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ADVS > SEC Filings for ADVS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for ADVENT SOFTWARE INC /DE/


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the following discussion in conjunction with our consolidated financial statements and related notes. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, including, but not limited to statements referencing our expectations relating to future revenues, expenses and operating margins. Forward-looking statements can be identified by the use of terminology such as "may," "will," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," "intends" or other similar terms and the negative of such terms regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include, among others, statements regarding the future of the investment management market and opportunities for us related thereto, future expansion, acquisition, divestment of or investment in other businesses, projections of revenues, future cost and expense levels, expected timing and amount of amortization expenses related to past acquisitions, future effective tax rates, future exchange rates, the adequacy of resources to meet future cash requirements, renewal rates, estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, future client wins, future hiring and future product introductions and acceptance. Such forward-looking statements are based on our current plans and expectations and involve known and unknown risks and uncertainties which may cause our actual results or performance to be materially different from any results or performance expressed or implied by such forward-looking statements. Such factors include, but are not limited to the "Risk Factors" set forth in "Item 1A. Risk Factors" in this Form 10-Q, as well as other risks identified from time to time in other Securities and Exchange Commission ("SEC") reports. You should not place undue reliance on our forward-looking statements, as they are not guarantees of future results, levels of activity or performance and represent our expectations only as of the date they are made.

Unless expressly stated or the context otherwise requires, the terms "we", "our", "us", the "Company" and "Advent" refer to Advent Software, Inc. and its subsidiaries.

Overview

We offer integrated software products and services for automating and integrating data and work flows across the investment management organization, as well as between the investment management organization and external parties. Our products are intended to increase operational efficiency, improve the accuracy of client information and enable better decision-making. Each solution focuses on specific mission-critical functions of the investment management organization (portfolio accounting and reporting; trade order management and post-trade processing; research management; account management; and custodial reconciliation) and is tailored to meet the needs of a particular market segment of the investment management industry, as determined by size, assets under management and complexity of the investment process.

On October 1, 2009, we completed the sale of our MicroEdge, Inc. subsidiary. The results of MicroEdge have been reclassified as a discontinued operation for all periods presented. Unless otherwise noted, discussion in this document pertains to our continuing operations.

Current Economic Environment

While we signed a number of new customer contracts in the first nine months of 2012, many of our customers remain cautious with the uncertainty caused by the European economic crisis, the upcoming implementation of the US Budget Control Act of 2011, colloquially known as the "fiscal cliff", and the upcoming US election. This caution has slowed buying decisions and elongated some sales. The conversion of our sales pipeline to new contract bookings, renewal rates and cash collections was lower than expected during the first nine months of 2012, especially in Europe and the Middle East, and we expect this environment may continue for the rest of 2012. Despite this, we grew our revenues 11% during the first nine months of 2012 compared to the same period last year, which was driven primarily by an increase in term license revenues and other recurring revenues. We expect to grow revenues by 9% to 10% in fiscal 2012 as a result of incremental term license booking activity and a full year of revenues that we expect to recognize from Black Diamond Performance Reporting LLC ("Black Diamond"), which we acquired in June 2011. As the current economic situation evolves, we will continue to evaluate its impact on our business and we will remain focused on increasing operating profit and margin. In response to this environment, in October 2012, we approved a re-organization plan designed to align our strategy and function, reduce operating costs and improve profitability. The re-organization is expected to result in a reduction in force of approximately 50 employees and pre-tax restructuring charges for one-time employee termination benefits between $2 million and $4 million that is expected to be incurred from the fourth quarter of 2012 through first quarter of 2013.


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Operating Overview

Operating highlights of our third quarter of 2012 include:

New and incremental bookings. The term license, Advent OnDemand and Black Diamond contracts signed in the third quarter of 2012 will contribute approximately $7.1 million in annual revenue ("annual contract value" or "ACV") once they are fully implemented. This represents a 16% decrease from the $8.5 million of ACV booked from contracts signed in the third quarter of 2011.

Advent Client Conference. Our annual client conference was held in Las Vegas in September 2012.

Repurchase of common stock. During the third quarter of 2012, we repurchased 0.6 million shares under our share repurchase program authorized by the Company's board of directors (the "Board") for a total cash outlay of $15.2 million and an average price of $23.71 per share.

Term License and Term License Deferral/Recognition

We have substantially completed our transition of converting the Company's license revenues from a perpetual license model to a term license model. When a customer purchases a term license together with implementation services, we do not recognize any revenue under the contract until the implementation services are complete and the remaining services are substantially complete. If the implementation services are still in progress as of quarter-end, we will defer all of the contract revenues to a subsequent quarter. At the point professional services are substantially completed, we recognize a pro-rata amount of the term license revenue, professional services fees earned and related expenses, based on the elapsed time from the start of the term license to the substantial completion of professional services. Term license revenue for the remaining contract years and the remaining deferred professional services revenue and related expenses are recognized ratably over the remaining contract length.

The term license component of the deferred revenue balance related to implementations in process will increase or decrease in the future depending on the amount of new term license bookings relative to the number of implementations that reach completion in a particular quarter. For the three months ended September 30, 2012 and 2011, the net term license implementation recognition (deferral) increased / (decreased) the Company's revenues as follows (in millions):

                                     Three Months Ended September 30
                                        2012                 2011          Change

Term license revenues             $           (1.5 )   $           (1.7 ) $    0.2
Professional services and other                0.1                 (1.0 )      1.1

Total net revenues                $           (1.4 )   $           (2.7 ) $    1.3

During the third quarter of 2012, we deferred net revenues of $1.4 million and directly related expenses of $0.2 million associated with our term licensing model. The impact on our operating income was approximately $1.2 million.

Amounts of revenues and directly related expenses deferred as of September 30, 2012 and December 31, 2011 associated with our term licensing deferral were as follows (in millions):

                             September 30     December 31
                                 2012            2011
Deferred revenues
Short-term                  $         30.9   $        30.5
Long-term                              6.7             6.9

Total                       $         37.6   $        37.4

Directly-related expenses
Short-term                  $         10.6   $        10.0
Long-term                              3.6             3.6

Total                       $         14.2   $        13.6

Deferred net revenue are classified as "Deferred revenues" (short-term and long-term) and directly related expenses are classified as "Prepaid expenses and other," and "Other assets," on the accompanying condensed consolidated balance sheets.


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Financial Overview



Financial highlights of our third quarter of 2012 and 2011 were as follows (in
thousands, except per share amounts, percentages and margin changes):



                                                                                      Percentage /
                                               Three Months Ended September 30           Margin
                                                 2012                  2011              Change

Net revenues                               $          90,174     $          84,566               7 %
Gross margin                               $          57,361     $          53,731               7 %
Gross margin percentage                                 63.6 %                63.5 %           0.1 %
Operating income                           $          12,629     $          10,576              19 %
Operating margin percentage                             14.0 %                12.5 %           1.5 %
Net income from continuing operations      $           7,687     $           6,826              13 %
Net income from continuing operations
per diluted share                          $            0.15     $            0.13              16 %
Operating cash flows                       $          25,256     $          23,796               6 %

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and related notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.

On an ongoing basis, we evaluate the process we use to develop estimates. We base our estimates on historical experience and on other information that we believe is reasonable for making judgments at the time the estimates are made. Actual results may differ from our estimates due to actual outcomes being different from those on which we based our assumptions.

We believe the following accounting policies contain the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Revenue recognition and deferred revenues;

Income taxes;

Stock-based compensation;

Restructuring charges and related accruals;

Business combinations;

Disposition;

Goodwill;

Impairment of long-lived assets;

Legal contingencies; and

Sales returns and accounts receivable allowances

There have been no significant changes in our critical accounting policies and estimates during the first nine months of 2012 as compared to the critical accounting policies and estimates disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Recent Accounting Pronouncements

With the exception of the below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2012, as compared to the recent accounting pronouncements described in Advent's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, that are of significance, or potential significance, to the Company.


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In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, Disclosures about Offsetting Assets and Liabilities ("ASU 2011-11"). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross and net information about these instruments. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU is not expected to have a material impact on our condensed consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 ("ASU 2011-12"), which defers indefinitely the provision within ASU 2011-05 requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the income statement and the statement in which other comprehensive income is presented. ASU 2011-12 does not change the other provisions instituted within ASU 2011-05. We adopted the provisions of ASU 2011-05 and ASU 2011-12 on January 1, 2012, and the adoption did not have a material impact on the accompanying condensed consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). ASU 2012-02 gives an entity the option to assess qualitative factors to determine whether or not an indefinite-lived intangible asset is impaired. If an entity believes, as a result of its qualitative assessment, that it is not more likely than not that the asset is impaired, then the entity is not required to take further action. Otherwise, the entity must perform the quantitative impairment test to determine the fair value of the asset. We elected to early adopt ASU 2012-02 at the beginning of our fourth quarter of 2012 on a prospective basis. The adoption of this ASU is not expected to have a material impact on our condensed consolidated financial statements.


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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND
2011

The following table sets forth, for the periods indicated, certain financial information as a percentage of total net revenues. The financial information and the ensuing discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto:

                                     Three Months Ended September 30        Nine Months Ended September 30
                                         2012                2011              2012                2011

Net revenues:
Recurring revenues                              90 %                89 %              90 %                89 %
Non-recurring revenues                          10                  11                10                  11

Total net revenues                             100                 100               100                 100

Cost of revenues:
Recurring revenues                              19                  19                19                  19
Non-recurring revenues                          14                  15                13                  12
Amortization of developed
technology                                       3                   3                 3                   3

Total cost of revenues                          36                  36                35                  34

Gross margin                                    64                  64                65                  66

Operating expenses:
Sales and marketing                             20                  22                21                  23
Product development                             19                  17                19                  17
General and administrative                      10                  11                10                  11
Amortization of other
intangibles                                      1                   1                 1                   1
Restructuring (benefit) charges                  *                   *                 *                   *

Total operating expenses                        50                  51                51                  52

Income from continuing
operations                                      14                  13                14                  14
Interest and other income
(expense), net                                   *                   *                 *                   *

Income from continuing
operations before income taxes                  14                  12                13                  13
Provision for income taxes                       5                   3                 5                   4

Net income from continuing
operations                                       9                   8                 8                   9

Discontinued operation:
Net income (loss) from
discontinued operation                           *                   *                 *                   1

Net income                                       9 %                 8 %               8 %                10 %

Percentages are based on actual values. Totals may not sum due to rounding.



* Less than 1%.


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NET REVENUES



                                Three Months Ended September 30                       Nine Months Ended September 30
                                  2012                  2011            Change           2012                2011           Change

Total net revenues (in
thousands)                  $          90,174     $          84,566   $    5,608   $        266,802    $        239,963   $   26,839

We derive our revenues from two sources: recurring revenues and non-recurring revenues. Recurring revenues are comprised of term license, perpetual maintenance arrangements and other recurring revenues (which includes revenues from Black Diamond, Advent OnDemand and incremental Assets Under Administration ("AUA") fees from perpetual licenses). The revenues from a term license, which includes both software license and maintenance services, are earned under a time based contract. Maintenance revenues are derived from maintenance fees on perpetual license arrangements. Other recurring revenues are derived from our subscription services and transaction-based services as well as AUA fees for certain perpetual arrangements. Non-recurring revenues consists of professional services and other revenue and perpetual license fees. Professional services and other revenues include fees for consulting, fees from training, and project management services and our client conferences. Perpetual license revenues are derived from the licensing of software products under a perpetual arrangement. Sales returns, which we generally do not provide to customers, are accounted for as deductions to these two revenue categories based on our historical experience.

Since fiscal 2009, recurring revenues have represented close to 90% of revenues.

                                        Nine Months Ended
                                          September 30
As a percentage of total net revenues         2012          2011   2010   2009

Revenues from recurring sources                        90 %   89 %   89 %   88 %
Revenues from non-recurring sources                    10 %   11 %   11 %   12 %

Revenues derived from international sales were 16% and 17% of total net revenues in the third quarter of 2012 and 2011, respectively. The decrease in the percentage of international sales in the third quarter of 2012, compared to the same period last year, primarily reflects slowing international sales growth as a result of the continuing Eurozone crisis, while domestic sales grew 8%. Revenues from customers in any single international country did not exceed 10% of total net revenues of the Company.

We expect total net revenues from continuing operations to be between $89 million and $93 million in the fourth quarter of 2012, and to be between $356 million and $360 million for fiscal 2012.

Recurring Revenues



(in thousands, except percent of        Three Months Ended September 30                    Nine Months Ended September 30
total net revenues)                       2012                  2011          Change          2012                2011          Change

Term license revenues               $          39,352     $          34,251   $ 5,101   $        117,733    $         98,601   $ 19,132
Maintenance revenues                           17,071                17,857      (786 )           50,380              53,096     (2,716 )
Other recurring revenues                       24,667                22,843     1,824             72,639              62,029     10,610

Total recurring revenues            $          81,090     $          74,951   $ 6,139   $        240,752    $        213,726   $ 27,026

Percent of total net revenues                      90 %                  89 %                         90 %                89 %

Revenues from term licenses, which include both software license and maintenance services for term licenses, increased $5.1 million during the third quarter of 2012 compared to same quarter of 2011. The growth of term license revenues reflects the continued layering of incremental annual contract value (ACV) sold in previous periods into our term revenue, revenues from Syncova, which we acquired in February 2011 and the continued market acceptance of our products. Additionally, adding to the increase in term license revenues was the decrease in the net deferral of term license revenues. For our term licenses, we defer all revenue on new bookings until our implementation services are complete. For the three and nine months ended September 30, 2012 and 2011, the term license revenue recognition (deferral) increased / (decreased) the Company's term license revenues as follows (in thousands):

Three Months Ended September 30 Nine Months Ended September 30 2012 2011 Change 2012 2011 Change

Term license revenues $ (1,541 ) $ (1,655 ) $ 114 $ 127 $ (2,724 ) $ 2,851

During the three and nine months ended September 30, 2012, more projects were completed, leading to a decrease in the net deferral of term license revenues.

Maintenance revenues decreased $0.8 million and $2.7 million during the three and nine months ended September 30, 2012, when compared to the same periods of 2011. These decreases were due to maintenance de-activations from customer attrition, maintenance level downgrades, reductions in products licensed or number of users by clients, perpetual license customers migrating to term licenses, and continued decrease in new perpetual license customers, partially offset by the impact of price increases.

Other recurring revenues, which primarily include revenues from incremental assets under administration fees from perpetual licenses, data services, outsourced services, Advent OnDemand, web-based services and Black Diamond, increased $1.8 million and $10.6 million during the three and nine months ended September 30, 2012, respectively, when compared to the same periods of 2011. The increase in other recurring revenues is primarily due to an increase of $1.3 million and $8.8 million, during the three and nine months ended September 30, 2012, respectively, from Black Diamond, which we acquired on June 1, 2011 and to a lesser extent, growth in revenues from data services, outsourced services, and web-based services.


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Our renewal rates are based on cash collections and are disclosed one quarter in arrears. We disclose our renewal rates one quarter in arrears in order to include substantially all payments received against the invoices for that quarter. We also update our renewal rates from the initially disclosed rates to include all cash collections subsequent to the initial disclosure. The following summarizes our initial and updated renewal rates (operational metric) since the second quarter of 2011:

                                                   Renewal Quarter
Renewal Rates                 Q312        Q212      Q112      Q411      Q311      Q211
Based on cash collections
relative to prior year
collections

Initially Disclosed
Renewal Rate (1)                     (2)      87 %      91 %      95 %      93 %      92 %
Updated Disclosed Renewal
Rate (3)                         n/a         n/a        94 %      97 %      94 %      97 %



(1) "Initially Disclosed Renewal Rate" is based on cash collections and reported one quarter in arrears

(2) The initially disclosed renewal rate for the third quarter of 2012 is not currently available as it is disclosed one quarter in arrears in order to include substantially all payments against invoices for the quarter.

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