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Executives

Heidi Flaherty -

Stephanie G. DiMarco - Founder, Chief Executive Officer and Director

James S. Cox - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

David Peter F. Hess - President

Analysts

Sterling P. Auty - JP Morgan Chase & Co, Research Division

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

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Kevane A. Wong - JMP Securities LLC, Research Division

Advent Software (ADVS) Q1 2012 Earnings Call April 30, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Advent Software Earnings Conference Call. My name is Stacy, and I'll be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, to Ms. Heidi Flaherty, Vice President of Finance and Investor Relations. Please proceed.

Heidi Flaherty

Thanks, Stacy, and good afternoon, everyone. I'm Heidi Flaherty. Thank you for joining us today for Advent's First Quarter 2012 Earnings Call. Hosting our call today are Stephanie DiMarco, Advent's Chief Executive Officer; Pete Hess, Advent's President; and Jim Cox, Advent's Chief Financial Officer.

Most of you participating in this call are aware of the regulations regarding forward-looking statements. Accordingly, we would like to note that during the course of this conference call, we will make forward-looking statements regarding future events and the future performance of the company. We wish to caution you that such statements are just predictions that involve risks and uncertainties, and that actual events or results may differ materially. We discuss a number of these risks in detail in the 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 risks and uncertainties. The company disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

As a reminder, we include non-GAAP financial measures in our disclosures. These non-GAAP financial results are not meant to be considered in isolation or as a substitute for results prepared on a GAAP basis. Please refer to the tables entitled, Reconciliation of Selected Continuing Operations: 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 have one more thing to note. Advent is hosting an Investor Day on the morning of Friday, May 11, at the NASDAQ market site in Midtown Manhattan. We'll be updating you on the Advent's strategy, initiatives and points of interest. We hope to see you there.

I'll now turn the call over to Stephanie.

Stephanie G. DiMarco

Thanks, Heidi, and welcome, everyone. Thank you for joining us. I'm pleased to report that Advent had another record first quarter. Revenues were $87 million, a 15% increase and we saw 45% increase in bookings over the same period last year. Later in the call, I'll 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.

James S. Cox

Thanks, Stephanie. Advent had a great start to the year, with our best-ever first quarter performance for bookings, operating cash flow and operating profits. We also set a record for quarterly revenue at $86.9 million.

Bookings, which we call annual contract value, or ACV, for new contracts signed during the first quarter, were $7.4 million, 45% increase over the first quarter of 2011. These results reflect solid performance across all of our products, region and markets.

Turning to renewals. Our initially reported renewal rate, which is based on cash collections and therefore reported 1 quarter in arrears, was 95% in the fourth quarter, which is all the better because the fourth quarter is our most active renewals quarter. When all the cash is collected for the fourth quarter renewals, we expect the initially disclosed rate of 95% to increase by our typical 2 to 4 points.

Our third quarter 2011 renewal rate increased from our initially reported 93% to an updated 94%, as we received subsequent collections.

Turning to the financials. Net revenue in the first quarter was up 15% over the first quarter of 2011 and recurring revenue increased 1.2 points from the first quarter last year to 91% of total revenue, our highest percentage ever for recurring revenue.

As a percentage of total revenue, international was 17%, which is consistent with the first quarter of last year but down sequentially from 18% in the fourth quarter of last year because certain of our large international clients report their AUA fees to us annually in the fourth quarter.

Turning to expenses and profitability. Cost of revenue for the first quarter was $29.1 million, up $5.6 million or 24% over the same period last year, resulting in a decline in gross margin for the quarter of just over 2 points to 66.5%. The decrease in gross margin was driven by lower professional services billable utilization and higher amortization of intangibles from our 2011 acquisitions.

Total first quarter operating expense was $46 million compared to $40.3 million in the same period last year, an increase of $5.7 million or 14%.

Of the operating expense increase, $4.2 million was in product development, which represented 19% of revenue in the quarter, up 2.5 points from the prior year. 2/3 of the product development expense increase was driven by increased headcount from 2011 acquisitions and additional investments in the development of next-generation products and cloud services. The other 1/3 of the product development expense increase reflected the timing of the development expense capitalization. In the first quarter, we capitalized $1.3 million less than we did in the same period in 2011, which was when Geneva 8.5 was released.

GAAP operating income for the first quarter was $11.8 million, a 2% increase over the prior year and comprised 13.6% of revenue. GAAP pretax income was $11.6 million, a 1% increase over the prior year, as increased interest expense from our debt was partially offset by foreign currency gains in the first quarter, as the dollar weakened relative to European currencies.

GAAP net income was $7.3 million for the quarter, down from $7.9 million in the same period last year, primarily due to a 37% effective tax rate in the quarter compared to a 32% rate in the prior year. The tax rate is higher in 2012 as a result of the lapsing of the federal R&D credit. GAAP diluted earnings per share from continuing operations were $0.14 in the quarter, consistent with the same period last year.

Turning to non-GAAP results. Non-GAAP operating income for the first quarter was $19.6 million, up $2 million from the same period last year. Non-GAAP operating margin for the first quarter was 22.6% of revenue, down 0.9 points compared to Q1 of 2012.

In the last earnings call, we noted that our operating margin in the first quarter of 2012 would be down compared to the prior year, because we didn't expect to capitalize the same level of software development as we did for the Geneva 8.5 release in the first quarter of 2011.

In the first quarter, we capitalized $300,000, down from the $1.6 million capitalized in the first quarter of 2011.

Non-GAAP diluted earnings per share were $0.24 for the quarter, up from $0.21 in the same period last year.

Turning to the balance sheet and cash flow. Operating cash flow for the first quarter -- was a first quarter record of $13.6 million due to a relatively strong collection. Recall that the first quarter of every year has the lowest operating cash flow, resulting from billing seasonality and the payment of annual variable compensation.

Deferred revenue was $174 million, down ever so slightly from the fourth quarter.

Finally, we repurchased $6.8 million worth of stock at an average price of $25.38 during the first quarter.

Turning to guidance. I'll be making additional forward-looking statements, so I'll remind you of the Safe Harbor statement in Heidi's opening remarks. In the second quarter, we expect revenue to be between $88 million and $90 million, up 10% to 12% over the second quarter of 2011. We're not updating our annual guidance at this time.

On the strength of our last 2 quarters' bookings, we have accelerated the pace of our hiring. For example, in April, we hired 38 people. As a result, our operating margin expansion throughout the year were likely be more back-end loaded.

Finally, I'd like to take a moment to reiterate Heidi's invitation to our Investor Day on the morning of Friday, May 11, in New York. We welcome the opportunity to update you on Advent's exciting progress.

Now let me turn the call back to Stephanie.

Stephanie G. DiMarco

Thank you, Jim. As you've just heard, Advent had an excellent first quarter. This is my last earnings call as Advent's CEO, and I'm thrilled to have such a capable successor in Pete Hess. This transition comes at a time when Advent has never been stronger and the opportunities in our business are as attractive and exciting as perhaps at any point I've seen in our almost 30-year history.

Over the past 9 years, we've transformed this business to be a 90-plus percent recurring revenue business with growing profitability. Our results are greatly enhanced by our strong financial foundation and the predictability of our business model, but the quarterly, yearly and long-term success comes from the company's focus on the success of our customers.

Customer success is a term we use a lot at Advent because this is -- that is why we exist, to create the most capable and innovative solution that enable our customers to succeed. As a result, we build long-term, loyal relationship. Our very first client is still our client today, and we enjoy among the highest retention rates in the history.

The first quarter of 2012 was excellent, representing a continuation of this journey. New bookings were $7.4 million. A sampling of the new business we added in the quarter include Driehaus Capital Management licensing Geneva; Fifth Third Asset Management, Scout Investments and Sands Capital Management licensing APX; Myriad Asset Management Limited of Hong Kong licensing Tamale; and Butterfield Fulcrum, one of the world's top 5 independent fund administrators licensing Geneva World Investor.

Today we announced the major release of our platform for asset management, APX plus Moxy, Advent Rules Manager and Advent Revenue Center. These products have always been tightly integrated, but this release marks the new level of integration with a common user interface, business intelligence, shared dashboards and the even more seamless workflow across the product. Our clients and prospects are responding really well to the enhancements we're making, and our first quarter momentum reflects that. I was personally very pleased to have Willis Investment Council make the move to the APX platform.

Willis was Advent's 14th client, and I was their sales rep. It's gratifying to see this long-term client commit to what we hope will be another 25 years with Advent.

Black Diamond continues to set the pace in the advisory space and had a great first quarter, winning new business and also proving out our theory that Black Diamond is a great migration choice for many advisers using Axys. Among the firms that made the move, were 2 that stand out, Emery Howard Portfolio Management here in the Bay Area and Northside Capital Management of Oregon. Both firms have been using Axys for almost 2 decades, and it's great to see these long-term clients find a path for their future growth on Black Diamond.

Growing our global presence continues to be an important growth opportunity for Advent. And given our success in Asia-Pac, we've been evaluating how to enter the China market for the past few years. There's a huge amount of wealth creation in China today with a potential to create a very large asset management market, which makes it a very compelling long-term opportunity for us.

As we announced today, we entered into a strategic distribution agreement with Shanghai-based Wind Information Co., a premier financial data information services provider in China, to deliver our Tamale solution to clients in mainland China. With Wind's market leading position in data for the Chinese market, we're excited to be working with them to bring Advent Solutions to Chinese financial institutions.

Looking ahead, this is a very exciting moment in Advent's almost 30-year history. We're embarking on yet another phase of growth and evolution, embracing the technology trends that will drive applications and business decision-making in the next 5 to 10 years. We see many opportunities ahead, and Pete and his team are focused on realizing these opportunities. We have the vision and the leadership to continue to grow in the years ahead. Advent will always be the company that can be trusted to solve the investment management industry's most complex operational challenges.

Thank you for joining us. And now, I'd like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Sterling Auty with JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

So, Stephanie, since you are the sales person on Willis, I want to know, did you get a commission for their upgrade?

Stephanie G. DiMarco

I didn't have my hand on this one.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

I was kind of curious in terms of if you could talk to us a little bit about the timing of implementations and deferred revenue release. I missed this, you mentioned what the deferred revenue release is in the quarter. Given what looks like a nice upside in ACV, I'm just trying to see how that should have flowed into revenue. Are some of these implementations and some of the deals that you signed maybe a little bit longer in length than what you're seeing over the last couple of quarters?

James S. Cox

Sterling, this is Jim. I'll take that. I think it's still fair to characterize the larger the deal is, the longer it takes to implement them. Having said that, kind of our norms of kind of 2 to 3 quarters to turn a booking into revenue that we see in the P&L remain consistent.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. And then in terms of the new release, in terms of the major new release for the asset manager, I'm kind of curious in terms of what -- was this a large data? Do you have any early lighthouse accounts that you were able to point? I missed that part of the prepared remarks. If you said it, I apologize.

David Peter F. Hess

Sterling, this is Pete. So the release is really a culmination of it's an effort on our part to stink up the releases of the products that we listed, the AMG product suite. So that's APX, it's Moxy, it's Revenue Center and its Rules, and sync those releases so it's easier for our clients to keep pace with us. Whereas in the past, we would release them all own their own, separate calendars and face potential compatibility issues or just make it challenging for clients to keep pace. So what that business unit has done is they've synced up the releases. They're moving to a 6-month, twice a year sending out releases to just again be more predictable and easier for our clients to keep pace with. Certainly, we've been in beta on the releases, the platform for a number of months. APX, Moxy, same thing is true with Revenue Center and Rules. The big enhancements that have people, I think, excited are that not only are we syncing up the release timing, but we're also integrating the user interfaces and workflow across those components that makes it much more intuitive for clients to use. There are more details in the press release about the features and functions. I can give you more detail if you'd like it, but that's sort of the story behind that platform release.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

All right, great. And last one is the 38 hires, how does that get split between sales and other place that you're looking to hire into?

David Peter F. Hess

It's spread all throughout the organization.

Operator

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

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

It sounds like in terms of the renewal rate, you were talking about the upward adjustment beat a normal one which put you at the high 90, so it didn't sound like anything unusual there. Anything unusual in terms of your bookings in the quarter? Last time, you had a Q1 this big you were coming off the financial crisis and things got pushed into the first quarter. Do we have anything unusual about this first quarter bookings that have a lot of -- something get pushed out? Is there something particularly big in this first quarter bookings number?

David Peter F. Hess

Gil, this is Pete. It was a well-rounded first quarter. I think about Black Diamond had a great quarter. We even actually had a decent quarter in Europe, even though the market over there has been tougher. The Geneva products sold very well. We had some really big-name, APX migrations, as well as some new APX clients. So it was -- and even Tamale landed some great new accounts. The name specifically, we've highlighted in Stephanie's script some of the names. But it was, generally speaking, a pretty well-rounded quarter.

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

Great. And then in terms of the new product platform, is one of the benefits of syncing up a product cycle, just making it more of a platform-type offering that it will facilitate a future generation that you're working on? Is there something we'll hear about maybe more at the Analyst Day?

David Peter F. Hess

We will -- we'll talk at Analyst Day about the product strategy and the vision. To some extent, we're not in position yet to launch some of those elements that we're working on, so we won't show that. But you're right. Semantically, what we're doing with this management platform is we're trying to make the user experience more attractive while making the cost of ownership lower. And thematically, that's what we're going to be doing for years to come. We'll leverage cloud technologies to make things even easier, but we'll also continue to offer those solutions on-site for firms that want them.

Operator

[Operator Instructions] Your next question comes from the line of Chris Donat with Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

I think I'll take advantage of Stephanie's presence on the call, to just ask sort of an almost philosophical question here. But as you've dealt with clients for multiple decades here, and you're on -- and you're rolling out an upgrade right now, major upgrade, what's the pace of upgrades that clients want? I mean it sounds like some can stay with Axys forever; and others are, and I know it varies, others want the newest thing now. But do you feel like Advent is on the right pace for upgrading and has a pretty solid pipeline of other upgrades to make in the next year or 2?

Stephanie G. DiMarco

Yes. I think we're on a very solid pace. And I think that what we work hard to position ourselves to be able to do is to be available when our clients are ready to upgrade, and whether it's a technology change they're making or they're changing their business or if they're looking to upgrade to new product, we're there when they need it. And we want to be able to use the carrot, not the stick.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And what about just cycles? I know -- I mean more the development cycles, do you feel like the feedback you get from clients -- I mean, obviously, it's working here with 95% renewals, but I guess what makes the process work as well as it does, client feedback, your own developers? How do you balance everything?

Stephanie G. DiMarco

Well, we've been refining it for a long time. And we're always working at getting better. And so that's a lot of cycles of being able to improve what we're doing. And we are looking for constant improvement in that regard because technology moves quickly, and it's really important for us to keep pace.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then I feel like -- I want to ask you this one. Just in terms of your own stock here, if I'm tracking the form force correctly, you've been -- had a couple of sales recently. You've got a 10b51 plan in place, correct?

Stephanie G. DiMarco

I do.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. So we can expect -- I guess we're seeing some sale in April and some in March, something like that?

Stephanie G. DiMarco

Yes, it will run for 12 months.

Operator

Your next question comes from the line of Kevane Wong with JMP Securities.

Kevane A. Wong - JMP Securities LLC, Research Division

Not a lot is standing out as far as jumping out, but you did sort of mention Europe. And I was just wondering if you can give a little color in terms of sort of the environment out there, particular surf [ph] up but also client mix, anything you're particularly seeing with particular types of clients buying, holding off, sort of where they fit? And then just also lastly on pricing, sort of curious if you're getting -- got much of a lift there or where that sort of fits?

David Peter F. Hess

So I'll take that. I would say there's more apprehension in that market. We're very busy. The pipeline is quite good. But we've seen this before. It's not as severe as what we saw in the United States in 2009 when everybody was really apprehensive and the sales cycles elongated basically almost doubled. In Europe, we're not seeing it as severe as that, but we are seeing more apprehension. So there's lots of interest. We're having lots of meetings. We're very busy. We're moving sales cycles, but when it comes time to make the decision and get the signatures, that's where we tend to see an extra committee meeting or another event that may drag it out a couple of months. So that's, generally speaking, the way I would characterize it. The distribution regionally of the business is actually pretty consistent with what we've always done. We're pretty active in the Middle East. We're very active in the Nordics, and we continue to become more and more active in some of the prime time markets in Switzerland and the U.K.

Kevane A. Wong - JMP Securities LLC, Research Division

Okay. So it sounds like the environment is sort of similar and that it's -- at least in Europe, there's causes but it's sort of slowly progressing then? You haven't had any particular changes one way or the other, it sounds like?

David Peter F. Hess

Yes. It's not something we're -- there's been no specific events in the news or otherwise that spiked our business or shut down the conversations we've been having. It's been more of a steady, bit more protracted process.

Stephanie G. DiMarco

The [indiscernible] is not a big market for us.

Kevane A. Wong - JMP Securities LLC, Research Division

How about the overall pricing? It's also looking at U.S or just overall, how's the pricing? Are you being able to get any lift in many regions where things are stable? How would you characterize that?

David Peter F. Hess

We have -- we do a price increase annually and in all regions. And so our discount levels remain pretty constant. So I would think -- I think the answer to your question is that we are seeing the average deal size actually continues to increase. So that's good news. We're not seeing any inordinate amount of pricing pressure right now.

Operator

[Operator Instructions] And at this time, I'd like to turn the call back over to Stephanie DiMarco, CEO, for closing remarks.

Stephanie G. DiMarco

Thank you very much for joining us, and you'll see -- you'll hear Pete and Jim next quarter. Goodbye.

Operator

We thank you for your participation in today's conference. As it does conclude your presentation, you may now disconnect, and have a great day.

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