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Advent Software, Inc. (NASDAQ:ADVS)

Q2 2009 Earnings Call Transcript

July 28, 2009 at 5:00 pm ET

Executives

Peter Hess - President

Stephanie DiMarco - Chief Financial Officer & Chief Executive Officer

Jim Cox - Principal Accounting Officer

Heidi Flaherty - Vice President, Investor Relations

Analysts

Tim Fox - Deutsche Bank

Thomas McCrohan - Janney Montgomery Scott

Jonathan Maietta - Needham & Company

Gil Luria - Wedbush Morgan Securities Inc.

Sterling Auty - JP Morgan

Kevane Wong - JMP Securities

Alan Dworsky - Mt. Auburn Management

Operator

Good afternoon. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to Advent Software second quarter 2009 earnings conference call. (Operator instructions) Ms. Flaherty, you may begin your call.

Heidi Flaherty

Thanks Christy and good afternoon, everyone. I am Heidi Flaherty, Vice President of Financial Planning and Investor Relations. Thank you for joining us today for Advent's second 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 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 to your questions.

On our Investor Relations home page, you will find a presentation that summarizes our second quarter results and an updated summary of trended operating metrics disclosed from 2005 to the second quarter of 2009. We hope these two documents will assist you in understanding our business.

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

We wish to caution you that such statements are just predictions that involve risks and uncertainties and that actual events or results could differ materially. We discuss a number of these business risks in detail in the Company's SEC reports, including our Quarterly Reports on Form 10-Q and our 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 would like to take this opportunity to invite you to our Annual Analyst Day event which will be held on Thursday, September 10th in New York City at the Time Warner Center from 9 am to 1 pm. In addition to presentations from our CEO and president, Stephanie and Pete, we will demonstrate new product functionality and host a client panel. Please contact me directly to register for this exiting event.

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 solid second quarter financial results. Revenues were $69.5 million, up 9% year over year. GAAP earnings were $0.31 and non-GAAP earnings per share were a record $0.38.

Second quarter operating cash flow was $22 million, GAAP operating income was up 70% year-over-year and non-GAAP operating income was up 61% year-over-year. Later in the call, I will talk more about our second quarter results as well as our perspective on the current economic climate but first, let me turn the call over to Jim who will provide further details on the financial results.

Jim Cox

Thanks Stephanie, there are five areas I will cover today; first, bookings and revenue; second, expenses and profitability; third, key balance sheet items; fourth, the plan divestiture of our MicroEdge segment and finally, updated guidance.

New term licensee annual contract value signed during the second quarter was $3.6 million, an improvement over the first quarter. While we do not immediately expect a return to bookings level of a year ago, we believe we are seeing early indicators of improved demand so far in this quarter. Revenue was $69.5 million, up 9% over the second quarter of 2008. Term license revenue was up $9.5 million over the second quarter of 2008 and was the primary growth driver as we continue to layer incremental annual contract value book in previous quarters into our term license revenue.

The portion of total revenue that is recurring has been growing consistently and is now at 86% of total revenue, up from 79% last year. As a reminder, we defer all term license and professional services revenue on new contracts until we have substantially completed the implementation services. These deferrals can fluctuate considerably from quarter to quarter depending on project timeline. In the second quarter, the revenue release from completed implementations exceeded the revenue deferred for projects being implemented increasing total revenue by $1.7 million, $800,000 to term and $900,000 to professional services.

This release from deferred revenue has only $500,000 of expense associated with it which results in an additional two points of operating margin within the quarter. Revenue from Europe, Middle East and Africa was 11% in the second quarter, down from 14% in the same period last year. This was largely a result of the dollar strengthening against the pound and the euro. While we are seeing good momentum in the international business, the effects of exchange rate have a dampening effect on the international revenue in the first half of this year. On the plus side, our international expenses are lower as well. So the net result is basically neutral to our operating margin.

Turning to our renewal rate, our initial blended renewal rate for the first quarter of this year was 85%. While we experience increased attrition in the first quarter, this attrition was anticipated in our full year guidance. The Q209 renewal rate which will be disclosed in October appears to be stabilizing so we do not expect the downward trends to continue next quarter. As a reminder, our renewal rates are disclosed one quarter in arrears and are based on cash collection so they are updated as cash continues to be collected. For example, the renewal rates disclosed in our last earnings call had since increased 5.5 points to 98% as we have continued the collection.

Turning to expense, cost of revenue for the second quarter was $21.9 million compared to $20.9 million in the same period last year. Gross margin was 69% compared to 67% in the same period last year. The increase was primarily due to the aforementioned release of deferred revenue from term implementation in this quarter while last year, the revenue deferral negatively impacted margins. This benefit to gross margin was offset by increased negative margins in our professional services business.

Total second quarter operating expense was $39 million compared to $38.1 million in the same period last year. As a result principally of additional headcount from our Tamale acquisition that occurred in the fourth quarter of last year. This increase was partially offset by our diligent headcount and other expense management. Headcount aside from the Tamale acquisition has been flat for the past four quarters. Additionally, marketing expense was down in the second quarter as we held our first virtual client conference which was very successful.

We have tightly managed discretionary spending to improve possibility during the current market condition. Each of the operating expense line items are within our normal ranges so I will just cover a few expense items that you need to know.

Capitalized cost for product development and internal use software decreased expenses by $2.1 million in the quarter that compares to a decrease in expense of $1.6 million in the same period last year. Depreciation in the second quarter was $2.4 million compared to $2.09 in the same period last year. Operating income in the second quarter was $8.6 million, up 70% over the same period last year representing operating margin expansion from 8% to 12% of revenue.

Interest and other income for the quarter was $2.2 million, down from $3.6 million in the same period last year. We received our second and final installment of the earn out related to the sale of Latent Zero resulting in a $2 million gain this quarter. The first installment occurred in the second quarter of last year and was $3.4 million. Finally, we recorded a tax provision of $2.8 million in the second quarter which equates to an effective tax rate of 26%. Tax rate used for our non-GAAP calculations continues to be 35%.

Net income was $8 million, up 9% over the same quarter last year. GAAP diluted EPS was $0.31 per share in the second quarter compared to $0.26 last year at 17% increase. With respect to non-GAAP earnings, I will remind of Heidi's opening comment, non-GAAP operating income in the second quarter was $15.1 million or 21.7% of revenue. Non-GAAP diluted EPS was $0.38 per share, up significantly over the $0.22 per share in the same period last year.

Turning to the balance sheet, as of June 30, we had $47 million in cash and cash equivalents compared with $36 million in the first quarter and $82 million a year ago. We also repaid the remaining $50 million outstanding on our line of credit in the second quarter leaving us with a zero balance. Days sales outstanding in the second quarter was 60 days, essentially flat with last quarter and a year ago period.

Capital additions in the second quarter were only $700,000, down from $1.1 million in the first quarter and down from $7.3 million in the same quarter last year. Capital spending is down in 2009 because we are not building out any of our office facilities this year.

Total deferred revenue was $148 million, up $700,000 from the first quarter and up $17 million from June 30 of last year. Operating cash flow for the quarter was $21.7 million, down 16% from the same period last year but up 8% on a trailing 12-month basis.

Turning to MicroEdge, yesterday we entered into a definitive agreement with MicroEdge business to Vista Equity Partners for approximately $30 million in cash. The transaction is subject to customer closing condition and we expect it to close early in the fourth quarter. We expect to report a gain upon disposition. MicroEdge represents approximately 10% of our revenue and 10% of our employees.

As we made the transition to a term license business model, MicroEdge's operating margins were higher than our core business. However, the core business is now growing faster and expanding its operating margins faster than the MicroEdge business. We believe it is the right time for us to redeploy our resources and sharpen our focus into the core business in an attempt to continue to accelerate our growth and profitability.

Starting with our third quarter results, MicroEdge will be reflected as a discontinued operation. Accordingly, we will classify our prior financial results to exclude MicroEdge from continuing operations for comparability. In the earnings release side, we have provided the MicroEdge segment results for the last six quarters to assist in modeling the continuing operations in the business until our third quarter results are published.

Turning to guidance, I will now be making forward-looking statements so I will remind you of the Safe Harbor Statements in Heidi’s opening remarks. Additionally, I will remind you that this guidance reflects only our continuing operation and to review prior guidance, please refer to our earning slides.

In the third quarter, we expect revenues to be between $61 million and $63 million reflecting a growth of 69% over the third quarter of 2008. Full year revenue is guided to be $28 million lower as the result of the MicroEdge sale. That results in the adjusted revenue range of $252 million to $262 million in revenue. Revenue guidance including MicroEdge would have stayed the same.

Full year GAAP and non-GAAP operating margin were originally guided to be flat with our 2008 result. We are now raising our full year GAAP operating margin guidance to 10% to 12% of revenue and non-GAAP operating margin to 18% to 20% of revenue. As for capital expenditures, we are reducing capital expenditure guidance by $4 million resulting in a range of $8 million to $10 million. Full year operating cash flow is adjusted down by $7 million for MicroEdge to an adjusted guidance range of $70 million to $75 million. However, with the $4 million reduction in CapEx guidance, free cash flow guidance has been decreased by $3 million.

In summary, we are pleased with our expanded operating margin and strong operating cash flow in the second quarter of 2009. We acknowledge it has been a tough time for our end market. However, there are early indicators of improved third quarter demand. We believe our results continue to validate the strength and stability of our term business model and the attractiveness of our product portfolio. While the second quarter was a challenging one for Advent, we controlled the things we could control and our impressive profit and cash flow results demonstrate that effort.

Now, let me turn the call back over to Stephanie.

Stephanie DiMarco

Thank you, Jim. As you have just heard, we delivered solid results from the second quarter. Revenues were up 9% and GAAP operating income was up 70%. Annual contract value of new bookings was $3.6 million, an improvement over Q1. We are pleased to be growing future revenues in this difficult sales environment.

As we have seen since the beginning of this economic downturn, our recurring revenue model and our strong market position has enabled us to continue to grow revenues and expand margins. In the second quarter, 86% of revenues were from recurring sources. Although we continue to see a fair amount of caution in terms of clients' budget, our sales teams around the world are very busy and we see improved activity in our end market.

The demand for our products continues as companies increasingly look to drive greater operational efficiency and more effectively manage risk. Our outlook for bookings for the third quarter is positive. The demand for outsourcing solutions remains strong. We now have more than 400 clients using Advent outsourcing services. We expect this momentum to continue as more and more firms look to control cost, enhance client service and lower risk by outsourcing.

In addition, we have recently expanded our outsource offering to include managed hosting so we now offer a full range of flexible outsourcing services from software service model to full business process outsourcing. New bookings from outsourcing were in excess of $1 million in Q2 and as a reminder, these bookings are not included in our new bookings number of $3.6 million. We also saw continued momentum this quarter in customer wins for Tamale, our industry leading research management solution.

Since our acquisition of Tamale in October of last year, we sold 31 Tamale contracts worldwide. Also notable are the up sells that we are seeing. It is not unusual for a single investment team at a firm to start with Tamale and then add additional investment team. We are also very encouraged by Tamale's increasing reach into market segments beyond the hedge fund market, fund of funds, endowments, foundations, pension plans, private equity firms, investment consultants and asset managers are all showing significant interest and willingness to invest in Tamale as more and more of the industry embraces research management as the best practice.

As we are seeing, there is and will continue to be an increased focus on investor confidence in this market place. Within the Advent's products suite, support for transparency, compliance and risk management is an integral part of what we do. Moxy and Advent Rules Manager help firms meet complex trade compliance requirement. APX provide multiple user security layers and audit trail. Geneva has the ability to give firms real-time views of counterparty risk, exposure reporting and addresses operational and valuation risk and Tamale provides a system of record and total visibility into the research to drive investment decision.

We are also paying close attention to what regulators are planning on a global basis so that they will be able to respond accordingly to new requirements that will affect our client and our market. Expanding our global footprint continues to be a key tenet of our growth strategy and we are pleased with the momentum that we continue to see internationally. The business climate appears to be improving and the pipeline is healthy. Our global team signed our fifth client in Saudi Arabia bringing the total number of clients in the Middle East to 32.

We also add two new clients in Asia Pacific bringing the total number of clients in that region to 27. As always, we continue to reinvest the healthy percentage of our revenues in product development and enhancement, 19% in the second quarter. Our teams are working hard on several significant product releases expected to be introduced in the second half of the year including updates in enhancements to Geneva, APX, Moxy, Advent Rules Manager, Advent Revenue Center and Tamale. We believe our ability to invest through this difficult period will enable us to come out of this cycle in an even stronger competitive position.

Underscoring our ongoing commitment to innovation, we were recognized in the second quarter with the series of industry awards including Best Technology Provider by Hedge Fund Manager Week magazine, Global Security Services Technology Vendor of the Year by ICFA magazine and Best Portfolio Management System by Waters magazine.

As Jim discussed, we announced today that we have signed the definitive agreement for the sale of our MicroEdge subsidiary to Vista Equity Partners. Although we continue to believe in the long-term potential of MicroEdge's product, we view this divestiture as a positive transaction for all parties. It will provide us with additional focus and resources to apply to our strategic core businesses and we are confident that MicroEdge's employees and customers remain in good hand.

In summary, the second quarter again demonstrated the strength of our business model and the importance of our solutions to our market. Despite the continued challenging environment, we grew revenue, profit and future revenues. In our view, the resiliency of our business during this tough economic period bodes well for the future. We believe we are well positioned as we enter the second half. The things we see driving demand, operating efficiency, cost controls, compliance, investor transparency, multi prime and risk management are all areas that played to Advent's core strength.

As we have discussed since the market downturn began in September of last year, we have seen the biggest challenges in new bookings and in renewal rates. We are definitely seeing an improvement in the environment and expect Q3 new bookings and renewal rates to be an improvement over Q2.

Thank you for joining us and I look forward to seeing many of you on September 10th at our Analyst Day in New York and now, I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tim Fox - Deutsch Bank.

Tim Fox - Deutsche Bank

First question was around guidance, just to be sure Jim, you mentioned that revenue guidance has been maintained from continuing operations. Did I hear you correctly there?

Jim Cox

Yes, Tim.

Tim Fox - Deutsche Bank

Okay so there is no change there and secondly, on the operating margin guidance, 18% to 20% from continuing ops, you obviously posted two quarters now north of that and I am just wondering what would impact that margin coming down in the second half and why would we not expect to see kind of continued strength there on the margin line?

Jim Cox

Sure Tim. So, one of the elements that the first half of the year benefited from was the releases from the term service deferral that was 2 points this quarter and about 2 points last quarter as well; and obviously, we would not plan or guide for those releases throughout the rest of the year but more fundamentally, we know there is a number of places where we want to make investments in the second half of the year specifically marketing expenses were down in the first half of the year, we are going to go out on the road and we are meeting our customers in six cities in the third quarter. That, we are going to spend money there and so we think that this guidance range provides the right balance between what we know we want to invest in on the second half of the year for our long term result against the continued good, prudent operating performance that we have done so far.

Tim Fox - Deutsche Bank

Got it, okay and second question I guess for Stephanie and for Pete, just on the demand environment, obviously bookings seem to be tough. Renewals are tough. You said you are seeing signs of an improvement. I am just wondering from a pipeline perspective, is it more just still the conversion rate that are holding you back or new opportunities slower to come to you? I just want to get a little bit of clarity on the nuances around your improved confidence in the outlook.

Peter Hess

Yes, this is Pete. The backdrop is that it is still a tough environment so in general, there are fewer placement deals taking place than we have normally seen and clients are not moving to APX as frequently and quickly as we have normally seen. So, the backdrop is that it is still tough but I think you are right, the conversion rate, the sales cycles are in process now maybe you would not have said that six months ago, or even three months ago, we got more in process. They take longer. You are not as sure you are going to convert at the end as you used to be because times change and budgets change and outlooks change.

But by and large, we are more active in talking with clients who are serious now than we have been at any other point in the year and so there does seemed to be a movement in the right direction which gives us some confidence about Q3.

Operator

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

Thomas McCrohan - Janney Montgomery Scott

I had a question on APX and hosting. It seems like this is another quarter where you are talking about demand for that product in a hosted basis and the bookings number, as you pointed out Stephanie, does not capture the APX sales. Is the unit sale number metric that you disclosed every quarter, does that capture APX sales on a hosted basis?

Stephanie DiMarco

No, not necessarily. Jim, why do not you..?

Jim Cox

Yes, that metric is on a trend to disclosure. It is only on site unit that we have for that.

Stephanie DiMarco

You might be probably talking about the 400 which is not something we disclose every quarter. Yes, the APX unit is just installed.

Thomas McCrohan - Janney Montgomery Scott

So, then looking at unit sales, the metric really does not give you necessarily a good gage for demand for the APX, is that fair to say? It is not a really good number. I mean, to say you sold 8 APX, you could have sold 20 on a hosted basis and only 8 on site, you know what I mean?

Stephanie DiMarco

Yes, you are right which is why we want to provide you the color because those operating metrics are just the installed system.

Peter Hess

Yes.

Jim Cox

We did announced something this quarter where we talked about 400 customers on APX, sorry, the way to think about it is ABOS has about 350 customers and about two-thirds of those were on APX and we have over a hundred APX customers on ABOS, if that helps.

Thomas McCrohan - Janney Montgomery Scott

Yes, I know could the press release talked about the 400, I wanted to ask you about that as well. So, you have, the 400 clients that you have on ABOS today, about 100 are APX? Is that the way to think about it?

Peter Hess

Yes.

Jim Cox

Yes.

Thomas McCrohan - Janney Montgomery Scott

Got it and the margins since that seems to be a pretty attractive solution for some of your clients in this environment, what are some of the metrics like operating margins for a hosted APX sale versus one that will be implemented on site?

Jim Cox

So, I think the tickets are generally higher for the hosted and we think of the operating margins kind of as you weigh through it all are about the same.

Thomas McCrohan - Janney Montgomery Scott

About the same, okay and just last question on renewal rate, Jim last quarter you talked about that you had 100 Geneva APX deals coming up for renewal and I guess in the remaining part of 2009, so I am just trying to say it sounds like the worse is behind you. We had a deepened renewal rate to 85%, majority which I guess are very new to this term deals that were coming up for renewal, so can you just give us some color around that? Last quarter, you talked about the negotiations were extending, but it sounds like the message I am getting are two things; one, renewal rates have dropped and they are going to improve from here and number two, the weakness you saw this quarter was mainly due to what you talked about previously which was the term deals coming up for renewals.

Jim Cox

So, I think we have some visibility so the number, the 85% that we reported just now is related to Q1 and cash collection and so we have some visibility into Q2 and what we are seeing there is it is not going to get worse. You would not draw that trend line to continue going down. That is about the level of visibility we have with respect to what we are going to announce next quarter so I am not sure I am willing to say that the worse is behind us just because we can only see so far. But from where we see, we do not see it getting worse right now.

Stephanie DiMarco

And it is important to remember that the rate is a function of a combination of things so it is term license renewals, it is also a large amount of perpetual licenses that are actually the vast majority of it and those perpetual maintenance contracts have price increases associated with them. We also do a lot of up selling traditionally with our existing customers and in this weaker demand environment, the up selling has largely gone away. So, that is affecting the rate making it not approach the 100% or be above 100% and as we will get back, we expect that will come back when the market comes back because there is pent-up demand, because historically over time, that has been a fairly consistent source of incremental recurring revenue but you just have an environment where you have a lot of cautious buyers.

So, it is a combination of all of those things that conspires to affect that maintenance renewal rate.

Thomas McCrohan - Janney Montgomery Scott

Yes, that makes sense.

Operator

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

Jonathan Maietta - Needham & Company

The first question I had, for Stephanie or Pete, it sounds like the quality of the pipeline has improved, more activity, more deals and process. Is it easier today to just get in front of a prospect or a client for a sales meeting than it was two or three months ago?

Peter Hess

Yes.

Stephanie DiMarco

Yes.

Jonathan Maietta - Needham & Company

Okay and then from a strategic standpoint as this $30 million in cash comes in, how might you deploy it? Is M&A an option? You are talking more and more about outsourcing, is M&A in the outsourcing space potentially an option, maybe you could help us trim that.

Stephanie DiMarco

Well, I do think we are thinking any differently about uses of our cash than we thought before we were going to get the $30 million. So, when we think about utilization of cash, we are always looking at potential M&A opportunities that complement our organic growth strategy and although we are not looking to grow just by buying companies and then we have been a big buyer of our stock historically so that is obviously another use of cash. So, we will continue to evaluate those opportunities.

Jonathan Maietta - Needham & Company

Got it, okay.

Stephanie DiMarco

In much the same way.

Jonathan Maietta - Needham & Company

And then just with regard to the guidance, just a couple of points of clarification. The operating cash flow guidance, free cash flow guidance, I guess that implies, it looks like you have stripped out the contribution from MicroEdge for the full year in that number.

Jim Cox

Yes, on the operating cash flow guidance, yes.

Jonathan Maietta - Needham & Company

Got you, okay. So, could you give us a sense then just to what MicroEdge's contribution had been in the first half of year in terms of cash flow?

Jim Cox

That is kind of 7.So, it is pretty even. Their fourth quarter has a little better cash flow characteristics but I think it is pretty 40% to 50% of that number is the right number or what was in the first half.

Operator

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

Gil Luria - Wedbush Morgan Securities Inc.

I just want to confirm that last point, the $7 million reduction on operating cash flow only has to do with MicroEdge who did not reduce your guidance for operating cash flow.

Jim Cox

No.

Gil Luria - Wedbush Morgan Securities Inc.

Okay, and then also revisiting something that Stephanie went into a little bit detail but I just wanted to be a little more specific. In terms of the 85% renewal, we know part of that is going to get later on but of the two main components there, price concession and attrition of customers, which weighed heavier on that number being below 100%?

Stephanie DiMarco

I do not think we have that data.

Gil Luria - Wedbush Morgan Securities Inc.

Got it and then on outsourcing as this becomes a more important part of your business, if I am correct, traditionally you do not like hosting other people data center or taking over other peoples' data centers but I think you talked a little bit about expanding that business and getting involved more in business cross outsourcing and the like, are you going to use third parties to do those kinds of things or are you going to start looking to do more of the outsourcing value chain in house?

David Peter Hess

This is Pete. I will take that one. We are not looking at getting in to the outsourcing generic, outsourcing business and hosting of client infrastructures. It really is just about our applications and today we do most of the hosting ourselves. We do have partnerships with a few other hosted providers, third party hosted providers for the Geneva product. But directionally, I do think as we gain scale with this we will start to consolidate, look for a third party partner who we can rely upon to do a lot of the actual hosting.

When we talk about BPO services like Advent Back Office Service, it will be Advent hands on the keys in terms of managing the data and providing the BPO services.

Gil Luria - Wedbush Morgan Securities Inc.

I got it. And one last question, Latent Zero, you got $2 million in the quarter?

James Cox

Two point one million, yes.

Operator

Your next question comes from the line of Sterling Auty - JP Morgan.

Sterling Auty - JP Morgan

First, going back to the renewals, can you give us a little bit a color in terms of that? I know that rate is a blended rate. You got term. You got perpetual maintenance renewals. But can you give us some color and characterization in terms of what you are seeing on the term side versus what you are seeing on the maintenance side?

James Cox

I think it is fair to say we are not seeing anything significantly different than what we have seen so where we have terms that are coming up for renewal for the first time after three years. You obviously have “pent up attrition” in that and so there is probably more attrition in those relative to an annual renewal of a term license or an annual renewal of a perpetual maintenance license. But that has not really changed too much since then.

Sterling Auty - JP Morgan

Okay. And on those 100 terms that coming up for renewal, can you give us a sense as to how they sprinkled through the years? Is it backend loaded? Is it evenly spread? How should we think about that?

James Cox

The way I think about it is to go back and look at the ’06 bookings, which is in one of the slides on the slide deck and generally you would think that Q4 has most of those. Q2 has probably second most and Q1 and Q3 have slightly less.

Sterling Auty - JP Morgan

Okay. And then going back to the comment you made on the operating margin guidance, looking at the operating margin guidance now I understand that you have got the deferred revenue release that is in there. How much of the increase if you will in the margin guidance is specifically to the release of deferred revenue versus just improvement in other areas?

James Cox

So, well, let me try to think that one through for you. Let us take Q2 as an example year-over-year, we increase 7%. Five of that 7% in Q2 was related to the relative term license deferral or release. That is just in Q2, so 2% was real in Q2.

Now, as you think about the guidance, we did not layer any of that in going forward. So, I think probably if you kept it at 2% throughout the year I think that is a fair way to think about that benefit.

Sterling Auty - JP Morgan

Okay. And then last question, just sometimes on a simple thing when you look at this MicroEdge transaction with the influx of $30 million and looking at financials that you are getting on it. Would you consider this to be an accretive deal in the first four quarters post the sale?

James Cox

MicroEdge was a good business. They had very good operating margins as well and good cash flow characteristics. What we really drove us on this, was the strategic benefits of it.

Sterling Auty - JP Morgan

Just impression, so does that mean that is neutral or dilutive to the EPS line?

Stephanie DiMarco

I think one way to think about MicroEdge is that it has been a profitable business and with positive cash flow. During the time where we were converting to a term model so that has a dampening effect on the core business profitability but over the last two years our profitability has increased and we are getting the benefit of that term model transition. We are really at the maturity of that. We are starting to see the leverage of that in the business model, in the expanding operating margins and MicroEdge is kind of staying the same and so there will be a crossover point and we could see that that crossover point was coming and exactly what quarter it would hit, I am not exactly sure but probably sometime in 2010.

So, given the fact that it is not core that it is essentially management distraction because it is a different business and a different market and because of the maturity of our term model and our expanding margins. This is really a good time for us to choose to divest of it and have a home with strategic buyer who is going to really focus on their market.

Operator

(Operators Instructions) Your next question comes from the line of Kevane Wong - JMP Securities.

Kevane Wong - JMP Securities

I guess, first, a little color, if you can. You talked about things beginning to look better as far as the environment. Is there a particular geography or client type or are you sort of seeing this start in any sort of pocket in building out? How should we think about how that improvement has been seen?

James Cox

I would say actually it is pretty much across the board. We are seeing more activity pretty much across the board. I think in the hedge fund segment, certainly the first half of the year I think it was an overacting for that community and I think that we are seeing more activity actually now from that segment in particular as the dust settles on the trauma of the earlier part of the year and the fourth quarter last year. And then also we are seeing a fair amount of activity with Tamale. So, we are gaining traction with the product but I think the research management space is starting to gain some traction which is also a great thing for us. So, that is another area that stands out as may be increasing more than others.

Kevane Wong - JMP Securities

I got you. And then here is a simple one. Can you also give us a sort of, you mentioned a bunch of product releases that are coming up. Is there a sort of schedule or you can sort of tick off on the major ones? What are really the more important product as far as near terms have impacted the numbers?

James Cox

Well, we have got a big release of APX coming out second half of this year. That is exciting that will help us move up market or help us penetrate the wealth management market further and also it makes running the outsource business even easier for us.

So, that is coming out second half of the year. That is APX 3.0 and then we have got a Moxy release that we may or may not get out this year and there is a big Geneva release that I think we are targeting for this year as well and again there is also an additional Tamale release that we are going to be launching second half of this year also.

Kevane Wong - JMP Securities

I got you. Okay. So, it sounds like the APX this year, Tamale this year, Geneva and Moxy maybe this year or maybe next year.

James Cox

Geneva definitely this year, Moxy maybe this year or maybe next year.

Operator

You have a follow up question from the line of Sterling Auty - JP Morgan.

Sterling Auty - JP Morgan

Just one quick follow up. When you talked about the outsourcing or hosting business, how should we think about the long term margin profile to that business relative to the rest of the core business?

David Peter Hess

Sure, I will comment on that. In general, it is still young enough where we are not sure what the margin of the business will be because that will be a function of the scale that we have got and still relatively young. But when you look at the incremental margin of each new relationship, as Jim stated, we target essentially the same margins that we target with onsite software delivery.

So, it will be a matter of how long, the answer to your question I guess will be a point in time dependent equation but it is on a trajectory to be great from a top line perspective because we are able to charge more and at the same time we think we can sustain the types of margins that we want on each incremental client relationship.

Operator

(Operators Instructions) Your next question comes from the line of Alan Dworsky - Mt. Auburn Management.

Alan Dworsky - Mt. Auburn Management

Jim, in your remarks about MicroEdge, you mentioned that the divestiture would enable Advent to accelerate its growth. I understand that Stephanie pointed out that there will be less distraction to top management but how would the $30 million be used to help accelerate or will it just be the used of buyback more shares to accelerate earnings in that sense or there are some other sense that will help accelerate the growth?

Stephanie DiMarco

I think the best way to think about the rationale for the divestiture is a focus on the core business and MicroEdge is a good business but it has not proven to be that synergistic with the marketplace that we address. So, when we think about how the divestiture helps Advent, it will really allow us to focus exclusively on the core business without always having to say, “Okay now. Now let us think about how, what does this mean for MicroEdge or what do we need to do for MicroEdge?” It is challenging to have a business that is not tightly coupled with the same customer sets that you are serving, the same market sets that you are serving and so we think that it will be much more valuable for shareholders long term with MicroEdge with a separate owner.

Alan Dworsky - Mt. Auburn Management

So it is not the usual $30 million in cash that is as important as the quality that you just described.

Stephanie DiMarco

Yes. We do not need the $30 million…

Alan Dworsky - Mt. Auburn Management

I know

Stephanie DiMarco

So that is not why we are doing it. We are doing it for strategic reasons.

Operator

We have no further questions at this time. I will turn it back to you for closing remarks.

Stephanie DiMarco

Great. Well, thank you everyone for joining us and we look forward to speaking with you next quarter.

Operator

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

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Source: Advent Software, Inc. Q2 2009 Earnings Call Transcript
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