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ADVS > SEC Filings for ADVS > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for ADVENT SOFTWARE INC /DE/

Form 10-Q for ADVENT SOFTWARE INC /DE/


8-Nov-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 third quarter of 2013 include:

† Advent client conference. With over 1,000 attendees, we hosted our largest client conference in our 30 year history. We unveiled a number of new enhancements and product solutions including Geneva® 10.0, Tamale® 7.0 and Advent Direct™.

† New and incremental bookings. The term license, Advent OnDemand and Black Diamond contracts signed in the third quarter of 2013 will contribute approximately $7.1 million in annual revenue ("annual contract value" or "ACV") once they are fully implemented. This was consistent with $7.1 million of ACV booked from contracts signed in the same period last year.

† Renewal rates. Renewal rates, which are based on cash collections and therefore reported one quarter in arrears, were 92% for the second quarter of 2013. This represents an increase of 5 percentage points over the same period last year.

† Operating cash flows. Cash flows from operations in the third quarter of 2013 were $22.8 million which represents a decrease of 10% compared with $25.3 million in the same period last year. During the third quarter of 2013, we paid $5.4 million to option and SAR holders in connection with the equity award modification with no similar payments in the prior year. Cash flows from operations during the nine months ended September 30, 2013 were $61.9 million, which represents an increase of 15% from $53.8 million in the comparable period of 2012.


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† Special dividend. On June 12, 2013, our Board of Directors (the "Board") 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 July 9, 2013.

† Secondary security offering. During the third quarter of 2013, we incurred legal and professional fees of $0.6 million associated with the secondary market offering of our common stock by our former largest shareholder.

† Repurchase of common stock. In connection with the secondary security offering, our Board of Directors authorized and we repurchased 1.6 million shares of our common stock for a total cash outlay of $41.3 million at an average price of $25.785 per share during the third quarter of 2013.

† Equity award modification. We incurred stock-based compensation expense of $8.4 million in the third quarter of 2013 up from $5.4 million in the same period of 2012. In connection with the declaration of the Special Dividend, equity award modifications affecting approximately 900 employees and non-employee directors were made for awards outstanding as of July 9, 2013 in a manner to preserve the pre-cash dividend economic value of these awards resulting in the $3.0 million increase in the third quarter of 2013.

Financial Overview



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



                                                                                           Percentage /
                                                    Three Months Ended September 30           Margin
                                                      2013                  2012              Change

Net revenues                                    $          96,767     $          90,174               7 %
Gross margin                                    $          64,976     $          57,361              13 %
Gross margin percentage                                      67.1 %                63.6 %       3.5 pts
Operating income                                $          17,371     $          12,629              38 %
Operating margin percentage                                  18.0 %                14.0 %       4.0 pts
Net income from continuing operations           $           9,833     $           7,687              28 %
Net income from continuing operations per
diluted share                                   $            0.18     $            0.15              24 %
Operating cash flows                            $          22,835     $          25,256             -10 %

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 defer all of the contract revenues to a subsequent quarter. When 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.


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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 and nine months ended September 30, 2013 and 2012, changes in the net term license component of deferred revenues increased (decreased) the Company's revenues, costs and operating income as follows (in thousands):

                               Three Months Ended September 30                      Nine Months Ended September 30
                                2013                  2012            Change            2013                 2012          Change

Term license revenues       $         314     $             (1,541 ) $  1,855    $           (1,155 )   $          127    $ (1,282 )
Professional services
and other                             154                      163         (9 )              (1,847 )             (289 )    (1,558 )

Total net revenues          $         468     $             (1,378 ) $  1,846    $           (3,002 )   $         (162 )  $ (2,840 )


Professional services
costs                       $          12     $                (30 ) $     42    $           (1,264 )   $         (500 )  $   (764 )
Sales commissions costs               154                     (219 )      373                   (62 )              (34 )       (28 )
Total net costs             $         166     $               (249 ) $    415    $           (1,326 )   $         (534 )  $   (792 )

Operating income            $         302     $             (1,129 ) $  1,431    $           (1,676 )   $          372    $ (2,048 )

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

                             September 30     December 31
                                 2013            2012
Deferred revenues
Short-term                  $       32,746   $      29,735
Long-term                            6,638           6,647

Total                       $       39,384   $      36,382

Directly-related expenses
Short-term                  $       11,301   $      10,787
Long-term                            4,409           3,598

Total                       $       15,710   $      14,385

Deferred net revenues are classified as "Deferred revenues" (short-term and long-term), and directly-related expenses are classified 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 nine months ended September 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 pronouncements included in Note 1, "Basis of Presentation" to the accompanying condensed consolidated financial statements, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 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.


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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 30        Nine Months Ended September 30
                                           2013                2012              2013                2012

Net revenues:
Recurring revenues                                91 %                90 %              91 %                90 %
Non-recurring revenues                             9                  10                 9                  10

Total net revenues                               100                 100               100                 100

Cost of revenues:
Recurring revenues                                18                  19                18                  19
Non-recurring revenues                            12                  14                11                  13
Amortization of developed
technology                                         3                   3                 3                   3

Total cost of revenues                            33                  36                32                  35

Gross margin                                      67                  64                68                  65

Operating expenses:
Sales and marketing                               19                  20                21                  21
Product development                               18                  19                18                  19
General and administrative                        11                  10                15                  10
Amortization of other intangibles                  1                   1                 1                   1
Recapitalization costs                             *                   *                 2                   *
Restructuring (benefit) charges                    *                   *                 1                   *

Total operating expenses                          49                  50                59                  51

Income from continuing operations                 18                  14                10                  14
Interest and other income
(expense), net                                    (3 )                 *                (2 )                 *

Income from continuing operations
before income taxes                               15                  14                 8                  13
Provision for income taxes                         5                   5                 2                   5

Net income from continuing
operations                                        10                   9                 6                   8

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

Net income                                        10 %                 9 %               6 %                 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 September 30                     Nine Months Ended September 30
                                  2013                  2012           Change          2013                2012          Change

Total net revenues (in
thousands)                  $          96,767     $          90,174   $  6,593   $        285,380    $        266,802   $ 18,578

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 from recurring and non-recurring sources, as a percentage of total net revenues for the periods presented, were as follows:

                                         Three Months Ended September 30       Nine Months Ended September 30
As a percentage of total net revenues        2013                2012             2013                2012

Revenues from recurring sources                     91 %                90 %             91 %                90 %
Revenues from non-recurring sources                  9 %                10 %              9 %                10 %

Revenues derived from sales outside the U.S. were 18% and 16% of total net revenues in the third quarter of 2013 and 2012, respectively. For the nine months ended September 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 nine months ended September 30, 2013.

We expect total net revenues from continuing operations to be between $95 million and $97 million in the fourth quarter of 2013, and to be between $380 million and $382 million for fiscal year 2013.

Recurring Revenues



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

Term license revenues                                  $          47,087     $          39,352   $ 7,735   $        133,369    $        117,733   $ 15,636
Maintenance revenues                                              16,632                17,071      (439 )           49,401              50,380       (979 )
Other recurring revenues                                          24,397                24,667      (270 )           78,092              72,639      5,453

Total recurring revenues                               $          88,116     $          81,090   $ 7,026   $        260,862    $        240,752   $ 20,110

Percent of total net revenues                                         91 %                  90 %                         91 %                90 %

Revenues from term licenses, which include both software license and maintenance services for term licenses, increased $7.7 million and $15.6 million during the three and nine months ended September 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 September 30 Nine Months Ended September 30 2013 2012 Change 2013 2012 Change

Term license revenues $ 314 $ (1,541 ) $ 1,855 $ (1,155 ) $ 127 $ (1,282 )


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During the three months ended September 30, 2013, an increase in new service engagements as a result of bookings from the second half of 2012 and the first half of 2013 drove the increase in implementation services. However, a number of projects completed in the three months ended September 30, 2013, caused a net release in deferred term license revenues for the third quarter of 2013.

Generally, we no longer sell perpetual licenses to new customers. As a result, maintenance revenues from perpetual licenses decreased $0.4 million and $1.0 million during the three and nine months ended September 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, decreased $0.3 million and increased $5.5 million during the three and nine months ended September 30, 2013, respectively, when compared to the same periods of 2012. The increase in other recurring revenues for the nine months ended September 30, 2013 was primarily due to growth in revenues of $4.7 million from our Black Diamond product and to a lesser extent, growth in revenues from data services, outsourced services, and web-based services. The three and nine month periods ended September 30, 2013 also reflected lower fees from a renewed agreement with one of our larger clients effective with the third quarter of 2013.

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 2012:

                                                     Renewal Quarter
Renewal Rates                         Q313     Q213    Q113    Q412    Q312    Q212
Based on cash collections relative
to prior year collections

Initially Disclosed Renewal Rate
(1)                                    (2)      92%     94%     91%     94%     87%
Updated Disclosed Renewal Rate (3)     n/a      n/a     97%     95%     98%     92%



(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 2013 is not currently available as it is disclosed one quarter in arrears in order to include substantially all payments against invoices for this quarter.

(3) "Updated Disclosed Renewal Rate" reflects initially disclosed rate updated for subsequent cash collections.

Non-Recurring Revenues



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

Professional services and other revenues               $          8,281     $          8,488   $  (207 ) $        22,675    $        23,835   $ (1,160 )
Perpetual license fees                                              370                  596      (226 )           1,843              2,215       (372 )

Total non-recurring revenues                           $          8,651     $          9,084   $  (433 ) $        24,518    $        26,050   $ (1,532 )

Percent of total net revenues                                         9 %                 10 %                         9 %               10 %

Non-recurring revenues consists of perpetual license fees, professional services and other revenues. Perpetual license revenues are derived from the licensing of software products under a perpetual arrangement. Professional services and other revenues include fees for consulting, project management, custom implementation and integration, custom report writing, training and our client conference. Professional services and other revenues in the three months ended September 30, 2013 and 2012, respectively, included $1.0 million and $0.9 million of conference-related revenues.

Professional services projects related to Axys, Moxy and Partner products generally can be completed in a two- to six-month time period, while services related to Geneva and APX products may require four- to nine-months. We defer professional services revenue for services performed on term license implementations that are not considered substantially complete. Service revenue is deferred until the implementation is complete and remaining services are substantially completed. Upon substantial completion, we recognize a pro-rata amount of professional services fees earned based on the elapsed time from the start of the term license to the substantial completion of professional . . .

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