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OFFON

ASPEN TECHNOLOGY, INC.

(AZPN)
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ASPEN TECHNOLOGY : DE/ Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

08/18/2021 | 04:20pm EDT
You should read the following discussion in conjunction with our consolidated
financial statements and related notes beginning on page 51. In addition to
historical information, this discussion contains forward-looking statements that
involve risks and uncertainties. You should read "Item 1A. Risk Factors" for a
discussion of important factors that could cause our actual results to differ
materially from our expectations.
Our fiscal year ends on June 30, and references to a specific fiscal year are
the twelve months ended June 30 of such year (for example, "fiscal 2021" refers
to the year ended June 30, 2021).
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Business Overview
We are a global leader in asset optimization software that optimizes asset
design, operations and maintenance in complex, industrial environments. We
combine decades of process modeling and operations expertise with big data,
artificial intelligence, and advanced analytics. Our purpose-built software
improves the competitiveness and profitability of our customers by: increasing
throughput, energy efficiency, and production levels; reducing unplanned
downtime, plant emissions, and safety risks; enhancing capital efficiency; and
decreasing working capital requirements over the entire asset lifecycle to
support operational excellence.
Our software combines our proprietary mathematical and empirical models of
manufacturing and planning processes which reflects the deep domain expertise we
have amassed from focusing on solutions for the process and other
capital-intensive industries for over 40 years. Our products have embedded AI
capabilities that create insights, provide guidance, and automate and
democratize knowledge, known as Industrial AI, to create more value for the
process industries. We have developed our applications to design and optimize
processes across three principal business areas: engineering, manufacturing and
supply chain, and asset performance management. Each business area leverages our
artificial intelligence of things products as the foundation of industrial data
to help us realize our vision for Industrial AI at scale. We are the recognized
market and technology leader in providing process optimization and asset
performance management software for each of these business areas.
We have established sustainable competitive advantages based on the following
strengths:
•Innovative products that can enhance our customers' profitability and
productivity;
•Long-term customer relationships;
•Large installed base of users of our software; and
•Long-term license contracts.
We have approximately 2,500 customers globally. Our customers consist of
companies engaged in the process and other capital-intensive industries such as
energy, chemicals, engineering and construction, as well as pharmaceuticals,
food and beverage, transportation, power, metals and mining, pulp and paper, and
consumer packaged goods.
Business Segments
We have two operating and reportable segments, which are consistent with our
reporting units: (i) subscription and software and (ii) services and other. The
subscription and software segment is engaged in the licensing of process
optimization and asset performance management software solutions and associated
support services, and includes our license and maintenance revenue. The services
and other segment includes professional services and training, and includes our
services and other revenue.
Recent Events
In December 2019, the novel SARS-CoV-2 virus and associated COVID 19 disease, or
COVID-19, were reported in China, and in March 2020 the World Health
Organization declared a pandemic. Since the beginning of March 2020, the sudden
decrease in demand for oil due to the COVID-19 pandemic, compounded by the
excess supply arising from producers' failure to agree on production cuts,
resulted in a drop in oil prices. During fiscal 2021, our business was
negatively impacted by these factors. Specifically, we saw a slowdown in closing
customer contracts, a slight increase in our customer attrition rate due to
non-renewals and renewals at lower entitlement level and, to a lesser extent, a
slowdown in customer payments. We are continuing to assess the impact of these
items on global markets and the various industries of our customers. The extent
of the impact on our operational and financial performance going forward will
depend on capital expenditure and operational expenditure budgetary cycles that
are inherent in our customers' procurement strategies, which are informed by oil
prices and environmental factors such as COVID-19, all of which are uncertain
and cannot be predicted. We are continuing to monitor the potential impacts
related to the current disruption of COVID-19 and uncertainty in the global
markets on the various industries of our customers. These factors could
potentially impact the signing of new agreements, as well as the recoverability
of assets, including accounts receivable and contract costs.
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On June 14, 2021, as part of our common stock repurchase program, we entered
into an accelerated share repurchase program, or the ASR Program, with a
third-party financial institution. Pursuant to the terms of the ASR Program, on
July 1, 2021 we made an upfront payment of $150.0 million in exchange for an
initial delivery of approximately 872,473 shares of our common stock,
representing 80% of the total shares ultimately expected to be delivered over
the program's term.
At the ASR Program's conclusion, the financial institution may be required to
deliver additional shares of common stock to us, or, under certain
circumstances, we may be required to, at our election, deliver shares of our
common stock or make a cash payment to the financial institution. Final
settlement of the ASR Program is expected to occur during the first quarter of
fiscal 2022, with the number of shares to be delivered, or the amount of any
cash payment to be made, determined based on the volume-weighted average price
per share of our common stock over the term of the ASR Program, less an
agreed-upon discount.
Key Components of Operations
Revenue
We generate revenue primarily from the following sources:

License Revenue. We sell our software products to end users, primarily under
fixed-term licenses, through a subscription offering which we refer to as our
aspenONE licensing model. The aspenONE licensing model includes software
maintenance and support, known as our Premier Plus SMS offering, for the entire
term. Our aspenONE products are organized into three suites: 1) engineering; 2)
manufacturing and supply chain; and 3) asset performance management. Each
product suite leverages our AIoT products as the foundation of industrial data.
Our APM product suite is licensed by customer sites, user seats or cloud
connections. The engineering and manufacturing and supply chain product suites
are licensed by tokens, which are interchangeable measures of usage based on the
various units of measure such as users, servers, applications, manipulated
variables, etc. Customers may use tokens flexibly to access one or more products
in the suite in any combination. 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, and to license
additional tokens as business needs evolve.
We also license our software through point product arrangements with our Premier
Plus SMS offering included for the contract term.
Maintenance Revenue. We provide customers technical support, access to software
fixes and updates and the right to any new unspecified future software products
and updates that may be introduced into the licensed aspenONE software suite.
Our technical support services are provided from our customer support centers
throughout the world, as well as via email and through our support website.
Services and Other Revenue. We provide training and professional services to our
customers. Our professional services are focused on implementing our technology
in order to improve customers' plant performance and gain better operational
data. Customers who use our professional services typically engage us to provide
those services over periods of up to 24 months. We charge customers for
professional services on a time-and-materials or fixed-price basis. We provide
training services to our customers, including on-site, Internet-based and
customized training.
 Cost of Revenue
Cost of License. Our cost of license revenue consists of (i) royalties,
(ii) amortization of capitalized software and intangible assets, and
(iii) distribution fees.
Cost of Maintenance. Our cost of maintenance revenue consists primarily of
personnel-related costs of providing Premier Plus SMS bundled with our aspenONE
licensing and point product arrangements.
Cost of Services and Other. Our cost of services and other revenue consists
primarily of personnel-related and external consultant costs associated with
providing our customers professional services and training.
Operating Expenses
Selling and Marketing Expenses. Selling expenses consist primarily of the
personnel and travel expenses related to the effort expended to license our
products and services to current and potential customers, as well as for overall
management of customer relationships. Marketing expenses include expenses needed
to promote our company and our products and to conduct market research to help
us better understand our customers and their business needs.
Research and Development Expenses. Research and development expenses consist
primarily of personnel expenses related to the creation of new software
products, enhancements and engineering changes to existing products.
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General and Administrative Expenses. General and administrative expenses include
the personnel expenses of corporate and support functions, such as executive
leadership and administration groups, finance, legal, human resources and
corporate communications, and other costs, such as outside professional and
consultant fees, amortization of intangible assets, and the provision for bad
debt on accounts receivable.
Other Income and Expenses
Interest Income. Interest income is recorded for financing components under
Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with
Customers (Topic 606) or Topic 606. When a contract includes a significant
financing component, we generally receive the majority of the customer
consideration after the recognition of a substantial portion of the arrangement
fee as license revenue. As a result, we decrease the amount of revenue
recognized and increase interest income by a corresponding amount.
Interest Expense. Interest expense is primarily related to outstanding
borrowings under our Amended and Restated Credit Agreement.
Other (Expense) Income, Net. Other (expense) income, net is comprised primarily
of foreign currency exchange gains (losses) generated from the settlement and
remeasurement of transactions denominated in currencies other than the
functional currency of our entities.
Provision for Income Taxes. Provision for income taxes is comprised of domestic
and foreign taxes. We record interest and penalties related to income tax
matters as a component of income tax expense. Our effective income tax rate may
fluctuate between fiscal years and from quarter to quarter due to items arising
from discrete events, such as tax benefits from the disposition of employee
equity awards, settlements of tax audits and assessments and tax law changes.
Our effective income tax rate is also impacted by, and may fluctuate in any
given period because of, the composition of income in foreign jurisdictions
where tax rates differ.
Key Business Metrics
Background
We utilize key business measures to track and assess the performance of our
business. We have identified the following set of appropriate business metrics
in the context of our evolving business:

•Annual spend

•Total contract value

•Bookings

We also use the following non-GAAP business metrics in addition to GAAP measures to track our business performance:

•Free cash flow

•Non-GAAP operating income

We make these measures available to investors and none of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with GAAP.

Annual Spend


Annual spend is an estimate of the annualized value of our portfolio of term
license agreements, as of a specific date. Annual spend is calculated by summing
the most recent annual invoice value of each of our active term license
agreements. Annual spend also includes the annualized value of standalone SMS
agreements purchased with certain legacy term license agreements, which have
become an immaterial part of our business.

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Comparing annual spend for different dates can provide insight into the growth
and retention rates of our business, because annual spend represents the
estimated annualized billings associated with our active term license
agreements. Management utilizes the annual spend business metric to evaluate the
growth and performance of our business as well as for planning and forecasting.
In addition, our corporate and executive bonus programs are based in part on our
success in meeting targets for growth in annual spend that are approved by our
Board of Directors. We believe that annual spend is a useful business metric to
investors as it provides insight into the growth component of our term licenses
and to how management evaluates and forecasts the results of the business.

Annual spend increases as a result of new term license agreements with new or
existing customers, renewals or modifications of existing term license
agreements that result in higher license fees due to contractually-agreed price
escalation or an increase in the number of tokens (units of software usage) or
products licensed, and escalation of annual payments in our active term license
agreements.

Annual spend is adversely affected by term license and standalone SMS agreements
that are renewed at a lower entitlement level or not renewed and, to a lesser
extent, by customer agreements that become inactive during the agreement's term
because, in our determination, amounts due (or which will become due) under the
agreement are not collectible. Because the annual spend calculation includes all
of our active term license agreements, the reported balance may include
agreements with customers that are delinquent in paying invoices, that are in
bankruptcy proceedings, or where payment is otherwise in doubt.

As of June 30, 2021, approximately 90% of our term license agreements (by value)
are denominated in U.S. dollars. For agreements denominated in other currencies,
we use a fixed historical exchange rate to calculate annual spend in dollars
rather than using current exchange rates, so that our calculation of growth in
annual spend is not affected by fluctuations in foreign currencies.

Beginning in fiscal 2019 and for all future periods, for term license agreements
that contain professional services or other products and services, we have
included in the annual spend calculation the portion of the invoice allocable to
the term license under Topic 606 rather than the portion of the invoice
attributed to the license in the agreement. We believe that methodology more
accurately allocates any discounts or premiums to the different elements of the
agreement. We have not applied this methodology retroactively for agreements
entered into in prior fiscal years.

We estimate that annual spend grew by approximately 4.8% during fiscal 2021,
from $593.1 million as of June 30, 2020 to $621.3 million as of June 30, 2021.
We estimate that annual spend grew by approximately 9.6% during fiscal 2020,
from $541.0 million as of June 30, 2019 to $593.1 million as of June 30, 2020.

Total Contract Value


Total Contract Value ("TCV") is the aggregate value of all payments received or
to be received under all active term license agreements, including maintenance
and escalation. TCV was $2.9 billion and $2.8 billion as of June 30, 2021 and
2020, respectively.

Bookings

Bookings is the total value of customer term license contracts signed in the
current period, less the value of such contracts signed in the current period
where the initial licenses are not yet deemed delivered, plus term license
contracts signed in a previous period for which the initial licenses are deemed
delivered in the current period.

Bookings was $774.5 million during fiscal 2021, compared to $610.1 million and
$651.8 million during fiscal 2020 and 2019, respectively. The change in bookings
during fiscal 2021, 2020, and 2019 is related to the timing of renewals.

Free Cash Flow


We use a non-GAAP measure of free cash flow to analyze cash flows generated from
our operations. Management believes that this financial measure is useful to
investors because it permits investors to view our performance using the same
tools that management uses to gauge progress in achieving our goals. We believe
this measure is also useful to investors because it is an indication of cash
flow that may be available to fund investments in future growth initiatives or
to repay borrowings under the Amended and Restated Credit Agreement, and it is a
basis for comparing our performance with that of our competitors. The
presentation of free cash flow is not meant to be considered in isolation or as
an alternative to cash flows from operating activities as a measure of
liquidity.

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Free cash flow is calculated as net cash provided by operating activities adjusted for the net impact of (a) purchases of property, equipment and leasehold improvements, (b) payments for capitalized computer software costs, and (c) other nonrecurring items, such as acquisition related payments.

The following table provides a reconciliation of GAAP cash flow from operating activities to free cash flow for the indicated periods:

                                                                           June 30,
                                                          2021               2020               2019
                                                                    (Dollars in Thousands)
Net cash provided by operating activities (GAAP)      $ 276,134          $ 243,258          $ 238,313
Purchase of property, equipment, and leasehold
improvements                                             (1,237)            (1,278)              (436)
Payments for capitalized computer software costs         (1,129)              (141)            (1,131)

Acquisition related payments                              3,733              1,264                 27
Free cash flow (non-GAAP)                             $ 277,501          $ 243,103          $ 236,773


Fiscal 2021 Compared to Fiscal 2020
Total free cash flow increased $34.4 million during fiscal 2021 as compared to
the prior fiscal year primarily due to changes in working capital. For a more
detailed description of these changes refer to "Liquidity and Capital
Resources."
Fiscal 2020 Compared to Fiscal 2019
Total free cash flow increased $6.3 million during fiscal 2020 as compared to
the prior fiscal year primarily due to changes in working capital. For a more
detailed description of these changes refer to "Liquidity and Capital
Resources."
Non-GAAP Income from Operations
Non-GAAP income from operations excludes certain non-cash and non-recurring
expenses, and is used as a supplement to income from operations presented on a
GAAP basis. We believe that non-GAAP income from operations is a useful
financial measure because removing certain non-cash and other items provides
additional insight into recurring profitability and cash flow from operations.

The following table presents our income from operations, as adjusted for
stock-based compensation expense, amortization of intangible assets, and other
items, such as the impact of acquisition related fees, for the indicated
periods:
                                                 June 30,                                  2021 Compared to 2020                    2020 Compared to 2019
                                2021               2020               2019                 $                    %                   $                   %

GAAP income from operations $ 358,401 $ 257,359 $ 281,139

         $   101,042                39.3  %       $   (23,780)              (8.5) %
Plus:
Stock-based compensation       33,644             31,548             27,573                2,096                 6.6  %             3,975               14.4  %

Amortization of intangible
assets                          7,697              6,572              4,533                1,125                17.1  %             2,039               45.0  %

Acquisition related fees        4,518                 78              1,438                4,440             5,692.3  %            (1,360)             (94.6) %
Non-GAAP income from
operations                  $ 404,260          $ 295,557          $ 314,683          $   108,703                36.8  %       $   (19,126)              (6.1) %









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Results of Operations
The following table sets forth the results of operations, percentage of total
revenue and the year-over-year percentage change in certain financial data for
fiscal 2021, 2020 and 2019.
                                                                      Year Ended June 30,                                                   2021 Compared         2020 Compared
                                         2021                                 2020                                 2019                       to 2020 %             to 2019 %

                                                                                           (Dollars in Thousands)
Revenue:
License                     $ 497,479              70.1  %       $ 388,180              64.8  %       $ 404,581              67.8  %               28.2  %               (4.1) %
Maintenance                   185,164              26.1            178,139              29.8            163,567              27.4                   3.9                   8.9
Services and other             26,733               3.8             32,398               5.4             28,534               4.8                 (17.5)                 13.5
Total revenue                 709,376             100.0            598,717             100.0            596,682             100.0                  18.5                   0.3
Cost of revenue:
License                         9,276               1.3              7,241               1.2              7,060               1.2                  28.1                   2.6
Maintenance                    18,287               2.6             19,248               3.2             19,208               3.2                  (5.0)                  0.2
Services and other             32,588               4.6             35,118               5.9             31,548               5.3                  (7.2)                 11.3
Total cost of revenue          60,151               8.5             61,607              10.3             57,816               9.7                  (2.4)                  6.6
Gross profit                  649,225              91.5            537,110              89.7            538,866              90.3                  20.9                  (0.3)
Operating expenses:
Selling and marketing         114,959              16.2            114,486              19.1            111,374              18.7                   0.4                   2.8
Research and development       94,229              13.3             92,230              15.4             83,122              13.9                   2.2                  11.0
General and administrative     81,636              11.5             73,035              12.2             63,231              10.6                  11.8                  15.5
Total operating expenses      290,824              41.0            279,751              46.7            257,727              43.2                   4.0                   8.5
Income from operations        358,401              50.5            257,359              43.0            281,139              47.1                  39.3                  (8.5)
Interest income                36,791               5.2             32,658               5.5             28,457               4.8                  12.7                  14.8
Interest (expense)             (7,245)             (1.0)           (11,862)             (2.0)            (8,733)             (1.5)                (38.9)                 35.8
Other income (expense), net    (3,200)             (0.5)             1,202               0.2                664               0.1                (366.2)                 81.0
Income before income taxes    384,747              54.2            279,357              46.7            301,527              50.5                  37.7                  (7.4)
Provision for income taxes     64,944               9.2             49,686               8.3             40,165               6.7                  30.7                  23.7
Net income                  $ 319,803              45.0  %       $ 229,671              38.4  %       $ 261,362              43.8  %               39.2  %              (12.1) %


Revenue
Fiscal 2021 Compared to Fiscal 2020
Total revenue increased by $110.7 million during fiscal 2021 as compared to the
prior fiscal year. The increase of $110.7 million was due to an increase in
license revenue of $109.3 million and an increase in maintenance revenue of $7.0
million partially offset by a decrease in services and other revenue of $(5.7)
million, as compared to the prior fiscal year.
Fiscal 2020 Compared to Fiscal 2019
Total revenue increased by $2.0 million during fiscal 2020 as compared to the
prior fiscal year. The increase of $2.0 million was due to an increase in
maintenance revenue of $14.6 million and an increase in services and other
revenue of $3.9 million, partially offset by a decrease in license revenue of
$(16.4) million as compared to the prior fiscal year.
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License Revenue
                                       Year Ended June 30,                            2021 Compared to 2020                  2020 Compared to 2019
                            2021               2020               2019                 $                   %                  $                  %

                                                                            (Dollars in Thousands)
License revenue         $ 497,479          $ 388,180          $ 404,581          $   109,299              28.2  %       $   (16,401)            (4.1) %
As a percent of total
revenue                      70.1  %            64.8  %            67.8  %


We expect license revenue to increase or decrease as a result of: (i) dollar
value of bookings in the period; and (ii) timing of renewals.
Fiscal 2021 Compared to Fiscal 2020
The increase in license revenue of $109.3 million during fiscal 2021 as compared
to the prior fiscal year was primarily attributable to an increase in bookings
related to the timing of renewals.
Fiscal 2020 Compared to Fiscal 2019
The decrease in license revenue of $(16.4) million during fiscal 2020 as
compared to the prior fiscal year was primarily attributable to a decrease in
bookings and the timing of renewals.
Maintenance Revenue
                                         Year Ended June 30,                           2021 Compared to 2020               2020 Compared to 2019
                              2021               2020               2019                $                 %                  $                 %

                                                                            (Dollars in Thousands)
Maintenance revenue       $ 185,164          $ 178,139          $ 163,567          $   7,025              3.9  %       $   14,572             8.9  %
As a percent of total
revenue                        26.1  %            29.8  %            27.4  %


We expect maintenance revenue to increase as a result of: (i) having a larger
base of arrangements recognized on a ratable basis; (ii) increased customer
usage of our software; (iii) adding new customers; and (iv) escalating annual
payments.
Fiscal 2021 Compared to Fiscal 2020
The increase in maintenance revenue of $7.0 million during fiscal 2021 as
compared to the prior fiscal year was primarily due to growth of our base of
arrangements, which include maintenance, being recognized on a ratable basis.
Fiscal 2020 Compared to Fiscal 2019
The increase in maintenance revenue of $14.6 million during fiscal 2020 as
compared to the prior fiscal year was primarily due to growth of our base of
arrangements, which include maintenance, being recognized on a ratable basis.
Services and Other Revenue
                                       Year Ended June 30,                         2021 Compared to 2020                2020 Compared to 2019
                            2021              2020              2019                 $                 %                 $                 %

                                                                          (Dollars in Thousands)
Services and other
revenue                  $ 26,733          $ 32,398          $ 28,534          $   (5,665)           (17.5) %       $   3,864             13.5  %
As a percent of total
revenue                       3.8  %            5.4  %            4.8  %



We recognize professional services revenue for our time-and-materials ("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.
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Fiscal 2021 Compared to Fiscal 2020
Services and other revenue decreased by $(5.7) million during fiscal 2021 as
compared to the prior fiscal year primarily due to a decrease in bookings, delay
in timing of professional service engagements, and an increase in discounts
provided for the professional services engagements to help generate license
growth.
Fiscal 2020 Compared to Fiscal 2019
Services and other revenue increased by $3.9 million during fiscal 2020 as
compared to the prior fiscal year primarily due to the timing of professional
services engagements.
Cost of Revenue
Cost of License Revenue
                                     Year Ended June 30,                        2021 Compared to 2020               2020 Compared to 2019
                            2021             2020             2019               $                 %                  $                 %
                                                                       

(Dollars in Thousands) Cost of license revenue $ 9,276 $ 7,241 $ 7,060 $ 2,035

             28.1  %       $      181             2.6  %
As a percent of license
revenue                      1.9  %           1.9  %           1.7  %


Fiscal 2021 Compared to Fiscal 2020
Cost of license revenue increased by $2.0 million during fiscal 2021 as compared
to the prior fiscal year. The increase in cost of license revenue during fiscal
2021 was primarily due to increased amortization of intangible assets
attributable to acquisitions in the current year. License gross profit margin
was 98.1% in fiscal 2021 and was relatively consistent with that of fiscal 2020.
Fiscal 2020 Compared to Fiscal 2019
Cost of license revenue increased by $0.2 million during fiscal 2020 as compared
to the prior fiscal year. The increase in cost of license revenue during fiscal
2020 was primarily due to increased amortization of intangible assets from
acquisitions. License gross profit margin was 98.1% in fiscal 2020 and was
consistent with that of fiscal 2019.
Cost of Maintenance Revenue
                                         Year Ended June 30,                         2021 Compared to 2020               2020 Compared to 2019
                              2021              2020              2019                $                 %                  $                  %
                                                                            (Dollars in Thousands)
Cost of maintenance
revenue                    $ 18,287          $ 19,248          $ 19,208          $    (961)            (5.0) %       $        40             0.2  %
As a percent of
maintenance revenue             9.9  %           10.8  %           11.7  %


Fiscal 2021 Compared to Fiscal 2020
Cost of maintenance revenue was relatively consistent during fiscal 2021 as
compared to the prior fiscal year. Maintenance gross profit margin was 90.1% in
fiscal 2021 and was relatively consistent with that of fiscal 2020.
Fiscal 2020 Compared to Fiscal 2019
Cost of maintenance revenue was relatively consistent during fiscal 2020 as
compared to the prior fiscal year. Maintenance gross profit margin was 89.2% in
fiscal 2020 and was relatively consistent with that of fiscal 2019.
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Cost of Services and Other Revenue

                                       Year Ended June 30,                         2021 Compared to 2020                2020 Compared to 2019
                            2021              2020              2019                 $                 %                 $                 %
                                                                          (Dollars in Thousands)
Cost of services and
other revenue            $ 32,588          $ 35,118          $ 31,548          $   (2,530)            (7.2) %       $   3,570             11.3  %
As a percent of services
and other revenue           121.9  %          108.4  %          110.6  %



The timing of revenue and expense recognition on professional service
arrangements can impact the comparability of cost and gross profit margin of
professional services revenue from year to year. For example, 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.
Fiscal 2021 Compared to Fiscal 2020
Cost of services and other revenue decreased by $(2.5) million during fiscal
2021 as compared to the prior fiscal year. The decrease in cost of services and
other revenue during fiscal 2021 was primarily due to a decrease in
subcontractor costs. Services and other gross profit margin was (21.9)% in
fiscal 2021, compared to (8.4)% in fiscal 2020. The decrease in gross profit
margin is attributable to an increase in discounts provided for the professional
service engagements in fiscal 2021.
Fiscal 2020 Compared to Fiscal 2019
Cost of services and other revenue increased by $3.6 million during fiscal 2020
as compared to the prior fiscal year. The increase in cost of services and other
revenue during fiscal 2020 was primarily due to higher cost of delivering
professional services to support the corresponding increase in revenue during
the period. Services and other gross profit margin was (10.8)% in fiscal 2020,
compared to (16.2)% in fiscal 2019.
Gross Profit
                                      Year Ended June 30,                            2021 Compared to 2020                  2020 Compared to 2019
                           2021               2020               2019                 $                   %                  $                  %

                                                                           (Dollars in Thousands)
Gross profit           $ 649,225          $ 537,110          $ 538,866          $   112,115              20.9  %       $   (1,756)             (0.3) %
As a percent of total
revenue                     91.5  %            89.7  %            90.3  %


For further discussion of subscription and software gross profit and services
and other gross profit, please refer to the "Cost of License Revenue," "Cost of
Maintenance Revenue," and "Cost of Services and Other Revenue" sections above.
Fiscal 2021 Compared to Fiscal 2020
Gross profit increased by $112.1 million during fiscal 2021 as compared to the
prior fiscal year. Gross profit margin increased to 91.5% in fiscal 2021
compared to 89.7% in fiscal 2020 due to the growth in license revenue compared
to the related costs.
Fiscal 2020 Compared to Fiscal 2019
Gross profit decreased by $(1.8) million during fiscal 2020 as compared to the
prior fiscal year and gross profit margin remained relatively consistent at
89.7% in fiscal 2020 compared to that of fiscal 2019.
Operating Expenses
Selling and Marketing Expense
                                        Year Ended June 30,                           2021 Compared to 2020              2020 Compared to 2019
                             2021               2020               2019                 $                 %                $                 %
                                                                          (Dollars in Thousands)
Selling and marketing
expense                  $ 114,959          $ 114,486          $ 111,374          $      473             0.4  %       $   3,112             2.8  %
As a percent of total
revenue                       16.2  %            19.1  %            18.7  %


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Fiscal 2021 Compared to Fiscal 2020
The year-over-year increase of $0.5 million in selling and marketing expense in
fiscal 2021 as compared to the prior fiscal year was due to higher compensation
costs of $3.2 million primarily related to an increase in headcount, and an
increase in marketing programs of $3.0 million including our biennial customer
conference being held this fiscal year. The increase in selling and marketing
expense is offset by lower travel-related costs of $5.2 million in fiscal 2021.
Fiscal 2020 Compared to Fiscal 2019
The year-over-year increase of $3.1 million in selling and marketing expense in
fiscal 2020 as compared to the prior fiscal year was primarily due to higher
compensation costs of $6.9 million related to an increase in headcount and
higher stock-based compensation of $1.0 million, partially offset by lower
travel-related costs of $1.8 million, lower royalties of $0.9 million, and lower
marketing costs of $0.8 million due to our biennial customer conference held in
fiscal 2019.
Research and Development Expense
                                         Year Ended June 30,                        2021 Compared to 2020               2020 Compared to 2019
                              2021              2020              2019                $                 %                $                 %
                                                                           (Dollars in Thousands)
Research and development
expense                    $ 94,229          $ 92,230          $ 83,122          $   1,999             2.2  %       $   9,108             11.0  %
As a percent of total
revenue                        13.3  %           15.4  %           13.9  %


Fiscal 2021 Compared to Fiscal 2020
The year-over-year increase of $2.0 million in research and development expense
in fiscal 2021 as compared to the prior fiscal year was primarily due to higher
compensation costs of $1.9 million related to an increase in headcount.
Fiscal 2020 Compared to Fiscal 2019
The year-over-year increase of $9.1 million in research and development expense
in fiscal 2020 as compared to the prior fiscal year was primarily due to higher
compensation costs of $6.8 million related to an increase in headcount and
higher stock-based compensation of $1.7 million.
General and Administrative Expense
                                           Year Ended June 30,                         2021 Compared to 2020               2020 Compared to 2019
                                2021              2020              2019                $                 %                 $                 %
                                                                             (Dollars in Thousands)
General and administrative
expense                      $ 81,636          $ 73,035          $ 63,231          $   8,601             11.8  %       $   9,804             15.5  %
As a percent of total
revenue                          11.5  %           12.2  %           10.6  %


Fiscal 2021 Compared to Fiscal 2020
The year-over-year increase of $8.6 million in general and administrative
expense during fiscal 2021 as compared to the prior fiscal year was primarily
due to higher bad debt expense of $4.5 million, acquisition related fees of $4.4
million, and higher stock-based compensation of $1.8 million, partially offset
by a decrease in legal costs of $3.4 million.
Fiscal 2020 Compared to Fiscal 2019
The year-over-year increase of $9.8 million in general and administrative
expense during fiscal 2020 as compared to the prior fiscal year was primarily
due to higher professional fees of $3.1 million, higher bad debt expense of $2.0
million, higher compensation costs of $1.7 million related to an increase in
headcount, and higher stock-based compensation of $0.7 million.
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Non-Operating Income (Expense)
Interest Income
                                       Year Ended June 30,                         2021 Compared to 2020               2020 Compared to 2019
                            2021              2020              2019                $                 %                 $                 %
                                                                         (Dollars in Thousands)
Interest income          $ 36,791          $ 32,658          $ 28,457          $   4,133             12.7  %       $   4,201             14.8  %
As a percent of total
revenue                       5.2  %            5.5  %            4.8  %


Fiscal 2021 Compared to Fiscal 2020
The year-over-year increase of $4.1 million in interest income during fiscal
2021 as compared to the prior fiscal year was a result of: (i) increased
customer usage of our software; (ii) adding new customers; and (iii) escalating
annual payments.

Fiscal 2020 Compared to Fiscal 2019
The year-over-year increase of $4.2 million in interest income during fiscal
2020 as compared to the prior fiscal year was a result of: (i) increased
customer usage of our software; (ii) adding new customers; and (iii) escalating
annual payments.
Interest Expense
                                      Year Ended June 30,                          2021 Compared to 2020                 2020 Compared to 2019
                           2021               2020              2019                $                  %                  $                  %
                                                                          (Dollars in Thousands)
Interest expense        $ (7,245)         $ (11,862)         $ (8,733)         $   4,617             (38.9) %       $   (3,129)             35.8  %
As a percent of total
revenue                     (1.0) %            (2.0) %           (1.5) %


Fiscal 2021 Compared to Fiscal 2020
The year-over-year decrease of $4.6 million in interest expense during fiscal
2021 as compared to the prior fiscal year was primarily due to less interest
associated with the revolving line of credit under our Amended and Restated
Credit Agreement due to the repayment of the outstanding balance during fiscal
2021 and a lower interest rate associated with the term loan.
Fiscal 2020 Compared to Fiscal 2019
The year-over-year increase of $3.1 million in interest expense during fiscal
2020 as compared to the prior fiscal year was primarily due to interest expenses
related to an increase in borrowings under our Amended and Restated Credit
Agreement.
Other Income (Expense), Net
                                            Year Ended June 30,                         2021 Compared to 2020                  2020 Compared to 2019
                                  2021              2020             2019                $                  %                   $                  %
                                                                                 (Dollars in Thousands)
Other income (expense), net    $ (3,200)         $ 1,202          $   664          $   (4,402)            (366.2) %       $      538              81.0  %
As a percent of total revenue      (0.5) %           0.2  %           0.1  %


Other income (expense), net is comprised primarily of unrealized and realized
foreign currency exchange gains and losses generated from the settlement and
remeasurement of transactions denominated in currencies other than the
functional currency of our entities
Fiscal 2021 Compared to Fiscal 2020
Other income, net was comprised of $3.4 million of net foreign currency exchange
losses during fiscal 2021 compared to a $(0.9) million net foreign currency
gains for fiscal 2020.
Fiscal 2020 Compared to Fiscal 2019
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Other income, net was comprised of $1.2 million and $0.7 million of net foreign currency exchange gains during fiscal 2020 and 2019, respectively. Provision for Income Taxes

                                         Year Ended June 30,                             2021 Compared to 2020                2020 Compared to 2019
                           2021                2020                 2019                  $                  %                 $                  %
                                           As Adjusted          As Adjusted
                                                                             (Dollars in Thousands)
Provision for income
taxes                   $ 64,944          $    49,686          $    40,165          $   15,258              30.7  %       $   9,521              23.7  %
Effective tax rate          16.9  %              17.8  %              13.3  %


Fiscal 2021 Compared to Fiscal 2020
The effective tax rate for the periods presented is primarily the result of
income earned in the U.S. taxed at U.S. federal and state statutory income tax
rates, income earned in foreign tax jurisdictions taxed at the applicable rates,
as well as the impact of permanent differences between book and tax income.
Our effective tax rate was 16.9% and 17.8% during fiscal 2021 and 2020,
respectively.
We recognized income tax expense of $64.9 million during fiscal 2021compared to
$49.7 million during fiscal 2020. Fiscal 2021 was impacted primarily by the
higher pre-tax book income, offset by the Foreign-Derived Intangible Income
("FDII") deduction, tax credits, and the recognition of excess tax benefits
related to stock-based compensation. Assuming certain requirements are met, the
FDII deduction is a benefit for US companies that sell their products or
services to customers for use outside the US. Fiscal 2020 was unfavorably
impacted by the recognition of $6.4 million tax expense due to an accounting
method change election when we filed our fiscal 2019 federal tax return as a
result of a change in tax regulations during this fiscal year. Fiscal 2020 was
favorably impacted by the FDII deduction and tax credits.
As of June 30, 2021, we maintained a valuation allowance in the U.S. primarily
for certain deferred tax assets related to the investment in a joint venture and
on state research and development (R&D) credits. We also maintain a valuation
allowance on certain foreign subsidiary tax attributes, primarily net operating
loss carryforwards because it is more likely than not that a benefit will not be
realized. As of June 30, 2021 and 2020, our total valuation allowance was $9.9
million and $6.2 million, respectively.
We made cash tax payments totaling $61.4 million during fiscal 2021. We paid
$58.4 million for U.S. federal and state income taxes and $3.0 million for
foreign tax liabilities
Fiscal 2020 Compared to Fiscal 2019
The effective tax rate for the periods presented is primarily the result of
income earned in the U.S. taxed at U.S. federal and state statutory income tax
rates, income earned in foreign tax jurisdictions taxed at the applicable rates,
as well as the impact of permanent differences between book and tax income.
Our effective tax rate was 17.8% and 13.3% during fiscal 2020 and 2019,
respectively.
We recognized income tax expense of $49.7 million during fiscal 2020 compared to
$40.2 million during fiscal 2019. Fiscal 2020 was unfavorably impacted by the
recognition of $6.4 million tax expense due to an accounting method change
election when we filed our fiscal 2019 federal tax return as a result of a
change in tax regulations during this fiscal year. Fiscal 2020 was favorably
impacted by the FDII deduction and tax credits. Assuming certain requirements
are met, the FDII deduction is a benefit for US companies that sell their
products or services to customers for use outside the US. Fiscal 2019 was also
favorably impacted by the FDII deduction and the recognition of excess tax
benefits related to stock-based compensation.
As of June 30, 2020, we maintain a valuation allowance in the U.S. primarily for
certain deferred tax assets related to the investment in a joint venture and on
state research and development (R&D) credits. We also maintain a valuation
allowance on certain foreign subsidiary tax attributes, primarily net operating
loss carryforwards because it is more likely than not that a benefit will not be
realized. As of June 30, 2020 and 2019, our total valuation allowance was $6.2
million and $4.9 millions, respectively.
We made cash tax payments totaling $39.5 million during fiscal 2020. We paid
$37.1 million for U.S. federal and state income taxes and $2.4 million for
foreign tax liabilities.
Liquidity and Capital Resources
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Resources
In recent years, we have financed our operations with cash generated from
operating activities. As of June 30, 2021 and 2020, our principal sources of
liquidity consisted of $379.9 million and $287.8 million in cash and cash
equivalents, respectively.
We believe our existing cash and cash equivalents, together with our cash flows
from operating activities, will be sufficient to meet our anticipated cash needs
for at least the next twelve months. We may need to raise additional funds if we
decide to make one or more acquisitions of businesses, technologies or products.
If additional funding for such purposes is required beyond existing resources
and our Amended and Restated Credit Agreement described below, we may not be
able to effect a receivable, equity or debt financing on terms acceptable to us
or at all.

Credit Agreement

In December 2019, we entered into an Amended and Restated Credit Agreement with
JPMorgan Chase Bank, N.A., as administrative agent, joint lead arranger and
joint bookrunner, Silicon Valley Bank, as joint lead arranger, joint bookrunner
and syndication agent, and the lenders and co-documentation agents named therein
(the "Amended and Restated Credit Agreement"). The Amended and Restated Credit
Agreement, which amends and restates the prior Credit Agreement we entered into
as of February 26, 2016 with the same lenders (the "Prior Credit Agreement"),
provides for a $200.0 million secured revolving credit facility and a $320.0
million secured term loan facility. The indebtedness under the revolving credit
facility matures on December 23, 2024. Prior to the maturity of the revolving
credit facility under the Amended and Restated Credit Agreement, any amounts
borrowed under the facility may be repaid and, subject to the terms and
conditions of the Amended and Restated Credit Agreement, borrowed again in whole
or in part without penalty.
During fiscal year 2021, we paid off the outstanding balance of our revolving
credit facility of $119.2 million. As of June 30, 2021, our current borrowings
of $20.0 million consist of the term loan facility. Our non-current borrowings
of $273.2 million consist of $276.0 million of our term loan facility, net of
$2.8 million in debt issuance costs. We had current borrowings of $135.2 million
and non-current borrowings of $292.4 million as of June 30, 2020.
For a more detailed description of the Amended and Restated Credit Agreement,
refer to Note 12, "Credit Agreement," to our Consolidated Financial Statements.

Cash Equivalents and Cash Flows
Our cash equivalents of $1.0 million as of June 30, 2021 and 2020, respectively,
consisted of money market funds. The objective of our investment policy is to
manage our cash and investments to preserve principal and maintain liquidity.
The following table summarizes our cash flow activities for the periods
indicated:
                                                                     Year Ended June 30,
                                                          2021               2020               2019
                                                                    (Dollars in Thousands)
Cash flow provided by (used in):
Operating activities                                  $ 276,134          $ 243,258          $ 238,313
Investing activities                                    (19,781)           (76,203)            (7,665)
Financing activities                                   (165,134)            49,435           (254,527)
Effect of exchange rates on cash and cash equivalents       838               (620)              (360)

Increase (decrease) in cash and cash equivalents $ 92,057 $ 215,870 $ (24,239)



Operating Activities
Our primary source of cash is from the annual installments associated with our
software license arrangements and related software support services, and to a
lesser extent from professional services and training. We believe that cash
inflows from our term license business will grow as we benefit from the
continued growth of our portfolio of term license contracts.
Fiscal 2021
Cash from operating activities provided $276.1 million during fiscal 2021. This
amount resulted from net income of $319.8 million, adjusted for non-cash items
of $79.1 million, and net uses of cash of $(122.8) million related to changes in
working capital.
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Non-cash items within net income consisted primarily of stock-based compensation
expense of $33.6 million, depreciation and amortization expense of $10.3
million, provision for bad debts of $9.7 million, reduction in the carrying
amount of right-of-use assets of $8.9 million, deferred income taxes of $12.3
million, and net foreign currency losses of $3.4 million.
Cash used by working capital of $(122.8) million in fiscal 2021 was primarily
attributable to an increase in contract assets of $113.7 million, increases in
prepaid expenses, prepaid income taxes, and other assets of $12.8 million,
decreases in lease liabilities of $10.2 million, increases in accounts
receivable of $2.1 million, and increases in contract costs of $0.4 million,
partially offset by cash provided by increases in deferred revenue of $16.6
million.
Fiscal 2020
Cash from operating activities provided $243.3 million during fiscal 2020. This
amount resulted from net income of $229.7 million, adjusted for non-cash items
of $83.2 million, and net uses of cash of $(69.6) million related to changes in
working capital.
Non-cash items within net income consisted primarily of stock-based compensation
expense of $31.5 million, deferred income taxes of $28.1 million, depreciation
and amortization expense of $9.6 million, reduction in the carrying amount of
right-of-use assets of $9.1 million, provision for bad debts of $5.3 million,
and net foreign currency gains of $(0.9) million.
Cash used by working capital of $(69.6) million was primarily attributable to
cash used by increases in contract assets of $28.1 million, decreases in
accounts payable, accrued expenses and other current liabilities of $23.4
million, increases in accounts receivable of $12.9 million, decreases in lease
liabilities of $9.5 million, increases in prepaid expenses, prepaid income
taxes, and other assets of $5.3 million, and increases in contract costs of $3.6
million, partially offset by cash provided by increases in deferred revenue of
$13.0 million.
Fiscal 2019
Cash from operating activities provided $238.3 million during fiscal 2019. This
amount resulted from net income of $261.4 million, adjusted for non-cash items
of $8.4 million, and net sources of cash of $(31.5) million related to changes
in working capital.
Non-cash items within net income consisted primarily of stock-based compensation
expense of $27.6 million, depreciation and amortization expense of $8.1 million,
deferred income taxes of $(27.1) million, provision for bad debts of $0.6
million, and net foreign currency gains of $(1.3) million.
Cash used by working capital of $(31.5) million was primarily attributable to
cash used by increases in contract assets of $57.7 million, increases in
accounts receivable of $6.6 million, increases in contract costs of $4.5
million, and increases in prepaid expenses, prepaid income taxes, and other
assets of $2.4 million, partially offset by cash provided by increases in
accounts payable, accrued expenses and other current liabilities of $21.9
million, and increases in deferred revenue of $17.8 million. The increase in
accounts payable, accrued expenses and other current liabilities is primarily
due to an increase in income taxes payable as of June 30, 2019 from the tax
liability associated with adopting Topic 606. There was a correlating decrease
in deferred income taxes during fiscal 2019.
Investing Activities
Fiscal 2021
During fiscal 2021, we used $19.8 million of cash from investing activities. We
used $16.3 million for business acquisitions, $1.2 million for capital
expenditures, $1.1 million for equity method investments, and $1.1 million for
capitalized computer software development costs.
Fiscal 2020
During fiscal 2020, we used $76.2 million of cash from investing activities. We
used $74.5 million for business acquisitions, $1.3 million for capital
expenditures, $0.3 million for equity method investments, and $0.1 million for
capitalized computer software development costs.
Fiscal 2019
During fiscal 2019, we used $7.7 million of cash from investing activities. We
used $6.1 million for business acquisitions,$1.1 million for capitalized
computer software development costs, and $0.4 million for capital expenditures.
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Financing Activities
Fiscal 2021
During fiscal 2021, we used $165.1 million of cash from financing activities.
Uses of cash in the period included the repayment of the outstanding revolving
line of credit of $119.2 million, $45.6 million for repurchases of our common
stock, $16.0 million for repayments of the term loan, $9.2 million for
withholding taxes on vested and settled restricted stock units, and $1.2 million
for deferred business acquisition payments, partially offset by proceeds of
$26.1 million from the exercise of employee stock options.
Fiscal 2020
During fiscal 2020, $49.4 million of net cash was provided by financing
activities. Sources of cash in the period included proceeds of $449.2 million
from the Amended and Restated Credit Agreement, $125.0 million from the Prior
Credit Agreement, and proceeds of $9.0 million from the exercise of employee
stock options, partially offset by uses of cash of $152.4 million for
repurchases of our common stock, $10.2 million for withholding taxes on vested
and settled restricted stock units, $345.0 million for repayments of the
revolving line of credit from the Prior Credit Agreement, $10.0 million for
repayments of the revolving line of credit and $8.0 million for repayments of
the term loan from the Amended and Restated Credit Agreement, and $4.6 million
for deferred business acquisition payments, and $3.5 million for debit issuance
costs.
Fiscal 2019
During fiscal 2019, we used $254.5 million of cash for financing activities. We
used $299.2 million for repurchases of our common stock, $1.7 million for
deferred business acquisition payments, and $14.5 million for withholding taxes
on vested and settled restricted stock units. Sources of cash in the period
included proceeds of $50.0 million from the Prior Credit Agreement and proceeds
of $10.9 million from the exercise of employee stock options.
Contractual Obligations and Requirements
Our contractual obligations, which consisted of borrowings, interest, and fees
under our Amended and Restated Credit Agreement, operating lease commitments for
our headquarters and other facilities, royalty obligations, equity method
investments, deferred acquisition payments, and standby letters of credit and
other obligations, were as follows as of June 30, 2021:
                                                                      Payments due by Period
                                                    Less than 1                                                       More than 5
                                   Total               Year              1 to 3 Years           3 to 5 Years             Years
Contractual Cash Obligations:
Credit agreement (1)            $ 314,094          $   25,091          $      73,173          $     215,830          $         -
Operating leases (2)               62,363              10,718                 20,297                 11,287               20,061
Royalty obligations                 4,299               2,292                  1,498                    202                  307
Equity method investments           4,093               4,093                      -                      -                    -
Deferred acquisition payments       4,062               2,862                  1,200                      -                    -
Other purchase obligations         18,824              16,598                  2,226                      -                    -
Total contractual cash
obligations                     $ 407,735          $   61,654          $   

98,394 $ 227,319 $ 20,368 Other Commercial Commitments: Standby letters of credit $ 2,323 $ 779 $

- $ 1,544 $ - Total commercial commitments $ 410,058 $ 62,433 $

98,394 $ 228,863 $ 20,368

____________________________________________

(1)The $314.1 million of contractual obligations related to our Amended and
Restated Credit Agreement includes $296.0 million in outstanding borrowings
under our term loan facility, and $18.1 million of interest expense and
commitment fees as of June 30, 2021.
(2)The $62.4 million of contractual obligations includes rent and fixed fees for
all of our operating leases, including those not recognized on the balance
sheet.
We are not currently a party to any other material purchase contracts related to
future capital expenditures, and we do not expect our future investment in
capital expenditures to be materially different from recent levels.
The standby letters of credit were issued by Silicon Valley Bank in the United
States and secure our performance on professional services contracts and certain
facility leases.
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The above table does not reflect a liability for uncertain tax positions of $2.1
million as of June 30, 2021. We estimate that none of this amount will be paid
within the next year and we are currently unable to reasonably estimate the
timing of payments for the remainder of the liability.
Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Estimates and Judgments
Our consolidated financial statements are prepared in accordance with GAAP. The
preparation of our financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and related disclosures. We base our estimates on historical experience
and various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe that the assumptions and estimates associated with revenue
recognition policies have the greatest potential impact on our consolidated
financial statements.
For further information on our significant accounting policies, refer to Note 2,
"Significant Accounting Policies," and Note 3, "Revenue from Contracts with
Customers," to our Consolidated Financial Statements.
Revenue Recognition
In accordance with Topic 606, we account for a customer contract when both
parties have approved the contract and are committed to perform their respective
obligations, each party's rights can be identified, payment terms can be
identified, the contract has commercial substance, and it is probable that we
will collect substantially all of the consideration to which we are entitled.
Revenue is recognized when, or as, performance obligations are satisfied by
transferring control of a promised product or service to a customer.

Nature of Products and Services


We generate revenue from the following sources: (1) License revenue; (2)
Maintenance revenue; and (3) Services and other revenue. We sell our software
products to end users primarily under fixed-term licenses. We license our
software products primarily through a subscription offering which we refer to as
our aspenONE licensing model, which includes software maintenance and support,
known as our Premier Plus SMS offering, for the entire term. Our aspenONE
products are organized into three suites: 1) engineering; 2) manufacturing and
supply chain; and 3) asset performance management. Each product suite leverages
our AIoT products as the foundation of industrial data. Our APM product suite is
licensed by customer sites, user seats or cloud connections. The engineering and
manufacturing and supply chain product suites are licensed by tokens, which are
interchangeable measures of usage based on the various units of measure such as
users, servers, applications, manipulated variables, etc. Customers may use
tokens flexibly to access any product or combination of products in the licensed
suite.

We also license our software through point product term arrangements, which include our Premier Plus SMS offering for the entire term.

We determine revenue recognition through the following steps:


• Identification of the contract, or contracts, with a customer;
• Identification of the performance obligations in the contract;
• Determination of the transaction price;
• Allocation of the transaction price to the performance obligations in the
contract; and
• Recognition of revenue when, or as, we satisfy a performance obligation.

Term-based Arrangements: Term-based arrangements consist of on-premise term licenses as well as maintenance.

License

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License revenue consists primarily of product and related revenue from our aspenONE licensing model and point product arrangements.


When a customer elects to license our products under our aspenONE licensing
model, the customer receives, for the term of the arrangement, the right to all
software products in the licensed aspenONE software suite. When a customer
elects to license point products, the customer receives, for the term of the
arrangement, the right to license specified products in the licensed aspenONE
software suite. Revenue from initial product licenses is recognized upfront upon
delivery.

Maintenance

When a customer elects to license our products under our aspenONE licensing
model, our Premier Plus SMS offering is included for the entire term of the
arrangement and the customer receives, for the term of the arrangement, the
right to any updates that may be introduced into the licensed aspenONE software
suite. When a customer elects to license point products, our Premier Plus SMS
offering is included for the entire term of the arrangement and the customer
receives, for the term of the arrangement, the right to any updates that may be
introduced related to the specified products licensed. Maintenance represents a
stand-ready obligation and, due to our obligation to provide unspecified future
software updates on a when-and-if available basis as well as telephone support
services, we are required to recognize revenue ratably over the term of the
arrangement.

Services and Other Revenue

Professional Services Revenue

Professional services are provided to customers on a T&M or fixed-price basis.
The obligation to provide professional services is generally satisfied over
time, with the customer simultaneously receiving and consuming the benefits as
we satisfy our performance obligation. For professional services, revenue is
recognized by measuring progress toward the completion of our obligations. 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. The use of the
proportional performance method is dependent upon our ability to reliably
estimate the costs to complete a project. We use historical experience as a
basis for future estimates to complete current projects. Additionally, we
believe that costs are the best available measure of performance. Out-of-pocket
expenses which are reimbursed by customers are recorded as revenue.

Training Revenue

We provide training services to our customers, including on-site, Internet-based, public and customized training. The obligation to provide training services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as we satisfy our performance obligation. Revenue is recognized in the period in which the services are performed.

Contracts with Multiple Performance Obligations

Our contracts generally contain more than one of the products and services listed above, each of which is separately accounted for as a distinct performance obligation.


Allocation of consideration: We allocate total contract consideration to each
distinct performance obligation in an arrangement on a relative standalone
selling price basis. The standalone selling price reflects the price we would
charge for a specific product or service if it was sold separately in similar
circumstances and to similar customers.

If the arrangement contains professional services and other products or services, we allocate to the professional service obligation a portion of the total contract consideration based on the standalone selling price of professional services that is observed from consistently priced standalone sales.


The standalone selling price for term licenses, which are always sold with
maintenance, is the price for the combined license and maintenance bundle. The
amount assigned to the license and maintenance bundle is separated into license
and maintenance amounts using the respective standalone selling prices
represented by the value relationship between the software license and
maintenance.

When two or more contracts are entered into at or near the same time with the
same customer, we evaluate the facts and circumstances associated with the
negotiation of those contracts. Where the contracts are negotiated as a package,
we will
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account for them as a single arrangement and allocate the consideration for the combined contracts among the performance obligations accordingly.

Standalone selling price: When available, we use directly observable transactions to determine the standalone selling prices for performance obligations. Generally, directly observable data is not available for term licenses and maintenance. When term licenses are sold together with maintenance in a bundled arrangement, we estimate a standalone selling price for these distinct performance obligations using relevant information, including our overall pricing objectives and strategies and historical pricing data, and taking into consideration market conditions and other factors.

Other policies and judgments


Payment terms and conditions vary by contract type, although terms generally
include a requirement of payment annually over the term of the license
arrangement. Therefore, we generally receive payment from a customer after the
performance obligation related to the license has been satisfied, and therefore,
our contracts generally contain a significant financing component. The
significant financing component is calculated utilizing an interest rate that
derives the net present value of the performance obligations delivered on an
upfront basis based on the allocation of consideration. We have instituted a
customer portfolio approach in assigning interest rates. The rates are
determined at contract inception and are based on the credit characteristics of
the customers within each portfolio.

Contract modifications


We sometimes enter into agreements to modify previously executed contracts,
which constitute contract modifications. We assess each of these contract
modifications to determine (i) if the additional products and services are
distinct from the products and services in the original arrangement; and (ii) if
the amount of consideration expected for the added products and services
reflects the stand-alone selling price of those products and services, as
adjusted for contract-specific circumstances. A contract modification meeting
both criteria is accounted for as a separate contract. A contract modification
not meeting both criteria is considered a change to the original contract and is
accounted for on either (i) a prospective basis as a termination of the existing
contract and the creation of a new contract? or (ii) a cumulative catch-up
basis. Generally, our contract modifications meet both criteria and are
accounted for as a separate contract, as adjusted for contract-specific
circumstances.

Contract Costs


We pay commissions for new product sales as well as for renewals of existing
contracts. Commissions paid to obtain renewal contracts are not commensurate
with the commissions paid for new product sales and therefore, a portion of the
commissions paid for new contracts relate to future renewals.

We account for new product sales commissions using a portfolio approach and
allocate the cost of commissions in proportion to the allocation of transaction
price of license and maintenance performance obligations, including assumed
renewals. Commissions allocated to the license and license renewal components
are expensed at the time the license revenue is recognized. Commissions
allocated to maintenance are capitalized and amortized on a straight-line basis
over a period of four to eight years for new contracts, reflecting our estimate
of the expected period that we will benefit from those commissions.

Amortization of capitalized contract costs is included in sales and marketing
expenses in our Condensed Consolidated Statement of Operations.
Recent Accounting Pronouncements
Refer to Note 2 (o) "New Accounting Pronouncements Adopted in Fiscal 2021" and
Note 2 (p) "Recently Issued Accounting Pronouncements," to our Consolidated
Financial Statements for information about recent accounting pronouncements.
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.
In the ordinary course of conducting business, we are exposed to certain risks
associated with potential changes in market conditions. These market risks
include changes in currency exchange rates and interest rates which could affect
operating results, financial position and cash flows. We manage our exposure to
these market risks through our regular operating and financing activities and,
if considered appropriate, we may enter into derivative financial instruments
such as forward currency exchange contracts.
Foreign Currency Risk
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During fiscal 2021 and 2020, 12.6% and 6.6% of our total revenue, respectively,
was denominated in a currency other than the U.S. dollar. In addition, certain
of our operating costs incurred outside the United States are denominated in
currencies other than the U.S. dollar. We conduct business on a worldwide basis
and as a result, a portion of our revenue, earnings, net assets, and net
investments in foreign affiliates is exposed to changes in foreign currency
exchange rates. We measure our net exposure for cash balance positions and for
cash inflows and outflows in order to evaluate the need to mitigate our foreign
exchange risk. We may enter into foreign currency forward contracts to minimize
the impact related to unfavorable exchange rate movements, although we have not
done so during fiscal 2021 and fiscal 2020. Our largest exposures to foreign
currency exchange rates exist primarily with the Euro, Pound Sterling, Canadian
Dollar, Japanese Yen, and Russian Ruble.
During fiscal 2021 and fiscal 2020, we recorded net foreign currency losses of
$3.4 million and gains of $(0.9) million, respectively, related to the
settlement and remeasurement of transactions denominated in currencies other
than the functional currency of our operating units. Our analysis of operating
results transacted in various foreign currencies indicated that a hypothetical
10% change in the foreign currency exchange rates could have increased or
decreased the consolidated results of operations by approximately $8.1 million
and $4.8 million for fiscal 2021 and 2020, respectively.
Interest Rate Risk
We place our investments in money market instruments. Our analysis of our
investments and interest rates at June 30, 2021 and 2020 indicated that a
hypothetical 100 basis point increase or decrease in interest rates would not
have a material impact on the fair value of our investments determined in
accordance with an income-based approach utilizing portfolio future cash flows
discounted at the appropriate rates.
As of June 30, 2021, our current borrowings of $20.0 million consist of the term
loan facility under the Amended and Restated Credit Agreement. Our non-current
borrowings of $273.2 million consist of $276.0 million under our term loan
facility, net of $2.8 million in debt issuance costs. A hypothetical 10%
increase or decrease in interest rates paid on outstanding borrowings under the
Amended and Restated Credit Agreement would not have a material impact on our
financial position, results of operations or cash flows.
Investment Risk
During fiscal 2020, we entered into a limited partnership investment fund
agreement. The primary objective of this partnership is investing in equity and
equity-related securities (including convertible debt) of venture growth- stage
businesses. We account for the investment in accordance with Topic
323, Investments - Equity Method and Joint Ventures. Our total commitment under
this partnership is 5.0 million CAD ($3.5 million). Under the conditions of the
equity method investment, unfavorable future changes in market conditions could
lead to a potential loss up to the full value of our 5.0 million CAD
($3.5 million) commitment. As of June 30, 2021, the fair value of this
investment is 1.8 million CAD ($1.3 million), representing our payments towards
the total commitment during fiscal 2021, and is recorded in non-current assets
in our consolidated balance sheet.
Item 8.  Financial Statements and Supplementary Data.
The following consolidated financial statements specified by this Item, together
with the reports thereon of KPMG LLP, are presented following Item 15 of this
Form 10-K:
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended June 30, 2021, 2020
and 2019
Consolidated Statements of Comprehensive Income for the years ended June 30,
2021, 2020 and 2019
Consolidated Balance Sheets as of June 30, 2021 and 2020
Consolidated Statements of Stockholders' Equity for the years ended June 30,
2021, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended June 30, 2021, 2020
and 2019
Notes to Consolidated Financial Statements

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