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Advent Software, Inc. (NASDAQ:ADVS)

Q1 2009 Earnings Call

April 28, 2009 5:00 pm ET

Executives

Heidi Flaherty – VP IR

Stephanie DiMarco – CFO & CEO

Jim Cox – Principal Accounting Officer

Peter Hess – President

Analysts

Sterling Auty - JPMorgan

Gil Luria - Wedbush Securities

Andrey Glukhov – Brean, Murray, Carret & Co.

Tim Fox - Deutsche Bank

Jonathan Maietta - Needham & Company

Thomas McCrohan - Janney Montgomery Scott

Justin Hughes – Philadelphia Financial

Operator

Good afternoon, at this time I would like to welcome everyone to Advent’s first quarter 2009 earnings 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 first quarter 2009 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 from New York, is our President, Peter Hess.

To begin, Stephanie will give a brief overview of the quarter 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 IR home page, you will find a presentation that summarizes our first quarter results and an updated summary of trended operating metrics. 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 2008 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 a 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 that Advent delivered a strong first quarter. Revenues were $73 million, up 18% year over year, GAAP earnings per share were $0.24 and non-GAAP earnings per share were a record $0.38.

First quarter operating cash flow was $14 million, up 51% year over year, GAAP operating margin was 14%, up 7.5 points, and non-GAAP operating margin was 21%, up eight points. Later in the call I’ll talk more about the first quarter results as well as how we view the current economic climate’s impact on our business.

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 balance sheet items, and finally guidance.

We were pleased with our revenue performance in the first quarter. Revenue as Stephanie said was $72.8 million, up 18% over the first quarter of 2008. Term license revenue was up $11.7 million over the first quarter of 2008 and was the primary growth driver as we continue to layer incremental ACV booked in previously quarters into our term revenue.

The portfolio of total revenue that is recurring has been growing consistently and is now 84%, up from 80% in the same period last year. New term license annual contract values signed this quarter was $3.3 million. The first quarter is historically our toughest bookings quarter and the economic backdrop certainly created a tough selling environment.

In general we have to work a bit longer and a bit harder to get deals signed. Having said that, we booked new business in this environment because our value proposition remains compelling to our customers.

Our initial blended renewal rate for the fourth quarter of last year was 94%, which shows a sequential reduction of 4% from the third quarter. We are finding it more difficult to increase prices on our renewals. Additionally renewal rates on initial term renewals are lower then perpetual maintenance renewals. We are evaluating this trend and believe the main reason for this difference is longer renewal negotiations that result in cash not being collected at the time of initial disclosure.

As you know our renewal rates are disclosed one quarter in arrears and are based on cash collections, so they are updated as cash continues to be collected. In the fourth quarter there was one large term renewal which has not yet been collected that if collected, could increase the rate by five percentage points.

In 2009 we have about 100 Geneva and APX term clients renewing for the first time so we will continue to monitor our experience as the year goes forward. While we experienced increased attrition in the fourth quarter, this attrition was anticipated in our full year guidance and its also worth noting at these attrition levels we still expect our term license revenue to grow in 2009 because ACV layering into our revenue exceeds the revenue impact from term attrition.

As a reminder we defer all term license and professional services revenue on new contracts until we have substantially completed the implementation service. This deferral fluctuates from quarter to quarter depending on project timelines.

In the first quarter for the first time, the revenue recognized from completed implementations exceeded the revenue deferred from projects being implemented. This resulted in an increase to revenue of $2.7 million, $2.3 million of that was in term revenue and $400,000 was in professional services revenue.

We received sign-off on several implementations and contract deliverables within the quarter, the largest of which was a prime broker project originally booked in the fourth quarter of 2007. These implementations and the revenue associated with them will contribute to our ongoing term revenue run rate.

Turning to expenses the cost of revenue for the first quarter was $22.5 million, up 14% over the same period last year. Gross margin was 69% compared to 68% in the same period last year. The increase in gross margin was principally related to the release of the term implementation deferral, partially offset by an $800,000 increase in amortization of developed technology resulting from the Tamale acquisition.

Total first quarter operating expense was $40.4 million, up 6% over the same period last year representing good expense control. Each of the line items were within normal ranges so I’ll just cover a few unusual items for you.

Capitalized product development costs reduced product development expense in the quarter by only $43,000, that compared to $220,000 in the same period last year. Capitalized software development for internal use was $800,000 in the first quarter compared to $300,000 in the same period last year.

Depreciation for the first quarter was $2.4 million, up $300,000 from the same period last year but down $500,000 from the fourth quarter as accelerated depreciation of the assets at our prior data center facility ended in November of 2008.

We recorded a tax provision of $3.2 million in the first quarter which equates to an effective tax rate of 34%. The tax rate used for non-GAAP calculations continues to be 35%.

Q1 operating income was $9.9 million, up 165% over the same period last year representing operating margin expansion from 6% to 13.5% of revenue. As I mentioned before we had a $2.7 million release from deferred revenue which contributed 4.5% to the operating margin increase.

Net income of $6.2 million was up 136% from the same quarter last year. GAAP diluted EPS was $0.24 for the first quarter compared to $0.09 in the same quarter last year.

With respect to non-GAAP earnings, I remind you of Heidi’s opening comment, non-GAAP operating income for the first quarter was $15.3 million or 21% of revenue. Non-GAAP diluted earnings per share was $0.38, up significantly over $0.19 in the same period last year.

Turning to the balance sheet, as of March 31 after repaying $10 million in debt and repurchasing $15 million in stock, we had $36 million in cash and cash equivalents. That compares to $48 million in the fourth quarter and $58 million a year ago.

DSO in the first quarter was 61 days, down five days from the first quarter of last year and down three days from the fourth quarter on good first quarter collections. We repaid $10 million of the $25 million drawn on our line of credit in the first quarter and we have also repaid another $7.5 million of that in April, leaving $7.5 million outstanding on our line of credit.

Capital additions in the first quarter were only $1.1 million, down from $4.8 million in the fourth quarter and $2.5 million in the same quarter last year. Spending is down in 2009 because we finished a number of large capital projects in the fourth quarter.

Total deferred revenue was $147 million, down $6 million from the fourth quarter and up $24 million from the same quarter last year. As mentioned earlier we released $2.7 million of deferred revenue for completed implementations and secondarily there was a decrease in Q1 perpetual maintenance renewal billing relative to Q4.

We repurchased 690,000 shares in the first quarter leaving just a million shares available for repurchase under our current authorization. The shares repurchased in the quarter had an average price of $21.13.

Operating cash flow for the first quarter was $13.9 million, up 42% on a trailing 12-month basis due in part to strong collections. Turning to guidance, I’ll now be making forward-looking statements so I’ll remind you of the Safe Harbor Statements in Heidi’s opening remarks.

In the second quarter we expect revenues to be between $68 million and $70 million. This reflects growth of 6% to 9% over the second quarter of 2008. We do not expect to have a similar revenue benefit from the term service deferral in the second quarter.

We will continue to manage expenses prudently and we are leaving full year guidance unchanged.

In summary we are extremely pleased we were able to grow revenue, operating cash flow, and expand operating margins in the first quarter of 2009. We believe these results continue to validate the necessity of our products to our customers and the resilience and stability of our term business model.

We acknowledge it’s a tough time for our end market, but we are not immune to the economic downturn with respect to new bookings and client renewals. We believe we have planned adequately to manage through these conditions and expect to be poised to capitalize when the economic recovery occurs.

Now let me turn the call back to Stephanie.

Stephanie DiMarco

Thank you Jim, as you’ve just heard the first quarter was a solid one for Advent. Our ability to grow revenues and profits even in these difficult times is a testament to the resilience of our financial model and our market leading position.

The largest contributor to revenue growth was in term license revenues. Term license revenues were up 81% over the same period last year. Term revenue will continue to be a major driver of growth as we complete the large projects in our backlog as well as sign new customers.

The visibility we have from term revenues provides us a unique advantage in this difficult economic environment. As we communicated in our guidance last quarter, we expect revenues and profits to grow in 2009. Because of this stability we’re able to continue to invest in R&D through this downturn.

This is critically important because as a result of this financial crisis the demands on our customers and our prospects are growing. We anticipate that there will be strong regulatory responses that will create new requirements.

Advent is perfectly situated to help respond to these changes with the greatest efficiency and the fewest burdens. A robust infrastructure, independence, reliability and compliance, are all requirements that will become even more mission critical in the post crisis environment.

The annual contract value of new bookings was $3.3 million. While lower then some of the records we’ve achieved in recent quarters we’re pleased to be continuing to grow our future revenue even in this difficult sales environment.

Buyers are very cautious but nonetheless our sales teams around the world are very busy. We see areas of demand that are the direct result of this financial crisis. In hedge funds moving to multiple prime brokers and firms looking to better manage their costs with improved operating efficiency.

In addition the demand for outsourcing is high and we expect the success we’re seeing here to be another strong driver of revenue growth in 2009 and beyond. In fact, we’ve invested in expanding the delivery options for our solutions as more and more firms see outsourcing as a way to take advantage of the most advanced technology while managing overhead costs.

Advent now offers clients the full continuum of choice from locally installed software to managed hosting where we host the hardware and software as a service to a fully outsourced environment complete with reporting and reconciliation services.

We signed a $1 million outsourcing deal in the first quarter and currently have more then 350 clients using our outsource services. So we’re well positioned with an established reliable offering to meet the growth in demand that we expect.

In the first quarter we released Tamale RMS 4.0, which introduced an open flexible framework that allows firms to customize the application to meet their specific research process workflow requirements.

We’re very excited about the opportunity that Tamale represents. With Tamale, Advent is the only software provider that offers clients a comprehensive workflow solution for total visibility across the firm’s most important information, from ideas to positions to performance.

We’re also seeing demand for Tamale from the fund to funds, endowments, and the foundation markets. The Madoff scandal has focused the industry on the quality and comprehensiveness of their due diligence process.

They need a system that allows them to manage their due diligence and to be prepared to present it to their investors, their consultants, and their auditors. Tamale is a perfect fit for this application and we’re seeing strong demand from the industry. Of our approximately 150 Tamale clients, only eight of those are fund to fund, so we see this as an attractive growth opportunity.

Tamale 4.0 is just the first of several significant product releases this year including updates to Geneva, APX, Moxy, Advent Rules Manager, and Advent Revenue Center. On the international front we announced in the first quarter that we surpassed 30 clients in The Middle East and we added new clients in the UK, Switzerland, and Africa.

As the international market is impacted by global turmoil we’re seeing a similar tough sales environment in EMEA. However we believe we’ll continue to grow and gain share in these regions during the downturn for many of the same reasons we’re growing the business in the US.

We’re unquestionably in a very difficult business cycle. Fortunately many of the decisions we made at Advent five years ago, the move to term licenses, the expansion of our product portfolio, and our build up of global operations are providing us a very resilient business model to weather tough times.

We expect 2009 will continue to be a difficult sales and renewal environment but we have built this into the operating plans we’re executing against and as we’ve indicated before, we intend to grow through this tough period.

The extent of the current crisis is clearly unprecedented but we still see our market opportunity at many times the current size of Advent. We believe we are well positioned to take advantage of opportunities presented by this market environment because of the resilience of our financial model, our portfolio of market leading products, and our strong execution capabilities.

We’re focused on managing the business to balance both the short-term and the long-term. The current volatility has served to highlight just how important our solutions are to this industry. We believe we will emerge an even stronger industry leader then we are today.

In summary we are pleased with our first quarter results and as I said earlier, our ability to grow revenues and profits in this environment is a clear indicator of the underlying strength of our business.

Thank you and now I’d like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sterling Auty - JPMorgan

Sterling Auty - JPMorgan

So a couple of questions, first can you characterize what the close rates were like as you went through the quarter and sales cycles and how you’re kind of managing the pipeline, meaning is the pipeline growing in terms of opportunities to offset what I would expect to be lower close rates.

Stephanie DiMarco

Well what we’re seeing is that our sales teams are very busy and the way I would characterize the environment, is its just tougher to close business so more people are delaying buying decisions. And that gives us actually quite a bit of optimism because we think there’s going to be a lot of pent up demand when the pessimism of buyers changes.

Sterling Auty - JPMorgan

Okay and would you then characterize, do you need maybe the coverage of the pipeline to be much bigger in order to hit the kind of current estimates you have out there.

[break in audio]

Stephanie DiMarco

That was interesting.

Operator

Your next question comes from the line of Gil Luria - Wedbush Securities

Gil Luria - Wedbush Securities

Just a couple of questions, first with the reduction in the renewal rate due more to customers going away or to reduced pricing.

Stephanie DiMarco

It really is a combination of all of that. Its cancellations, its some customers going away, its having less ability to capture price increases and up selling opportunities.

Gil Luria - Wedbush Securities

So then just a follow-up, could you provide any color on renewals thus far in Q2.

Jim Cox

So I think it remains holding up. I wouldn’t say that its getting better yet would be the way that I would describe it. But I think it hasn’t significantly changed. And just as a point of clarification, we reported on Q4 so next quarter we’ll report on Q1.

Operator

Your next question comes from the line of Andrey Glukhov – Brean, Murray, Carret & Co.

Andrey Glukhov – Brean, Murray, Carret & Co.

So if I look at the operating metrics, it seems to be there is a dichotomy between the performance of the two business units here, the global account sort of business unit, the Geneva sales continue to actually hold up very nicely in the deal count versus the APX sales are sort of shrinking for the first couple of quarters, do you expect the trend to continue or do you expect that to start reverting to the [mean] a little bit.

Stephanie DiMarco

I think deal counts are a little bit misleading in our model because we count every new contract as a deal and so they can be very big or very small or in between so I’m not necessarily certain that you can extrapolate a trend just simply to deal count.

Andrey Glukhov – Brean, Murray, Carret & Co.

And then on the large renewal to Q4 that got delayed that could have lifted the maintenance rate by five points, now that we are in May, did that renewal get done.

Jim Cox

We haven’t collected the cash yet, but we expect to.

Andrey Glukhov – Brean, Murray, Carret & Co.

And one other thing on the renewal rate, I think you suggested that the renewal rate on the term deals are lower then maintenance renewals if I understood that correctly, can you give us—

Jim Cox

On initial term renewals, so if you think, and so these are deals that we initially signed in 2006 that are coming up for renewal in 2009.

Andrey Glukhov – Brean, Murray, Carret & Co.

Understood, right, can you give us a sense for the discrepancy between the two, sort between sort of the maintenance renewals versus the term renewals.

Jim Cox

So I think, no, to be blunt. Sorry. I think that we’ve given enough kind of color that perpetual maintenance is better then term. And its still early, right, 2006 was one of the very first term, strong booking years for term licenses and so I think we’ll continue to watch that to see.

Andrey Glukhov – Brean, Murray, Carret & Co.

Since the revenue, since basically we had revenue come out of deferred right, and benefit the services here, shouldn’t the services margin have been positive for the quarter.

Jim Cox

Well that certainly helped on the services margin, you’re right, because that’s flowing in at a higher margin. There’s a number of factors that effect services margins, utilization, rate per hour, all of those elements and so in a tough selling environment, we’re working hard to keep people busy and so that would obviously impact margins as well.

Andrey Glukhov – Brean, Murray, Carret & Co.

So on a clean basis your services business right now is sort of operating at a loss even if we, basically if you clean out the term deferrals.

Jim Cox

I think, as its shown on the external reporting, yes, there’s some overhead in there as well that if you just look at the core businesses, they’re operating in the low teens to high single-digits as a contribution margin, and then there’s some overhead laid on top of that which would bring it down. I think that’s probably fair.

Operator

Your next question comes from the line of Tim Fox - Deutsche Bank

Tim Fox - Deutsche Bank

Question around the margin strength in the quarter and then on guidance going forward, if you could just give us a little bit of color as to why margins might stay in that 15% to 16% range for the full year given the fact that you reported such strong non-GAAP margins in Q1, are we to model pretty significant sequential decline in the next few quarters, just kind of help us think through that nice upside on gross margins in particular and what to expect for the full year going forward.

Jim Cox

I think a big contributor to those operating margins in Q1 was the release of the deferred revenue and those flow in at very high costs so even if you normalize for that we were up three points year over year.

I think as we look out to the rest of the year, I think its very early in the year to think about full year guidance and so I think the performance was strong here and I think we’re focused on cost control and cost containment. And so as we think going forward I think we would be uncomfortable to move that up because we want to balance the investment we’re making in the business for when the economy turns against the near-term operating margin benefits that we see.

Tim Fox - Deutsche Bank

So just to clarify, is that you had a net of the deferred revenue effect you had actually a three percentage point increase in Op margins clean.

Jim Cox

Right. So its not as strong as it looks, but its great, its great.

Tim Fox - Deutsche Bank

And around bookings, obviously Q1 is a tough time seasonally, I just wondering if you could talk a little bit about the pipeline, a follow-on to Sterling’s commentary. Do you think at this point we should see some sequential improvement going forward just given the seasonality and if you could talk a little bit about in terms of Tamale, how that might be performing very early here in 2009 versus your expectations.

Stephanie DiMarco

Well I think it’s the most difficult piece of the business to predict right now just because of the constraints with the end market and so you have a lot of people delaying decisions. So what we’re seeing is a lot of pipeline isn’t going away and there’s a lot of activity but getting deals done and its much more challenging and there’s much more pricing pressure just because there’s just general pricing pressure in the economy across all businesses.

So it’s the hardest thing for us to predict what the year is going to look like. I would expect it would be more back end loaded. Our years tend to be a little bit more back end loaded just because of the workflow of our customers. They tend to think about putting systems in nearer to the end of the year and on the Tamale we’re just really starting to rev up getting all the sales teams at Advent with Tamale as part of their quota and as part of their workflow and we’re seeing a real benefit of that.

So that pipeline, Tamale pipeline is growing very quickly because we’re getting the benefit of the Advent marketing engine and the sales force out there. Peter, I don’t know if there’s anything you want to add on to that.

Peter Hess

No I think you said it. I think one other place where we’re seeing a lot of interest is in the outsourcing services, so our Advent back office service, especially from the advisory market segment where there are a lot of start-ups that are occurring, ex brokers from Merrill Lynch and other firms where they’ve been merged. That creates fragmentation which is a good thing for us.

So the outsourcing service is another place I think where we’re seeing another good pipeline development.

Stephanie DiMarco

And we really believe that there’s a lot of pent up demand. I read all the trip reports that come out from our relationship managers, and a very common theme is budgets are tight, people are cautious, but when the budget opens back up, they’re going to buy A, B, C, D, E, and F.

And there’s a lot of demand from the existing customer base to upgrade to a lot of the systems that we have.

Operator

Your next question comes from the line of Jonathan Maietta - Needham & Company

Jonathan Maietta - Needham & Company

I just wanted to follow-up on the services piece, you mentioned utilization, do you have that number in the quarter or approximately.

Jim Cox

We don’t disclose that publically.

Jonathan Maietta - Needham & Company

Okay, and then I just wanted to get a sense of the tone of business given that we don’t have the volatile equity markets that we had in January and February, is it a little bit easier to book a sales meeting in this environment today then it was two or three months ago.

Stephanie DiMarco

Yes, I think that that’s a fair characterization. I ask the sales people a lot, has the environment improved and across the board I’m hearing yes, its better.

Operator

Your next question comes from the line of Thomas McCrohan - Janney Montgomery Scott

Thomas McCrohan - Janney Montgomery Scott

I had a question on the renewal rates, I was just wondering if I’m hearing you correctly, I just want to make sure I understand what you’re trying to say in regard to renewals. Where I’m coming at it from is perpetual, you pretty much went through the process for the perpetual maintenance fees this year, right, because they’re on a one year renewal. You just finished Q4, you had pretty good renewal rates, so really going forward this year, the challenge as far as how renewal rates are going to trend, they’re really a function of the term deals sold in 2006, is that kind of what you’re saying.

Jim Cox

I think, really when the renewals occur is a function of when they were initially sold. So you’re right, Q4 has historically been our strongest quarter. I would put Q2 next, the next strongest and then kind of Q1 and Q3 as lower renewal rate quarters. So I think that perpetual maintenance will continue to have the same effect, the same kind of proportion, the relative proportion on our blended rate throughout the year.

Thomas McCrohan - Janney Montgomery Scott

Said another way, what’s going to really drive the renewal rate the back half of the year, is it really perpetual maintenance or is going to be more the term renewals.

Jim Cox

So term renewals has consistently become, if you think of it kind of as a pool, we started with a very large pool of perpetual maintenance and that pool has remained relatively the same size and the pool of term renewals continues to grow and it will continue to grow throughout this year. So the relative proportion of term goes up throughout the year. That’s probably fair.

Thomas McCrohan - Janney Montgomery Scott

And did you say in your prepared remarks there’s 100 Geneva clients renewing for the first time.

Jim Cox

I said about 100 APX or Geneva clients. We think of our large term renewal clients coming up throughout the year, there’s about 100 of them.

Thomas McCrohan - Janney Montgomery Scott

Lastly, more of a margin question, if you strip out kind of the benefits from the revenue deferrals this quarter, you gave us kind of that pro forma operating margin guidance, it looks like you did a $0.30 quarter, which still was better then street expectations, so going forward how should we think about margin trends given, if you do simple math, you did 16.5% operating margins this quarter above your full year guidance, stripping out the revenue deferral. So what would the [term] and how the margin is going to trend this quarter absent revenue deferrals.

Jim Cox

I think as you think about the rest of the year, so those, we also get the negative margin impacts going forward as well. So we’ve stripped it back to a zero impact and I think when you think about term and service deferrals going forward those have generally depressed our margins. So that’s when we think about the whole year we think about that.

We also think about where we are in our cost base now and as we look out into the future what is our perpetual license going to look like going forward. What are all of these other trends that you’re seeing in our other operating metrics, what are those going to look like going forward and we think probably right now, April, it still feels pretty early for the whole year.

Thomas McCrohan - Janney Montgomery Scott

Any more color on international, its not a surprise that it seems a little more challenging outside of the United States but is there any commentary around kind of expectations for this year, was Q1 particularly weak for any reason or is there any signs that that, markets outside of the US pipeline are still strong and you still expect some strong growth in that area.

Peter Hess

I would say that the wave has sort of worked itself from the States to Europe and The Middle East and probably on about a three to six month delay so their pipeline stayed a little bit less impacted by the downturn in the market back in Q4 but now I would say that the activity levels are pretty consistent with what we’re seeing here in the States.

So I don’t know how to paint that any differently. The pipeline both for the States and in Europe I would characterize as healthy in terms of its overall size. The challenge is again just getting people to make decisions. So we’re very busy and we’re working hard to get people to a point where they’ll commit. But that’s tougher to do in this market and I would characterize the situation in Europe about the same as it is in the States.

Thomas McCrohan - Janney Montgomery Scott

In the past people have asked management a lot about kind of the exposure to hedge funds and can you just talk about your expectations for that industry in the context of how much you think that industry will contract now that we’ve kind of gotten through the hardest part of that cycle so far, and what, how would you frame out kind of revenue exposure at risk to hedge funds at this point.

Stephanie DiMarco

Well as there was a lot of focus on hedge funds really the last couple of quarters, what we’ve tried to explain to people is that we actually didn’t participate in many ways in the hedge fund bubble so between 2003 and 2008, the number of hedge funds went from about 3,000 to 11,000. And we added about 150 Geneva hedge funds and maybe 50 APX are access hedge fund clients.

So we didn’t really participate in that big bubble and that’s where a lot of the contraction has been seen. So on the margin we’re effected but we aren’t effected in the same proportion that you’ve seen the contraction in the industry and that has proven out. We’re seeing that in our renewal rates and with a number of fund closures within our customer base and so we think that will probably continue that we’ll be effected on the margin, but if the industry contracts by 50%, we don’t see a contraction in the number of our customers by 50%.

And then interestingly enough a lot of the hedge funds that never bought our system, the ones that aren’t going to go out of business, they’re looking at probably being regulated by the SEC requiring a more robust infrastructure, feeling that they were and many of them were effected by the collapse of Lehman Brothers, and those are trends that drive them to want to put an internal system in.

So we actually are going to pick up we believe, and are picking up some of those funds.

Operator

Your next question comes from the line of Justin Hughes – Philadelphia Financial

Justin Hughes – Philadelphia Financial

I’m kind of surprised about all the pricing talk and the pressure on renewal rates, on the last conference call in early February I think the exact words were pressure on pricing was not material and now it sounds like it is. I just want to make sure I’m interpreting correctly that in early February there was no pressure and now you are receiving pricing pressure.

Stephanie DiMarco

Well I think the environment is definitely deteriorated and Q1 was probably more difficult then Q4.

Justin Hughes – Philadelphia Financial

Okay so its just been very recently then.

Stephanie DiMarco

Yes.

Justin Hughes – Philadelphia Financial

Okay, and then also last quarter you gave us two definitions of renewal rates, kind of the old renewal rate was 88% given on the last quarter conference call which was one quarter lagged, and the new one was 103, what are those same numbers, I’m sorry if I missed them before.

Jim Cox

So the 94, it was last quarter it was 98% under the new renewal rate and then it became 94 in Q4. And then it was 88 in Q3 and it became 82%.

Justin Hughes – Philadelphia Financial

Do you have any early estimates on 1Q.

Jim Cox

No.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Stephanie DiMarco

Thank you everyone for joining us and we’ll speak to you next quarter.

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Source: Advent Software, Inc. Q1 2009 Earnings Call Transcript
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