Industries Fix Factory Flow Using Aspen Technology

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The process of refining oil, natural gas, petrochemicals and other fuels is a complex one that involves dozens of steps and variables, and can lead to disaster if you don't do it the right way.

To streamline the process and reduce the risk of error, refineries depend on software programs that let them do everything from simulating the refining process to designing the facility itself.

One company that provides this kind of software,Aspen Technology ( AZPN ), has seen a big turnaround in its financial fortunes thanks to efforts to streamline its own process of doing business.

Aspen makes business management software for oil, gas, energy and chemical companies. Its Aspen One suite is used in engineering, manufacturing and supply chain processes. The software lets clients model and design facilities, monitor and optimize performances, estimate costs and analyze data.

Pivoting For Pricing

Refineries can also use the technology to determine what kinds of fuels they should produce to take advantage of price trends.

"If aviation fuel is selling high, you might try to produce more jet fuel than octane fuel," said Mark Schappel, an analyst at Benchmark. "Their software can tell you that you should get this much octane out, this much kerosene out, this much petroleum jelly out. It allows you to simulate what happens in a plant offline. You can do it on the computer first, which helps minimize mistakes."

Because Aspen's technology is so specialized, much of its competition comes from smaller, privately held software firms.

Aspen also vies with much larger automated control companies such asHoneywell International ( HON ),Rockwell Automation ( ROK ) and Invensys, though Schappel says the software at these companies "is not considered best in class."

Aspen's technology is considered among the best in the business, analysts say. But that hasn't always been enough to offset problems in other areas of the business.

In 2008, Aspen shifted from an upfront license model to a subscription model as a way of smoothing out its revenue stream and giving it more visibility on future business.

While that change was being implemented, however, the company struggled on the bottom line. It lost money for three straight years, from fiscal 2010 to fiscal 2012.

The earnings picture has been much brighter in recent quarters. Aspen returned to profitability in fiscal 2013, which ended in June. It has now produced five straight quarters of black ink.

"For several years, restructuring occupied the company," Schappel said. "With that mostly out of the way, they can now act like a real software company and focus on R&D. They are also talking to the sales force instead of sitting in front of attorneys or accountants."

The renewed focus was evident during the company's fiscal first quarter of 2014, which ended in September. Q1 earnings more than doubled from a year earlier to 19 cents a share, topping consensus estimates for 15 cents. The bottom line got a big boost from a much better-than-expected operating margin.

Revenue for the quarter gained 23% to $87.6 million, topping views for $85 million. It was the 12th straight quarter of double-digit revenue growth.

Optimizing Aspen

Aspen's total license contract value, or TLCV, climbed 13.2% year-over-year during the quarter. That was slightly ahead of the 12.5% estimate issued by JPMorgan analyst Sterling Auty.

"In this fifth year of the six-year Aspen One transition, the vast majority of customers have converted to usage-based models, which offer more product with the ability to grow usage," Auty noted in a report.

Aspen is the 10th-largest company by market capitalization in IBD's Computer Software-Enterprise industry group that's dominated bySAP ( SAP ),ADP ( ADP ) andSalesforce.com (CRM). The group itself is ranked No. 19 of 197 that IBD tracks.

Analysts expect Aspen to grow full-year earnings 53% this fiscal year and 26% in fiscal 2015. The company's stock price set a nearly 13-year high of 39.02 on Oct. 30.

Aspen's revenue is fairly evenly split among the U.S., Europe and the rest of the world. Like any company whose fortunes are tied to the oil/gas industry, Aspen must deal with the ups and downs of commodity prices. The prices of both crude oil and natural gas have fallen in recent months from multiyear highs earlier in the year.

In a conference call with analysts following Aspen's first-quarter results, CEO Antonio Pietri said the global macro environment "remains volatile," but added that Aspen has "not seen a material change" in customer buying behavior in recent months.

"We continue to benefit from the combination of our market-leading position, long-term contracts that are typically five to six years in length and the mission-critical nature of our applications," Pietri said.

He conceded that "no company is immune" from a sustained deterioration of the macro environment. However, Aspen continues to see positive demand from customers.

"Our primary end markets remain relatively healthy on a worldwide basis, and we're in the early stages of benefiting from the innovation that we have introduced in recent years," Pietri added.

It was Pietri's first conference call as CEO after replacing Mark Fusco, who retired. Pietri previously ran Aspen's field operations, which included sales and services.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: ADP , AZPN , HON , ROK , SAP

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