Revenue from Contracts with Customers

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. The aspenONE licensing model provides customers with access to all of the products within the aspenONE suite(s) they license. We refer to these arrangements as token arrangements. Tokens are fixed units of measure. The amount of software usage is limited by the number of tokens purchased by the customer.

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.

Term licenses

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 time-and-materials ("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 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, such as customer type and geography.

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.

Disaggregation of Revenue

We disaggregate our revenue by region, type of performance obligation, timing of revenue recognition, and segment as follows:



	Three Months Ended December 31,				Six Months Ended December 31,
	2018		2017		2018		2017
			As Adjusted				As Adjusted
	(Dollars in Thousands)
Revenue by region:
United States	$	41,525	$	35,949	$	80,753	$	89,027
Europe	46,471		34,121		75,417		60,539
Other (1)	52,427		35,460		98,422		82,451
	$	140,423	$	105,530	$	254,592	$	232,017

Revenue by type of performance obligation:
Term licenses	$	93,368	$	56,975	$	157,123	$	135,865
Maintenance	41,038		40,729		84,077		80,993
Professional services and other	6,017		7,826		13,392		15,159
	$	140,423	$	105,530	$	254,592	$	232,017

Revenue by segment:
Subscription and software	$	134,406	$	97,704	$	241,200	$	216,858
Services and other	6,017		7,826		13,392		15,159
	$	140,423	$	105,530	$	254,592	$	232,017

____________________________________________


(1)	Other consists primarily of Asia Pacific, Canada, Latin America and the Middle East.

Contract Balances

The difference in the opening and closing balances of our contract assets and deferred revenue primarily results from the timing difference between our performance and the customer’s payment. We fulfill our obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. We recognize a contract asset when we transfer products or services to a customer and the right to consideration is conditional on something other than the passage of time. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. We recognize deferred revenue when we have received consideration or an amount of consideration is due from the customer and we have a future obligation to transfer products or services.

Our contract assets (liabilities) were as follows as of December 31, 2018 and June 30, 2018:



	December 31, 2018			June 30, 2018
				As Adjusted
	(Dollars in Thousands)
Contract assets	$	687,716		$	645,000
Deferred revenue	(41,312		)	(27,504		)
	$	646,404		$	617,496

Contract assets and deferred revenue are presented net at the contract level for each reporting period.

The change in deferred revenue in the six months ended December 31, 2018, excluding the impact of the netting of contract assets and deferred revenue, was primarily due to an increase in new billings in advance of revenue recognition, partially offset by $7.2 million of revenue recognized that was included in deferred revenue at June 30, 2018.

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.

Transaction Price Allocated to Remaining Performance Obligations

The following table includes the aggregate amount of the transaction price allocated as of December 31, 2018 to the performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:



	Year Ended June 30,
	2019		2020		2021		2022		2023		Thereafter
	(Dollars in Thousands)
License	$	30,126	$	32,680	$	27,050	$	9,425	$	2,423	$	1,585
Maintenance	82,016		139,991		103,811		68,173		40,263		20,891
Services and other	37,763		7,082		1,408		941		598		196

Impact to Prior Period Information

The following table presents the effect of the adoption of Topic 606 on select consolidated statements of operations line items for the three and six months ended December 31, 2017:



	Three Months Ended December 31, 2017
	As Previously Reported		Adjustments			As Adjusted
	(Dollars in Thousands, Except per Share Data)
Consolidated Statements of Operations:
License revenue	$	—	$	56,975		$	56,975
Maintenance revenue	—		40,729			40,729
Subscription and software revenue	117,658		(117,658		)	—
Services and other revenue	7,244		582			7,826
Gross profit	112,813		(19,372		)	93,441
Selling and marketing expense	24,380		(452		)	23,928
General and administrative expense	14,178		5,440			19,618
Income from operations	54,465		(24,360		)	30,105
Interest income	40		6,199			6,239
Provision for (benefit from) income taxes	14,928		(112,115		)	(97,187		)
Net income	$	38,078	$	93,954		$	132,032
Net income per common share:
Basic	$	0.53				$	1.83
Diluted	$	0.52				$	1.81
Weighted average shares outstanding:
Basic	72,342					72,342
Diluted	73,036					73,036



	Six Months Ended December 31, 2017
	As Previously Reported		Adjustments			As Adjusted
	(Dollars in Thousands, Except per Share Data)
Consolidated Statements of Operations:
License revenue	$	—	$	135,865		$	135,865
Maintenance revenue	—		80,993			80,993
Subscription and software revenue	233,414		(233,414		)	—
Services and other revenue	14,269		890			15,159
Gross profit	222,862		(15,666		)	207,196
Selling and marketing expense	47,951		(507		)	47,444
General and administrative expense	27,854		6,801			34,655
Income from operations	107,778		(21,960		)	85,818
Interest income	181		12,364			12,545
Provision for (benefit from) income taxes	31,805		(109,315		)	(77,510		)
Net income	$	72,833	$	99,719		$	172,552
Net income per common share:
Basic	$	1.00				$	2.37
Diluted	$	0.99				$	2.35
Weighted average shares outstanding:
Basic	72,683					72,683
Diluted	73,333					73,333

The following table presents the effect of the adoption of Topic 606 on select consolidated balance sheet line items as of June 30, 2018:



	June 30, 2018
	As Previously Reported		Adjustments			As Adjusted
	(Dollars in Thousands)
Consolidated Balance Sheets:
ASSETS
Current contract assets	$	—	$	304,378		$	304,378
Contract costs	—		20,500			20,500
Accounts receivable, net	21,910		19,900			41,810
Non-current contract assets	—		340,622			340,622
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current deferred revenue	286,845		(271,695		)	15,150
Non-current deferred revenue	28,259		(15,905		)	12,354
Deferred income taxes	—		214,125			214,125
Other non-current liabilities	18,492		(1,424		)	17,068
Retained earnings	$	305,208	$	760,299		$	1,065,507

The adoption of Topic 606 had no impact on our total cash flows or net cash provided by operating activities. The impacts of adoption resulted in offsetting shifts in cash flows throughout the components of net income and various changes in working capital balances. The following table presents the effect of the adoption of Topic 606 on select consolidated statement of cash flows line items for the six months ended December 31, 2017:



	Six Months Ended December 31, 2017
	As Previously Reported			Adjustments			As Adjusted
	(Dollars in Thousands)
Consolidated Statements of Cash Flows:
Cash flows from operating activities:
Net income	$	72,833		$	99,719		$	172,552
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	4,296			(95,077		)	(90,781		)
Changes in assets and liabilities:
Contract assets	—			(40,927		)	(40,927		)
Contract costs	—			(59		)	(59		)
Accounts receivable	3,656			(3,989		)	(333		)
Deferred revenue	(41,586		)	40,333			(1,253		)
Net cash provided by operating activities	$	54,762		$	—		$	54,762