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Advent Software Inc. (NASDAQ:ADVS)

Q3 2008 Earnings Call Transcript

October 28, 2008, 5:00 pm ET

Executives

Heidi Flaherty – VP of Financial Planning and IR

Stephanie DiMarco – President and CEO

Jim Cox – VP, Principal Accounting Officer, and Corporate Controller

Analysts

David Scharf – JMP Securities

Tom McCrohan – Janney Montgomery

Tim Fox – Deutsche Bank

Jonathan Maietta – Needham & Company

Ryan Thibodeaux – Maple Leaf Partners

Alan Dworsky – Mt. Auburn Company

Operator

Good afternoon. My name is Lisa, and I am your conference operator today. At this time, I would like to welcome everyone to the Advent’s Q3 earnings call.

(Operator instructions) Thank you. Ms. Flaherty, you may begin your conference.

Heidi Flaherty

Thanks, Lisa, good afternoon. I am Heidi Flaherty, Vice President of Financial Planning and Investor Relations. Thank you for joining us today for Advent's Third Quarter 2008 Earnings Call. Hosting our call today are Stephanie DiMarco, Advent's Chief Executive Officer and Jim Cox, Advent’s Principal Accounting Officer.

To begin, Stephanie will give a brief overview of the quarter and then Jim will review the financials. Stephanie will then return to discuss Advent’s recent business highlights, after which we will open up the call for your questions.

On our Investor Relations home page, you will find a presentation that summarizes our third quarter results and an updated summary of trended operating metrics disclosed from 2005 through the third quarter of 2008. We hope these two documents will assist you in understanding our business.

Most of you participating in this call are aware of the regulations regarding forward-looking statements. Accordingly, we would like to note that during the course of this conference call, we will make forward-looking statements regarding future events or the future performance of the company including estimated future operating results, anticipated benefits of acquisitions including Tamale Software, international growth, domestic demand, market acceptance of our products and new product releases, uncertain market conditions, and the general momentum of the business.

We wish to caution you that such statements are just predictions that involve risks and uncertainties, and that actual events or results could differ materially. We discuss a number of these business risks in detail in the company's SEC reports, including our quarterly reports on Form 10-Q and our 2007 annual report on Form 10-K and any forward-looking statements must be considered in the context of such risks and uncertainties.

The company disclaims any intention or obligation to publicly update or revise any forward-looking statements whether as a result of events or circumstances after the date hereof or to reflect the occurrence on unanticipated events.

As a reminder, we include non-GAAP financial measures in our disclosures. These non-GAAP financial results are not meant to be considered in isolation or as a substitute for results prepared on a GAAP basis. Please refer to the tables entitled "Reconciliation of Selected GAAP Measures to Non-GAAP Measures" in our earnings release, which is filed with the SEC on Form 8-K and available on our website for a reconciliation of GAAP to non-GAAP financial measures.

I will now turn the call over to Stephanie.

Stephanie DiMarco

Thanks, Heidi, and welcome everyone. Thank you for joining us this afternoon. I am pleased to report Advent’s solid third quarter results. Revenues were a record $65 million, up 17% year-over-year. Operating cash flow was strong at $19 million, up 54% year-over-year. Additionally, during the quarter we announced our acquisition of leading research management solution provider Tamale Software, which closed in early October.

I will talk in greater detail about our third quarter accomplishments and highlights in the current business environment later in the call, but first let me turn the call over to Jim Cox to review our financial results.

Jim Cox

Thanks, Stephanie. There are four areas I will cover today, first, bookings and revenue; second, expenses and profitability; third, key balance sheet items; and finally guidance for the fourth quarter.

Once again, the sales performance was strong across all of our products and geographies. Annual term license contract value was $6.2 million and the corresponding term license contract value was $18.1 million. The four-quarter trailing growth rate for annual term license contract value was 38%.

Beginning with our fourth quarter results, we will incorporate new bookings from our Tamale RMS product into our total ACV numbers. Our Tamale RMS product is licensed in one-year contracts, so we will shift to disclosing annual term license contract value exclusively in order to summarize all of our new contracts consistently.

Turning to revenue, total revenue for the third quarter was $64.9 million, up 17% over the same period last year. Term license maintenance and other and recurring revenue was $51.7 million, up 20% over the same period last year. Recurring revenue represents 80% of our total revenue.

Perpetual license revenue was $4.6 million, down 25% from the third quarter of last year. Both periods included $1.5 million in assets under administrations revenue. We licensed fewer perpetual seats and modules to our existing perpetual client base. We have experienced a decrease, given our transition to term licensing, and we have discussed in the past several earnings calls, but this decrease was more significant than we had expected for this quarter.

Perpetual license revenue, including assets under administrations revenue declined 2% in 2001 and 13% year-to-date. We expect that trend will continue. Professional services revenue and other revenue was $8.6 million, up 34% from the third quarter last year, primarily reflecting an increase in consulting revenues from increased revenue generated head count and third party service providers.

As we have mentioned in prior calls, we defer all term license and professional services revenue until we have substantially completed the implementation. This adjustment fluctuates considerably from quarter-to-quarter, depending on project timelines.

In the third quarter we deferred revenue of $3.8 million for term license contracts not yet implemented. This compares to $2.9 million deferred in the third quarter of 2007. Associated expense deferred in the quarter was $1 million, flat with the combined expense deferral in the third quarter of 2007.

The operating margin reduction due to the term service deferral in the third quarter of 2008 was four points. Our blended renewal rate, which includes both perpetual maintenance and term license contracts, was 86%. We report our renewal rate one quarter in a year based on cash collections. We will be watching renewal rates carefully to this uncertain economic period.

We should remind you that our renewal rate is based on cash collections and has historically increased by two to nine points after its initial disclosure as cash continues to be collected. If you wish to review the final renewal rate, we have added them to our trended disclosures report, which is available on our Investor Relations home page.

Cost of revenue for the third quarter was $24 million, up 33% over the same period of last year. Gross margin was 63% compared to 68% in the period last year. The decrease is primarily the result of three elements, a $1.5 million reduction in perpetual license sales, a term implementation deferral which was $900,000 higher than the same period of last year, and expenses of $300,000 related to our annual client conference.

Total Q3 operating expense was $36.2 million, up 14% from the same period of last year. The operating expense details for the third quarter were as follows. Sales and marketing was $15.5 million for the quarter, up 15% from the same period in 2007. Sales and marketing expense was 24% of Q3 revenue, flat compared to the same period of last year. Product development expense was $11.1 million for the quarter, up 19% from the same period in 2007. Product development expense was 17% of Q3 revenue, again flat with the same period last year. Capitalization of product development cost was $1.8 million in Q3 of 2008 versus $2.1 million in Q3 of 2007.

G&A expense was $9.5 million in the quarter, up 14% from the same period in 2007. G&A expense in the third quarter included an increase of $900,000 for severance related expenses.

Amortization of intangibles for the third quarter was $141,000 down $322,000 from the same period last year. Depreciation for the third quarter was $2.5 million, up $0.5 million from the same period of last year and about half of that increase is related to accelerated depreciation from the early termination of our data center lease.

We recorded a tax provision of $1.8 million in the third quarter, which equates to an effective tax rate of 40.5%. Although Congress renewed the R&D tax credit that occurred after September 30, 2008, so we are unable to apply it in the third quarter.

If the tax credit were applied in the third quarter, our earnings per share would be benefited by $0.04. We believe our effective tax rate in the fourth quarter will be significantly lower to bring the full year tax rate to 20% to 25%. Of course, the tax rate use for non-GAAP calculations continue to be 35%.

We recorded operating income of $4.7 million, down 18% from the same period in 2007, and net income was $2.7 million, again down 18% from the third quarter of 2007. GAAP EPS was $0.10 per share in the third quarter compared to $0.12 in the same period of last year.

In summary, there were three significant elements which negatively impacted GAAP earnings, the reduction in perpetual back sales to existing clients, the timing of the R&D tax credit ruling, and severance related expenses. Tax expense will obviously correct itself in the fourth quarter.

With respect to non-GAAP earnings, I remind of Heidi’s opening comments. Non-GAAP operating income was $10.2 million, up 5% over the third quarter of 2007, and non-GAAP diluted EPS was $0.23 per share in the third quarter, flat with last year.

Turning to the balance sheet, as of September 30th, we had $76 million in cash and cash equivalents compared with $43 million a year ago. Other balance sheet highlights are as follows. AR totaled $48 million and our DSO was 68 days, up one day from the third quarter of last year, and up nine days from Q2.

Capital additions in the third quarter were $9 million, up from $2 million in the third quarter of last year and up from $7 million in the second quarter of this year. While Q3 capital expenditure was higher than expected, the 2008 spending reflects the following three planned investments, relocation of the aforementioned data center, the first half of our CRM replacement project, and the build out of the first and second floors of our corporate headquarters in San Francisco.

We are increasing our CapEx guidance for the full year to $22 million to $24 million, which translates to $4 million to $6 million for the fourth quarter. We expect CapEx to be lower in the fourth quarter as the relocation build-out projects will reach completion.

Total deferred revenue was $138 million, up $38 million from the third quarter of last year, and up $7 million from the last quarter. The compensation of deferred revenue in the third quarter was similar to the second quarter.

If you would like to review the compensation and deferred revenue since 2005, please see Slide 10 of our earnings presentation and our trended disclosures report, both of which are available on the Investor Relations home page. Operating cash flow for the quarter was strong at $19 million, up 47% on a four-quarter trailing basis.

And finally, we have repurchased 360,000 shares in September; an additional 640,000 in October completing our current share repurchase authorization. These shares were repurchased at an average price of $34.49.

Turning to the fourth quarter, I will be making forward-looking statements, so I will remind you of the Safe Harbor Statement in Heidi's opening remarks. I will also remind you that we closed the Tamale acquisition on October 1st, so this guidance reflects the affects of that acquisition.

For Q4 2008 we expect revenue to be between $68 million and $70 million, which raises full year revenue guidance to $258 million to $260 million, and reflects growth of 19% to 21% over 2007.

This guidance includes a full quarter of Tamale revenue, net of the reduction to their deferred revenue required by purchase accounting rules. For full year of 2008, we are decreasing our non-GAAP operating margin guidance provided last quarter by one point to include Tamale’s expenses. The full-year non-GAAP operating margin is now expected to be 14% to 15% of revenue.

This yields a non-GAAP diluted EPS range of $0.88 to $0.92 per share for the year. On a GAAP basis, diluted EPS is estimated to be between $0.58 and $0.62 per share. We are increasing our full year guidance for operating cash flow to $72 million to $75 million, which implies $18 million $21 million in the fourth quarter.

In summary, these results reflect the core business that delivered strong revenues, strong ACV, and strong operating cash flow during the current market environment. We are focused on continuing to execute throughout the fourth quarter. We look forward to sharing our expectations for 2009 with you in the year-end earnings call once we have completed our annual planning process.

Now, with that, let me turn the call back to Stephanie.

Stephanie DiMarco

Thank you, Jim. Before I discuss the business highlights for the quarter, I want to start today’s call by addressing the current market environment. During the past several years, Advent has undertaken several important actions that put us in a strong operating position for navigating these uncertain times.

First, we have successfully transitioned our revenue model to term licenses. Today, 80% of revenues are recurring. As a result, our revenues are more predictable and are significantly less dependent up on near term bookings. Secondly, we have invested carefully in research and development and have a large and expanding product portfolio of market leading products.

In our review, these products are the core systems that our customers’ run their businesses on, and therefore, they are less susceptible to budget cuts. Because of our deep strategic relationships with our customers, more than ever, they will be looking to us to enable their operations to be more efficient.

The need for compliance and persistence to enable funds to work with multiple prime brokers and the need for operational efficiency in risk management are all requirements that Advent’s products address.

Thirdly, over the past 5 years, we focused on improving profitability and operating cash flow. In the trailing 12-month period, operating cash flow grew 47%. Strong operating cash flow will remain a key financial objective for Advent. We have raised guidance for operating cash flow for the full fiscal year to between $72 million and $75 million.

Hedge funds have been in the news a lot. It has been predicted that as many as 30% of hedge funds in the market could close up shop as a result of this market crisis. We do not disagree with the potential for this to occur, as we expect that many hedge funds will close in this cycle.

However, we do not anticipate that this will have a significant impact on Advent. There are over 10,000 hedge funds globally, of which only 480 are Advent client, just under 5%. Of the 480, approximately 100 of those are Geneva accounts. We believe the distribution among hedge fund failures will be concentrated in the lower 30% of hedge funds in terms of size, not in the upper quartile where our biggest customers are.

On the bright side, we see real opportunity on the other side of this crisis in what is certain to be more regulated risk management oriented business in the future, Advent’s products will be in more demand than ever.

The Bear Sterns and Lehman Brothers’ failures have created greater demand for funds to work with multiple financial institutions. In order to do this, funds must implement a system like APX or Geneva. So, although it is likely to be a challenging demand environment in the short term, we believe Advent is in a strong position to navigate through it.

This market tumult comes at a time when our company has never been stronger. We are focused on building the business for the long term. In the short term, we have many levers to pull to continue to perform well from a financial standpoint. We are managing expenses and head count growth aggressively, while continuing to focus on serving our customers in a period, which is obviously very challenging for many of them.

So, returning to the third quarter, the biggest highlight was our acquisition of leading research management solution provider Tamale Software, which closed earlier this month. The completion of this acquisition represents a significant step for us to expand our footprint in the front office and establish ourselves as a leader in the nascent research management field.

Tamale pioneered the RMS space in the 2004 and has become a clear leader with more than 1700 investment professionals using their workflow solution to manage their workflow and research process. We announced the Tamale acquisition at our client conference last month.

The product was enthusiastically received by clients generating a lot of interest for Tamale. In fact, it was wonderful to see the positive responses to all of our products at the conference, which was our largest and most successful conference to date. The excellent turn out and the level of engagement with our clients reinforces the crucial role Advent plays in their operations.

Let me discuss a few Q3 product highlights. We introduced the new version of Advent Partner, featuring the new World Investor Module and are currently in the process of rolling it out to clients. Partner World Investor is a landmark release. It is an all-in-one solution for both onshore and offshore investor accounting with enhanced investor management and servicing capabilities.

World Investor will be a great benefit to fund administrators, global hedge funds, and service providers of complex global investment funds. We also introduced a significant new model to Geneva in the third quarter called Advantage.

Geneva Advantage is a universal industrial strength reconciliation tool with out-of-the-box integration to prime brokers and industry data providers currently in development. We feel this would be an extremely valuable tool for selling Geneva globally as it offers even more depth and breadth to our already robust platform.

Turning to APX, we saw continued momentum in customer wins for Q3. We sold a third quarter record of 29 APX contracts brining the total number of APX contracts sold to 266 worldwide.

Work is under way for a new release of Axys, which we plan to launch in the fourth quarter. Enhancements included in Axys 3.7 are compatibility with new platforms, additional reports, and an improved knowledge base. This release marks our continued commitment to keeping our Axys platform current as technology and regulatory changes impact our customer base.

Expanding our global footprint continues to play a key role in our growth strategy and we are extremely pleased with the momentum we are seeing in the EMEA region. We have a strong EMEA pipeline and our license business had a record third quarter.

We have a significant customer win in both the UK and the Middle East, which included our first client in India. In Q3, our international business generated 13% of revenues.

In summary, we are pleased with our third quarter results where we posted record revenues and strong operating cash flow, our strategic acquisition of Tamale, enhancements to our product suite, our largest client conference to date, and our expanding international business, all highlight our excellent operating and market position.

With that I would like to open the call for questions. Lisa? Operator?

Question-and-Answer Session

Operator

Can you hear me? Hello.

Stephanie DiMarco

Yes, now we can.

Operator

Thank you, I am sorry. (Operator instructions) And our first question is from –.

Stephanie DiMarco

Why don't you go ahead, and he can introduce himself. Just let the call through.

Operator

Your first question is from David Scharf from JMP Securities.

David Scharf – JMP Securities

Hi good afternoon, hopefully the wait was worth it. Stephanie, thanks for the commentary on the hedge fund sector, obviously the entire end market is topical right now. Can you give us a little color on maybe just sort of the monthly trends in bookings in a little more anecdotal color on how we ought to think about, you know, the outlook for the next 6 months, obviously it is anybody’s guess, just how many fund closures there are, but even just more anecdotal information about whether or not, 2008 budgets are in the bag, but whether you are hearing a little more pessimism about 2009, you know, just how we ought to think about next year without necessarily giving out any numbers?

Stephanie DiMarco

Well, I think the – obviously the environment is very tough, so I think any short-term predictions are likely to be wrong and because you have a market where the end market is suffering extreme pain because of the loss in market value and assets, so in the near term, it is anybody’s guess including ours what is going to happen, I think in the short term could be impacted. That said, you have people in this market who are making a lot of money. I spoke to a prime broker this morning who said that they had booked three years of business in the last three weeks, and so this trend to move to multiple primes is real, and you have a lot of – you still have a lot of assets out there that are moving around and creating opportunities for people. Anyone on the trading side of the business is doing extremely well right now. I would expect a lot of our hedge fund clients in that top quartile are doing extremely well right now in this market volatility because this plays well within their strategies. So, it is really – it is a very challenging market, and it is difficult to predict the short term. We are managing the business assuming that the demand – the end demand market will be slow in the near term, and, you know, we have good pipelines coming into the quarter and we have had good momentum all year, but we do not want to be overly optimistic. We want to manage the business really carefully.

David Scharf – JMP Securities

Is there anything anecdotally regarding, let’s say cancellations, you know, what you had thought would be previously booked business, you know, kind of second thoughts where you are pretty much signed, but before implementation, have you seen any increase of sort of stepping back and saying, you know what, we are going to take a wait and see approach?

Stephanie DiMarco

I do not think we have seen that on the implementation side. We have certainly seen on the sales side. People say, we want to do it, but you know, right now I need to be spending my time talking to my customers and looking at my portfolios, so I would not say that necessarily a new buying decision for mission critical system is always going to be at the top of their list, and that is not true across all markets, but it certainly has been true, you know in – anyone who is in a 100% equities and certainly in the domestic market.

David Scharf – JMP Securities

Got it, and it looks like you may have started to see a little pick up in cancellations, I guess, the renewal rate dropped to its lowest level in the few years, is that concentrated in any particular type of asset manager?

Stephanie DiMarco

We actually had – have one – a lot of that, about two points of that is attributable to one large renewal where we have agreed to the renewal, but the cash has not been collected, so we expect the rate to go up.

David Scharf – JMP Securities

Okay, got it. And lastly, and then I will let some others hop on and I will get back in the queue. Can you just give us a little help in terms of understanding how Tamale flows through the fourth quarter guidance in terms of both the sliding in revenue as well as where the bulk of the expenses are likely to fall?

Stephanie DiMarco

Well, we are taking a full quarter of Tamale because we closed the acquisition at the beginning of the quarter, and we have to take a hair cut to the deferred revenue and that is why we lowered our guidance, and we have to take 100% of the expenses, so Tamale is dilutive in this first quarter and we guided to Tamale being EPS neutral in 2009 and we still expect that to be the case.

David Scharf – JMP Securities

Okay, and I am sorry, was – I am trying to back into what the implied fourth quarter revenue guidance is for Advent minus Tamale? Was there ever a –?

Stephanie DiMarco

We have not broken it out.

David Scharf – JMP Securities

Okay, I will get back in line, thank you.

Stephanie DiMarco

Operator?

Operator

Your next question is from Tom McCrohan from Janney Montgomery.

Stephanie DiMarco

Hi Tom.

Tom McCrohan – Janney Montgomery

Hi everyone. A strong quarter in light of, I think some people’s expectations, the bookings were a little better than what I was modeling for, and I was wondering if you could talk about composition of the new wins, particularly on the Geneva side, you had 10 new unit sales, was there any color you can provide on, you know, who was buying Geneva during the quarter and was there any material change in the kind of composition of customers that bought Geneva this quarter, either the geographic distinction or kind of asset size?

Stephanie DiMarco

I do not think a material difference in the composition or geography. We did have a couple in Europe, but that is not atypical, and I think, you know, the traditional players who buy Geneva, same – same composition of customer type during the quarter.

Tom McCrohan – Janney Montgomery

Okay, and as far as the pipelines, and I appreciate you being somewhat cautious, is there any change in pipelines in the US relative to non-US business?

Stephanie DiMarco

US relative to non-US business, I think, you know we have not seen a big change in our pipelines, I would say more that – we see more caution on the part of the end buyer, and as a result we are being very cautious, and as you know, and as we pointed out, our model is not really that dependent on near term bookings, so if the short term is more challenging, we don’t know if it will be, but – we know it will be because the end market is challenged, but it does not have a material impact on the company’s results for 2009.

Tom McCrohan – Janney Montgomery

Okay great, and one last question just on pricing, I know you talked about it before, but people still ask about it, may be you can talk quickly about the pricing bands given the market declines, how that impacts your business given the revenue model some type – sometimes pricing is tied to like certain asset size of customers, can you just touch on that – ?

Stephanie DiMarco

The most direct correlation with asset values are assets under administration fees and those – last year, those were about $8.5 million and even those are not that direct, because we have a lot of customers who are just paying at their minimum, so even if their assets go down they – they still have a minimum contract that they pay with us, so it is not a huge number, and then within our pricing matrix for our license products, we have asset bands depending on the size of a customer, their pricing will fall within those bands, so people do drop below those on a renewal period, they could fall down into a lower pricing band, and so we are modeling that and building that into our forecast for 2009.

Tom McCrohan – Janney Montgomery

Fantastic, and Jim welcome to the call. As a matter of fact, could you just reiterate those three items that you mentioned adversely impacted GAAP net income? I could not write fast enough.

Jim Cox

Sure. The first was the perpetual – the decrease in the perpetual license sales, the second was the severance expense of about $900,000, and the third was the effective tax rate, particularly impactful.

Tom McCrohan – Janney Montgomery

Thanks, very much.

Stephanie DiMarco

Thanks Tom. Operator?

Operator

Your next question is from Tim Fox from Deutsche Bank.

Tim Fox – Deutsche Bank

Hi, thank you, good afternoon. First question around Tamale, actually two questions there, I believe that the bulk of their business to date has been driven out of – out of hedge funds and there was an effort there to start looking at, you know, kind of more long-only [ph] funds at some point, but is there any concern around the Tamale business performance now that you have actually closed the deal given the fact that their customer base is largely concentrated at hedge funds?

Stephanie DiMarco

Yes, they do have a larger concentration in hedge funds than we do in our core business, and so I would expect that they would have a greater impact from cancellations, but again they tend to sell to the largest hedge funds, and so when you think about the universe of 10,000 hedge funds, I think the majority of them that are going to close are not going to be the ones that Tamale and Advent sell to, they are going to be the less than $500 million shops that have been being their prime broker for their accounting. We will have some and Tamale will have some, but we do not think that it has a material impact. Nonetheless, we are being very cautious as we model the business that we are building in a cushion for cancellations in the short term.

Tim Fox – Deutsche Bank

Okay and the second question on that front. You know, Tamale being more of a front office product, I am wondering if you have any views at this point about a softening environment whether that is going to more – have a broader impact on front office purchases versus some of the more mission critical back office Stuff that you sell?

Stephanie DiMarco

Well, I think there are two sides to that. It is – you could argue that it is more discretionary, but at the same point it is a much easier sell than the mission critical back offices because there has to be replacement cycle for the back office sale to occur, and with Tamale, if a portfolio manager looks at it and says, I want it, it typically can be out of a budget cycle and as a practical matter in terms of their total budget what it costs, it is not that much money, so we think we are going to continue to have good Tamale sales. We think the road is going to be, you know, it going to be a rocky road in the short term and I certainly would not want to model the long term of the business on what is going to happen.

In the short term, we are really focused on what can we do in this downturn to really manage the business so that we are very, very successful coming out of a downturn, and I do think the downturns create unique opportunities particularly for companies like Advent that we do not require funding, we have strong cash flow, we have a very sticky product, so we think that – although there may be some softness in retention rates, it does not materially impact our fundamentals. We have an opportunity to change the game on our competitors that may not have those characteristics, so in a way we look at it is what are all the things that we can do in this environment to really strengthen the company for the long term.

Tim Fox – Deutsche Bank

Okay, that’s helpful, and then lastly if I may, you mentioned the softening on the renewals, I was wondering if you could talk a little bit about whether that came primarily from maintenance renewals on the perpetual licenses or have you seen any softness in actually some of the term contracts that are coming up for renewal for the first time this year?

Stephanie DiMarco

We still have a very few contracts that we are renewing on a term basis because we really started this transition about four years ago, so we do not have – the sample size is very, very small. I think the place that we are going to see – where people are going to come to us and our customers will have lost 40% of their fee income and they are going to be looking to downgrade fees or maybe downgrade a product, I think that is where we are going to see the softness, not so much people going out of business. I do not think the majority of asset managers are going to go out of business, but they are going to have budget constraints. They are going to come to us and want to negotiate, and that is what is going to probably create some of the softness. You know, we are in a position where we can weather that and coming out of that period, they are going to be expanding their seats and we are going to do very, very well, so we look at it as kind of a short-term blip.

Tim Fox – Deutsche Bank

Okay, thank you.

Stephanie DiMarco

Thanks. Operator? Operator?

Operator

Yes madam, I am waiting for them to promote. Your next question comes from Jonathan Maietta from the Needham & Company.

Jonathan Maietta – Needham & Company

Hi, thanks very much. Stephanie, I was wondering if you could share with us when the Board will have – when the next opportunity the board will have to vote on another share repurchase authorization?

Stephanie DiMarco

We have the flexibility to call a Board meeting at any time.

Jonathan Maietta – Needham & Company

Okay, and then in this regard – with regard to Tamale, I think when the deal was closed, you had put out a number of $17 million to $20 million in 2009, is that still a good range or how should we think about that?

Stephanie DiMarco

We are working on our 2009 plan right now, so we have not finalized that, but as I said before, we are taking a cautious view and we want to be sure that we are managing the business so that we can be optimizing our cash flow and our profitability, so we will probably take a pretty conservative view of all lines of the business and expect that, you know, there is going to be some softness and we want to build that into our model so that we do not over extend in terms of expense growth.

Jonathan Maietta – Needham & Company

Got it, okay, thanks very much.

Stephanie DiMarco

Operator?

Operator

Your next question comes from Ryan Thibodeaux from Maple Leaf Partners.

Ryan Thibodeaux – Maple Leaf Partners

Hi good afternoon. Can you talk about the amount of capitalized software in the quarter? What – where was that and in what line item? Is that all in product development?

Jim Cox

So that is going to come out the product development line and –?

Ryan Thibodeaux – Maple Leaf Partners

Should we expect that to tick back up next quarter?

Jim Cox

Yes you should.

Ryan Thibodeaux – Maple Leaf Partners

And so, was all – was it roughly a $3 million total, is that correct?

Jim Cox

No, it is $1.8 million this year and $2.1 million last year. The accounting rules say that between the period where you are technologically feasible and you release, you capitalize that, so people are working on this all the time, and then you fall into that capitalization bucket, and in the last two years, that capitalization bucket has occurred in Q3 in each of the last two years, but you would expect not that level of capitalization going forward.

Ryan Thibodeaux – Maple Leaf Partners

Okay, and Stephanie, when you talked about just being cautious on the environment and how that translates into budgeting for OpEx, what kind of – how cautious are you guys being and when does that begin? Is that something that you start to implement now for next year?

Stephanie DiMarco

Yes.

Ryan Thibodeaux – Maple Leaf Partners

Or is it just kind of wait and see?

Stephanie DiMarco

No, no. We started to implement it now and we have completed the big CapEx that was planned, so we would expect small CapEx for 2009, but in terms of the growth in expenses, we are being – we are continuing to hire into positions where we – the revenue producing roles or where we have commitments. We announced last quarter a large contract with TIAA-CREF and we continue to, you know, staff for that project, but we want to be careful that we are not moving too quickly on expense management – expense growth, I am sorry.

Ryan Thibodeaux – Maple Leaf Partners

So – but you are not doing like a hiring freeze or anything like that at this point?

Stephanie DiMarco

No.

Ryan Thibodeaux – Maple Leaf Partners

Okay, and then lastly on just back to gross margins, if you kind of back out the items that you talked about, I think I get up to like 66% or so kind of backing off those items, is that a number that we should kind of look at going forward or how should we think about that including Tamale?

Stephanie DiMarco

I am sorry, what –?

Ryan Thibodeaux – Maple Leaf Partners

Just the normalized kind of gross margin.

Stephanie DiMarco

Gross margin.

Jim Cox

Let me take a second and think about how Tamale will affect that. I think that that is probably fair. I do not think that Tamale is going to materially affect that long-term run of 66%, 67%.

Ryan Thibodeaux – Maple Leaf Partners

Okay, right, thanks.

Stephanie DiMarco

Operator?

Operator

Your next question is from Alan Dworsky, Mt. Auburn Company.

Alan Dworsky – Mt. Auburn Company

Hi, Stephanie. Did I miss you – miss any reference to the changes in head count this last quarter?

Stephanie DiMarco

We increased head count by ten.

Alan Dworsky – Mt. Auburn Company

Just by ten, that is more modest than usual?

Stephanie DiMarco

Yes, and so that reflects this – what I talked about earlier as being cautious on growth in people. Head count is our largest variable expense, and so we are making hires where we believe they are critically important, but if we – we want to be cautious during this period.

Alan Dworsky – Mt. Auburn Company

Even for implementation of contracts that are under way?

Stephanie DiMarco

Well, those would be among – the people that we are hinging would be around implementations, and remember, we have also greatly expanded our third-party consultant partnership program, so we can offload a lot of that to third parties and we work with a number of third parties now.

Alan Dworsky – Mt. Auburn Company

Wouldn't you want to reduce – offload to third parties – isn’t that less profitable when you have to use–?

Stephanie DiMarco

No, as long as the demand is there, then we are very happy to use third parties to kind of keep track of or help us manage peak demand so that we are not having to increase staff.

Alan Dworsky – Mt. Auburn Company

Has the hiring environment in San Francisco improved any with the weakness in the economy?

Stephanie DiMarco

Yes, I would say that the hiring environment is improved in every financial center.

Alan Dworsky – Mt. Auburn Company

Okay, fair enough. Okay, thank you.

Stephanie DiMarco

Operator, I think we have one more.

Operator

Your next question is from David Scharf with JMP Securities.

David Scharf – JMP Securities

I just had one follow-up to clarify. Did you comment early on as going forward you are not going to provide total term contract value to just on a annual basis?

Jim Cox

You are right, David. We are only going to go to annual term license contract value, and the reason for that is the Geneva and APX products are sold on 3 to 5 year terms and the Tamale RMS product is sold on a one-year term. So, in order to make apples-to-apples, we are just going to more forward with what we call ACV or annual term license contract value.

David Scharf – JMP Securities

Okay, I guess –?

Stephanie DiMarco

We also think it is a better metric.

David Scharf – JMP Securities

Right, It detracts a little from kind of obviously forecasting next couple of years’ visibility, but we can always back into those numbers, and just lastly, once again in Tamale, it looks like – we know what the original annual guidance was next year, it sounds like that may be – if we approach cautiously, it sounds like on the gross margin side it is not going to impact that percentage too much. As far as the operating expenses, is there much additional product development with the Tamale acquisition or are we probably going to – stock comp kind of stay at this $10 million per quarter range?

Stephanie DiMarco

Well, the $10 million per quarter, I am not sure what you are looking at.

Jim Cox

Do you mean for PD or what are you –?

David Scharf – JMP Securities

No, no, for all of that, I mean when combined with Tamale, I am trying to get a sense for product development investment going forward, and I am kind of looking at numbers excluding the allocated stock compensation. It looks like it came down a couple of million dollars this quarter.

Jim Cox

Okay. Got it.

Stephanie DiMarco

That was because of the capitalization. I would not [ph] expect us to be meaningfully growing product development in 2009. We have full teams and we may add incrementally, but not meaningfully.

David Scharf – JMP Securities

Okay, perfect, thank you.

Operator

Okay.

Stephanie DiMarco

All right, thank you every one for joining us and we look forward to speaking with you next quarter.

Operator

At this time, ladies and gentlemen, your conference has concluded, you may disconnect your lines.

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