Aspen Technology, a company you don’t usually see me writing about, today announced results for its first quarter of fiscal 2010. AspenTech creates chemistry, process management and supply chain solutions for the oil and gas, chemical and other industries and is arguably the largest of the companies providing this type of solution. AspenTech should be interesting to observers of the software space because it is in the process of transitioning its customers from a typical perpetual model, where a large upfront new license payment is followed by much smaller periodic maintenance payments in succeeding years, to a subscription program called the aspenOne licensing scheme. In the short term, this transition will significantly reduce revenue as the large initial payments are not booked, but, it is hoped, will build a stable, repeatable revenue base for the future. Says the company, “from a long-term perspective, we expect our financial performance to ultimately exceed that which would have been possible under our previous commercial model.”

AspenTech launched its aspenONE licensing model early in the September quarter and will serve as a case study for other companies seeking to change their licensing model:

– It will be difficult to convince customers to change their purchasing habits without reopening their broader review of market offerings. We’ll monitor whether AspenTech’s customers take their business elsewhere.
– It will take years to complete the transition from perpetual to subscription since customers can only be transitioned when existing contracts expire. How well can the company manage its costs given the dramatically lower revenue?
– Many companies have had to make this transition while publicly-traded and and saw their stock prices plummet. AspenTech was delisted in early 2008 because of issues with timely filing of earnings reports but has said that it is seeking relisting early in calendar 2010. How will investors respond to the license model change?

It remains to be seen how this turns out in the long-term, but the short-term predictions proved correct. For the quarter ended September 30, 2009, AspenTech reported total revenue of $39.8 million, less than half of the $86.4 million reported in the the prior year. While there was some economic effect, the company reports that the “strong majority” of the decline was due to the license model transition.

The company reported only $25,000 (not a typo: $25,000) in subscription revenue in FQ1. Subscription revenue recognition begins when the first payment is due, typically 30 days after the contract is signed, so at most 60 days of revenue could have been booked for deals signed on the very first day of the quarter, so expectations were low — but, still.

AspenTech also reported that non-subscription license revenue, lumped into a “software” category, was $11.1 million in the first quarter of fiscal 2010, compared to $49.6 million the prior year. It should be noted that the 2009 total included $15 million of deferred revenue that was recognized in Q1 2009.

Despite these rather dismal early results, the company reports that customer interest in the new model has been good and that the December-ending quarter will prove a better barometer for customer acceptance.

Services revenue declined from $36.8 million last year to $28.7 million in Q1 2010, and is a result of the “more challenging economic environment compared to the year ago period”. This category is expected to decline as the subscription line grows, as maintenance is bundled into that offering.

Needless to say, the overall impact of the licensing change and macroeconomic environment was a net loss from operations of $24.8 million and a net loss of $21.1 million in the first quarter of fiscal 2010.

It will be interesting to watch how AspenTech manages the transition to a subscription license model. Those large checks written for initial payments are addictive and many companies have had a hard time convincing customers to change — and to restructure their sales incentives, account management, sales channel build-out and other in-house functions to make it happen. Stay tuned for the Q2 announcement in February.