Advent Software Management Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Advent Software, Inc. (ADVS)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Advent Software Earnings Conference Call. My name is Regina, and I'll be your conference operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Heidi Flaherty, Vice President of Finance and Investor Relations. Please go ahead, Heidi.

Heidi Flaherty

Thanks, Regina, and good afternoon, everyone. Thank you for joining us today for Advent's First Quarter 2013 Earnings Call. Hosting our call today are Peter Hess, Advent's Chief Executive Officer; and Jim Cox, Advent's Chief Financial Officer.

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 and the future performance of the company. 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 discussed a number of these risks in detail in the company’s SEC reports, including our quarterly forms -- reports on Form 10-Q and our 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 of 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 Reconciliations of Selected Continuing Operations: GAAP Measures to Non-GAAP Measures and Reconciliation of Projected Continuing Operations: GAAP Operating Income Percent to Non-GAAP Operating Income Percent 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 Jim.

James S. Cox

Thanks, Heidi, and welcome, everyone. With record revenue, record profitability and healthy bookings, our first quarter performance is a fantastic start to the year. We are conscious, however, that it is just the first quarter, and we know we have a lot to do both this year and beyond.

Starting with bookings. Annual contract value, or ACV, for new contracts signed during the first quarter was $8.7 million, an increase of 17% over a strong first quarter last year. We always say bookings are lumpy. And this quarter, that lumpiness came together in a good way with 2 large contracts closing in the first quarter. In addition, we were pleased to see a good global dispersion of our bookings in the first quarter with a number of contracts signed in Europe, Middle East and Africa and Asia Pacific to complement our strong North American results.

Turning to renewals. Our initially reported renewal rate in the fourth quarter, which is based on cash collections and, therefore, reported one quarter in arrears, was 91%. When all the cash is collected for the fourth quarter renewals, we expect the renewal rate to increase to the mid-90s as it has in the past. Our third quarter renewal rate has increased 2 points from the initially reported 94% to an updated 96%.

Let's turn to the financials. We had a record revenue of $92.5 million in the first quarter, an increase of 6% over the prior year. We deferred net revenues of $3.1 million in both professional services and term license for implementation projects that are not yet complete. This compares to a $400,000 deferral in the prior year. Additionally, the timing of AUA revenues in the current year increased revenue by $1 million compared to last year. After adjusting for the impact of both these items, revenue increased 9% over the prior year.

Turning to margins, expenses and profitability. Gross margin was 69.2% in the first quarter, an increase of 270 basis points over the prior year, driven by expansion in our recurring revenue gross margins as our business continues to scale. Professional services' gross margins remain an area of critical focus for us on our path to improve profitability, and we're happy to see improvement in the first quarter. After excluding the impact of the term service deferral, professional services' margins improved by 300 basis points over the prior year.

Turning to operating expense. Sales and marketing expense decreased by 7% over the prior year. This decrease is driven both by a reduction in headcount in product management and product marketing and by the transfer of certain positions from sales and marketing to product development after our reorganization. The restructuring charge in the first quarter was $2.3 million.

Once we began our reorganization efforts, we recognized more opportunities for cost saving than we had an original expected, and we achieved the savings across the entire organization. Annual run rate savings from the reorganization is now expected to be $11 million. With the reorganization now behind us, we see a number of exciting growth opportunities that we want to resource. Therefore, we expect headcount to increase going forward, and we expect to hire approximately 40 net new heads between now and the end of the year.

We're very pleased with our profitability in the quarter as GAAP operating income increased 37% over the prior year to $16.2 million. This business has the characteristics to generate tremendous operating leverage. For example, in the quarter, incremental GAAP operating margin was 79%. Non-GAAP operating income for the first quarter was $26.4 million or 28.5% of revenue, an increase of 590 basis points over the prior year. The GAAP provisional tax rate was 24% in the quarter compared to 37% in the prior year from the reinstatement of the 2012 federal R&D tax credit in the first quarter. Overall, first quarter net income increased $4.7 million to -- or 65% over the prior year, and diluted earnings per share was $0.23 with non-GAAP diluted earnings per share being $0.32, increasing 67% and 36%, respectively, over last year.

Now I'll turn to the balance sheet and cash flow. As of March 31, we had $247 million in cash, cash equivalents and marketable securities, and outstanding debt was $93 million, resulting in a net cash balance of approximately $154 million. As of March 31, deferred revenue was $177 million, down from December 31 due to seasonality, but has increased $3 million over the prior year. Operating cash flow for the quarter was $17 million, up 27% over the first quarter of 2012. With the expected increase in our cash tax rate over the next few years, we expect that those changes may impact the comparability of operating cash flow growth.

As a result, this quarter, we will begin reporting adjusted EBITDA as a supplemental non-GAAP measure to evaluate our operating performance. For the first quarter, adjusted EBITDA was $27.8 million, an increase of $4.4 million or 19% over the prior year. You can find a reconciliation of all of our non-GAAP measures in our news release.

Let me turn to guidance now. I'll be making forward-looking statements, so I'll remind you of the Safe Harbor remarks in Heidi's opening statement. In the second quarter, we expect revenue to be $93 million to $95 million, which is 4% to 6% organic growth over the second quarter of 2012. For the full year, we are increasing our guidance for GAAP and non-GAAP operating margin by 50 basis points. That makes the range for GAAP operating margins to be 18% to 18.5% and for non-GAAP, 17 -- I'm sorry, excuse me, 27.5% to 28% on the basis of our strong first quarter results.

Also, I want to reiterate what I said to you about seasonality of our profitability throughout the year last quarter. Last quarter, we explained that the second quarter will be the most profitable of 2013 because of the timing of software development capitalization. Conversely, in the third quarter, our annual client conference occurs and will be held in San Francisco, and we expect the conference to compress margins in that quarter. Finally, as we've said before, lower revenues from a large customer renewal will impact the third and fourth quarters of this year.

As our outstanding profit improvement shows, we have made a lot of progress in a short period of time. And while we continue to have a lot of work ahead of us to execute our strategy, we're as excited as ever about the opportunities ahead.

Now let me turn the call over to Pete, who's going to give us color around our first quarter performance. Pete?

David Peter F. Hess

Thank you, Jim. Welcome, everybody. Thank you for joining us today. I'd like to share some color on the quarter and how our strategy is progressing, and then we'll open the line for questions.

As you just heard, we had a great start to the year with strong bookings, profitability, renewals and cash flow. During our last 2 earnings calls, I laid out our strategy and structure going forward. Our purpose, to help our clients thrive and transform the investment management industry, is supported by our strategy, which is to be the best at what our clients expect from us, capture the global opportunity and drive operational improvements throughout our business. To this end, we changed our structure from business units to organization by function. Now that we've got the restructuring behind us and our teams are all set, we are focused on executing our strategy to continue delivering results and value to our clients and to our shareholders.

Behind our strong bookings are some great client stories. Our Geneva solution had an outstanding start to the year, adding both new clients and clients converting from Axys. For example, Gramercy Funds Management, a global emerging markets investment manager, which had been running Axys for years, will be implementing Geneva to help grow their business into the future.

Similarly, we continue to migrate asset management and wealth management clients from Axys to APX as their needs change. A long time Axys client and one of the largest full-service banks and wealth management companies in the United States is migrating to APX to enhance client service as they consolidate multiple platforms to improve operational efficiency as they reduce operational risk. Additionally, demand continues to grow for our Advent OnDemand managed hosting service with one of our largest clients deciding to outsource their APX environment to Advent.

2012 was the best year in Black Diamond's history, and Q1 marked another big step forward in Advent's journey as the leading technology provider to the advisory marketplace. It's been almost 2 years since the acquisition, and Black Diamond and the Black Diamond client base has grown over 70% in that time. It's been incredibly gratifying to see advisory firms like Welch, Hornsby, & Welch, who signed in Q1, are regularly choosing Black Diamond to bring the benefits of Advent's unrivaled experience and investment and innovation to their business.

Another highlight of the quarter is our new relationship with APG in the Netherlands where their asset management business will be working with our Geneva solutions. Known mostly for its presence in the alternative asset management market, Geneva is increasingly becoming the solution of choice for large-scale pension funds and traditional asset management firms around the globe. Other new client relationships in EMEA include a Nordic asset manager, which has selected APX and Tradex, as well as Investec, a South African asset manager that purchased Tamale to enhance their research and investment due diligence process.

In Asia Pac, firms continue to choose Geneva for its strong reputation and positive client references among what was a tight-knit alternatives investment community. We are working with our first Taiwanese client, where we will be providing Geneva and Geneva World Investor to a division of SinoPac Securities. They plan on rolling the solutions out across Asia to support both hedge funds and traditional asset management funds in the region. Other new Geneva and Geneva World Investor clients in the region include Qant Edge, a Singapore-based qualitative global macro hedge fund, and we're also working with our first Indonesian family office. Continuing on the Asia Pac update, Myriad Asset Management went live in the first quarter on Syncova for its margin management to complement their use of Geneva and Tamale.

I'm also excited about what one of the world's leading global custodians will be doing with Syncova, having signed in the first quarter our largest Syncova agreement ever. They'll work with Advent as a development partner to implement Syncova for their agency and principal lending businesses.

In other good news, I'm very proud to say for the seventh year in a row, Advent's been named one of the Best Places to Work in the Bay Area by San Francisco Business Times. We have a spectacular team at Advent, and I'm a firm believer that happy employees lead to happy clients and a stronger business.

Q1 has been a great beginning to 2013 for Advent. In 2012, we enhanced our strategy, we optimized our organizational structure and invested in the next generation of our solutions in order to help our clients win. Looking ahead, we'll continue to execute our strategy, delivering the solutions that help our clients thrive and to increase our value for you, our shareholders.

And with that, I'd like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from the line of Gil Luria with Wedbush.

Gil B. Luria - Wedbush Securities Inc., Research Division

Would you mind giving us an update in terms of the health of your customers and the health of the market for your product? It seemed -- that seemed to have taken some deterioration last year but very good results this quarter. Is that an indication that things have stabilized somewhat for that customer base?

David Peter F. Hess

Gil, this is Pete. I think we're getting about what we expected, and we expected about the same as we experienced last year in terms of the overall market environment. A lot of budgets for IT were set, as you think back to last year in the fourth quarter, where there were a lot of unknowns. And so we're not seeing a huge rebound in the market conditions. I think our first quarter was exceptionally strong, partly because bookings can be lumpy. We closed a few big deals in the first quarter. A couple of them we thought we might get in the fourth quarter of last year, they came over into the first quarter of this year. So I wouldn't read too much into the -- to a big improvement in the market environment.

Gil B. Luria - Wedbush Securities Inc., Research Division

Got it. And then without ruining it too much for the customers in September, can you give us a little bit of a preview of what to expect in terms of the product roadmap you're going to deliver at your annual conference?

David Peter F. Hess

We'll be profiling new cloud solutions. So we've talked in code about some reporting capabilities that are mobile -- of mobile application and cloud-based delivery of some of the other workflows, like reconciliation, et cetera. Those are all new products that we will be demoing and showing at the conference coming up, as well as the next versions of all of our traditional products.

Operator

Your next question is from the line of Sterling Auty of JPMorgan.

Saket Kalia - JP Morgan Chase & Co, Research Division

It's Saket here filling in for Sterling. A couple of quick questions. Pete, going on the last line of questioning, you had mentioned in the second half of last year, specifically about longer sales cycles, especially internationally. And it looked like this quarter, international had somewhat of a better quarter than even domestic. So the question is what changed this quarter?

David Peter F. Hess

Well, I think we -- those sales cycles that elongated, a lot of them closed in the first quarter. And sales cycles, as I mentioned before, they are still elongated relative to premarket crisis. And last year, in particular, internationally was difficult. So I think we're still experiencing that, but we had a good enough pipeline and the deals that we brought in, in the first quarter are examples that we're extremely competitive internationally. And there are businesses -- there's business to be done, but it is still slower than what it was a couple of years ago.

Saket Kalia - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And then on bookings, you called out the 2 contracts. It sounds like at least one of those was international. Would bookings have been up year-over-year, excluding those 2 contracts to the extent you can disclose?

David Peter F. Hess

Yes.

Saket Kalia - JP Morgan Chase & Co, Research Division

Okay, very helpful. And then, Jim, just a question on the restructuring. You noted the run rate cost savings was actually higher than you previously have guided, I think coming in at about $11 million. Last quarter, I think you said it would be about $8 million. And I think that was really hinged on headcount being down about 50 heads. It looks like you're going to be back filling much of that with about 40 net heads, I think, now planned for 2013. Are there any other areas that you're able to cut that's allowing you to sort of lower the expense run rate but still increase headcount?

James S. Cox

Sure. So, Saket, maybe I'll start -- this is Jim. I'll start and then lay that out. So you're right, those were the metrics, and we were able to cut. Once we got in and kind of evaluated things, we were able to cut further than we had originally anticipated. But -- and Pete can talk more to this as well. But really, it's also an element of rebalancing our portfolio. And so when we look at that $11 million run rate, what we're able to do is we're going to be investing in BD, we're going to be investing in net revenue-generating head. And those are generally going to be less expensive on a run rate basis than maybe some of the headcount that came out as a result of that. Pete, do you want to add?

David Peter F. Hess

Yes, I think -- what we did -- Jim talked about rebalancing the portfolio, and there were 2 aspects to that: one; reducing investment in lower-growth, lower-potential products and increasing investment in higher-potential, higher-growing products. Black Diamond is a key benefactor of that portfolio rebalancing. And when you add heads to Black Diamond, you're adding them in Jacksonville predominantly, which is a lower-cost region for us. And therefore, we're adding headcount in on an average OTE that's actually lower than the headcount that we took out of some of those lower-performing products.

Saket Kalia - JP Morgan Chase & Co, Research Division

Got it. That makes sense. And lastly, if I could slip it in, Jim, can you remind us how much more you're paying in cash taxes in 2013 compared to how much you paid in 2012?

James S. Cox

So what we've said for 2013 is about $20 million of cash tax -- I'm sorry, not $20 million, I apologize. Let me restate that, it's 20% cash taxes, and you can do the math on that number.

Operator

[Operator Instructions] Your next question is from the line of Peter Heckmann with Avondale.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

As regards to the large contract renewal that you called out last year in 10-Q, has that renewal been totally put to bed? And can you -- and if so, can you talk about -- or maybe put some parameters around what type of revenue headwind that creates for 2013?

James S. Cox

Sure, Peter. This is Jim. I'll cover this. So we're awaiting signatures on it. So we expect it to be completely put to bed imminently. With respect to the revenue headwind, it is a headwind, and I'll just reiterate what we said last quarter. That headwind is included in our revenue guidance for the year. So we're not going to be explicit about the amount, but I can just tell you it's less and that, that headwind has been incorporated into our full year guidance.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay, that's fair. And then it appears that you did not buy back any stock in the quarter. I assumed part of that was you were locked out. Any change in attitude as regards to buybacks, or just continue to look opportunistically for both M&A and buybacks?

James S. Cox

We have net cash of about $150 million on the balance sheet, when you back out the debt. And so I think that our approach going forward, it's probably fair to say that it'll be consistent with our approach in the past, which has been to buy back shares, to return that value to shareholders or to look at smaller acquisitions. And I don't think there's any change at this point in that mindset.

Operator

Ladies and gentlemen, this concludes the question-and-answer portion of today's event. I like to turn the call back over to management for any closing remarks they'd like to make.

David Peter F. Hess

Well, we appreciate everybody joining us on the call. We're really excited about the progress that we're making, and we look forward to the next call 3 months from now.

So that's it. Thank you, very much.

Operator

Ladies and gentlemen, thank you so much for your participation today. This does conclude our presentation, and you may now disconnect. Have a great day.

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