Aspen Tech case study

History and Overview
•  Specialized in the development of simulation software for customer in process manufacturing industries
•  Advanced System for Process Engineering (ASPEN) project conducted at the Massachusetts Intitutes of Technology (MIT) in Cambridge Massachusetts, from 1976 to 1981
•  Founded in 1981 by Dr. Larry Evans, a professor of chemical engineering at MIT
•  Larry Evans”leadership in the development and application of integrated systems for modeling, simulation and optimization of industrial chemical process

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History and Overview
•  In 1982 its first year of operations, AspenTech lost USD565,000 on sales of USD182,000
•  Over next 13 years AspenTech’s sales grew rapidly as it became a major payer in the process simulation segment of the software industry.
•  1995 company earned net income $5.4 million on sales $57.5 million. AspenTech estimated that it commanded 50% of the
simulation market for chemical sector.
•  1995, it employed 417 people of which 265 ware based in the US and the remainder in office in 5 countries.

History and Overview
•  AspenTech went public in USDD31 million IPO which included a USD 18 Million primary offering and USD 13 Million secondary offering :
–  to finance further R&D
–  to acquire externally developed technologies
–  to allow early investors to monetize their holdings in the company,

•  Feb1995, Aspentech conducted a $23 million public offering, which included a USD 1 million primary offering and USD 22 million secondary offering.
•  1995, AspenTech was the only one of the firms that specialized in simulation programs for chemical petroleum, and petrochemicals industries that was publicly traded.

Products (versi makalah)
• Aspen Plus
Aspen Plus is the most popular product
a steady state modeling system built around the core technology This product accounted 48% of sales in 1995

• Speed UP
It was AspenTech’s dynamic process modeling product
commercialized in 1986 by Prosys Tecknology that AspenTech purchased in 1991

• Max
It is a less powerful version of Aspen Plus

• Advent
A software to optimize the tradeoff between capital expenditures for energy saving heat exchangers and the energy saving realized

  Product Portfolio (versi makalah)
•  Properties PLUS
It is a database of chemicals properties underlying its other products, popular with customers ~ developed in-house modeling software

•  Other modules
–  offers to the customers ~ license separately
–  use with its other products to model subsystems used in highly specialized chemicals processing application.

Product Portfolio (versi web)
• Process Engineering

Process simulation Chemicals (10 products : AspenPlus)
Process simulation Oil&Gas (8 products : AspenHYSYS)
Process simulation Refining (11 products : Aspenadsim+)
Process simulation Batch/Pharma (8 products :Aspenproperties) Model Deployment (3 products : AspenModelrunner)
Equipment modeling (8 products :AspenAcol+)
Basic Engineering (2 products :AspenKbase)
Economic Evaluation (3 products : Aspn Icarus Project Manager)

• Advance Process Control (14 products : Aspen Apollo, Aspen IQ)

• Planning & Scheduling (10 products : Aspen Advisor, Aspen MBO)

• Supply & Distribution (3 products : Aspen Retail)

• Production Management & Execution (16 products : Aspen 0server)

Sales & Marketing

• 1995, licensed to more than 450 companies ~ chemical industry and 350 univerities

• The selling cycle for process modelling software was long (6-12 months)

• AspenTech charged a premium over competitors products, raise licensing fees three times (1998-1995)~10%

• Customer loyalty
–  Over 90% renewed their software
–  1994 : 34% revenue from software renewal; 34% from expansion from existing customer

• United States :
–  Directs sales force
–  Earned combination of salary & commission

• Sales subsidiaries : UK, Japan, HongKong, Brussels
–  Serve local & regional markets via directs sales forces

• Licensed software for a non-cancelable term ~ 3 or 5 years

• Charge :
–  annual fee x license term (year)
–  Interest rate 9.5% – 11% currently 12%

• Customer were more likely to buy software priced in local currency

Risk Exposure
1.  Foreign Exchange Risk

sell software in local currencies installment from three-to-five years creates foreign exchange exposure exchange rate fluctuations
52% revenue generated from foreign company with following revenues figures:

•  Europe 31%
• Asia 12%
• Other countries 9%
• In United State 48%.

Risk exposure are might be applicable :Transaction Exposure (High)
most the costumer operated outside of US
Translation Exposure (Low)
convert foreign currency financial statements into a single currency (USD).

Risk Exposure
2. Interest Rate Risk (low)
–  AspenTech debt using US dollar currency fix interest rate and mid term (3years)
–  place a seasonal line-of-credit facility with a New England Bank

Risk Exposure
3. Credit Risk
–  Credit risk (default risk) in high exposure level

2 sources probability trigger this risk:

growing rapidly
customer choose to defer payment of their license over the life of the contract
Ex: AspenTech was liable for $ 4,6 million of this amount under limited recourse agreement
Unwilling (Low)
most of the customers are a loyal customer
Unable (High)
depend on the type of business of customer

Liquidity Risk

many of its customers chose to defer payment of their licenses over the life of the contract
the company usually experienced an operating cash shortfall
Ex: the firm booked revenue of USD57.5 million, yet receive cash payments directly from customers of only $38.5 million (66.96%).

Management Risk Perform by AspenTech
Foreign Exchange Risk
eliminated all sales transaction exposure arising from foreign currency denominated license contract inline with its risk management policy by doing hedging : –  Sale non USD installment receivable for USD

–  forward currency agreement

Credit Risk
–  AspenTech has not managed the risk of the uncollectible installment

–  The contract with GE and Sanwa in selling the account receivable has limited recourse agreement

 Liquidity Risk
–  To manage its liquidity risk in order to cover their day to day operation, AspenTech

sell its receivable to GE and Sanwa and other financial institution. – AspenTech also has debt to Massachusetts Capital Resources –  placed a seasonal line of credit facility with New England bank.

AspenTech’s should reexamine the firm risk management policies and practices in light of the changes :
–  over the past year AspenTech’s international sales had remained a substantial portion of its revenues
–  the firm international expenses had increase a slightly faster rate than its international revenue
–  AspenTech had gone from private company into a publicly traded company

AspenTech’s should review and determine an acceptable level of risk. It involves determining reasonable level of risk in-line with appropriate opportunity to gain

Net Foreign Exchange Exposure (Operational Hedging)
AspenTech’s Value at Risk, 1995 (95% confidence level)

UK Pound
German DM
Belgian Franc
Japanese Yen

Expenses in local

Monthly Std.


*Average exchange rate (U.S. dollar per unit of foreign currency) over fiscal year 1995


AspenTech’s Net Foreign Exchange Exposure (‘000) by Currency, 1995 Cash Inflows
UK Pound
German DM
Belgian Franc
Japanese Yen

Current Sales

Prior Sales

Cash Outflows

AspenTech should hedge only the net exposure
•  Net foreign exchange exposure in German and Japan
•  Forward contract for Belgian’s operating expense

Net Exposure

Liquidity & Credit Risk
–  AspenTech should look other possibility to deal with other financial
institution to increase their bargaining position to GE and Sanwa With higher bargaining position, AspenTech can get lower cost and better position in managing their credit risk

–  Maximize in selling long term receivable first

Others Hedging Instrument :
–  Plain-Vanilla Options
give the buyer of the option the right but not the obligation to buy (call) or sell (put) a specific amount of currency at a predetermined strike price (exchange rate
High cost

–  Average-Rate Options
•  Spot rate are calculated as an average over a period
•  Transaction possible during the expiry period at several predetermined dates
•  Strike rate can be fixed or floating

–  Knock-in/knock-out Options
•  Does not provide full protection
•  The key is in determining the barrier rate
•  Low cost

–  Cross-currency transactions
–  Foreign currency money-market borrowing

•  Others Hedging Instrument :
–  Cross-currency transactions
•  transaction basically does not provide ability to hedge or secure any risk
•  provide probability of arbitrage if there is a difference between cross rate and indirect rate.

–  Foreign currency money-market borrowing
•  Borrowing in the money market, rather difficult to use since the company need to determine level of debt that matched with its cash inflow from other matched currency

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