Advent Software, Inc. Q4 2009 Earnings Call Transcript

| About: Advent Software, (ADVS)

Advent Software, Inc. (NASDAQ:ADVS)

Q4 2009 Earnings Call

February 1, 2010 5:00 pm ET

Executives

Heidi Flaherty - VP, Finance and IR

Stephanie DiMarco - CEO

Jim Cox - CFO

Peter Hess - President

Analysts

David Scharf - JMP Securities

Tim Fox - Deutsche Bank

Thomas McCrohan - Janney Montgomery Scott

Sterling Auty - JP Morgan

John Maietta - Needham & Company

Andrey Glukhov - Brean Murray

Gil Luria - Wedbush

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2009 Advent Earnings Conference Call. My name is Derrick and I will be your operator today. (Operator instructions) I would like to turn the call over to your host for today, Ms. Heidi Flaherty. Please proceed.

Heidi Flaherty

Thanks, Derrick. Good afternoon. I’m Heidi Flaherty, Vice President of Finance and Investor Relations. Thank you for joining us today for Advent’s fourth quarter 2009 earnings call. Hosting our call today are Stephanie DiMarco, Advent's Chief Executive Officer; and Jim Cox, Advent’s Chief Financial Officer. Also with us today is our President, Peter Hess.

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. 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 of unanticipated events.

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 of unanticipated events.

Additionally, unless specifically identified as discontinued operations, all of the numbers discussed relate to results from continuing operations and exclude MicroEdge.

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

On our Investor Relation’s home page, you will find an updated summary of trended operating metrics disclosed from 2005 through the fourth quarter of 2009, as well as a presentation summarizing our results.

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 had a very strong fourth quarter. Revenues from continuing operations were $66 million. New annual contract value was $9 million, up 49% from the previous quarter.

GAAP operating income from continuing operations was $6 million and non-GAAP operating income from continuing operations was $12 million.

Diluted earnings per share from continuing operations were $0.16 on a GAAP basis and $0.28 on a non-GAAP basis.

Operating cash flow from continuing ops was $21 million.

These strong results capped an excellent year for Advent. Annual revenues from continuing operations were $260 million, up 9% over 2008.

New annual contract value was $22 million. GAAP operating income from continuing operations was $28 million, up 55% year-over-year.

Diluted earnings per share from continuing operations were $0.78 on a GAAP basis and $1.23 on a non-GAAP basis, up 45% year-over-year.

Operating cash flow from continuing operations was $72 million.

The strength of our performance in 2009 is a clear testament to the must have nature of our software and services and our market leading position.

Later in the call, I will talk more about our accomplishments and highlights, but first let me turn the call over to Jim who will provide further details on the numbers.

Jim Cox

Thanks, Stephanie. During the fourth quarter, we experienced a nice up-tick in customer demand, which is evident in a few of our metrics. First, new customer acquisition. As Stephanie said, the annual contract value or ACV of our new incremental business signed in the fourth quarter was $8.9 million, a significant improvement over the first three quarters of the year.

For the second half of the year, ACV doubled over our first half performance.

Second, our renewal rate, which is based on cash corrections and therefore reported a quarter in the rears, grew to 89% in the third quarter.

On our last earnings call, we have predicted renewal rates would stay in the mid-80% range for the next few quarters. We’re obviously encouraged by both our ACV and renewal rate results and it appears that the freeze our customers have felt is beginning to thaw.

Along with the return of customer demand, we have turned to a net deferral of our new term license revenues. As a reminder, we defer all revenue on new bookings until our implementation services are completed.

In the fourth quarter, we had a net deferral of term license and professional services revenue of $500,000. Associated with this deferral, we also deferred $200,000 of expense, reducing our operating margin by half a point this quarter.

After the net deferral, revenue in the fourth quarter was $66.3 million, essentially flat compared to the fourth quarter 08.

For the full year, revenue was $260 million, representing 9% growth over 2008. We see this as good performance on absolute basis and great relative performance through a tough 2009.

That performance was helped by our growing recurring revenues. 85% of fourth quarter revenue was recurring, up from 80% in the same period last year.

One final note on revenue, we provide product and customer segment mix as a percentage of revenue on an annual basis. These metrics are shown in our trended disclosure report and our updated investor presentation, which can be found on our IR website page.

Also on an annual basis, we disclosed yearend backlog. Backlog represents contractual bookings that have not yet been invoiced. On December 31, backlog was $100 million, down from $152 million at the end of 2008.

Let me explain why it decreased. First, 2009 bookings ACD were down over 20% from 2008 and 2007. That accounts for roughly one third of the decrease.

Second, when we renew our initial three year term contracts, we generally renew for one year period. A one year renewal generates deferred revenue, but does not generate backlog. Although we will occasionally renew for another three year term, we prefer to pursue one year renewals, because an annual cycle creates a simpler renewal decision and offers us a more timely opportunity to sell to our existing customer base. This renewal effect accounts for roughly half of the decrease.

Third, we previously disclosed that the Teacraft and Fidelity contracts were five year contracts. The passage of time on these contracts accounts for the final 20% of the decrease.

Given our annual renewal strategy for our term licenses, we would expect deferred revenue to consistently increase over time, but backlog may or may not increase.

Turning to expenses and profitability, our total fourth quarter spending remain constant year-over-year Cost of revenue for the fourth quarter was $22 million down from $22.5 million in the same period last year.

Gross margin grew to 70% up from 66% in the same period last year.

Total fourth quarter operating expense was $39.7 million compared to $37.7 million in the same period last year, an increase of 5%. Within that increase, there was about $700,000 of expense related to office expansion, including $400,000 in one-time expenses related to the opening of our new Beijing office, and a $300,000 a quarter of double rent while we both occupy our existing space and build out our new space in NY and Boston.

We expect the double rent to reduce again in the third quarter once we’ve vacating our existing spaces.

On another item related to expense, you’ll notice headcount increased from the third to the fourth quarter of last year, but it is really a shift of 51 headcount from third party contractor status to employee status at our office in Beijing. This new office houses developers and product support personnel. We do not expense our expense run rate to change materially as a result of the transition from contractor to employee status.

GAAP operating income from continuing operations for the fourth quarter was $6.4 million, up slightly over the same period last year.

GAAP operating income from continuing operations for the full year was $27.9 million up $9.9 million over 2008.

GAAP net income from continuing operations was $4.3 million, down 23% from the same quarter last year due to this quarter’s 29% income tax rate. That rate compares to 2% income tax rate in the same period last year.

In the fourth quarter 2008, the research and development tax credit was approved by congress. When that occurred, we booked a full year of credit in the fourth quarter. In 2009, the effect of the tax credit was spread throughout the year. Congress had not yet approved the tax credit again in 2010, so you can expect more fluctuation in our effective tax rate based on the timing of its reinstatement next year.

Turning to our non-GAAP financial results, as a reminder, these are not meant to be considered in isolation nor as a substitute for results prepared on a GAAP basis. Please refer to the tables in our earnings release for a reconciliation of GAAP to non-GAAP financial measures.

Non-GAAP operating income from continuing operations for the fourth quarter was $11.8 million or 18% of revenue. For the full year, non-GAAP operating income from continuing operations was $51 million or 19.6% of revenue, up 39% over 2008. This represents an incremental margin of over 60%, demonstrating excellent leverage.

Non-GAAP diluted EPS was $0.28 per share for the quarter, equal to the same period last year.

Turning to the balance sheet and cash flow, our cash balance is growing. As of December 31, we had $117.6 million in cash, cash equivalents, and marketable securities. This compares to $69.2 on September 30.

The increase in cash includes just over $27 million received on October 1 from the disposition of our subsidiary.

We recorded a gain within discontinued operations of $13.6 million as a result of the MicroEdge transaction.

With our cash balances at these levels, we do not anticipate renewing our credit facility when it expires on February 14 of this year.

Total deferred revenue increased to $46.1 million on December 31, up $13 million from the $132.7 million balance on September 30, as a result of the strong bookings and renewals in the fourth quarter.

Finally, operating cash flow from continuing operations in the quarter was $20.8 million, resulting in a full year operating cash flow of $72.4 million, again, up slightly from 2008.

Turning to guidance, I will now be making forward-looking statements, so I will remind you the Safe Harbor statements in Heidi’s opening remarks. Additionally, I will remind you that this guidance reflects only our continuing operations.

In the first quarter, we expect revenue to be between $65 million and $67 million, basically flat over the same period last year. For the full year, we expect revenue to be $272 to $278 million, representing an increase of 5% to 8% over 2009.

In the same way our business model from the downturn in 2009, it will dampen our revenue and profitability growth, particularly in the beginning of 2010, because recall there is a two to three quarter lag effect between the time bookings accelerate and the time customers are implemented and we can begin to recognize revenue. Further, the higher client attrition throughout 2009 result in a full year impact of revenue on 2010.

As you will hear from Stephanie, we are seeing strong demand across all of the product areas, so we expect a much improved bookings year in 2010.

For 2010, we expect GAAP operating margin to be in the range of 11 to 12% and non-GAAP operating margin to be in the range of 20 to 21. The improved non-GAAP operating margin by4 points in 2009, two of which were from the release of revenue deferred at a relatively high margin. Even with the headwind from the term license and service deferral, we believe we can improve margin by approximately one point.

We anticipate capital expenditure in the range of $18 to $22 million in 2010. This includes the build out of our facilities in both NY and Boston. The capital required for these two build outs is approximately 12 to 14 of the guidance range.

Full-year operating cash flow guidance is between $77 and $82 million, which represents a 6 to 13% increase over 2009.

Please note that the first quarter has historically produced lower cash flows due to lower collections than our fourth quarter and the payout of annual bonuses and yearend commissions within the first quarter. We expect this pattern to repeat in the first quarter of 2010.

As you will hear from Stephanie, we are seeing strong growth in our outsourcing business. As a result, beginning in the first quarter, we will be expanding our ACV disclosure to include outsourcing bookings. At that time, we will provide disclosure of comparative results as well.

In summary, we’re pleased with our performance in the fourth quarter and for the full year 2009. In a very tough year for our end market, we drove revenues, profits, and cash flow while investing to expand our footprint and service our customers.

These results demonstrate how our financial strength and business model is truly an asset, not only to our shareholders, but to our customers as well, because they can rely upon us to innovate and respond to their needs in any and all market environments.

Now let me turn the call back to Stephanie.

Stephanie DiMarco

Thank you, Jim. As you have just heard, we achieved strong results across all of our key financial metrics in the fourth quarter, including new bookings, revenue, renewals, and operating cash flow. We saw improved demand around the world. Our sales teams are busy and our pipeline is healthy, all strong indicators that the business climate for Advent continues to improve.

ACD bookings more than doubled to approximately $15 million in the second half of 2009 from approximately $7 million in the first half.

On the customer front, we saw continued momentum in customer wins across our product portfolio. In the fourth quarter, we added 11 new Geneva customers and our product was named best portfolio accounting product for the third year in a row by Buy Side Technology magazine. We’re seeing that the needs of our clients to automate tracking and reporting and to manage counter party risk across a broad range of asset classes is more important than ever.

Geneva delivers the necessary infrastructure to tackle these challenges. The upcoming release of Geneva, which adds middle office functionality, is due out in the first half of 2010 and may be our most exciting release to date. We’ve heard clearly from the market about the importance of these capabilities and believe Geneva 80 will differentiate even more from our competitors.

The fourth quarter marked the one year anniversary of our Tamale acquisition. We continue to be very enthusiastic about this market space. Tamale has extended beyond the hedge fund market into fund-to-funds, endowments, foundations, pension plans, private equity firms, investment consultants, and asset managers. Pre-acquisition, 90% of Tamale’s revenues came from hedge funds. Now, just one year later, that percentage is 60% with the other 40% split between multi-managers and asset managers.

Our success in these diverse firms demonstrates the value Tamale brings to an investment organization. Firms that initially adopt Tamale as a nice-to-have application are realizing that it is a must-have application and a critical part of their workflow.

As one client told us recently—it’s a competitive advantage to have Tamale. How firms function without it is a mystery. In fact, a recent report by Telegroup predicted that one of the top ten trends for 2010 will be asset managers spending more on research management systems. In the fourth quarter, we have a major Tamale win in the asset manager space, including a contract with one of the largest global asset managers in the world. Our trading suite comprised of Moxy and Advent rules manager, also had a strong fourth quarter.

We saw continued customer momentum both on the domestic and international fronts and we further expanded counterparty and integration options for our customers.

Work is underway our next release of Moxy 7.0, due out in the second half of 2010. With more than 850 clients, Moxy remains the most widely used trade order management solution in the world.

APX also had a terrific fourth quarter, signing 35 locally installed contracts worldwide, a large portion of which were from Amia. Combined with our APX outsource contracts, we have sold nearly 600 APX licenses worldwide since we first released the product.

In addition, we’re pleased with the response to the limited release of APX version 3.0, a feature rich release that we expect will drive new client acquisitions as well as migrations and will come out later this year.

We took a big step forward this year with our outsourced offerings, soon to be branded as Advent on Demand. Advent now offers clients and prospects the full spectrum of delivery options, including our traditionally locally installed model and now with Advent on Demand, a fast model with hosted options ranging from hardware application managed hosting to full business process outsourcing.

In the fourth quarter, we saw continued momentum in customer wins and we’re very excited to find two large contracts to close the asset management suite.

The outsourcing business continues to gain a lot of traction and remains a very important growth market for us.

Expanding our global footprint also plays a key role in our growth strategy. In the fourth quarter, as well as for the full year, we achieved record bookings in our Amia region. We’re extremely pleased with the momentum we continue to see in Europe, the Middle East, and Asia. We see continued opportunities to grow the international business.

The stability of our business model, even in the worst market we’ve ever experienced, has proved to us the advantage of being able to continue to invest aggressively in product development during the downturn. This is a powerful competitive differentiator and key to our long-term success.

Because of our continued investment, we have a robust lineup of product releases coming out this year that we believe will further drive demand for our portfolio of products.

As we look into 2010, we’re encouraged of the resilience in many segments of the financial services industry. New firm foundation is occurring around the world, assets under management are up, and the focus for firms on operational efficiency, risk management, and a robust infrastructure are greater than they’ve ever been.

Industry analysts are expecting the economy in IT spending to improve in 2010. Although there are undeniable issues in economies around the world, our own momentum and the industry indicators offer hopeful signs on the horizon. We see the available opportunities for Advent over the long-term as many times our current size.

This year we expect to see healthy growth in bookings, as well as improvements in renewals we progress through this year.

In summary, I’m extremely proud of our fourth quarter and 2009 results. We grew revenues, profits and operating cash flow and continue to help our customers achieve their business goals while maintaining our operating discipline.

We’re making real strides in every area of the business and we’re well positioned for both the short term and the long term.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of David Scharf - JMP Securities

David Scharf - JMP Securities

What degree of referrals should we be thinking about? What’s kind of factored into that guidance range at the top line?

Jim Cox

Maybe the best way to answer that if you look back at what we did to defer back in 2008 and 2007 and we’re looking at total revenue deferrals in 2006 of $8 million, 2007 of almost $12 million, and 2008 of almost $10 million. So obviously it depends on how actual bookings play out, but that seems like the…

I misspoke when I was reading. The top end of our guidance range is 280. I believe I misspoke and said 278. Sorry about that.

David Scharf - JMP Securities

I know you only gave a margin outlook for the full year and you highlighted some of the....can you give us any thoughts about how the non-GAAP operating margin might trend throughout the year?

Jim Cox

If you remove the effect of the term service deferral, which can be 200 or 300 points easily. The other is how perpetual licenses disproportionate effect on margin in any quarter. Those are generally kind of largest in fourth quarter. Then the other element, is capitalization within product development and depends when products are in beta or not and that could be anywhere throughout the year.

David Scharf - JMP Securities

Q1, on the pricing front, when I think back to a year ago, I think you entered 2009 pretty confident in your ability to price increases on the first wave of APX, you know licenses that were up for renewal and of course reality set in and you had to back off from there. Are we back into an environment where expiring term contracts are being met with some increases or still pretty cautious environment?

Pete Hess

It’s a baseline, if we could say our pricing practices were baseline in 2008, you’re right, 2009 we definitely backed away from some of those. We certainly implemented price increases, but not to the same extent that we did in 2008.

I think 2010 will probably fall right in between the two. So we think we can do more, but at the same time, we anticipate there to continue to be some pushback and ultimately some compromise that will make the consequence, but we do see it as being better than 2009.

Operator

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

Tim Fox – Deutsche Bank

APX, obviously a very strong rebound there in bookings and you mentioned Amia was part of the driver there. I’m just wondering if you can talk about, one, if you look at the full year, what do you think the percentage of APX contracts, local or outsourced, came from upgrades just in a general percentage terms relative to competitive displacements?

Pete Hess

We had traditionally talked about there being a 50-50 split with APX units of migrations versus new client acquisition and I think that in terms of the on-site deployments, which is the number that we disclosed to you guys, it’s par for the course in the fourth quarter. So it’s about half and half.

When you look at overall APX adoption, it’s much more focused on new client acquisitions with the on demand deployment model that we talked about where the units are much higher. The firms tend to be a little bit smaller that go on the on demand offering, but when we talk about 600 firms using APX, most of those at this point came to us as new clients to Advent rather than migrations, because the volumes are so much higher in this on demand world. Does that make sense.

Tim Fox – Deutsche Bank

It does. The second question is around the strength in Amia. What is driving that adoption of APX and are you anticipating also Geneva with a new version starting to get a little more traction, particularly in the UK market?

Pete Hess

Internationally, I would say more than anything it’s pent up demand. The fourth quarter we saw domestically as well as internationally in that APX business. Where deals that we’ve been working pretty much all year long finally moved forward in the fourth quarter, helps I think that the market improved and our sales process finally got over the hump. So that to me is the biggest explanation for what happened in the fourth quarter.

Internationally, there are some nice things happening I think the buy product again. Stephanie made the point that we’ve been able to continue to invest and we have a new release of APX and a new release of Moxy coming out this year and a new release of Geneva and a new release of Tamale and they’re big substantial releases. That gives us I think a competitive step forward relative to some of the firms that maybe two years ago we would lose to, we’re now winning, and we’re really seeing that in Europe actually, specifically.

So that, to me, is kind of the Advent produced element of that acceleration of business that we saw internationally.

Stephanie DiMarco

Geneva. I can answer that. I talked about this new release that’s coming out, Geneva 8.0, and we think that’s going to be very attractive for the international market in particular and so we’re seeing a lot of interest in that from hedge funds in London and Geneva.

Tim Fox – Deutsche Bank

Guidance, obviously from a top line perspective, I’m wondering if you could talk a little bit about even directionally about how to think about the major revenue line items. Obviously there’s the term revenue going to be impacted, as Jim mentioned, because of the lower bookings number, but how should we think about other recurring revenue and professional services growth for the full year?

Jim Cox

If you look at the other recurring revenue line and jump from Q3 to Q4, we now have both the Fidelity and Teacraft contracts fully implemented and we’re recognizing revenue on those. So that was a bit of a nice bump there.

I think our strategy on professional services, although demand is going up in that area, I think our strategy in professional services is not to grow that as much as perhaps we would have back in 2006 or 2007. So we thought about that and utilized third party contractors more if you think about that line as well.

Operator

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

Thomas McCrohan - Janney Montgomery Scott

I thought the outlook was really encouraging. Was there anything in the quarter that was a surprise for the upside for you folks that gave you increased optimism?

Pete Hess

Actually, when you have a year like last year, I think we probably were positively surprised with the bookings result in the fourth quarter just because you see some of these deals take forever, you wonder if they’re ever going to close. So we actually saw most of the deals that we expected to close and some that we didn’t came through.

So I think that fuels the optimism a little bit, but the other thing that’s nice to see as well is that we’re entering 2010 with a much better pipeline than we entered in 2009. So we didn’t drain the pipe in order to produce the numbers we did in the fourth quarter. We actually built up the pipe and produced the numbers that we did in the fourth quarter.

So there’s visibility that we got there that I think gives us some confidence for the bookings environment.

Stephanie DiMarco

And then the product cycle, we’re very encouraged about, because we have all these exciting new releases coming out that we think will create competitive differentiation. Then if you think about Tamale, we acquired the company and then the market collapsed and then they sold primarily to hedge funds. So it was a tough year for Tamale, but we still had hundreds of meetings where we showed that product to lots and lots of different types of asset management organizations and we consistently got the feedback, you know, this really looks like a product that we need. And so we’re also optimistic that some of the sales cycles that maybe didn’t progress because of the marketplace and market conditions, we think will progress in 2010.

Thomas McCrohan - Janney Montgomery Scott

And you sell it alone. They don’t have to buy it bundled with another Advent product, is that right?

Yes.

Great. Do you think the mix of Geneva versus APX is going to ship much this year. Are you still looking for a similar mix in revenue by product?

Jim Cox

It will be pretty similar. We will start to sell Geneva more actively outside of the hedge fund space in 2010 to larger global asset managers. You know, the release Stephanie mentioned, Geneva is really built for that purpose and so we expect it to start to sort of diversify the Geneva portfolio a bit and that may make some changes, but by and large, it will be pretty similar.

Stephanie DiMarco

The good news is all the product areas are growing. So I would expect it to stay pretty consistent.

Thomas McCrohan - Janney Montgomery Scott

On the product road map, should we expect new versions of each of those primary products every year going forward?

Secondly, given all the change on the regulatory side, how are you guys viewing this massive regulatory swing, positive or negative?

Pete Hess

I don’t think we’ll be putting out a major release of all of our four core products every year. Typically they are on 18-24 month cycles, kind of depends on the product. This year, coincidentally, almost all of our products are having a major release, but we’re not let’s do one each year. We’re looking at it a little more conservatively.

Number two, regulatory, definitely an opportunity. It’s not good news for anybody in our business, and there are system implications to adhering to new regulations. That’s where we can prove our value to our clients. It helps with renewal rates. It helps with new client acquisitions. Sometimes vendors aren’t able to keep up and people have to switch. Those are good news items for us.

Operator

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

Sterling Auty - JP Morgan

A couple of questions. One following up on an earlier one. Can you characterize how the demand environment looked in terms of the bookings of business you were doing with existing customers versus maybe some new customer acquisitions in the quarter?

Jim Cox

It remains about 50-50. One element that’s interesting, kind of thinking of existing customers, is in Amia for the first time, historically a lot of Amia has been new customer acquisition and we finally built up a customer base in Amia now that we’re also seeing back sales from there, which is great.

Another good demand element that I witness was in the domestic market, the first quarter of this year, we had opportunities that both came in and closed within the same quarter. Those had really slowed down and those came back. So that kind of links to me that maybe those are back sales related.

Sterling Auty - JP Morgan

I want to get a better understanding. Your revenue guidance for the year is light of consensus, but how much of it may have been professional services item that you described. Maybe you could also go in and give us an idea of what the revenue contribution from like GI Fidelity, etc. I think there’s one other contract in there. Is there a timing issue maybe of when that third one comes in and the contribution, just so we can connect the dots.

Jim Cox

When I gave my prepared remarks, why we connected ACV renewal rates right into term service deferral. What we said was—look, it takes a couple three quarters between when something is booked until it’s fully implemented and running. So that has a tendency to drive that down. Although we’re seeing the demand come back, just like in the first half of 2008 we were receiving benefits from the term services. Sorry 2009, excuse me, we were seeing benefits from the term service deferral. That’s going to come back in the first half of this year.

Sterling Auty - JP Morgan

So we may have been aggressive on our side in terms of when some of the pickup would actually flow through revenue.

Jim Cox

I think so.

Sterling Auty - JP Morgan

As we think about the three year deals that are coming back up for renewal, there’s going to be a natural level of ACV as long as your renewal rates continue to be at least where they are now. S

Jim Cox

Very important thing to understand. ACV is only new and incremental business. All those renewals that are coming up every year, there’s no affect on ACV. It’s only affecting the renewal rate.

Operator

Your next question comes from the line of Andrey Glukhov – Brean Murray.

Andrey Glukhov - Brean Murray

Yes. Thanks for taking the question. You basically continue to generate a fairly healthy amount of cash. In the past, you allocate a decent portion of your cash generation to share repurchase. Where do you guys shake out on that?

Stephanie DiMarco

Andrey, we still have a million shares available that have been authorized for repurchase. So we still have an active repurchase program. We didn’t repurchase any shares last quarter, but it still is part of our strategy.

Andrey Glukhov - Brean Murray

Jim, would you say that the sum of deferred revenue and backlog at the end of 2010 should be up from 2009?

Jim Cox

Yes.

Andrey Glukhov - Brean Murray

How do you think about (?) So you think there is an opportunity to see a stepped up level of (?) as business comes back?

Pete Hess

This is Pete. The way I think of the market environment in 2010 is probably similarly the way we talked about our pricing power. It will be somewhere in between that baseline of 2008 and then the tough year last year. With respect to migrations in particular, I think we should see maybe a disproportionate improvement partially because there is pent up demand, as we said. There were a few migrations first half of 2009 and the other is APX 3.0 addresses some functional requirements that our cube client base needed us to take care of. We have about 150 clients that are active on our cube CRM system which we have sunset and are going to be encouraging them to move to APX over the next couple of years.

So that’s an event that we didn’t have in 2009 or 2008, with respect to moving people from access to APX.

Andrey Glukhov - Brean Murray

One of the things that should be an opportunity to some of your alternative asset customers, their personnel may start new ventures and presume they’re going to turn to you….are you starting to see that yet or still going to take a longer time to materialize?

Pete Hess

We did see quite a bit in 2009 of start-up activity that folks had either broken away or shut down and reopened. So it was an active year in that regard.

Those deals tend to be smaller from an ACV perspective than a replacement deal with an established institution, but from the long-term outlook it’s good news anytime you bring on these folks. So yeah, as we look into 2010, will we see the same levels of reengagement, you know, start-ups and whatnot? I don’t know for sure, but I think we’ll get a better year out of the hedge fund sector than we did in 2009.

Operator

Your next question comes from the line of John Maietta with Needham & Company.

John Maietta - Needham & Company

Stephanie, you talked about new fund formation and Pete, you just commented on it, to the extent that you’re seeing new fund formation. Are more of those firms adopting the on demand solution today as compared to a year or three years ago?

Pete Hess

The on demand service doesn’t tend to cater to the hedge fund segment as much, because underneath it is APX and so mostly our hedge fund focus is for the Geneva platform. So if you want to talk specifically about hedge fund start-ups, they are really being faced with it used to be most of the time they would just work with their prime until they got big enough, went multi-prime, and then they would bring it in-house. Now, their decision is different. The prime may not be a viable back office for them. So they’re either going to look at an Advent or a vendor like us or they’re going to look at their administrator. The administrators are stepping up their service offerings so that they can be that outsourced BPO provider for back office. That’s a big race in that industry, frankly, is to tool up to be able to provide those services.

Advent has a dual prong strategy. Number one would be to sell directly to the fund who start up and we offer Geneva and we’ve actually commercialized Geneva such that’s it’s easier for small funds to get started on it.

Then number two is that we’re working with our administrator clients to offer Geneva on an outsource basis through their service offering.

So one way or another, we’re hopefully going to benefit from this dislocation of essentially these small funds from prime. It’s not to say that primes don’t still do the back office work. They do, but not for as many funds as they used to.

John Maietta - Needham & Company

Did you notice that the duration of the sales cycle shortened at all or seeing people make decisions and actually sign off on business?

Pete Hess

Definitely in the third and fourth quarter, there was an increasing improvement in the length of sales cycles, so they were shortening. So we closed some deals that we found in the fourth quarter. We closed them in the fourth quarter and I can’t say we did that in the first or second quarter. So it was a combination of deals that started in the fourth quarter, but also deals that had started in the first quarter that came to fruition at the end of the year.

So yes, in general, I would say the sales cycles are shortening.

John Maietta - Needham & Company

Jim, the interest in other line kind of went negative for the second quarter in a row. Is that just a little bit of FX in there?

Jim Cox

There’s a little of FX in there. There’s a little of the kinds of fees we’re charged for the credit facility. That will drop off. Then obviously the yields were getting on our investment balances are pretty miniscule.

Operator

Your next question comes from the line of Gil Luria with Wedbush.

Gil Luria – Wedbush

GI and Fidelity, were they in the whole fourth quarter. Do you get those all three months in the fourth quarter?

Yes.

How big approximately a contribution was that?

Jim Cox

Do we want to share that? Roughly the increase in I’ll just call it broadly the increase in recurring line could be construed to be that.

Gil Luria – Wedbush

You mentioned the one year renewals. You starting selling the three year term, if I remember correctly, 2004-2005. At what point, have you always done one year renewals at the end of a three year term? Are all of your renewals one year renewals when you have a three year term come up?

Jim Cox

I think the way to think about it is in 2004 and 2005, the volume, those came up for renewal in 2007 and 2008. I think during that period we didn’t know. So we tried to ascertain what was the best practice. Is it the best practice to go for a three year renewal or a one year renewal and our learnings coming out of those two years were that a one year renewal was better.

There are circumstances where we will definitely go for a three year renewal. It usually has to do with how fundamentally involved the purchasing department of the customer is involved. It’s worth probably having that conversation once every three years instead of once a year.

Aside from that, we would probably prefer to move to an annual renewal.

Gil Luria – Wedbush

Since beginning of 2009, you run most of your deals on a one year basis.

Jim Cox

I would say most are on a one year basis.

Gil Luria – Wedbush

How does that impact your ability to get a price increase. Does it help you, because you get a chance every year and if you’re not revisiting all those contracts in ’09 or does it hurt, because you don’t have three years to say at the end then, it’s been three years.

Jim Cox

Obviously the sticker shock of three year pent up price increase is impactful and so that’s part of the strategy behind the one year renewal. It’s easier.

Gil Luria – Wedbush

With that in mind, this model, which is different from the model you had in previous years in terms of how often contractors get renewed. You’ve passed the trough in terms of your renewal rate. What’s your target for renewal rate as we calculate it now and then how long do you think it will take before you get to that target rate?

Jim Cox

I think we feel good for what we can see, right, so we’ve disclosed what’s in Q3 and we’ve looked into Q4. I think we think the 90’s feel better. We’ll have to continue to evaluate that and long term, it’s hard to know when long term occurs and what long term looks like, but there’s no reason to believe that we don’t return to those levels that we’ve historically seen at some point.

Stephanie DiMarco

On the term licenses, we’re still selling three and five year terms in some cases. Mostly three for new customers. It’s just on the renewal.

Gil Luria – Wedbush

I think the chart shows in Q208, you peaked at 109 in terms of obviously with those price increases in there. That’s doable within let’s say the three to five time horizon?

Three to five years, sure.

Operator

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

Sterling Auty - JP Morgan

Just two follow-up questions. So when you look at the outsource business that you’re doing, can you kind of go through. With some of the newer discussions that you’re having, what are the things that you’re most commonly seeing that they would outsource to you? And is there other outsourcers in there providing other pieces of the overall platform?

Pete Hess

It really depends on the profile of the client. Most of our on demand clients are independent advisors and a big part of what they need is the reporting piece. What they want from us is to do all the work typically. Post all the applications, prep the data, manage the data, so that they just run the reports on clean data. That’s what they want from us and there are other things that they need that we don’t provide. So plan development. You know, a lot of these guys have a financial planning practice. They’re rebalancing functions that they would ultimately like to see us add to our suite. So an element of our product strategy is to evaluate what besides just doing the reporting should we be doing for these guys and that’s under review and that’ll come out over the next couple of quarters how we grow that service.

Then you’ve got bigger institutions, billion dollar asset managements who may use our full suite and for those guys usually they don’t need you or want you to manage their data for them, but they like to manage hosting where we take care of the hardware and the application. So we launched recently a managed hosting offering, which is a subset really of what we’ve been doing with the full BPO service, but now we’re hosting all of our applications and in the fourth quarter we actually signed a couple of charter clients to get that new derivative of our on demand service up and running. We expect that to become more and more popular as time passes. Hedge firms are trying to rationalize their expense infrastructures and IT budgets

Sterling Auty - JP Morgan

Who at this point are your biggest fund administrator customers and how does the revenue model work there? In other words, how are you charging them or do they end up being just a conduit to the customer? How do you actually get paid in a fund administrator type of situation?

Jim Cox

So we get paid on a basis point model with those generally, based on the assets of administration, that they’re administering on our software platforms.

Stephanie DiMarco

If you look at, I think it’s seven of the top ten fund administrators in the world are our customers. So we have the majority of them.

Operator

At this time, I’m showing no further questions in queue. I would like to turn the call back over Ms. Stephanie DiMarco. Please proceed, maam.

Stephanie DiMarco

Thank you for listening and again, we’re very pleased with our fourth quarter results and we look forward to speaking with you next quarter. Bye-bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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