Advent Software, Inc. Q4 2008 Earnings Call Transcript

| About: Advent Software, (ADVS)

Advent Software, Inc. (NASDAQ:ADVS)

Q4 2008 Earnings Call

February 3, 2009 5:00 pm ET

Executives

Heidi Flaherty – Vice President of Financial Planning and Investor Relations

Stephanie DiMarco – President and Chief Executive Officer

Jim Cox – Vice President, Principal Accounting Officer and Corporate Controller

Analysts

Tim Fox – Deutsche Bank

Andrey Glukhov – Brean Murray, Carret & Co.

Sterling Auty – JP Morgan

Jonathan Maietta – Needham & Company

Gil Luria – Wedbush Morgan Securities

Kevane Wong – JMP Securities

Ryan Thibodeaux – Maple Leaf Partners

Tom McCrohan – Janney Montgomery

Operator

I would like to welcome everyone to the Advent quarter four 2008 conference call. (Operator instructions)

Ms. Flaherty, you may begin your conference.

Heidi Flaherty

Good afternoon. I am Heidi Flaherty, Vice President of Financial Planning and Investor Relations. Thank you for joining us today for Advent's fourth quarter 2008 earnings call. Hosting our call today are Stephanie DiMarco, Advent's Chief Executive and Financial Officer and Jim Cox, Advent’s Principal Accounting Officer. Also with us today is our newly appointed President, Peter Hess.

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 fourth quarter and full year 2008 results and an updated summary of trended operating metrics disclosed from 2005 through the fourth quarter of 2008. 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 in 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. Welcome everyone. Thank you for joining us this afternoon. I am very pleased to report that the fourth quarter capped an outstanding year for Advent with record annual revenue of $265 million, record annual operating cash flow of $77 million and a record $28 million in new annual term license contract value.

GAAP earnings per share for 2008 grew 51% over 2007 and non-GAAP earnings per share for 2008 grew 40% over 2007. The strength of Advent’s performance in 2008 particularly in the light of the challenges in the market is a clear testament to the essential nature of our products and services and the power of our term license business model.

Later in the call I will review some of our fourth quarter highlights and talk in greater detail about how Advent is well positioned to navigate the current business environment. 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 backlog. Finally, guidance for 2009.

Once again, Q4 sales performance was strong. Annual term license contract value (NYSE:ACV) was $9.5 million. The corresponding term license contract value (TCV) was $34 million. For the full year, ACV was $28.1 million slightly over the $27.6 million for 2007. With the closing of the Tamale acquisition on October 1, 2008 ACV includes one quarter of Tamale bookings.

Organically 2008 ACV was essentially flat with 2007. As a reminder Tamale signs one year contracts and starting next year we will disclose ACV or annual contract value only in order to summarize all of our new term license bookings consistently.

Turning to revenue, as Stephanie said total revenue for the fourth quarter was $74.4 million, up 25% over the same period last year. Term license, maintenance and other recurring revenue was $57.7 million, up 32% over the same period last year primarily as a result of growth in term license revenue.

Perpetual license revenue was $7.3 million, down 17% from the fourth quarter of last year primarily from a $1.1 million decrease in back sales to existing Axys customers. Assets under administration revenue within the perpetual license line item was $3.5 million in the fourth quarter, down 6% from the same period last year.

Professional services and other revenue was $9.5 million, up 39% from the fourth quarter last year primarily because several large implementations were completed in the fourth quarter. As a reminder, we defer all term license and professional services revenue until we have substantially completed the implementation. This deferral fluctuates considerably from quarter-to-quarter depending on project timelines.

In the fourth quarter we deferred $640,000 in net revenue. This compares to $4.2 million of revenue deferred in the fourth quarter of 2007. The operating margin reduction due to term service deferrals in the fourth quarter of 2008 was less than one point compared to a five point reduction in the fourth quarter of 2007.

The stronger than anticipated fourth quarter revenue results are attributed to two elements; the smaller than anticipated term service deferral and perpetual revenue particularly from our MicroEdge segment holding up better than we had expected. On an annual basis we provide both product mix and customer segment mix as a percent of revenue and both are shown in our trended disclosures report and our updated investor presentation which can be found on our IR homepage.

Turning to expenses, cost of revenue for the fourth quarter was $25.7 million, up 39% over the same period last year. Gross margin was 65% compared with 69% in the same period last year. The decrease in gross margin is primarily due to both a $1 million increase in the amortization of technology resulting from the Tamale acquisition on October 1 and an $800,000 impairment charge within the MicroEdge segment from the sunsetting of the Portico product.

Total Q4 operating expense was $41.5 million up 11% from the same period last year. Operating expense details for the fourth quarter were as follows: Sales and marketing $17.1 million for the quarter, up 13% from the same period of 2007. Sales and marketing expense was 23% of fourth quarter revenue, down two points from the same period last year. Marketing expense included an approximately $400,000 cancellation fee in Q4 because we suspended our 2009 Advent Client conference. We think our clients travel budgets will tighten in 2009 making it more difficult for them to attend our conference. We plan to return to our regular conference schedule in 2010.

Product development expense was $13.2 million in the quarter, up 11% from the same period in 2007 and product development expense was 18% of fourth quarter revenue also down two points from the same period last year. Capitalized product development costs reduced PD expense by about $1.1 million in the quarter compared to $600,000 in the same period last year.

G&A expense was $10.2 million for the quarter up 4% from 2007. G&A expense for the fourth quarter was 14% of revenue again down two points from the same period last year. Depreciation in the fourth quarter was $2.9 million, up $900,000 from Q4 2007. Depreciation in the quarter included a final approximately $500,000 of accelerated depreciation related to the relocation of our data center. We reported non-operating expense of $500,000 in the fourth quarter primarily related to foreign currency losses of $400,000 and interest expense of $100,000 from the draw down of $25 million from our line of credit.

These expenses compared to non-operating income of $200,000 in the same period last year. We reported a tax provision of $500,000 in the fourth quarter which equates to a quarterly tax rate of 8%. Many of you know Congress renewed the R&D tax credit in the fourth quarter so the unusually low tax rate reflects the recognition of a full year’s tax credit all within the fourth quarter. For the full year our effective tax rate was 21%. The tax rate used for non-GAAP calculations continues to be 35%.

Q4 operating income was $7.2 million, up 104% over the same period in 2007 representing operating margin expansion from 6% to 10% of revenues. Net income was $6.2 million, up 63% from the fourth quarter. GAAP diluted EPS was $0.23 for the fourth quarter compared to $0.13 in Q4 2007.

With respect to non-GAAP earnings I remind you of Heidi’s opening comments. Q4 non-GAAP operating income was $14.6 million or 20% of revenue. This is up over 90% over the fourth quarter 2007. Non-GAAP diluted EPS was $0.34 per share, up significantly over the $0.18 in Q4 of last year.

Turning to the balance sheet as of December 31 we had $48 million in cash and cash equivalents compared to $50 million one year ago. Other balance sheet highlights include accounts receivable totaling $51.7 million, our day sales outstanding was 64 days down 10 days from the fourth quarter last year and four days from last quarter on strong December collections. Capital additions in the fourth quarter were $4.8 million up $3 million from the fourth quarter last year.

The unusually high capital spending in 2008 reflects three planned investments; the relocation of our data center and the build out of our corporate headquarters in San Francisco, both of which are now complete, as well as our CRM replacement project which will continue into 2009.

Total deferred revenue was $153 million, up $33 million from the fourth quarter last year and up $15 million from the third quarter. Please have a look at our trended disclosure report for the composition of our deferred revenues. In addition to deferred revenues, backlog at the end of 2008 was $152 million. That compares to a revised $99 million at the end of 2007. Historically, we have defined backlog as the value of multi-year term license contracts which contain a binding commitment for the full term of the contract less any amounts from those amounts already invoiced. So term contracts only.

With the increase in the large outsourcing arrangements we now perform we have revised our backlog definition to include those multi-year deals as well for 2008 and we have revised 2007 as well.

We repurchased nearly two million shares in the fourth quarter, and an additional almost 600,00 shares in January leaving approximately one million shares available to repurchase under our current authorization. The shares repurchased in the fourth quarter had an average price of $23.61.

During the fourth quarter we drew down $25 million on our line of credit and have repaid $10 million in January leaving $15 million outstanding.

Finally, operating cash flow for the quarter was $23 million and for the full year it was $77 million up 23% over 2007.

Our blended renewal rate which is reported one quarter in arrears and is based on cash collections was 88% for Q3 2008. This compares to 91% for Q3 2007. We should remind you our renewal rate disclosures are based on cash collections and have historically increased after their disclosure as cash continues to be collected. In addition we are adding a new renewal rate to our disclosures which may better assist you in modeling our business.

Our historic rate is the calculation of renewal achievement over renewal opportunity. The new renewal rate calculation compares client’s year-over-year spend for the same products. This calculation uses prior revenue run rate as the basis for comparison and therefore can be greater than 100% when annual price increases exceed client attrition. The rate will be reported one quarter in arrears and again is based on cash collections rather than billings.

Our new blended renewal rate which includes both perpetual maintenance and term license contracts was 98% in the third quarter. In the first and second quarters of 2008 the renewal rate was 103% reflecting the fact that price increase more than offset the client’s attrition. Both the new and the old calculations are provided in our earnings presentation and our trended disclosure report which are available at the Investor Relations homepage.

We will continue to provide both renewal rate calculations through 2009 to assist you in the transition.

Speaking of 2009, I will now be making forward-looking comments so I will remind you of the Safe Harbor statements within Heidi’s opening remarks. I also remind you that we closed the Tamale acquisition on October 1 so this guidance reflects the effects of that acquisition.

In the first quarter we expect revenue to be between $68-70 million reflecting growth of 11-14% over the first quarter of 2008. In the first quarter we expect term deferral to return to our level of historical experience. We also expect assets under administration revenue to be lower because there are fewer annual contracts measured in the first quarter. Finally, we expect continued weakness in perpetual license sales.

For the full year 2009 we anticipate revenue will be in the range of $280-290 million which is 6-10% growth over this year. The full year non-GAAP operating margin range is expected to be 15-16% of revenue. On a GAAP basis we expect full year operating margin to be 7-8%.

Lastly, we are guiding 2009 operating cash flow to be between $77-82 million, flat to up 6% over 2008. CapEx will be between $12-14 million throughout 2009. As a reminder, we pay a significant amount of our annual variable compensation in the first quarter so you will recall that Q1 cash flows have historically been lower than the other quarters.

In summary, we are extremely pleased that we grew revenues, grew operating profits, grew operating cash flows, grew deferred revenues and grew backlog throughout 2008. We believe these results validate the necessity of our products to our customers and the power of our term license business model. For 2009 we plan to continue to grow revenues and operating profit and we remain focused on continuing to execute on our plans throughout 2009 and beyond.

With that let me turn the call back to Stephanie.

Stephanie DiMarco

Thank you Jim. As you have just heard we had a terrific fourth quarter to close what was the strongest year in Advent’s 25 year history. Completing the acquisition of Tamale Software, the industry’s leading research management solution was an important highlight of the fourth quarter. Advent has a long history of delivering innovative and reliable solutions to our client’s mission critical problems so Tamale was a natural fit to expand our footprint in the front office.

Even more exciting is how Tamale fits in to Advent’s overall product story. With Tamale, Advent is the only provider that offers a comprehensive work flow solution for total visibility across the firms’ most important information from ideas to positions to performance. Our clients are telling us this will significantly improve decision making and productivity. You will be hearing more about this expansion of Advent’s value proposition throughout the year.

Also in the fourth quarter Geneva and Advent portfolio exchange received top honors from Buy-Side Technology Magazine for the second consecutive year. Geneva was named best Buy-Side Portfolio accounting product and APX was named best Buy-Side Client reporting product which is a great validation of the work we continue to do and the investments we make to ensure that both of these platforms continue to meet and exceed our client’s expectations.

On the international front we continue to see strong momentum in Europe and the Middle East with several competitive wins and expansion into new countries. With over 30 clients, the Middle East has seen the largest growth in the region and we have significantly increased the size of the team there with hires across all business functions.

In addition we are pleased to announce that our Hong Kong office is now up and running. Organizationally we promoted Pete Hess to President in December. In this expanded role, Pete is responsible for worldwide marketing, sales and services for the company’s investment management, global accounts, straight through processing and Tamale’s management groups as well as our international operations. I have worked closely with Pete during his 15 years at Advent. He is a proven leader with a deep understanding of our business and I am excited about his expanded role.

Looking ahead, we expect to grow revenue, operating cash flow and earnings in 2009 as you heard from Jim. We are certainly not immune to the current market challenges. Our clients and our target markets have been significantly impacted by the market downturn. In some cases clients and prospects are choosing to hold off on new expenditures and there have been and will be firms that close their doors. However, the market dislocations are also creating various opportunities in our market.

These opportunities are coming from several areas. First, technology is one of the best levers businesses have to manage costs and increase operational efficiency in tougher times. For example, we signed a very large Geneva deal in the fourth quarter with a very large financial institution that, like all of its competitors, has been significantly impacted by the credit crisis. The firm chose to move forward with this contract because Geneva allows them to consolidate multiple systems across several business areas generating significant cost savings.

Solutions like ours that help customers save money and be more efficient continue to find buyers. In that same vein, outsourcing continues to be an area of opportunity for us. There was a lot of momentum in our outsource solutions in 2008 which drove much of the growth in backlog that Jim highlighted. The Teller Group predicts that outsourcing will continue to be an area of growth in 2009 as firms look to reduce overhead. With over 350 clients using our outsourcing services today, we are well positioned as a proven partner to meet the demand.

The current climate and the major disruptions from the Lehman collapse to the Madoff scandal have also put a spotlight on risk, transparency and compliance for institutional investors and hedge funds. These requirements drive the need for Advent’s products whether it is Geneva which enables clients to operate in a multi-prime environment or Moxy with Advent Rules Manager to handle complex trade compliance requirements or the increased security that APX delivers or the system of records for investment research that Tamale provides, Advent helps firms to achieve the compliance and visibility that today’s market conditions demand.

Also as credit oriented assets are starting to offer more attractive returns and have grown in availability a number of credit oriented shops have turned to Geneva because of our recognized leadership in accounting for distressed debt and bank debt. We had two large deals in the fourth quarter involving conversions from competitors. Those firms found that not only could Geneva best solve their problems but their old systems just couldn’t handle their business.

We believe the total population of firms investing in credit specific strategies to be well over 500 firms so we see this as a nice growth opportunity over the coming years. I am also very optimistic about our international growth. Today our international presence is relatively small at approximately 14% of revenue in 2008 but as I mentioned earlier we continue to see strong momentum in Europe and the Middle East and have expanded our international footprint with the opening of an office in Asia.

We expect that international will continue to be an important part of our growth story.

A final source of our confidence is the financial strength of our business. Over the past several years we have had enormous success selling many large multi-year contracts. Our combined deferred revenue and backlog is $305 million as of the end of 2008, up 38% from 2007. These commitments give us excellent visibility into our future revenue stream.

In building our plan for 2009, we have taken a very conservative approach on renewal rates, cancellations, new sales as well as expense growth to reflect the difficult market conditions. As our guidance reflects, we expect to grow the business in 2009 albeit at a slower growth rate. We also intend to continue to invest in the business for the long-term. The current market dynamics have certain highlights just how important our solutions are to this industry. The demands for better technology will only increase in the future.

Advent’s ability to invest through this difficult period will enable us to come out of this cycle in a very strong competitive position. In closing, I am very proud of our 2008 performance. They were extraordinary results delivered in challenging times. Our strength today is rooted in our diversity; the diversity of our clients, our products, our geographical footprint and our R&D investment. That diversity gives us the resilience to continue delivering sustainable growth over both the short and the long-term.

Thank you for joining us. I now would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Tim Fox – Deutsche Bank.

Tim Fox – Deutsche Bank

My first question is around guidance and per your comments around the environment. Can you talk a little bit about, if you can help quantify, whether the asset under management portion of your pricing is going to be significant enough headwind do you think given the fact that many of your client’s assets are down markedly over the past year? How can we think about that in relation to renewals that are coming up in 2009 as these clients sit down to negotiate their renewals?

Stephanie DiMarco

One of the things is we have been very pleased with our pricing model and the resilience of our pricing model in this period because we are not as highly correlated with assets as our customers are and some other service providers are. While we do have some correlation it is not a one-to-one correlation so as you saw in Jim’s discussion our assets under administration went down about 6% which is certainly a lot less than the market was down. The reason for that is a lot of our asset under administration contracts have minimums associated with that and so it is difficult to give you a single number but we just don’t think it is that significant in terms of the correlation with asset values.

Tim Fox – Deutsche Bank

In a related question, around pricing bands, more so on the term renewal side how much of an impact do you think the pricing band shifts might be for the term renewals that you see in 2009?

Stephanie DiMarco

Those pricing bands tend to be pretty wide so we would expect it to maybe have the same sort of impact as we have seen with assets under administration. Not that material.

Tim Fox – Deutsche Bank

Just regarding Tamale, I know we talked roughly about an annualized number there. How should we think about Tamale contribution in 2009? Obviously it is a little bit more of a discretionary spend one would imagine. Can you give us some general guidelines as to where you think that may end up for a contribution in 2009?

Stephanie DiMarco

We baked Tamale into the guidance numbers we have given. We gave specific guidance after we did the acquisition of $17-20 million in top line contribution for 2009. We expect it to be below that. That was before the market really crashed through severely and we are not going to be breaking that out specifically going forward but we have baked in the lower guidance into the overall revenue guidance. So a little bit lower than our expectations when we did the acquisition but that said we are seeing a lot of traction for Tamale. I would say that the meetings I have been in where our customers see the product they love it and we get a lot of comments about how I don’t see how I can operate my business without this. I have seen it. We think the pipelines are good. It is maybe not the best buying environment but we look at this as a very long-term part of our product strategy and we think the take up of that product is going to be excellent over time.

Tim Fox – Deutsche Bank

Lastly, on the new renewal rate that you are providing could you just give a little more color as to how that is calculated? How should we think about that 98% number? Is that suggesting that you are seeing some fall off from customers maybe just going away and maintenance going away but you are also getting some price increases? If you could just help us think about how that blended rate works and how should we think about that 98%?

Jim Cox

The reason why we moved off the old renewal rate was people were taking the 88 or 86% and they were kind of applying that to your perpetual maintenance revenue line item. That is not going to get you the right answer there. That metric was useful kind of on a relative basis. 88% or 86% probably isn’t as good as 98% or 94%. But you know all of 2007 we were at 90-94% on the old metric and we grew 2008 perpetual maintenance 7% this year. So the goal was to try and alleviate that disconnect. The simplest way to try and describe it is the same customer, same products, how did the dollars change?

So if a customer buys a new product then that is an ACV that is a new product that is not a renewal. If they renew at a higher price than the prior year you are going to get a rate greater than 100%. If they renew at a lower price it is going to be less than 100%. If they inactive the rate would be zero for that customer. Does that help? I would have to say it is not precise and so we are going to give both rates throughout the whole year so we can see how these things work out and make sure that is right. I think it is a blunt tool that should help.

Operator

The next question comes from Andrey Glukhov – Brean Murray, Carret & Co.

Andrey Glukhov – Brean Murray, Carret & Co.

Just to follow-up on Tim’s question, Stephanie you talked about the fact that your 2009 guidance actually is based in a more conservative renewal rate than you have seen historically. Can you give us a little more color on that?

Stephanie DiMarco

There is really kind of three areas where we see potential softness and we have built a pretty conservative plan. The first is renewals and cancellations. We have modeled that across our business and we have a lot of diversity in the business so the model kind of varies by customer type. So in the IMG world where we have thousands of customers we built a model that is modeling what we think the attrition rates will be. In the global accounts world I would say we are doing more specific identification and taking a look at specific accounts and seeing where there may be risk and attributing a conservative rate of potential cancellation or downgrade. It is an amalgamation of a lot of the data of the people who are on the front lines doing those renewals coming up with their best estimates of what we think it will be in 2009.

The other area where we baked in conservativism is we think perpetual licenses will be lower than they were in 2008 and historically for the last few years and also the sales environment is more challenging so we may have more softness in ACV. I identified a bunch of counter-balancing trends. I have often said that there is kind of a bull case and bear case for Advent and I think what we saw in the fourth quarter was that a lot of the reasons that people buy in a bear case came true but it is hard to predict what will happen in 2009 so to what extent those counter-balancing trends counter-balance. It is difficult for us to predict.

Andrey Glukhov – Brean Murray, Carret & Co.

If you look at your basically IMG units where APX is most applicable when we look at the number of APX transactions this quarter can you talk about what percentage of them was migrations versus new deals and arguably that is probably a little lower deal count than you would have hoped for so maybe can you talk through what you expect near-term in terms of trends in specifically the IMG business?

Peter Hess

It remains about a 50/50 split between new clients that we are adding versus migrations in terms of the units. In terms of the trends I think in our portfolio of business units the long only domestic space is I think a space that has been hit by the market pretty tough and I think you can expect a little bit slower pick up of APX, both migrations and new units. That said, Stephanie mentioned a lot of the other counter-balancing trends so I would go back to her comments. It is hard for us to predict exactly what is going to happen but there are a number of competitors out there we are focused on that we have had a lot of success converting firms off of and then the migrations it is still a very compelling offering and a lot of our clients are pipelined. I would say that our pipelines not just in IMG but across the board are really good going into 2009. The issue is really just about how quickly people are making decisions in this market. That is a little bit slower.

Andrey Glukhov – Brean Murray, Carret & Co.

Since historically executions from IMG was a little more prominent and more important for the first half of the year and the global accounts carry kind of the second half. Would you expect when you look at 2009 that the seasonality in ACV would be a little bit more back-end loaded then we observed in the last couple of years?

Peter Hess

It is tough to say. Your guess is as good as mine. We look at the overall year looking at kind of how things are going to even out. If the market starts to come back a bit towards the end of next year I think that will reflect positively for us. It is hard for us to say.

Operator

The next question comes from Sterling Auty – JP Morgan.

Sterling Auty – JP Morgan

I missed it if you said it but could you give us what the Tamale contribution was in the quarter?

Jim Cox

We didn’t give that.

Stephanie DiMarco

We won’t be breaking it out specifically going forward. It will be baked into the total guidance.

Sterling Auty – JP Morgan

Let me spin it around a different way. Relative to the original guidance that you gave what areas showed the best out performance to the original plan for the quarter?

Jim Cox

The three areas were term service deferral which was smaller than we had anticipated. Perpetual licenses held up better than we had anticipated. Those were the two main ones. Obviously with the volumes in the market some of our data revenue was good as well relative to what we had expected.

Sterling Auty – JP Morgan

Looking at the total backlog number that you gave, the $153 million, is there a duration to that or can you describe how much of that should flow into revenue during 2009?

Jim Cox

Before it flows into revenue it is going to flow into deferred revenue and so we have roughly $150 million of deferred revenue. That will flow in to 2009. Then as we invoice again for those multi-year contracts, for example and second or third year of those contracts, it will come out of backlog and flow into deferred revenue and then obviously amortize throughout.

Sterling Auty – JP Morgan

So your deferred revenue and backlog are mutually exclusive then?

Jim Cox

Yes they are.

Sterling Auty – JP Morgan

You mentioned the FX loss in other income but what was the FX impact to revenue and expenses in the quarter?

Jim Cox

Let me get back to you on that one.

Operator

The next question comes from Jonathan Maietta – Needham & Company.

Jonathan Maietta – Needham & Company

The first question I had Stephanie given your comments around increased transparency, regulations and security complexities, some of the things clients are looking for do you think in 2009 perhaps you can take market share at a greater rate from some other maybe smaller, less well financed competitors out there than versus 2008 and 2007?

Stephanie DiMarco

Absolutely. I think one of the issues in these kinds of markets is a flight to quality and Advent has a reputation for reliability, consistency and financial strength that I think steers people in our direction.

Jonathan Maietta – Needham & Company

Directionally with regard to MicroEdge is that a business that you think about as being kind of flattish in 2009? Can you grow that business a little bit? How should we think about that directionally?

Stephanie DiMarco

It has been about a 10% grower and I think that is about right for 2009.

Jonathan Maietta – Needham & Company

Jim, a couple of housekeeping items. Is the 35% a fair tax rate to use on the non-GAAP number for 2009?

Jim Cox

Yes.

Jonathan Maietta – Needham & Company

With regard to the interest and other I missed that. Could you just…

Jim Cox

$500,000 of that is foreign exchange losses and the other $100,000 is interest related to we drew down on our line of credit.

Operator

The next question comes from Gil Luria – Wedbush Morgan Securities.

Gil Luria – Wedbush Morgan Securities

I wanted to ask about first of all the renewal rates and new context for renewal is very helpful and the detail around that I think is very helpful. One of the other questions that comes up though has to do with customer counts and cancellations. I understand that would be captured in the renewal rate to the extent that when a contract comes up for renewal if there is no renewal for that customer that goes to zero. But that could give us a lagging indicator in the sense that if somebody cancels now and they already paid maintenance for the beginning of the year we would only find out about it maybe next year. Do you have a customer count, maybe broken out by Geneva and the rest of the customers and how that has changed through the year? I’m trying to get to how many customers have gone away in recent months and what the trend is for that.

Stephanie DiMarco

We don’t. That isn’t something we have broken out specifically although each year we do disclose the percentage of revenues that are coming from each customer segment and that is on our trended disclosures page. Not specific customer counts.

Gil Luria – Wedbush Morgan Securities

So you do disclose cumulative contracts signed so for Geneva that is up to 204 now. Of those 204 how many are still active customers?

Stephanie DiMarco

I don’t have that data.

Gil Luria – Wedbush Morgan Securities

A follow-up on that same vein in the revenue customers you mentioned you have an other line that was the major increase in fiscal year 2008. It went from 7% to 11%. What goes into that line?

Jim Cox

Those are some of our partnerships. Some of the people who provide data and other partnerships.

Operator

The next question comes from Kevane Wong – JMP Securities.

Kevane Wong – JMP Securities

First, on the expenses looking at product development if you take out spot comp it has been fairly flat over the last few quarters at $12 million. Is that a good quarterly run rate to expect going forward? Is that going to change for any particular reason?

Jim Cox

If you recall, we capitalized $1.1 million of product development expenses in Q4. The timing of that is lumpy, kind of when a project becomes technologically feasible between that and when it is generally available. So that will create some lumpiness quarter-to-quarter in your PD line.

Stephanie DiMarco

Then we added Tamale in Q4. So you want to factor that into your run rate.

Kevane Wong – JMP Securities

So increase it. Then also just looking at renewal rates actually just some color going forward. Obviously these are in arrears. Can you give us a little bit more color as far as what you have seen in Q4 or for January as far as renewals and what you may be seeing as far as customer response on the outlook here?

Stephanie DiMarco

We get a regular report on it and the renewals are holding up really well. So we have been pleasantly surprised. I think it just speaks to the fact that even though our customer revenues are down as a result of their ASP’s being down, our products are pretty essential to their operations. If they are in business they are going to renew their contracts.

Kevane Wong – JMP Securities

I am curious as far as pricing increase, are you having any success there? How much push back are you getting? You had some stuff that needed to come back at the list price as I recall. Can you talk about what you are seeing as far as price increases on those contracts?

Peter Hess

We are not seeing a huge amount of price increase push back. We actually I think have found a pretty good approach to it with our client base and to the extent that we are continuing to reinvest and especially in a tough market environment they depend on us. Those conversations usually come out with people usually feeling justified in paying their bills and the price increase that we put into it. That is sort of business as usual.

Operator

The next question comes from Sterling Auty – JP Morgan.

Sterling Auty – JP Morgan

You mentioned the other recurring revenue volumes helping in the fourth quarter. How should we think about that revenue line in 2009 meaning you have firms that are going out of business and headcount that is reducing, what is that line most correlated to or could just the increased volumes and the market continue to drive growth in that segment for 2009?

Stephanie DiMarco

On the income statement the line category we have is recurring revenue. It is going to be a growth period because of the outsourcing business. That is the best way to think about it. We had incremental improvement in Q4 because we had some trading revenue associated with partnerships with trading destinations but the trend for that revenue line in 2009 will be up because we have these big, multi-year outsourcing commitments that will go live.

Sterling Auty – JP Morgan

You have talked here and there about the different segments and price. You have talked about domestic only funds getting hit hardest. As you have thought about your planning process for 2009 where do you think the areas within the customer base that are going to get hit hardest and how does that match up against your opportunities to take market share from the competition?

Stephanie DiMarco

Well I would echo what Pete said that I think the long only period is going to be the softest. That said, if your Buy-Side asset manager you can right size your business fairly quickly. We have seen businesses doing that and so the advantage is it isn’t as if they have to reinvent their business models or come up with a next generation of products. They have right sized and laid off staff to the extent that they needed to so the businesses are actually probably where they need to be right now and so as the market recovers those firms recover. When that happens we actually think a lot of these deferrals and purchases then come kind of screaming back because the issue is they have laid off staff so they really need technology to be able to accommodate the growth and precisely when that happens we don’t have a crystal ball either. It is hard to predict but we are trying to manage the business so that we can navigate that well.

Operator

The next question comes from Ryan Thibodeaux – Maple Leaf Partners.

Ryan Thibodeaux – Maple Leaf Partners

Just a follow-up on the question on the revenue mix break out on other. It looks like it was about 1/3 of total revenue growth or nearly that for all of 2008. Could you just give a little more explanation on the partners? Is that like for data services with the financial times or what all is in that grouping?

Jim Cox

Unfortunately other includes a lot of things but that is the right way to think about it, those data services. I wouldn’t think of it as revenue growth there. It is mix change. Right? Does that help?

Ryan Thibodeaux – Maple Leaf Partners

Did you give a number or are you going to give a number in the future that excludes APX migrations?

Jim Cox

I think we will give just one kind of ACV number that includes migrations, includes the annual licenses that Tamale signs as well. The idea is to combine it all.

Operator

The next question comes from Tim Fox – Deutsche Bank.

Tim Fox – Deutsche Bank

I just wanted to follow-up with a couple of quick ones. You mentioned the opportunity for multi-prime. Could you help describe a little bit about dynamics there and how exactly does this move forward to multi-prime, how exactly does that affect your overall bookings?

Stephanie DiMarco

It is primarily focused in the Geneva marketplace. If you think about what happened with Lehman Brothers and in particular Lehman Brothers in London firms that were dependent on those in that firm for all of their reporting and where they had custody of all their assets were in a bad predicament. So it is really a reinforcement of the idea that asset security and diversification of trading partners. So for a lot of hedge funds they really believe they need to operate in a multi-prime environment. So that is generating demand. I would say with smaller funds historically people would go multi-prime when they got to a certain size. Now I think firms of all sizes are saying we need to be in control of our own systems and so that is what is really driving that. I don’t know Pete if you want to add anything to that.

Peter Hess

I think the effect of it is the viable universe of Advent clients in the hedge fund industry is a lot bigger now as a result of this asset security movement that is driving the multi-prime.

Tim Fox – Deutsche Bank

So essentially these hedge funds that now don’t exist with the Geneva license will now actually look to own that internally as well as using the prime broker?

Stephanie DiMarco

Right.

Tim Fox – Deutsche Bank

My second question was on the international business. We obviously know the pain that many of the U.S. funds are going through. I’m just wondering how is the international client base performing, the folks you are interacting with, and what percentage of revenues do you think they may represent for 2009? Do you see an increase on that 14%?

Stephanie DiMarco

I think the pain is pretty evenly distributed around the world and there was a lag effect but it is pretty evenly distributed. So we have the same kind of market dynamics around the world in Asia and in Europe and now in the Middle East. I think we are seeing a similar dynamic there. I think what is important about international is it is such a tiny portion of our business so we don’t have to gain a whole lot of share to start to be increasingly more meaningful. So we are coming off such a small base but even in a difficult market we expect that to continue to grow.

Tim Fox – Deutsche Bank

You do expect international to get a larger percentage of revenue this year?

Stephanie DiMarco

Yes.

Operator

The next question comes from Tom McCrohan – Janney Montgomery.

Tom McCrohan – Janney Montgomery

Just a follow-up question on international. It looks like the growth rates really held up pretty well there this quarter. From my calculation of 25% year-over-year growth and last quarter about 27%. Can you talk a little bit more, I’m sorry if you are repeating yourself, what you are seeing in the pipeline? It sounds like from your comments there is a lift there that growth rate potentially could slow although there are probably some offsets. Could you give us a sense and talk in context of the pipeline? Are you seeing any deterioration in the pipeline or activity or anything like that which would suggest the 25% growth that we saw this quarter could potentially slow?

Stephanie DiMarco

I think the macro trends are the same kind of across the business, domestically and internationally. They are just coming off of a smaller base and they have had a couple of really good years of growth and they have a lot of momentum. They have momentum in areas where our market share is so small so we expect we will continue to be able to grow our market share. The other thing is that as our product portfolio, there are two things going on; our product portfolio has greatly expanded so the opportunity set that we have is so much bigger and Tamale is a really good example. People really only change out that portfolio to accounting systems every 10 years and so we have optimized our business to be able to capture a very large share of those valuations when they occur. Tamale is a green field. A lot of firms don’t have systems. When they first see Tamale it may be hard to get a meeting initially in this environment because they say oh we are not buying anything but once we can get a meeting and show them the product they really realize that it is hard to operate without a product like that in this environment and it is such a productivity tool.

What is exciting to us is it isn’t a replacement cycle that is 10 years. So essentially the whole market is available to us. If you think about available market it really increases our available market and that is true internationally as well as domestically. It is those kinds of things we feel a little odd projecting that we think we can continue to grow the business given all the dire news but as we look at the trends in our business we really believe that we have the right solutions that people need and we will be able to continue to grow through this tough time.

Tom McCrohan – Janney Montgomery

Are you thinking at all about changing how Tamale is priced given how difficult it is out there in the market, potentially bundling it with other products or do you still expect to price that separately or not separately?

Stephanie DiMarco

Our experience is first of all I will say that for everything we sell relative to the value it produces for a firm it is a pretty small amount and I would say the same is true of Tamale. So once people see Tamale and see what it can do for them price is rarely an issue. It just isn’t that expensive relative to the time that it saves. The kind of people that use Tamale are the portfolio managers and research analysts. These are the most valuable expensive people in the firm. So their time is really valuable. So for someone to spend $70,000 or $100,000 a year for an enterprise license a year for Tamale it really price is not a big issue.

Tom McCrohan – Janney Montgomery

Is there any update you could provide us on the TIAA-CREF deal or does your initial guidance still hold at about $8-10 million of run rate revenue beginning in Q1 2010? Is that still tracking towards that?

Stephanie DiMarco

Yes and that guidance was for the combination of Fidelity and TF. So those were two big outsourcing deals that we signed and it is the combination of those two beginning in 2010.

Tom McCrohan – Janney Montgomery

Just a clarification, Jim when you were talking about, I wasn’t sure I got this right, was there a P&L impact this quarter from the cancellation of the user conference?

Jim Cox

Yes there was. It was just over $400,000 in the sales and marketing line.

Stephanie DiMarco

Our decision there was that we were concerned that people would not be able to travel because they would be cutting their budgets so we are planning an outreach program where we will be going to our customers in key cities, doing a lot of web events so we don’t want to lose the marketing impact of the conference but we want to be sensitive to the fact that people’s budgets for travel will be constrained in 2009.

Operator

We have no further questions.

Stephanie DiMarco

Thank you everyone for joining us. We will look forward to speaking to you next quarter.

Operator

Thank you. This concludes our conference call for today. You may now disconnect your lines.

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