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ADVS > SEC Filings for ADVS > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for ADVENT SOFTWARE INC /DE/

Form 10-Q for ADVENT SOFTWARE INC /DE/


6-May-2014

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 and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes included under Item 1 of this Form 10-Q. 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 referencing our expectations relating to future revenues, expenses and operating margins, regarding the future of the investment management market and opportunities for us related thereto, future expansion, product releases, 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 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.

The results of MicroEdge, a former subsidiary which we sold in 2009, have been reclassified as a discontinued operation for all periods presented. Unless otherwise noted, discussion in this document pertains to our continuing operations.

Recent Developments

Quarterly cash dividend. On April 28, 2014, the Company announced that its Board of Directors had approved a quarterly cash dividend to the Company's shareholders. A quarterly cash dividend payment of $0.13 per common share will be made on July 15, 2014 to shareholders of record as of June 30, 2014.

Operating Overview

Operating highlights of our first quarter of 2014 include:

Annualized Recurring Run Rate. Annualized Recurring Run Rate of all of our contracted recurring revenue streams was $375.8 million at March 31, 2014, an increase of 6% compared to $352.9 million at March 31, 2013.

Renewal rates. Renewal rates, which are based on cash collections and therefore reported one quarter in arrears, were 95% for the fourth quarter of 2013. This represents an increase of 4 percentage points over the same period last year.

New and incremental bookings. The term license Advent OnDemand and Black Diamond contracts signed in the first quarter of 2014 will contribute approximately $5.1 million in annual revenue ("annual contract value" or "ACV") once they are fully implemented compared to $8.7 million of ACV booked from contracts signed in the same period last year.

Operating cash flows. Cash flows from operations in the first quarter of 2014 were $20.9 million which represents an increase of 21% compared with $17.2 million in the same period last year.


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Financial Overview



Financial highlights of our first quarter of 2014 and 2013 were as follows (in
thousands, except per share amounts, percentages and margin changes):



                                                                               Percentage /
                                             Three Months Ended March 31          Margin
                                                2014              2013            Change

Net revenues                               $       96,804    $       92,490               5 %
Gross margin                               $       68,322    $       64,011               7 %
Gross margin percentage                              70.6 %            69.2 %           1.4 pts
Operating income                           $       19,313    $       16,213              19 %
Operating margin percentage                          20.0 %            17.5 %           2.5 pts
Net income from continuing operations      $       10,907    $       12,057             -10 %
Net income from continuing operations
per diluted share                          $         0.20    $         0.23             -12 %
Operating cash flows                       $       20,875    $       17,190              21 %

Term License and Term License Deferral

Term license revenues 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.

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 March 31, 2014 and 2013, 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 March 31
                                      2014              2013         Change

Term license revenues             $        (272 )  $        (1,675 ) $ 1,403
Professional services and other           1,665             (1,451 )   3,116

Total net revenues                $       1,393    $        (3,126 ) $ 4,519

Professional services costs       $       1,102    $          (893 ) $ 1,995
Sales commissions costs                     115               (285 )     400
Total net costs                   $       1,217    $        (1,178 ) $ 2,395

Operating income                  $         176    $        (1,948 ) $ 2,124


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As of March 31, 2014 and December 31, 2013, deferred revenue and directly related expense balances associated with our term licensing deferral were as follows (in thousands):

                            March 31     December 31
                              2014          2013
Deferred revenues
Short-term                  $  31,725   $      33,505
Long-term                       7,146           6,758

Total                       $  38,871   $      40,263

Directly-related expenses
Short-term                  $   9,740   $      11,055
Long-term                       4,565           4,467

Total                       $  14,305   $      15,522

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 first quarter of 2014 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, 2013.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2014, as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, that are of significance, or potential significance, to our condensed consolidated financial statements.


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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

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 March 31
                                                             2014             2013

Net revenues:
Recurring revenues                                                 92 %             91 %
Non-recurring revenues                                              8                9

Total net revenues                                                100              100

Cost of revenues:
Recurring revenues                                                 19               18
Non-recurring revenues                                              8               10
Amortization of developed technology                                2                3

Total cost of revenues                                             29               31

Gross margin                                                       71               69

Operating expenses:
Sales and marketing                                                20               19
Product development                                                18               18
General and administrative                                         11               11
Amortization of other intangibles                                   1                1
Restructuring charges                                               *                3

Total operating expenses                                           51               52

Income from continuing operations                                  20               18
Interest and other income (expense), net                           (2 )              *

Income from continuing operations before income taxes              18               17
Provision for income taxes                                          6                4

Net income from continuing operations                              11               13

Discontinued operation:
Net loss from discontinued operation                                *                *

Net income                                                         11 %             13 %

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 March 31
2014 2013 Change

Total net revenues (in thousands) $ 96,804 $ 92,490 $ 4,314

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 March 31
(as a percentage of total net revenues)       2014             2013

Revenues from recurring sources                     92 %             91 %
Revenues from non-recurring sources                  8 %              9 %

Revenues derived from sales outside the U.S. were 18% and 19% of total net revenues in the first quarter of 2014 and 2013, respectively. The decrease as a percentage of total revenues during the first quarter of 2014 primarily reflects relatively slower sales activity outside the U.S. 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.

We expect total net revenues from continuing operations to be between $96 million and $98 million in the second quarter of 2014.

Recurring Revenues



                                                         Three Months Ended March 31
(in thousands, except percent of total net revenues)        2014              2013        Change

Term license revenues                                  $       47,039    $       41,252   $ 5,787
Maintenance revenues                                           16,142            16,436      (294 )
Other recurring revenues                                       25,948            26,795      (847 )

Total recurring revenues                               $       89,129    $       84,483   $ 4,646

Percent of total net revenues                                      92 %              91 %

Revenues from term licenses, which include both software license and maintenance services for term licenses, increased $5.8 million during the first quarter of 2014 compared to the same quarter of 2013. The growth of term license revenues reflects strong renewals, the continued layering of incremental annual contract value (ACV) of term licenses sold in previous periods into our term revenue, the continued market acceptance of our products and less deferral of term license revenue.


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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 March 31 2014 2013 Change

Term license revenues $ (272 ) $ (1,675 ) $ 1,403

During the first quarter of 2014, more projects completed the implementation phase than commenced compared to the first quarter of 2013, resulting in less deferral of term license revenues.

Generally, we sell very few perpetual licenses to new customers. Maintenance revenues from perpetual licenses decreased by $0.3 million during the first quarter of 2014 when compared to the same quarter of 2013. 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. We expect the downward trend in maintenance revenues from perpetual licenses to continue as we continue to sell predominantly term licenses.

Other recurring revenues, primarily include revenues from incremental assets under administration (AUA") fees from perpetual licenses, data services, outsourced services, Advent OnDemand, web-based services and Black Diamond. The decrease of $0.8 million in other recurring revenues for first quarter of 2014 compared to the same quarter of 2013 primarily reflected lower fees of $2.2 million from a renewed agreement with one of our larger clients effective in the third quarter of 2013. In addition, incremental assets under administration fees from perpetual licenses in the first quarter of 2013 included $1.1 million due to an AUA report received in the first quarter of 2013 that typically reports in the fourth quarter. These decreases were partially offset by continued growth in our Black Diamond product of $1.7 million 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 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 fourth quarter of 2012:

                                                   Renewal Quarter
Renewal Rates                       Q114    Q413    Q313    Q213    Q113    Q412
Based on cash collections
relative to prior year
collections

Initially Disclosed Renewal Rate
(1)                                    (2 )    95 %    97 %    92 %    94 %    91 %
Updated Disclosed Renewal Rate
(3)                                   n/a     n/a      99 %    95 %    99 %    96 %



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

(2) The initially disclosed renewal rate for the first quarter of 2014 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 March 31
(in thousands, except percent of total net revenues)        2014                2013         Change

Professional services and other revenues               $         7,243     $         7,052   $   191
Perpetual license fees                                             432                 955      (523 )

Total non-recurring revenues                           $         7,675     $         8,007   $  (332 )

Percent of total net revenues                                        8 %                 9 %

Non-recurring revenues consists of perpetual license fees, professional services and other revenues. Professional services and other revenues include fees for consulting, project management, custom implementation and integration, custom report writing, training and our client conference. Perpetual license revenues are derived from the licensing of software products under a perpetual arrangement.


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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 services. The remaining deferred professional services revenue is recognized ratably over the remaining contract term.

Professional services and other revenues changed due to the following (in thousands):

                                                                     Change From
                                                                    Q113 to Q114

Increased revenue related to term license implementation deferral   $       3,116
Decreased consulting services                                              (1,158 )
Decreased project management                                                 (516 )
Decreased custom reports                                                     (359 )
Decreased data conversion                                                    (334 )
Various other items                                                          (558 )

Total change                                                        $         191

The slight increase in professional services and other revenues during the first quarter of 2014, compared to the same period last year, primarily reflects the increase in recognition of net deferred revenue resulting from more projects being completed during the first quarter of 2014 compared to the first quarter of 2013. This was partially offset by a decrease in billable utilization for professional services resources due to a decrease in recent bookings activity.

The change in our term license implementation deferral increased/(decreased) professional services and other revenues for the three months ended March 31, 2014, as follows (in thousands):

Three Months Ended March 31 2014 2013 Change

Professional services and other $ 1,665 $ (1,451 ) $ 3,116

Total perpetual license fees decreased $0.5 million primarily due to a decrease in sales of perpetual seat licenses and modules to our existing perpetual client base as we now sell predominantly term licenses.

COST OF REVENUES



                                                         Three Months Ended March 31
(in thousands, except percent of total net revenues)        2014              2013        Change

Stock-based compensation expense                       $        1,217    $          870   $   347
All other cost of revenues                             $       27,265    $       27,609   $  (344 )
Percent of total net revenues                                      28 %              30 %
Total cost of revenues                                 $       28,482    $       28,479   $     3
Percent of total net revenues                                      29 %              31 %

Cost of revenues is made up of three components: cost of recurring revenues, cost of non-recurring revenues and amortization of developed technology, and are discussed individually in the following discussion. Gross margin improved to 71% in the first quarter of 2014 from 69% in the first quarter of 2013 as we expanded our recurring revenue gross margins from our improved efficiency in our global support organization and also decreased amortization expense from fully amortized technology-related intangible assets. Gross margin in the first quarter of 2014 includes the impact of increased stock-based compensation expense associated with the equity award modification in the second quarter of 2013, as disclosed previously in our 2013 Annual Report on Form 10-K.


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Cost of Recurring Revenues



                                                         Three Months Ended March 31
(in thousands, except percent of total net revenues)        2014              2013        Change

Stock-based compensation expense                       $          842    $          488   $   354
All other cost of recurring revenues                   $       17,785    $       15,924   $ 1,861
Percent of total recurring revenues                                20 %              19 %
Total cost of recurring revenues                       $       18,627    $       16,412   $ 2,215
Percent of total recurring revenues                                21 %              19 %

. . .

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