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ADVS > SEC Filings for ADVS > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for ADVENT SOFTWARE INC /DE/

Form 10-Q for ADVENT SOFTWARE INC /DE/


5-Aug-2013

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 condensed 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 the 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.

Operating Overview

Operating highlights of our second quarter of 2013 include:

New and incremental bookings. The term license, Advent OnDemand and Black Diamond contracts signed in the second quarter of 2013 will contribute approximately $6.7 million in annual revenue ("annual contract value" or "ACV") once they are fully implemented. This represents a 7% decrease from the $7.2 million of ACV booked from contracts signed in the second quarter of 2012.

Renewal rates. Renewal rates, which are based on cash collections and therefore reported one quarter in arrears, were 94% for the first quarter of 2013. This represents an increase of 3 points over the first quarter of 2012.

Debt modification. On June 12, 2013, we amended and restated our existing credit agreement. The amended agreement provides for a $225 million term loan and a $200 million revolving line of credit. Principal payments with respect to the term loans will be made in 20 equal consecutive quarterly principal installments of $5 million, commencing on September 13, 2013, with the remaining outstanding principal balance and all accrued and unpaid interest due on June 12, 2018. Principal payments with respect to the revolving loans, together with all accrued and unpaid interest, are due on June 12, 2018. We may prepay the term loans and revolving loans at any time without penalty. The revolving loans and term loans bear interest, at our option, at the alternate base rate plus a margin of 0.25% to 1.25% or an adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 1.25% to 2.25%, in each case with such margin being determined based on the consolidated leverage ratio for the preceding four fiscal quarter


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period. In June 2013, we paid down $92.5 million on our existing credit agreement and borrowed $225 million of term loans; and in July 2013 we borrowed an additional $125 million under the revolving line of credit to finance the Special Dividend described below.

Special dividend. On June 12, 2013, our Board of Directors declared a one-time special cash dividend of $9 per share payable on July 9, 2013 to shareholders of record on July 1, 2013 (the "Special Dividend"). A total of $470.1 million was paid on 52.2 million shares on July 9, 2013.

Equity award modification. In conjunction with the Special Dividend, we modified our employee stock option plans to enable the reduction of outstanding equity awards exercise prices by $9.00 per option to reflect the impact of the Special Dividend. We recalculated the Black-Scholes fair values of its eligible outstanding options and SARs on the Modification Date, reflecting the reduction in their exercise prices of up to $9.00 per share, to determine the non-cash incremental stock-based compensation expense. For certain options that could not be reduced by the full $9.00, we compensated those option holders in July 2013 with a cash payment for the difference between $9.00 and the reduction of their exercise price. Holders of restricted stock units (RSUs) will receive the right to receive $9.00 per RSU upon vesting.

The total charge resulting from the equity award modifications was $41.2 million, comprised of $16.1 million in cash charges and $25.1 million in non-cash charges. We recognized $21.9 million of charges in cost of revenues and operating expenses in the second quarter of 2013. We expect total stock-based compensation expense to be approximately $8.0 million in the third quarter of 2013.

Recapitalization expenses. During the second quarter of 2013, in conjunction with the debt modification, Special Dividend and equity award modification, we incurred a total of $6.0 million in operating expenses related to advisory fees from third parties including financial advisory fees, legal fees, and valuation fees. We have reported those fees as a separate line item within our operating expenses. Additionally, we incurred a total of $0.7 million of third party financing fees in conjunction with the debt refinancing which has been included in interest expense.

Second quarter loss from continuing operations before income taxes and comparability to prior year performance. We incurred a loss from continuing operations before income taxes of $7.2 million in the second quarter of 2013 as a result of the second quarter expenses relating to the equity award modification of $21.9 million and total recapitalization expenses of $6.7 million. In the second quarter of 2012, we reported income from continuing operations before income taxes of $11.3 million. Absent the expenses associated with the recapitalization and equity award modification in our third and fourth quarters of 2013, we expect our trend of improved quarterly profitability over the prior year to continue.

Operating cash flows. Cash flows from operations in the second quarter of 2013 were $21.9 million. This represents an increase of 47% compared with $14.9 million in the second quarter of 2012.

Financial Overview



Financial highlights of our second quarter of 2013 and 2012 were as follows (in
thousands, except per share amounts, percentages and margin changes):



                                                                                 Percentage /
                                                Three Months Ended June 30          Margin
                                                 2013               2012            Change

Net revenues                                 $      96,123      $      89,724               7 %
Gross margin                                 $      65,727      $      58,395              13 %
Gross margin percentage                               68.4 %             65.1 %           3.3 %
Operating (loss) income                      $      (5,849 )    $      12,063            (148 )%
Operating margin percentage                           (6.1 )%            13.4 %         (19.5 )%
Net (loss) income from continuing
operations                                   $      (4,155 )    $       7,197            (158 )%
Net (loss) income from continuing
operations per diluted share                 $       (0.08 )    $        0.14            (159 )%
Operating cash flows                         $      21,875      $      14,929              47 %


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Term License and Term License Deferral

Term license revenues now comprise substantially all of our license revenues. 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 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 term.

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 June 30, 2013 and 2012, changes in the net term license component of deferred revenues increased (decreased) the Company's revenues as follows (in thousands):

                                     Three Months Ended June 30
                                      2013               2012          Change

Term license revenues             $         206     $         1,353   $ (1,147 )
Professional services and other            (549 )               287       (836 )

Total net revenues                $        (343 )   $         1,640   $ (1,983 )

During the second quarter of 2013, we deferred net revenues of $0.3 million and directly related expenses of $0.3 million associated with our term licensing model.

As of June 30, 2013 and December 31, 2012, deferred revenue and directly related expense balances associated with our term licensing deferral were as follows (in thousands):

                            June 30     December 31
                              2013         2012
Deferred revenues
Short-term                  $ 32,709   $      29,735
Long-term                      7,143           6,647

Total                       $ 39,852   $      36,382

Directly-related expenses
Short-term                  $ 11,145   $      10,787
Long-term                      4,732           3,598

Total                       $ 15,877   $      14,385

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

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2013 as compared to those 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 fiscal year ended December 31, 2012.

Recent Accounting Pronouncements

With the exception of the pronouncement below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2013, as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, that are of significance, or potential significance, to our condensed consolidated financial statements.

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income


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("ASU 2013-02"). ASU 2013-02 provides additional guidance regarding reclassifications out of accumulated other comprehensive income ("AOCI"). ASU 2013-02 requires entities to report the effect of significant reclassifications out of AOCI on the respective line items in net income unless the amounts are not reclassified in their entirety to net income. For amounts that are not required to be reclassified in their entirety to net income in the same reporting period, entities are required to cross-reference other disclosures that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this ASU in our first quarter of 2013 had no impact on our condensed consolidated financial results as the guidance relates only to additional disclosures.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign
Entity ("ASU 2013-05"). ASU 2013-05 clarifies the applicable guidance applied for the release of cumulative translation adjustments into net income when a reporting entity either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets that constitute a business within a foreign entity. ASU 2013-05 is effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. ASU 2013-05 was early adopted by us effective April 1, 2013 and had no impact on our condensed consolidated financial position, results of operations or cash flows.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740):
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 requires, unless certain conditions exists, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application is permitted. ASU 2013-05 was early adopted by us effective April 1, 2013 and had no impact on our condensed consolidated financial statements.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012

The following table summarizes, for the periods indicated, certain items in the condensed consolidated statements of operations as a percentage of 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 June 30       Six Months Ended June 30
                                       2013               2012           2013            2012

Net revenues:
Recurring revenues                           92 %               90 %           92 %            90 %
Non-recurring revenues                        8                 10              8              10

Total net revenues                          100                100            100             100

Cost of revenues:
Recurring revenues                           19                 20             18              20
Non-recurring revenues                       10                 12             10              12
Amortization of developed
technology                                    2                  3              3               3

Total cost of revenues                       32                 35             31              34

Gross margin                                 68                 65             69              66

Operating expenses:
Sales and marketing                          24                 22             21              22
Product development                          19                 18             18              19
General and administrative                   24                 10             17              11
Amortization of other
intangibles                                   1                  1              1               1
Recapitalization costs                        6                  *              3               *
Restructuring charges                         1                  *              2               *

Total operating expenses                     74                 52             63              52

(Loss) income from continuing
operations                                   (6 )               13              5              14
Interest and other income
(expense), net                               (1 )               (1 )           (1 )            (1 )

(Loss) income from continuing
operations before income taxes               (7 )               13              5              13
(Benefit) provision for income
taxes                                        (3 )                5              *               5

Net (loss) income from
continuing operations                        (4 )                8              4               8

Discontinued operation:
Net income from discontinued
operation                                     *                  *              *               *

Net (loss) income                            (4 )%               8 %            4 %             8 %

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 June 30                      Six Months Ended June 30
                                2013              2012          Change         2013             2012          Change

Total net revenues (in
thousands)                 $       96,123    $       89,724   $    6,399   $     188,613    $     176,628   $   11,985

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, 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.

Revenues as a percentage of total net revenues for the periods presented were as follows:

                                         Three Months Ended June 30      Six Months Ended June 30
As a percentage of total net revenues       2013             2012          2013            2012

Revenues from recurring sources                   92 %             90 %          92 %            90 %
Revenues from non-recurring sources                8 %             10 %           8 %            10 %

Revenues derived from sales outside the U.S. were 17% of total net revenues in the second quarter of 2013 and 2012. For the six months ended June 30, 2013 and 2012, revenues derived from sales outside the U.S. were 18% and 17%, respectively, of total net revenues. The increase as a percentage of total revenues during the year-to-date period of 2013, when compared to the same period last year, primarily reflects a slight rebound in growth outside the U.S. as the European sovereign debt crisis continues to subside. We plan to continue expanding our sales efforts outside the U.S., both in our current markets and elsewhere. Except for the U.S., the revenues from customers in any single country did not exceed 10% of total net revenues for the three and six months ended June 30, 2013.

We expect total net revenues from continuing operations to be between $93 million and $95 million in the third quarter of 2013, and to be between $375 million and $379 million for fiscal 2013.

Recurring Revenues



                                                          Three Months Ended June 30                   Six Months Ended June 30
(in thousands, except percent of total net revenues)        2013              2012        Change        2013             2012         Change

Term license revenues                                  $       45,030    $       39,765   $ 5,265   $      86,282    $      78,381   $  7,901
Maintenance revenues                                           16,334            16,649      (315 )        32,770           33,309       (539 )
Other recurring revenues                                       26,899            24,528     2,371          53,694           47,972      5,722

Total recurring revenues                               $       88,263    $       80,942   $ 7,321   $     172,746    $     159,662   $ 13,084

Percent of total net revenues                                      92 %              90 %                      92 %             90 %

Revenues from term licenses, which include both software license and maintenance services for term licenses, increased $5.3 million and $7.9 million during the three and six months ended June 30, 2013, respectively, when compared to the same periods of 2012. The growth of term license revenues reflects the continued layering of incremental annual contract value (ACV) of term licenses sold in previous periods into our term revenue and the continued market acceptance of our products.

For our term licenses, we defer all revenue on new bookings until our implementation services are complete. The change in our term license implementation deferral increased (decreased) term license revenues as follows (in thousands):

Three Months Ended June 30 Six Months Ended June 30 2013 2012 Change 2013 2012 Change

Term license revenues $ 206 $ 1,353 $ (1,147 ) $ (1,469 ) $ 1,668 $ (3,137 )

During the three months ended June 30, 2013, an increase in new service engagements as a result of bookings from the latter half of 2012 and the first half of 2013 drove the increase in implementation services. However, a number of projects completed


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in the three months ended June 30, 2013, caused a net release in deferred term license revenues for the second quarter of 2013. During the first quarter of 2013, a large number of projects were in the implementation phase, leading to a net increase in deferred term license revenues.

We generally do not sell perpetual licenses to new customers. As a result, maintenance revenues from perpetual licenses decreased $0.3 million and $0.5 million during the three and six months ended June 30, 2013, when compared to the same periods of 2012. This decrease was 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 a 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 $2.4 million and $5.7 million during the three and six months ended June 30, 2013, respectively, when compared to the same periods of 2012. The increase in other recurring revenues is primarily due to growth in revenues of $1.1 million and $2.8 million, during the three and six months ended June 30, 2013, respectively, from our Black Diamond product and to a lesser extent, growth in revenues from data services, outsourced services, and web-based services.

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 . . .

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