Aspen Technology free essay sample

Aspen is a software company which was established in 1982. The company mainly provides simulation solutions to process manufacturing companies. The main industry which the company focuses on is chemical processing. The entire idea began with the project of Advanced System for Process Engineering in MIT in 1976. This project was than acquired by Lawrence Evans whom founded Aspen. In a very short amount of time Aspen became a major player in the simulation part of the software industry. The company started off as a privately owned firm but in 1995 turned into a publicly traded company with a capitalization of 200 million dollars. The leading product of Aspen is Aspen Plus; we have to note that 48 % of sales were stemming from this product in 1995. The company gives great significance to RD as the customers commitment depends on the development of Aspen’s current products. In 1995, 11. 4 million dollars was dedicated to RD. We will write a custom essay sample on Aspen Technology or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page There is a factor of foreign currency expense as 20% of the total RD expense was denominated in British pounds; the rest was in U. S dollars. Aspen enjoys a collection of committed and loyal customers; we can come to this from the increase of the licensing fees between the periods of 1988 and 1995. There were three increases in those periods at the rates of 10 percent. It is also crucial to note that 90 % of Aspen’s customers renewed their licensing agreements. Aspen attained 34 % of revenues from license renewals. An additional 34 percent was gathered from providing further services to current customers. The company has sales offices in UK, Hong Kong, Japan and Brussels. There is a joint venture operation with China’s national petroleum and petrochemical company. Aspens European operation headquarters is located in Belgium. Aspen’s general sale policy is built upon non-cancelable contracts which last three to five years. The annual cost of a license for a single US user is between $10,000 to $25,000 dollars. The company’s policy of offering three to five years contracts enables options of financing to customers. Aspen’s interest rates for the last year are between 9. % and 11%. The rate of interest in 1995 was 12%. Aspen generated revenue from UK which was denominated in pounds, in Japan sales were in yen, in Germany the revenue was denominated in marks. This information is essential as we are going to observe the currencies to properly grasp the risk exposure stemming from foreign currency exchange. Aspen’s financing plan to customers created a problem for the company; in 1995, the revenue was $57. 5 million and th e received cash from customers was $38. 5 million. As we can comprehend the company’s receivable account regarding installments soared however the company faced a cash flow problem. Aspen sold cash receivables to GE Capital and Sanwa Bank for cash. Foreign denominated contracts attained dollars immediately however dollar denominated contracts were discounted based on the treasury rate. Let us take note of this as for the contracts that are not sold right after agreement, Aspen will bore risk as the interest of the contract stemming from the finance institutions will not be passed to the customer. It is crucial to point out that Aspen uses hedging for foreign exchange receivables however expenditures denominated in foreign currency is not hedged. This is the current portrait of the company, let us observe the exposures. The Risk Exposures of Aspen: The foremost risk exposure of Aspen stems from the financing cycle of the company. The company’s offered deferment plan which consists periods of three to five years triggers the company to have low cash flows. The installment receivable account however is high because most of the customers prefer the deferment plan. Aspen to finance its cash cycle therefore sell the receivables for cash, this has risks since the accounts that are not sold at the spot of the agreement could create losses due to alternating US treasury rates (if the account is dollar denominated), forward exchange and interest rates (if the account is foreign currency denominated). The sale of receivables also depends on the purchasing willingness of counterparties. Aspen could find itself in a contracting finance cycle if the deferred payments are not paid on time and the finance institutions are willing to accept any further long term installment receivables. We also have to note that the company has further liabilities such as the 4 million dollar subordinated debenture to the Massachusetts Capital Resource Company. In the case of delayed payments of receivables, the purchasing unwillingness of finance institutions towards future sale of receivables and currents loans could trigger bankruptcy of Aspen. The long term deferment plan increases business but poses grave risk for the cash flow of the company. We also have to note that positive cash carries great significance as Aspen is now a publicly traded company, the cash flow could directly affect the stock price f the company and therefore influence the interest of investors towards Aspen. The company is also subjected to foreign exchange exposures due to the sales in foreign markets. The data shows us that 48 % of Aspen’s revenues come from United States, 31 % comes from Europe, 12 % from Asia and 9 % from other regions of the world. This subjects the company to have a hedge plan for British pounds, Yen, Yuan, Mark. We have to distinguish the fact that the company has hedging for receivables however this does not apply to expenses. We can come to the conclusion that the company is focused on â€Å"stable net income† to establish confidence among the investors. This could however trigger a problem as we can see that the expense in 1995 stemming from the Belgium headquarters is $5,153,000. Since we acknowledge that Aspen’s business is growing every year, the expenses shall also increase at a following rate therefore the expense denominated in foreign currency shall no longer be a negligible amount and cause serious problems due to foreign exchange exposure. In summary, the company has exposure due to operational and strategic factors. The company’s business with countries other than United States creates the problem of foreign currency denominated revenues and expenses. The strategic exposure is company’s unwillingness to hedge against foreign exchange expense exposure. Since the company is always at the risk of low cash flow, Aspen mainly focuses on net income therefore does not dedicate sufficient attention towards expense exposure. Financing Cycle: As Aspen is now a publicly traded company, the deferment plan should be reviewed. In 1994, the revenue generated from services is $44,975,000. In 1995, it is $57,498,000; there is an increase of 27 percent in revenue. Let us observe how this is distributed in terms of cash; the cash in 1994 is $2,488,000 and in 1995 $4,189,000. The cash denomination of year 1994 is 5. 5 percent and for 1995 it is 7. 28 percent. The increase in cash compared to the overall increase in revenue is minute. We can also look at the deferred revenue as in 1994 it is $4,183,000 and in 1995 it is $4,994,000; we can comprehend that there is an increase of 19 percent in deferred revenue. This increase is almost as much as the increase in overall revenue. After we observe these numbers, we can conclude that the deferment plan of Aspen should either change or a new strategy is needed. A higher percentage of cash business would certainly solve the problem of low cash flow of the company; it would even limit the long term foreign exchange exposure. This could however trigger loss of customers as most clients of Aspen prefer financing their licensing fees. Instead of one to five year financing plans, the company could offer financing for shorter periods of time, this would work favorably as long term forward exchange contracts do not find much demand. The shorter term financing could also increase the appetite of financial institutions regarding the purchase of long term account receivables. If the company does not wish to change any variable with the current financing plan, another possible path to limit the financing cycle exposure would be to establish a strategic partnership with a financial institution. The company would have guaranteed demand by selling account receivables therefore would have a certain future dealing with cycle exposures. There would not be any concerns regarding the appetite of purchase towards long term receivables. This could be established by sharing a certain amount of the profit with the financial institution, allowing them to share the risk with Aspen. The sale of receivables would be at the established and favorable rates compared to the market data. Foreign Exchange Exposure: The company’s 48 percent of revenues are attained from United States. This does not create any problems since the 2/3 of the company’s expense is US dollar denominated. The problem is with the 52 percent of the revenue; this is not only gathered from a single location but 31 percent from Europe, 12 percent from Asia and 9 percent from other locations. The company obviously has direct foreign exchange exposure from revenues. Aspen’s hedging method is selling long term foreign currency receivables and gathering dollars for it. They also enter into forward currency contracts when license agreements are signed. The method of selling long term foreign currency receivables is not reliable since purchasers could not be found for contracts which are longer than two years. The company therefore used a series of one year forward contracts to swap the expired ones. In this scenario the timing could be problematic for Aspen. The best way to hedge for long term foreign currency revenues would be to create a portfolio of currencies by basing Canadian dollar due to low standard deviation and correlation and decreasing the amount of other currencies would limit the exposure. We can see that Canadian dollar is less risky due to the stability of the currency. At the current portrait, the company due to the financing faces low cash flows since the company is publicly traded; low cash flows would have adverse effects on investor confidence. The company should focus on net income and have proper plans for hedging revenue. Aspen is long for all currencies when we observe the case from annual sales and expenses but the company is short for currencies when we look at it from cash flow. Aspen emphasizes on stable â€Å"net income†. Since they sell account receivables, they actually can accomplish this but as explained above in certain situation basing the hedging on the sale of account receivables could have serious consequences. A problem which is being overlooked by Aspen is the foreign currency exposures from expenditures. As we look at the figures, we can see that the expected operating expense for Aspen is $50,947,000. The operating expense of Aspen stemming from United States is $35,810,000; this indicates us that the foreign operating expense of Aspen is $15,137,000. This is a large amount and we can see that British pound, Belgium franc and Japanese Yen are the largest denominated debts so hedging is required against three currencies. We can use the same principle as discussed above; building a portfolio of currencies and basing our portfolio on a reliable currency such as Canadian dollar. We can see that Canadian dollar has low standard deviation and correlation. We should also lower the proportion of other currencies while we use Canadian dollar as the foundation of our portfolio. It is crucial that while the company focuses on foreign exchange revenue exposure, Aspen should also hedge against expense exposure. We can see that as the business of Aspen is growing so is the foreign denominated expense. Competition: There are various firms that can create market share problems for Aspen. Simulation Sciences is a software company that has entered the simulation software industry, creating solutions specific to chemical industry. We have to state that 65 percent of Aspen’s business comes from chemical industry. They are located in United States and this might increase competition for Aspen this could eventually affect the cash flow which is sometimes poses conflicts for the company. Hyprotech is a Canada based company. They already old 10 percent of the chemical industry market for simulation software. The specialty of their product is that it is interchangeable from steady state to dynamic state. This could pose a problem for Aspen since the loyal customer base could demand add on or such functionality and this would increase the RD costs of the company. Chemshare and Chemstations are Houston based companies although not as established as Aspen or Simulation Sciences due to th eir location they pose a threat for the domestic market share of the company. Belsim and Prosim are simulation software companies located in Belgium and France, they pose a threat towards the European market share of Aspen. The affects of these competitors could trigger higher prices in expenses and better terms of financing, it is crucial to comprehend the market share and place of these competitors to properly shape Aspen’s plans. Conclusion: Aspen has exposure due to the financing cycle, offering long terms of deferment to clients trigger low cash flow. Since the company is publicly traded, the low cash flow could have an adverse affect on investor confidence and thus lower the stock price. We have reviewed possible options to alter the financing cycle without damaging the demand, shorter financing frames or strategic partnership with a financial institution could limit the exposure of Aspen and eventually solve the problem of low cash flow. We have to stress the severity of this problem as the company could bankrupt because of deferred payments. There is also the foreign exchange risk both from operational and strategic reasons. The operational exposure is because the company attains revenues abroad United States and the currency is foreign denominated. The strategic risk stems from the fact that company neglects to hedge against foreign currency expenses and the data shows us that the expense is sizeable and as the business grows so does the foreign expense†¦ We have suggested that the company should hedge with the use of a currency portfolio, emphasizing on reliable currencies such as Canadian dollar due to low standard deviation and correlation. The proportion of other currencies should be reduced for effective hedging. Aspen should also acknowledge the market share and effectiveness of competitors as they can have a direct impact on revenues and thus the stability of net income.