue model have reached the end of their original term and been renewed under our new licensing model, subscription and software revenue has steadily increased from the beginning of fiscal 2010 through the first nine months of fiscal 2012.  To the extent the remaining term license agreements executed under our upfront revenue model expire and are renewed under our new licensing model, we expect to recognize levels of revenue and operating profit comparable to or higher than our pre-transition levels.

 
Our installments receivable balance is expected to continue to decrease over time, as licenses previously executed under our upfront revenue model reach the end of their terms and are renewed under our new licensing model.  Under our aspenONE subscription offering and for point products arrangements with SMS included for the contract term, installment payments are not considered fixed or determinable and, as a result, are not included in installments receivable. These future payments are included in billings backlog, which is not reflected on our unaudited condensed consolidated balance sheets.
 
 
The amount of our deferred revenue is expected to continue to increase over time as the remaining portion of our customers transition to the new licensing model.  Under our aspenONE subscription offering and for point product arrangements with SMS included for the contract term, installments for license transactions are deferred and recognized on a ratable basis.
 
 
As of March 31, 2012, a portion of our customers, representing a significant percentage of our portfolio of active license agreements, have transitioned to our new licensing model. Over the next few years, we anticipate that a significant portion of our remaining customers will transition to our new licensing model as their existing license agreements reach the end of their original terms. During this transition period, we may continue to have arrangements where the software element will be recognized upfront, including perpetual licenses, amendments to existing legacy term arrangements, and in limited cases, renewals of existing legacy term arrangements. However, we do not expect revenue related to these sources to be significant in relation to our total revenue.

Introduction of our Enhanced SMS Offering
 
Beginning in fiscal 2012, 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 annually renewable SMS offering continues to be available to customers with legacy term and perpetual license agreements.
 
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, all 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.
 
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.
 
 
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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.
 
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 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 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 upon delivery of the software provided all other revenue recognition criteria were met. Arrangements that qualify for upfront recognition include sales of perpetual licenses, amendments to existing legacy term arrangements and renewals of legacy term arrangements.
 
Subscription and Software Revenue
 
Subscription and software revenue consists of product and related revenue from the following sources:
 
 
(i)
aspenONE subscription arrangements;
 
 
(ii)
Point product arrangements with our enhanced SMS offering included for the contract term (referred to as point product arrangements with enhanced SMS);
 
 
8

 
 
(iii)
legacy arrangements including (a) amendments to existing legacy term arrangements, (b) renewals of legacy term arrangements and (c) legacy arrangements that are being recognized over time as a result of not previously meeting one or more of the requirements for recognition under the upfront revenue model; and
 
 
(iv)
perpetual arrangements.
  
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 have been 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 have been met.
 
Perpetual license and legacy arrangements 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 of these license arrangements and can therefore separate the undelivered elements.  Accordingly, the license fees for perpetual licenses and legacy arrangements continue to be recognized upon delivery of the software products using the residual method, provided all other revenue recognition requirements are met.
 
Results of Operations Classification - Subscription and Software Revenue
 
Prior to fiscal 2012, subscription and software revenue were each classified separately on our consolidated 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 legacy arrangements and perpetual arrangements to be significant in relation to our total revenue going forward. Since the distinction between subscription and point product ratable revenue does not represent a meaningful 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 unaudited condensed consolidated 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
             
- Legacy arrangements
Subscription and software
 
Software
 
Residual method
 
Residual method
- Perpetual arrangements
Subscription and software
 
Software
 
Residual method
 
Residual method
 
 The following tables reconcile the amount of revenue recognized during the three and nine months ended March 31, 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.
 
 
9

 
   
Three Months Ended
March 31,
   
Three Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Dollars in thousands)
   
% of Total
 
Subscription and software revenue:
                       
Ratable (1)
  $ 40,328     $ 17,240       95.0 %     56.2 %
Residual method (2)
    2,116       13,415       5.0       43.8  
Subscription and software revenue
  $ 42,444     $ 30,655       100.0 %     100.0 %
                                 


   
Nine Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Dollars in thousands)
   
% of Total
 
Subscription and software revenue:
                       
Ratable (1)
  $ 100,509     $ 38,744       83.2 %     51.7 %
Residual method (2)
    20,347       36,211       16.8       48.3  
Subscription and software revenue
  $ 120,856     $ 74,955       100.0 %     100.0 %
                                 


 
(1)
During the three and nine months ended March 31, 2011, the fair value of the SMS element of point product arrangements totaled $0.6 million and $1.5 million, respectively and was presented in the unaudited condensed consolidated statements of operations as services and other revenue.  Effective July 1, 2011, the fee attributable to the SMS in point product arrangements is no longer separable since we are unable to establish VSOE, and as a result, is included within ratable revenue.

(2) Residual method revenue detail
 
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Dollars in thousands)
   
(Dollars in thousands)
 
Residual method revenue:
                       
Point products - Software
    *     $ 5,156       *     $ 14,935  
Legacy arrangements
    1,714       7,827       18,498       19,703  
Perpetual arrangements
    402       432       1,849       1,573  
                                 
Total residual method revenue
  $ 2,116     $ 13,415     $ 20,347     $ 36,211  
                                 
 
* Effective July 1, 2011, 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 unaudited condensed consolidated statements 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 unaudited condensed 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 unaudited condensed consolidated statements 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.
 
 
10

 
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 arrangement, 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 on a ratable basis 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 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 invoice 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, taking into consideration the customer’s credit rating. The finance element is 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 unaudited 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 in our unaudited condensed consolidated balance sheets. As a result, we did not have any past due installments receivable as of March 31, 2012.
 
Our non-current installments receivable are within the scope of Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. As our portfolio of financing receivables arises from the sale of our software licenses, the methodology for determining our allowance for doubtful accounts is based on the collective population 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 81% and 92% of our total installments receivable allowance for doubtful accounts at March 31, 2012 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.

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.
 
 
11

 
 
The following table summarizes our net current and non-current installments receivable, net of related unamortized discount and allowance for doubtful accounts balances at March 31, 2012 and June 30, 2011 (dollars in thousands):

   
Current
   
Non-current
   
Total
 
March 31, 2012
                 
Installments receivable, gross
  $ 38,157     $ 23,528     $ 61,685  
Less:  Unamortized discount
    (1,826 )     (2,784 )     (4,610 )
Less:  Allowance for doubtful accounts
    (10 )     (147 )     (157 )
Installments receivable, net
  $ 36,321     $ 20,597     $ 56,918  
                         
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  
                         
 
 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 SMS included for the contract term, installment payments are not considered fixed or determinable and, as a result, are not included in installments receivable. These future payments are included in billings backlog, which is not reflected on our unaudited condensed consolidated balance sheets.
 
The following tables show a roll forward of our current and non-current allowance for doubtful accounts for the installments receivable balances during the three and nine months ended March 31, 2012 and 2011, respectively (dollars in thousands):

Three Months Ended,
 
Current
   
Non-current
   
Total
 
                   
March 31, 2012
                 
Balance at December 31, 2011
  $ 661     $ 64     $ 725  
Transfers to trade accounts receivable
    (741 )     -       (741 )
Transfers from non-current to current
    -       -       -  
Write-offs
    (7 )     (7 )     (14 )
Recoveries of previous write-offs
    -       -       -  
Provision for bad debts
    97       90       187  
Balance at March 31, 2012
  $ 10     $ 147     $ 157  
                         
March 31, 2011
                       
Balance at December 31, 2010
  $ 998     $ 1,157     $ 2,155  
Transfers to trade accounts receivable
    (860 )     -       (860 )
Transfers from non-current to current
    88       (88 )     -  
Write-offs
    (38 )     (289 )     (327 )
Recoveries of previous write-offs
    194       -       194  
(Reduction of) provision for bad debts
    (171     110       (61
Balance at March 31, 2011
  $ 211     $ 890     $ 1,101  
                         

 
Nine Months Ended,
 
Current
   
Non-current
   
Total
 
                   
March 31, 2012
                 
Balance at June 30, 2011
  $ 767     $ 121     $ 888  
Transfers to trade accounts receivable
    (782 )     -       (782 )
Transfers from non-current to current
    -       -       -  
Write-offs
    (26 )     (28 )     (54 )
Recoveries of previous write-offs
    -       10       10  
Provision for bad debts
    51       44       95  
Balance at March 31, 2012
  $ 10     $ 147     $ 157  
                         
March 31, 2011
                       
Balance at June 30, 2010
  $ 1,119     $ 1,196     $ 2,315  
Transfers to trade accounts receivable
    (935 )     -       (935 )
Transfers from non-current to current
    118       (118 )     -  
Write-offs
    (264 )     (301 )     (565 )
Recoveries of previous write-offs
    194       -       194  
(Reduction of) provision for bad debts
    (21     113       92  
Balance at March 31, 2011
  $ 211     $ 890     $ 1,101  
                         
 
 
12

 
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. Refer to Note 11 for discussion of these matters and related liability accruals.

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 and nine months ended March 31, 2012 are as follows (dollars in thousands):

   
Reporting Unit
 
Asset Class
 
License
   
SMS,
Training, and
Other
   
Professional
 Services
   
Total
 
Balance as of June 30, 2011
                       
Goodwill
  $ 68,049     $ 16,144     $ 5,102     $ 89,295  
Accumulated impairment losses
    (65,569 )     -       (5,102 )     (70,671 )
    $ 2,480     $ 16,144     $ -     $ 18,624  
                                 
Effect of currency translation
    (12 )     (709 )     -       (721 )
                                 
Balance as of December 31, 2011
                               
Goodwill
  $ 68,037     $ 15,435     $ 5,102     $ 88,574  
Accumulated impairment losses
    (65,569 )     -       (5,102 )     (70,671 )
    $ 2,468     $ 15,435     $ -     $ 17,903  
                                 
Acquisitions
  $ 1,641     $ -     $ -     $ 1,641  
                                 
Effect of currency translation
    (12 )     280       -       268  
                                 
Balance as of March 31, 2012
                               
Goodwill
  $ 69,666     $ 15,715     $ 5,102     $ 90,483  
Accumulated impairment losses
    (65,569 )     -       (5,102 )     (70,671 )
    $ 4,097     $ 15,715     $ -     $ 19,812  
                                 
 
 We test goodwill for impairment annually (or more often if impairment indicators arise), at the reporting unit level in accordance with the provisions of ASC 350, Intangibles—Goodwill and Other.  We have elected December 31 as the annual impairment assessment date and perform additional impairment tests if triggering events occur.

 We adopted ASU No. 2011- 08, Intangibles- Goodwill and Other (Topic 350): Testing Goodwill for Impairment, during the nine months ended March 31, 2012. In accordance with the provisions of ASU No. 2011-08, we must first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine based on this assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform the two-step goodwill impairment test. The first step requires us to determine the fair value of each reporting unit and compare it to the carrying amount, including goodwill, of such reporting unit. If the fair value exceeds the carrying amount, no impairment loss is recognized. However, if the carrying amount of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount of impairment, if any, is measured based upon the implied fair value of goodwill at the valuation date.
 
Fair value of a reporting unit is determined using a combined weighted average of market-based approach (utilizing fair value multiples of comparable publicly traded companies) and an income-based approach (utilizing discounted projected cash flows). In applying the income-based approach, we would be required to make assumptions about the amount and timing of future expected cash flows, growth rates and appropriate discount rates. The amount and timing of future cash flows would be based on our most recent long-term financial projections. The discount rate we would be required to utilize would be determined using estimates of market participant risk-adjusted weighted-average costs of capital and reflect the risks associated with achieving future cash flows.
 
 
13

 
 We performed our annual impairment test for each reporting unit as of December 31, 2011 and based upon the results of our qualitative assessment determined that it is not likely that their respective fair values are less than their carrying amounts. As such, we did not perform the two-step goodwill impairment test and did not recognize impairment losses as a result of this analysis. No triggering events indicating goodwill impairment occurred during the three and nine months ended March 31, 2012.

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 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 research and development 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”) carryforwards because it is more likely than not that a benefit will not be realized. At March 31, 2012 and June 30, 2011, our total valuation allowance was $8.6 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 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 more 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
 
We determine fair value by utilizing a fair value hierarchy that ranks the quality and reliability of the information used in its determination. Fair values determined using Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Fair values determined using Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves for similar assets and liabilities.

Cash equivalents of $164.0 million and $139.0 million as of March 31, 2012, 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 unaudited condensed consolidated 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 exceeded the carrying value by $0.3 million and $1.1 million as of March 31, 2012 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.
 
 
14

 
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 March 31, 2012 and June 30, 2011 (dollars in thousands). Refer to Note 2 for a summary of our installments receivable balances.  Collateralized receivables are presented in the unaudited condensed consolidated balance sheets 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
 
March 31, 2012:
                       
Account Receivable
  $ 30,082     $ -     $ 2,218     $ 27,864  
Collateralized Receivable
                               
Current
    11,496       352       -       11,144  
Non-current
    364       31       -       333  
    $ 11,860     $ 383     $ -     $ 11,477  
                                 
June 30, 2011:
                               
Account 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):
 
   
March 31,
 2012
   
June 30,
2011
 
             
Royalties and outside commissions
  $ 5,624     $ 5,244  
Payroll and payroll-related
    13,375       20,510  
Restructuring accruals
    1,641       3,259  
Amount due to financing institutions
    18,201       26,038  
Other
    10,573       9,416  
Total accrued expenses
  $ 49,414     $ 64,467  
                 
 
 Current liabilities for amounts due to financing institutions totaled $18.2 million at March 31, 2012 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 fully repaid to, or replaced with, the financing institution. During the nine months ended March 31, 2012, we made an annual installment payment of $7.9 million on this arrangement to the financing institution.

Other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets consist of the following (dollars in thousands):
 
   
March 31,
 2012
   
June 30,
 2011
 
             
Restructuring accruals
  $ 56     $ 942  
Deferred rent
    1,727       2,139  
Royalties and outside commissions
    244       603  
Other*
    28,815       29,394  
Total other non-current liabilities
  $ 30,842     $ 33,078  
                 
 
*
Other is comprised primarily of our reserve for uncertain tax liabilities (including accrued interest and penalties) of $27.4 million and $28.3 million as of March 31, 2012 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 expire within 7 or 10 years of grant. Restricted stock units (RSUs) generally vest over four years. Historically, our practice has been to settle stock option exercises and RSU vesting through newly issued shares.
 
 
15

 
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, less an estimated forfeiture rate, over the requisite service period for time-vested awards.
 
The weighted average estimated fair value of awards granted during the three months ended March 31, 2012 and 2011 was $6.47 and $7.14 respectively, and during the nine months ended March 31, 2012 and 2011 was $6.50 and $4.92, respectively.
 
We utilized the Black-Scholes option valuation model with the following weighted average assumptions:

   
Nine Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Risk-free interest rate
    1.2 %     1.4 %
Expected dividend yield
    0.0 %     0.0 %
Expected life (in years)
    4.58       4.53  
Expected volatility factor
    49.7 %     52.8 %
                 
 
The stock-based compensation expense and its classification (dollars in thousands) in the unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2012 and 2011 were as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Recorded as expenses:
                       
Cost of services and other
  $ 280     $ 234     $ 897     $ 720  
Selling and marketing
    1,103       911       3,502       2,713  
Research and development
    319       297       1,020       874  
General and administrative
    1,123       914       4,185       3,091  
Total stock-based compensation
  $ 2,825     $ 2,356     $ 9,604     $ 7,398  
                                 
 
 
16

 
 
A summary of stock option and RSU activity under all equity plans for the nine months ended March 31, 2012 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  
Grant
    763,910       15.52                     907,532       15.52  
Settled (RSUs)
    -       -                     (562,484 )     11.89  
Exercised
    (874,214 )     7.52                     -       -  
Cancelled / Forfeited
    (77,037 )     12.33                     (112,289 )     11.90  
Outstanding at March 31, 2012
    4,536,964     $ 8.91       5.20     $ 52,711       1,571,135     $ 12.54  
                                                 
Exercisable at March 31, 2012
    3,445,556     $ 7.46       4.12     $ 45,032                  
                                                 
Vested and expected to vest as of March 31, 2012
    4,353,947     $ 8.72       5.04     $ 51,429       1,348,364     $ 12.50  
                                                 
 
 During the three and nine months ended March 31, 2012, the weighted average grant-date fair value of RSUs granted was $16.53 and $15.52, respectively, and during the three and nine months ended March 31, 2011 was $14.39 and $11.00, respectively. During the three months ended March 31, 2012 and 2011, the total fair value of shares vested from RSU grants was $4.0 million and $3.5 million, respectively, and during the nine months ended March 31, 2012 and 2011 was $9.5 million and $6.5 million, respectively.
 
At March 31, 2012, the total future unrecognized compensation cost related to stock options and RSUs was $5.6 million and $15.8 million, respectively, and is expected to be recorded over a weighted average period of 2.8 years and 2.6 years, respectively.
 
The total intrinsic value of options exercised during the three months ended March 31, 2012 and 2011 was $4.7 million and $6.2 million, respectively, and during the nine months ended March 31, 2012 and 2011 was $9.7 million and $9.0 million, respectively. We received $6.6 million and $7.7 million in cash proceeds from option exercises during the nine months ended March 31, 2012 and 2011, respectively.  We paid $3.1 million and $2.7 million for withholding taxes on vested RSUs during the nine months ended March 31, 2012 and 2011, respectively.
 
At March 31, 2012, common stock reserved for future issuance or settlement under equity compensation plans was 11.6 million shares.

8.  Common Stock
 
On November 1, 2011, our Board of Directors approved a share repurchase program for up to $100 million worth of our common stock. This replaced the prior share repurchase program approved by the Board of Directors on October 29, 2010 for up to $40 million, which had approximately $17.0 million of remaining capacity at October 31, 2011. The timing and amount of any shares repurchased are based on market conditions and other factors.  All share repurchases of our common stock have been recorded as treasury stock under the cost method.  We repurchased 1,837,395 shares of our common stock for $32.1 million during the nine months ended March 31, 2012. As of March 31, 2012, the remaining dollar value under the stock repurchase program approved by our Board of Directors on November 1, 2011 was $80.4 million.

9.  Net Loss per Common Share
 
Basic loss per share is determined by dividing the net loss by the weighted average common shares outstanding during the period. Diluted loss per share is determined by dividing the net loss attributable to common stockholders 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 income per share based on the treasury stock method.

For the three and nine months ended March 31, 2012 and 2011, 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):
 
 
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Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net loss
  $ (520 )   $ (5,687 )   $ (8,420 )   $ (31,424 )
                                 
Weighted average shares outstanding
    93,583       93,862       93,851       93,298  
                                 
Dilutive impact from:
                               
Share-based payment awards
    -       -       -       -  
Warrants
    -       -       -       -  
Dilutive weighted average shares outstanding
  $ 93,583     $ 93,862     $ 93,851     $ 93,298  
                                 
Loss per share
                               
Basic
    (0.01 )     (0.06 )     (0.09 )     (0.34 )
Dilutive
    (0.01 )     (0.06 )     (0.09 )     (0.34 )
                                 
 
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 the nine months ended March 31, 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 March 31, 2012 or June 30, 2011.

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

   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Employee equity awards
    6,392       7,134       6,805       7,800  
                                 
 
10.  Comprehensive Loss
 
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions from non-owner sources and other events and circumstances. The components of comprehensive loss for the three and nine months ended March 31, 2012 and 2011 were as follows (dollars in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net loss
  $ (520 )   $ (5,687 )   $ (8,420 )   $ (31,424 )
Foreign currency translation adjustment
  $ 219     $ 620     $ (434 )   $ 1,341  
Total comprehensive loss
  $ (301 )   $ (5,067 )   $ (8,854 )   $ (30,083 )
                                 
 
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.
 
 
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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 last quarter 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.

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 relating to termination of its purported status as a reseller and to purported customer contracts in Kuwait.
 
(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 of these actions have been settled and/or dismissed.
  
The most recent settlement was entered into in December 2011 in the matter of 380544 Canada, Inc., et al. v. Aspen Technology, Inc., originally 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 included 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.  Pursuant to the settlement referenced above, this case was dismissed with prejudice on December 23, 2011. The financial impact related to this matter was recorded during the nine months ended March 31, 2012. This impact was not material to our financial position or results of operations during the period then ended.
 
(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 intellectual 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 March 31, 2012, that, in the opinion of management, might have a material adverse effect on our financial position, results of operations or cash flows. Liabilities related to the aforementioned matters discussed in this Note have been included in our accrued liabilities at March 31, 2012 and June 30, 2011, as appropriate, and are not material to our financial position for the periods then ended.
 
 
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As of March 31, 2012 we do not believe that there is a reasonable possibility of a loss exceeding the amounts already accrued for the proceedings or matters discussed above.

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.

We have three operating segments: license, SMS 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 SMS 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 in our year-end financial statements on form 10-K). 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):

   
License
   
SMS,
Training, and Other
   
Professional
 Services
   
Total
 
Three Months Ended March 31, 2012
                       
Segment revenue
  $ 42,444     $ 12,935     $ 5,958     $ 61,337  
Segment expense
    17,224       2,179       5,702       25,105  
Segment operating profit (1)
  $ 25,220     $ 10,756     $ 256     $ 36,232  
Three Months Ended March 31, 2011
                               
Segment revenue
  $ 30,655     $ 15,473     $ 6,473     $ 52,601  
Segment expense
    16,374       3,094       7,007       26,475  
Segment operating profit (1)
  $ 14,281     $ 12,379     $ (534 )   $ 26,126  
                                 
Nine Months Ended March 31, 2012
                               
Segment revenue
  $ 120,856     $ 41,503     $ 16,758     $ 179,117  
Segment expense
    50,639       7,385       17,945       75,969  
Segment operating profit (1)
  $ 70,217     $ 34,118     $ (1,187 )   $ 103,148  
Nine Months Ended March 31, 2011
                               
Segment revenue
  $ 74,955     $ 49,479     $ 21,075     $ 145,509  
Segment expense
    45,565       9,577       19,087       74,229  
Segment operating profit (1)
  $ 29,390     $ 39,902     $ 1,988     $ 71,280  
                                 


(1)
The Segment operating profits reported reflect only the direct expenses of the operating segment and do not contain an allocation of selling and marketing, general and administrative, research and development, restructuring and other corporate expenses incurred in support of the segments.
 
 
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Reconciliation to Loss Before Income Taxes
 
 
The following table presents a reconciliation of total segment operating profit to loss before income taxes for the three and nine months ended March 31, 2012 and 2011 (in thousands):
   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Total segment operating profit for reportable segments
  $ 36,232     $ 26,126     $ 103,148     $ 71,280  
Cost of license
    (2,717 )     1,725       (8,063 )     (2,369 )
Selling and marketing
    (4,011 )     (3,748 )     (10,326 )     (9,279 )
Research and development
    (12,205 )     (10,165 )     (34,350 )     (30,349 )
General and administrative and overhead
    (17,373 )     (19,141 )     (52,347 )     (58,297 )
Stock-based compensation
    (2,824 )     (2,356 )     (9,603 )     (7,398 )
Restructuring charges
    84       315       143       160  
Other (expense) income, net
    (26 )     7       (2,483 )     1,936  
Interest income (net)
    1,165       1,911       3,323       6,250  
Loss before income taxes
  $ (1,675 )   $ (5,326 )   $ (10,558 )   $ (28,066 )
                                 
 
13.  Subsequent Events

         We evaluated events occurring between March 31, 2012 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,” of Part II 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 to 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.

Our software incorporates our proprietary empirical models of manufacturing and planning processes and reflects the deep domain expertise we have amassed from focusing on solutions for the process industries for 30 years. We have developed our applications to design and optimize processes across three principal business areas: engineering, manufacturing and supply chain. We are a recognized market and technology leader in providing process optimization software for each of these business areas.
 
 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.

We have established sustainable competitive advantages based on the breadth, flexibility and return on investment associated with our software offerings, as well as our market leadership position, our extensive process industry expertise and our established, diversified customer base. We consult and collaborate with our customers to identify new applications which leads to innovative, targeted solutions and fosters long-term customer relationships. This approach has helped us develop software solutions that are embedded in our customers’ operations and integrated with their core business processes.

We primarily license our aspenONE products through a subscription offering.  Our aspenONE products are organized into two suites: 1) engineering and 2) manufacturing and supply chain (MSC).  The aspenONE subscription offering provides customers with access to all of the products within each respective suite.  Customers can change or alternate the use of multiple products in a licensed suite through the use of exchangeable units of measurement, or tokens, licensed in quantities determined by the customer.  This licensing system enables customers to use products as needed and to experiment with different products to best solve whatever critical business challenges the customer faces. We believe easier access to all of the aspenONE products will lead to increased software usage and higher revenue over time. Customers can increase their usage of our software, by purchasing additional tokens, as business needs evolve, without disrupting business processes.   

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 in 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 subscription term and customers are entitled to any software products or updates introduced into the licensed suite. Revenue is recognized over the term of the subscription on a ratable basis. We also continue to offer customers the ability to license point products, but since fiscal 2010, have included SMS for the term of the arrangement. In fiscal 2010 and 2011, license revenue from point product arrangements was generally recognized on the due date of each annual installment, provided all revenue recognition criteria were met, including evidence of fair value for the SMS component. Revenue from SMS was recognized ratably over the period in which the SMS was delivered.
 
As of July 2011, we are unable to establish evidence of the fair value for the SMS component included in our point product arrangements, and revenue from these arrangements is now recognized on a ratable basis.
 
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. Since the adoption of the new licensing model, our net cash provided by operating activities has increased from $33.0 million in fiscal 2009 to $38.6 million in fiscal 2010 and $63.3 million in fiscal 2011, respectively. During these periods we have realized steadily improving free cash flow due to the continued growth of our portfolio of term license contracts as well as the renewal of customer contracts on an installment basis that were previously paid upfront.
 
 
22

 
Impact of Licensing Model Changes
 
The principal accounting implications of the change in our licensing model 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 first nine months of fiscal 2012 was significantly less than the level achieved in the fiscal years preceding our licensing model change.

 
The introduction of our new licensing model resulted in operating losses for fiscal 2010, 2011 and the first nine months of fiscal 2012. The change to our licensing model did not impact the incurrence or timing of our expenses, and there was no corresponding expense reduction to offset the lower revenue.  As a portion of the license agreements executed under our upfront revenue model have reached the end of their original term and been renewed under our new licensing model, subscription and software revenue has steadily increased from the beginning of fiscal 2010 through the first nine months of fiscal 2012.  To the extent the remaining term license agreements executed under our upfront revenue model expire and are renewed under our new licensing model, we expect to recognize levels of revenue and operating profit comparable to or higher than our pre-transition levels.

 
Our installments receivable balance is expected to continue to decrease over time, as licenses previously executed under our upfront revenue model reach the end of their terms and are renewed under our new licensing model.  Under our aspenONE subscription offering and for point products arrangements with SMS included for the contract term, installment payments are not considered fixed or determinable and, as a result, are not included in installments receivable. These future payments are included in billings backlog, which is not reflected on our unaudited condensed consolidated balance sheets.
 
 
The amount of our deferred revenue is expected to continue to increase over time as the remaining portion of our customers transition to the new licensing model.  Under our aspenONE subscription offering and for point product arrangements with SMS included for the contract term, installments for license transactions are deferred and recognized on a ratable basis.
 
 
As of March 31, 2012, a portion of our customers, representing a significant percentage of our portfolio of active license agreements, have transitioned to our new licensing model. Over the next few years we anticipate that a significant portion of our remaining customers will transition to our new licensing model as their existing license agreements reach the end of their original terms. During this transition period, we may continue to have arrangements where the software element will be recognized upfront, including perpetual licenses, amendments to existing legacy term arrangements, and in limited cases, renewals of existing legacy term arrangements. However, we do not expect revenue related to these sources to be significant in relation to our total revenue.

Introduction of our Enhanced SMS Offering
 
Beginning in fiscal 2012, 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 annually renewable SMS offering continues to be available to customers with legacy term and perpetual license agreements.
 
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, all 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.

 For additional information about the recognition of revenue under the upfront revenue model and our new licensing model, 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.  Due to the accounting implications resulting from the change in our licensing model, we believe that 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 until a significant majority of our license agreements executed under our upfront revenue model reach the end of their original terms and are renewed under our subscription-based licensing model. Accordingly, we are focusing on a number of other business metrics, including those described below under “—Key Business Metrics.”
 
 
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Revenue
 
We generate revenue primarily from the following sources: