Aspen Technology,Inc.

:
Currency Hedging Review

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

History and Overview

In 1982 its first year of operations, AspenTech lost USD565,000 on

sales of USD182,000

Over next 13 years AspenTechs 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 AspenTechs 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

Sales & Marketing

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:

4.

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 .

Recommendation
AspenTechs should reexamine the firm risk management policies and
practices in light of the changes :

over the past year AspenTechs 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

AspenTechs should review and determine an acceptable level of risk. It

involves determining reasonable level of risk in-line with appropriate
opportunity to gain

Recommendation

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
currency
3,129
722
158,223
414,793

Monthly Std.
Deviation
2.90%
2.80%
2.70%
3.00%

Exchange
Rate*
1.5873
0.6711
0.0326
0.0106

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

VaR
$238
22
230
218
$707

AspenTech's Net Foreign Exchange Exposure ('000) by Currency, 1995

Cash Inflows
UK Pound
German DM
Belgian Franc
Japanese Yen

Current Sales
1,724
1,015
308,984

Prior Sales
981
577
175,781

Cash Outflows
Expenses
3,129
722
158,223
414,793

AspenTech should hedge only the net exposure

Net foreign exchange exposure in German and Japan
Forward contract for Belgians operating expense

Net Exposure
(424)
870
(158,223)
69,972

Recommendation
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

Recommendation
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

Recommendation
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