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Advent Software, Inc. (NASDAQ:ADVS)

Q4 2013 Earnings Conference Call

February 03, 2014 17:00 ET

Executives

Justin Ritchie - Director, IR

Pete Hess - CEO

Jim Cox - CFO

Analysts

Gil Luria - Wedbush Securities

Peter Heckmann - Avondale Partners

Sterling Auty - JPMorgan

Chris Donat - Sandler O'Neill

Ross MacMillan - Jefferies

Operator

Good day ladies and gentlemen and welcome to the Q4, 2013 Advent Software Earnings Conference Call. My name is Chris and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Justin Ritchie, the Senior Director of Investor Relations. Please proceed.

Justin Ritchie

Thanks, Craig. Good afternoon everyone. Within our call today are Pete Hess, Advent's Chief Executive Officer, Jim Cox, Advent’s Chief Financial Officer.

Before I turn the call over to the Pete and Jim, I want to remind you 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 our market and future events, products, strategies, financial guidance and the performance of the company. We wish to caution you that such statements are just predictions that involve assumptions, risks and uncertainties, and that actual events or results could differ materially. We’ve discussed a number of these risks in detail in our company's SEC reports, including our quarterly 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 assumptions, 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 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. For a reconciliation of GAAP to non-GAAP financial measures, please refer to the tabs entitled Reconciliation of Selected Continuing Operations' GAAP Measures to Non-GAAP Measures and Reconciliation of Projected Continuing Operations' GAAP Operating Income Percentage to Non-GAAP Operating Income Percentage in our earnings release, which is filed with the SEC on a Form 8-K and available on our website.

And I will turn the call over to Pete.

Pete Hess

Thanks Justin and welcome everybody and thanks for joining us this afternoon. We’re pleased with our fourth quarter performance and with the team delivering a solid finish to a very important year for Advent Software. In the quarter we saw consistent profitability, very strong renewal rates and validations that our long term strategy is on the right track. We had a lot to be proud of in 2013 and I would like to review some highlights. First we mark Advent’s 30th anniversary by rebranding the company to bring innovation from a hidden to very visible asset of the company. We completed the program we began in 2012 to restructure and realign the company, merging our business and regional organizations together into a global functional structure. This has allowed us to move faster and consolidate investments in product development to be the best at what our clients expect. A positive byproduct of the reorganization has been increased operational efficiency which has contributed to over 600 basis points in non-GAAP operating margin improvement for the year. Basically we’re leaner and we’re faster.

Finally fulfilling our promise to focus on shareholder value we realigned our capital structure, issued a $9 special dividend and bought back approximately $41 million in shares.

Turning to Q4, our focus on profitability led to solid operating profit and cash flow leveraging a record revenue quarter. We’re very pleased with the initial 97% renewal rate for Q3 which we expect to increase in the same vein as the lift in Q2 renewals which increased from 92% to 94%.

We’re also encouraged with the progress in improving the financial contribution from our professional services practice which was profitable in Q4. This has been a priority throughout the year and we remain focused on making professional services profitable for the full year in 2014.

Turning to Annual Contract Value, I would like to provide context to our $8.8 million result. At the Advent Client Conference in September we announced that in the second half of 2014 we would launch Advent Direct ramping up availability across our client base. We made this announcement in Q3 of last year to generate demand for our Advent Direct beta program, to help our clients better plan for the future and to reduce client attrition to alternative cloud based providers. As I mentioned on our last earnings call we expected the Advent Direct news would slow migrations from Axys. As it turned out in the fourth quarter we did approximately 2 million in ACV less from migrations than we did in Q4 of 2012. On the flip side we saw a much improved renewal rate for Q3 on a year-over-year basis yielding us approximately $2 million in additional pure profit run-rate going into 2014. In summary the softness in Q4 ACV was in client sales and mostly due to reduced migration sales.

Both our client and prospect pipelines are strong as we enter 2014 and we believe the slowing of migrations is a temporary consequence of exciting new cloud delivered offerings that will drive growth once launched in the second half of the year until then we expect continued softness in the Axys to APX and Black Diamond migrations portion of our bookings portfolio. Keep in mind now our ultimate goal is to grow the long term recurring revenue of the company.

Going forward we will continue to leverage our existing upfront commitment, term commercial model and direct sales force but we will also increasingly leverage new commercial models and distribution channels to accelerate our growth. In light of these comments on how our business is evolving we believe ACV will become less relevant as a leading indicator of Advent’s future growth. As such we would like to introduce a new metric which we will provide on a quarterly basis annualized recurring run-rate which includes not only the effects of ACV but also renewals, basis point revenue share agreements and other revenue not included in ACV.

Jim will provide more color on this metric and give you some historical perspective on results. Our priority as a management team is to continually enhance the health of the business so we end up asking ourselves the following questions: Are we winning where we’re trying to be the best? Are we becoming more valuable to our clients? And third, are our clients increasingly satisfied with Advent?

I can say with confidence that the answer to each is yes. We have already discussed the high renewal rates which reflect our client satisfaction so let me briefly share some examples of success this quarter in winning new customers and expanding relationships with existing customers around the globe. We’re particularly pleased to have added Nordea Bank, the largest financial institution in Northern Europe as a Tamale customer, where Advent is helping improve efficiencies, managing their research process. Another key international win for Geneva is SMT Fund Services, a fund administrator based in Ireland and part of the Sumitomo Mitsui Bank Group based in Japan. We also expanded our relationship with Bankdata in Denmark who will be migrating from Axys to Geneva to better serve their clients.

In the U.S. McGladrey Wealth Management became a Black Diamond client. McGladrey with $5 billion in assets under management, provides investment advisory services, financial planning and other wealth management services to individuals and businesses. They were looking for a technology partner that could support their growth by providing higher quality data, robust integration with their custodians and complementary systems providers and better asset gathering tools for their advisors. A key differentiator for Advent in the McGladrey opportunity was Black Diamond’s rebalancing functionality that was launched in early 2013.

Lastly Bank of New York Mellon’s Pershing client brokerage business, an existing Geneva client, added Syncova Finance to increase transparency around fee calculations and create flexibility to offer a tiered service model to their client base. The Advent Direct roll-out is progressing as planned as beta deployments are providing terrific feedback. We continue to add beta clients and in parallel prepare for launch in the second half of the year. We’re confident Advent Direct will be a real differentiator to help us win new business as well as grow wallet share with our current customers. We will provide progress and updates on Advent Direct as we move through the year.

Now Jim will share more detail on Q4 and give specific detail around the new metric and then I will provide some color around our outlook for 2014 before we take questions.

Jim Cox

Thanks Pete. Good afternoon everybody. I plan to cover three areas during the call today. First, I will cover fourth quarter and full year 2013 results. Second, I will discuss the metric we will be introducing at this time, annualized recurring run-rate, and lastly I will cover 2014 guidance.

Turning to fourth quarter and full year operating results, we had record revenue of $97.6 million in the fourth quarter, an increase of 6% over the prior year driven by our strong renewal and growth in our Black Diamond business. For the full year revenue was a record $383 million which represent 7% growth over 2012. In 2013 we focused on returning our Professional Services practice to profitability and I’m very pleased to say that we achieved an important milestone. The Professional Service practice was profitable in the fourth quarter.

We were able to achieve these results through rationalization of resources across the globe, better billable utilization of resources and increased discipline in sales and services execution. Going forward for 2014 we believe Professional Service’s performance may vary between profit and loss in any specific quarter but we expect the practice to be profitable for the full year.

Switching to margins and expenses. Gross margin was 70.2% in the fourth quarter a 220 basis point increase over the fourth quarter of last year driven largely by improved profitability in Professional Services.

For the full year gross margins improved 294 basis points over 2012. As we look forward we continue to see opportunities for gross margin expansion through the continued improvement in Professional Services and greater efficiency in our global support organization. We’re achieving greater efficiency in our global support practice by creating better linkage between our team through technology and better leveraging our lower cost geography including adding to our team in Jacksonville, Florida and engaging our [first] [ph] team in Manchester.

In the fourth quarter 2013 as expected sales and marketing expenses increased as we invested in the implementation of the new Advent brands and some of the development at least [ph]. General and administrative expenses increased as a result of consulting engagements that we undertook in the fourth quarter to improve our commercialization strategy, sales effectiveness and professional services practice. GAAP operating income for the fourth quarter was $18.4 million or 18.9% of revenue and included a restructuring charge of $811,000 related to severance and exit cost for Advent Norway offer.

Interest and other expense in the fourth quarter was $2.6 million compared to $515,000 in the same period last year reflecting the larger outstanding debt balance during the quarter. GAAP earnings per share were $0.20 in the fourth quarter representing a 32% increase over the fourth quarter 2012.

Now I will turn to non-GAAP results. Non-GAAP operating income for the fourth quarter was $28.9 million or 29.6% of revenue. For the full year non-GAAP operating income was a record $115.3 million or 30.1% of revenue an increase of over $30 million or 36% growth over the prior year. Non-GAAP earnings per share was $0.32 in the fourth quarter which represents a 5% increase over the fourth quarter of 2012. Non-GAAP earnings per share were a $1.32 for the year a 28% increase over 2012.

Turning to the balance sheet and cash flow, operating cash flow for the quarter were a record at $36.7 million, for the year outstanding operating cash flow which was outstanding was $98.6 million up 14% over 2012. For the full year recollected over $400 million from customers but strong collections enabled us to pay down $45 million of debt within the fourth quarter, as a result outstanding debt was $305 million at year end. At December 31, our leverage ratio was below three times leverage at 2.8 times. When our leverage ratio falls between 2.5 and 3 times our debt interest rate decreases by 50 basis points to LIBOR up a 175 basis points.

Deferred revenue as of the end of the year totaled $194 million compared to a $183 million at the end of 2012. Backlog increased year-over-year from a $129 million in 2012 to a $165 million this year due largely to the 5 year renewal of a large customer agreement as well we have seen an increase in multi-year contract renewals in our term business. We don’t manage our business to maximize backlog or deferred revenue, but these amounts provide further evidence of the visibility and resilience of our business. Speaking of the resilience of our business we believe that a key driver in the long term value of our business is growth in our recurring revenues. Therefore we want to introduce a metric that we expect will better align with the measurement of our recurring revenue.

In the past we have provided industries with operating metric including annual contract value or ACV in wallet terms and renewal rates in percentage terms. These are very useful metrics to provide an understanding that a demand environment, the competiveness of our solutions and health of our customer base. We will continue to provide those metrics throughout 2014. However those metrics do not capture all of the changes within our recurring revenue stream of certain product distribution method and commercial arrangements that we expect to increasingly leverage going forward are not reflected in these metrics. Therefore as Pete said for introducing a metric annualized recurring run-rate.

The metric is the annualized run-rate of all of our contracted recurring revenue streams as of a point in time and we will report this metric at the end of each quarter. The metric includes the combined effects of ACV renewals and the existing run-rate of recurring revenues into a single dollar term metric. In our earnings slides we have provided the last eight quarters of annualized recurring run-rate. As of December 31, 2013 there was $359 million a 5% increase over December 2012.

Now let’s turn to 2014 guidance. In the first quarter we expect revenues to be between $95 million and $97 million which is 3% to 5% organic growth over the first quarter of 2013.

For the full year we expect revenue to be between $395 million and $403 million. Remember that we continue to have a drag on revenue growth in the first and second quarters of 2014 from the step down in revenue in the July 1, 2013 contract renewal at our largest clients. For 2014 we’re guiding full year GAAP operating margins to be in the range of 21% to 21.5% and a non-GAAP operating margin to be in a range of 31% to 31.5% which represents margin expansion of 90 to a 140 basis point over 2013. We expect profit margins to increase throughout 2014 with the fourth quarter being our most profitable. We also expect most of the margin expansion will come through improved profitability in Professional Services and increased efficiency in our support organization. We will see increased investment and product development and sales and marketing as we prepare for the commercial launch of Advent Direct in the second half of the year.

With the R&D tax credit expiring in 2014 we expect the GAAP provisional tax rate to be about 40% in the first quarter of 2014 unless the Federal R&D credit is renewed within the quarter. Over the entire year we expect the provisional tax rate to range from 35% to 40%.

We expect full year operating cash flow in 2014 to be between a 105 million and 115 million which represents an increase of 7% to 17% over 2013. Please note that the first quarter produces lower cash flows due to seasonally lower billings coupled with a payout of annual bonuses in the first quarter and as it's evidenced by this last fourth quarter the fourth quarter is seasonally our highest cash flow quarter. We anticipate capital expenditures to be in the range of $8 million to $11 million in 2014, this is slightly higher than 2013 as it includes our normal rate of CapEx plus investments to build out our Beijing and Jacksonville offices.

Now I will hand the call back to Pete.

Pete Hess

Thank you Jim. So you’ve just heard Advent has eclipsed many important milestones over the last year and that we’re very excited about the strategy we have chosen and the path forward in 2014. The industry trends we have talked about will again be the story this year. The impact of regulation, globalization of wealth the evolution of our customers’ needs as they introduce new lines of business and the need for increased technology especially the cloud to take advantage of all of these changes. We have the products and the team to help our clients turn these trends into opportunities. Now our focus is on executing to complement the market leading solutions that serve as our foundation with next generation cloud solutions to further help our clients throughout [ph].

As Jim just outlined in his guidance we recognize and are ready to meet the challenges ahead but we have a solid pipeline and confidence in the team’s ability to work through this transition. In the meantime we continue to commit to growing profitably as we lead the innovation that will help our clients, employees, and investors thrive. We have never been more energized about the opportunity ahead for Advent and look forward to sharing our progress with you. And with that we will open up the phone for questions.

Question-and-Answer Session

Operator

(Operator Instructions). All right, so it looks like you do have a few questions. Your first question comes from the line of Gil Luria with Wedbush Securities. Please proceed.

Gil Luria - Wedbush Securities

First of all, in terms of the overall health of your customer base obviously last couple of days notwithstanding, did the budgeting process for your customers how did that go in the fourth quarter based on the year they had last year? Are those conversations leading to some of the higher renewal rates as well? What’s the overall temperature on your customer base right now?

Pete Hess

I think it's good, I mean compared to a year ago I like where we sit. You’re right, the last few weeks notwithstanding with the market but the anecdotal evidence that I’ve is that people are looking at making investments in 2014 and our prospect pipeline in particular reflects that. So we feel pretty good, and EMEA as well, you know that region I think people are feeling pretty optimistic about relative to last year. So it's good news.

Gil Luria - Wedbush Securities

And then can we revisit - you talked about this at your Analyst Day, the timeline for the financial impact of the Advent Direct roll-out, if you do go live with some customers in the second half of the year is it, will you have some revenue recognition already in the second half of this year with some customers going live on the hosted solution or is that when you’re just going to start some of the implementations that will go live in calendar ’15?

Jim Cox

The way we’re thinking about Advent Direct with respect to 2014 is that there is very little revenue from Advent Direct in 2014. Really the revenue impact that you’re going to see from Advent Direct is going to come in 2015.

Gil Luria - Wedbush Securities

And then just a quick follow-up Jim, cash tax rate for 2014?

Jim Cox

Yeah, for 2014 we’re confident that it will be about 20%, total tax.

Operator

Your next question comes from the line of Peter Heckmann with Avondale Partners. Please proceed.

Peter Heckmann - Avondale Partners

Could you give a little color as to you mentioned EMEA should be better, but could you talk about some of the trends that you saw from the international business as regards you called out several what sounded like larger deals but would you say that international was flattish from a ACV perspective in the second half of 2013? Did you see better trends? Can you talk about that a little bit?

Pete Hess

Yeah, in EMEA specifically we had our best bookings year ever which was I have to say it was a nice positive result because the market environment wasn’t that great but we did land some pretty significant business. Peter I mentioned here and others that we landed earlier in the year including [APG] [ph] which was a first quarter deal that was a big one. So we were excited about that, the time that I’ve spent over there this year and the counsel that I get from my contacts in the region are that there is capital that will be flowing into Europe. People are I think looking for a bit of sort of macro rebound in that region so that typically bodes well for us in renewals and in deals. The renewal rate in EMEA also bounced back really strong in 2013, we’ve talked about how 2012 in some ways was really kind of the trough year for EMEA, kind of like our 2009 was and so there seems to be positive trends there.

Peter Heckmann - Avondale Partners

Can you talk about for the Advent Direct roll-out, have you made any changes in terms of your thoughts of the order in which you may roll-out some products and then can you talk a little bit more about any additional thoughts you might have in terms of the appropriate revenue model or what do you think that revenue model is going to look like for clients?

Pete Hess

So what I can share now and actually on the next call we will be in a position to explain that commercial model. So we’re honing in on that and we’re excited about it. I mean I think it gives us opportunity to get a lot of people using it but also see the revenue grow as their businesses grow. So more detail on that on the next call. In terms of where we’re focused with Advent Direct the first solution we put out something we’re calling Investor Management so it's largely workflows around communicating with end investors and we have got that in beta, it's maturing quickly and we’re going to, we’re targeting going into a commercial launch of that product in the summer time. So second half of the year is when we will start.

Peter Heckmann - Avondale Partners

Okay and then last question should I infer from the headwind that you’ve in the first half from that large client contract renegotiation that we may see somewhat better revenue growth as well as somewhat better margins in the second half of ’14, is that how should we be thinking about it?

Jim Cox

So generally that is how I would think about it. The one caveat that I always like to give myself is the term service deferral has both an impact on revenue as well as that [goes] [ph] through the margin in every quarter but definitely see kind of sequential improvement throughout the year notwithstanding the variability that we can see in that.

Operator

Your next question comes from the line of Sterling Auty with JPMorgan. Please proceed.

Sterling Auty – JPMorgan

So the backlog comment I’m assuming that refers to your largest customer that renewed that’s creating the headwind? That was the impact on backlog?

Jim Cox

Exactly, there were really two significant drivers of backlog increase, that obviously was one, so obviously we stepped down but we’re in a five year renewal so we’ve great visibility there. And then the second element is that we for some of our larger clients we have engaged in multi-year term license renewals. So previously we would just once their three year or five year term had come up we would renew them for one year and through a variety of kind of commercial offerings and internal technology improvements we’re able to kind of have an uptick each year in term licenses for some of our larger clients and so that has enabled us to move to a multi-year renewal model that has been met with some positive response from clients. So it's a combination of those two has driven that growth.

Sterling Auty - JPMorgan

Okay and with the Advent Direct launch in the second half how should we think about the capitalization of R&D expenses over the next couple of quarters in terms of what’s going through OpEx and what’s going through CapEx and then the reverse of that when it's actually launched, how big of an impact is it?

Jim Cox

So we would expect to see pretty consistent capitalization this year in all four quarters of this year and for it to be pretty consistent with the capitalization levels we saw in 2013. When the periods when we’re capitalizing are right before where we’re releasing in each of those versions and so as we have various products being released throughout the year and being worked on for release in subsequent years that’s going to be pretty even throughout the four quarters.

Sterling Auty - JPMorgan

But shouldn’t there be once Advent Direct goes live, shouldn’t there be a release where you start to amortize some of the capitalized expenses or was the amount dedicated just to Advent Direct just not that incremental relative to [inaudible]?

Pete Hess

You’re right. I mean you’ve the accounting right there, you’re absolutely right. There will be a release but as we amortize that over a few years and the dollars that we’re talking about it is not that significantly different to run-rate that we have seen historically.

Sterling Auty - JPMorgan

Okay. And let’s talk about a little bit about the annual recurring run-rate which is a mouthful by the way. We need some sort of acronyms to help on that one but as…

Pete Hess

We’re just going to call it the run-rate, we started with R, but we sounded like pirates so let’s go with run-rate metrics.

Sterling Auty - JPMorgan

So then you have to put a (indiscernible) and it will be very messy so yeah I think run-rate works better. So when you look at the seasonality or look at the predictive powers have you kind of taken a look and back tested? Is this going to be something where we can take you know the run-rate divided by four, add a little bit of growth and that’s going to give us a good estimate for the next quarters you know recurring revenue and then we kind of step it up through the year so does it have that kind of predictive power or will that be a mystery?

Pete Hess

So ultimately I would like to get there with this Sterling but I think since we have only looked at it in eight quarters I understand about the sequential and kind of year-over-year changes that give me confidence in this but it really is a point in time metric and so I think we want to see a number of more quarters and do more back testing for everybody for you to be able to, you can obviously test the predictability of it but that’s kind of, that would ultimately be our goal. Really what we’re trying to do is deliver metric similar to FactSet has the ASV metric and it's a point in time metric but it's very helpful for folks and so that was the direction we were trying to take with this.

Sterling Auty - JPMorgan

Okay and then Pete you talked about Axys APX migrations. I just want to make sure that I’m clear, you’re saying that basically there are some ACV headwind over the next couple of quarters as you have kind of frozen the markets to a certain extent as certain people lead Advent Direct rather than doing Axys APX migration and let’s start with that, is that what you’re describing?

Pete Hess

Basically and the way I would characterize it, it's not necessarily and either or clients aren’t necessarily saying, will I migrate or will I go with Advent Direct. Some clients may make that choice but a lot of them will probably migrate and go with Advent Direct but their new questions that they need us to answer and some of it has to do with really deep detailed knowledge about what it takes to implement Advent Direct and how it's going to be commercialized and a lot of things that we still haven't learned ourselves entirely in a position where we can roll that out in every sales conversation. So we are as you say we’re kind of frozen in some circumstances but I think we will start to solve [ph] in the second quarter on that and be in a position to start selling it in Q3 and probably ramp that sales up in the fourth quarter as we get some repetitions under our belt as we turn it out to the whole sales force.

So that’s kind of the process but yes I do anticipate some headwinds in the first two quarters of this year because we have introduced this new question.

Jim Cox

And just for context we went back and looked at the first half of 2013 and there were between a 1 million and a 1.5 million in migrations in each quarter in the first half of 2013.

Sterling Auty - JPMorgan

And those commercial questions Pete you’re saying just the exact place and model, support model et cetera so they want to understand what they are getting and when you say the second quarter will that second quarter kind of be the trough? I mean third quarter gets better or the first quarter will be the trough and you actually think the second quarter gets better?

Pete Hess

I don’t know for sure. It's hard. As you guys know I went on record last time we spoke and said it's going to be a headwind but I didn’t think it would be that significant, it turned out to be more than I thought. So I’m hesitant to prognosticate the exact impact but we will have dramatically we will have more answers in the second quarter than we do right now. So I could see the (indiscernible) start there as I mentioned. One thing to keep in mind on the bookings metric too, the client sales part as we guys have heard it's stays about half traditionally half of our bookings performance comes through client sales and most of that’s migrations. On the prospect side, the good news is win rates are as good as we have seen them. We had a great quarter in terms of Black Diamond, I think it had its best quarter ever and the win rates are great. So going back to my comment and my script about the health of the business we feel really good there so it's the enthusiasm that we see you can’t see it physically but we’re feeling good and I think when Advent Direct comes online it's going to lift both the client and the prospect side because it definitely helps us differentiate against our competitors when we’re out landing new business as well.

Operator

Your next question comes from the line of Chris Donat with Sandler O'Neill. Please proceed.

Chris Donat - Sandler O'Neill

I had one question just to make sure I’m thinking about your run-rate metric the right way, so on the non-recurring side is that mostly all professional services or what else is when I think about the whole pie of your revenues then excluding recurring what appears in recurring run-rate what’s left?

Pete Hess

The annual recurring run-rate only kind of compares to recurring revenues, so non-recurring revenues include professional services and perpetual license sales which are minimal these days. So generally it's just professional services and when we talk about our recurring run-rate it is only as it relates to recurring, so the non-recurring revenues you would model however you continue to model them.

Chris Donat - Sandler O'Neill

Okay as soon as we try our back testing of this metric we’re just mapping it to recurring revenues?

Pete Hess

Precisely.

Chris Donat - Sandler O'Neill

Okay and then to your comments about maybe having some higher sales and marketing as you roll-out Advent Direct, would you care to quantify that at all? Sales and marketing was just under 80 million in 2013. Should we expect sort of similar increase to what you see in revenue or maybe a little bit more?

Pete Hess

Yeah Chris the way we have been thinking about it is that we would hold it constant as a percentage of revenue.

Chris Donat - Sandler O'Neill

Okay. And then just thinking about the debt you paid down $45 million of it this quarter and your uses of cash is that something you’re targeting like kind of 45 million or I know it's going to depend on other factors but big picture how should we think about what you do with your paying down your debt and?

Pete Hess

With excess cash yeah. So I think it's very important for us to get below that three times leverage and so we have been focused on that. Also the fourth quarter is our biggest cash flow quarter and so you wouldn’t model 45 for the first quarter just knowing how our operating cash flow is operating. But I think in general that is our default position which is to pay down the debt. At this point in time I think we’re always looking for ways to return capital to shareholders and we will continue to evaluate those but I think short of any answer there the facto approach it's going to be to pay down debt.

Chris Donat - Sandler O'Neill

Okay so it's not like you’ve just got the three times bogie and you’re through that and you’re going to stop, you’re going to continue?

Pete Hess

Yes.

Operator

Your next question comes from the line of Ross MacMillan with Jefferies. Please proceed.

Ross MacMillan – Jefferies

So just the first question I had maybe for you Pete was as you think about Advent Direct and the opportunity it's basically increased user count per customer that’s at least the way that we have been thinking about how the model would likely work. When I think about the investor lifecycle management piece first and then other subsequent pieces like the information lifecycle management and so forth. Do you think that the early modules or early parts of Advent Direct are the ones that have the biggest impact in your ability to expand users per account or maybe simply put, are the ones that have the biggest sort of economic uplift to Advent? Does that make sense?

Pete Hess

Yeah it's a good point. We’re not able yet to sort of give proper names to some of these things, there have been names, you’ve mentioned the few that have been sort of centered around and horse names from an internal standpoint but the point is that the initial workload it's Investor Management that may have the most sort of desktop potential. So to your point, yes it touches a lot of different players so we potentially get more legs at that one than we do with the others down the road like trade lifecycle management as an example that would be more used by the operation staff. So all of them I think add value, we’re starting with the ones that get us exposure, broader across the organization and in the hands of the front office folks as well as they are talking to other clients.

Just one thing to add on that as we’re thinking about the commercial strategy and we will talk more about that in the next quarter. You said what’s our biggest economic, it sounds to me like you’re asking is there one big bang to get economic benefit and then I think you’re conceptualizing it and then you grow as the next thing rolls-out. I think we also have to think about this as an evolution of functionality that’s being delivered and so we’re also thinking about a commercial model that as we’re delivering more within those same kind of product market names as we deliver more functionality to those customers there is incremental opportunity for uplift as additional features and functions get rolled out to them. So I think it's not necessarily a stair step approach to kind of the economic growth but a steady kind of expansion both within the existing customer base as well as adding on additional product names.

Ross MacMillan – Jefferies

Yeah that makes sense, so it's an evolving set of services which will incrementally add to your revenue opportunity per count overtime. So on the same line I guess my second question was when I think about revenue forgone in the migrations or the ACV forgone in the migration slowdown and you think about the potential impact from Advent Direct, it goes a little bit back to Sterling’s question. Even though it won't impact revenue this year we should start to see it in the run-rate metric I presume and I’m just curious as to whether you have got conviction that as we get into the second half of the year the initial products within Advent Direct will be sufficient to offset that migration deceleration if you will. So if you’re thinking about run-rate of 1.5 million or so a quarter and then 2 million in Q4 do you currently have the view that that Advent Direct release would be enough to offset that? Maybe just offset it or perhaps it could actually start to drive higher growth over and above that? I’m just curious to get your qualitative view on that.

Pete Hess

We’re hopeful that it would offset it and it's not just an offset but keep in mind clients may buy Advent Direct and that’s all or they may buy Advent Direct in conjunction with the migration. So I think of it more like not comparing Advent Direct to migrations but rather how do we grow client sales and it's a combination of those two things it's too early to say exactly how they are going to shape out but there is a value proposition of migrating and implementing Advent Direct that it's superior to just implementing Advent Direct and so I think we will see firms migrating but also buying Advent Direct. So we will see how it goes, I don’t, it's too early to say but when it's introduced every indication we have so far is that there are a lot of people that are going to want to buy it.

Ross MacMillan – Jefferies

Okay and then the final one just to really housekeeping, on the debt pay down and the reduction in your annual interest cost. Are there any other leverage ratios or fixed charges ratios or anything else that would create a further step down on the interest paid on the debt or was it really just this one time to get below three times?

Pete Hess

If we were to pay down below 2.5 times we would drop another 25 basis points and if we drop below 2 another 25 after that.

Operator

Your next question comes from the line of Kash Rangan with Merrill Lynch. Please proceed.

Unidentified Analyst

(Indiscernible). I got a quick question on the headcount for the client services and the sales and marketing. Those have tailed down in the last year, how do we expect that to rebound in the upcoming year or is that sort of especially under the client support side, was that, do we expect it to kind of be flat going forward?

Jim Cox

So we would expect client support to pick up gradually throughout 2014 with respect to sales and marketing some of that change is a result of reclassification and the beginning of 2013 between PD and sales and marketing but the short answer to your question is we would see sales heads being added throughout 2014 as well.

Operator

(Operator Instructions).

Jim Cox

Sounds like we’re done.

Pete Hess

Well okay thank you everybody for joining us. Excited to as I mentioned, we’re, to Jim we’re 10% done with 2014 already but it's been a great 10% and there is a lot of energy here. We’re very excited about where we’re headed. Thanks for taking an interest. Talk to you guys soon.

Operator

All right so ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Everyone have a great day.

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Source: Advent Software's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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