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Advent Software (NASDAQ:ADVS)

Q3 2012 Earnings Call

October 30, 2012 5:00 pm ET

Executives

Heidi Flaherty

David Peter F. Hess - Chief Executive Officer, President and Director

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

Analysts

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

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

David M. Scharf - JMP Securities LLC, Research Division

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

Operator

Hello, and welcome to the Q3 2012 Advent Software Earnings Conference Call. My name is Myesha, and I will be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Heidi Flaherty. You may begin.

Heidi Flaherty

Thanks, Myesha, and good afternoon, everyone. I'm Heidi Flaherty, Vice President of Finance and Investor Relations. Thank you for joining us today for Advent's Third Quarter 2012 Earnings Call. Hosting our call today are Pete Hess, Advent's Chief Executive Officer; and Jim Cox, Advent's Chief Financial Officer.

Most of you participating on this call are aware of the regulations regarding forward-looking statements. Accordingly, we would like to note that during the course of this conference call, we will make forward-looking statements regarding future events and the future performance of the company. We wish to caution you that such statements are just predictions that involve risks and uncertainties, and that actual events or results could differ materially. We 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.

On this call, we are modifying the speaker order. Pete will provide his prepared remarks first, followed by Jim. And then as usual, we will take your questions. I'll now turn the call over to Pete.

David Peter F. Hess

Thanks, Heidi, and welcome, everyone. Before I begin, I just want to take a moment to thank everyone for understanding our change in the schedule. And for those of you on the East Coast, I hope that your families are all okay and away from Hurricane Sandy. Thank you for taking the time out of your day to be here with us.

Now before I hand the mantle over to our CFO, Jim Cox, to provide detailed financials on our Q3 performance, I'd like to share an overview on the quarter as well as some exciting news regarding our go-forward strategy. Our third quarter results showed record revenue and profitability as we posted strong third quarter margin in cash flows. At the same time, the market headwinds we highlighted last quarter and especially in the EMEA region have persisted as we forecasted that they would on the last earnings call. Consequently, bookings and renewals were lighter than last year's Q3.

Nevertheless, we are thrilled with our win rates, which remain very strong, as well as a long list of impressive new clients, product updates and industry awards that were announced in the third quarter.

Back in September, we held an -- our annual client conference, AdventConnect, in Las Vegas. As it has been for many years, this event was a great success with more than 1,100 attendees. The conference gave us the opportunity to continue developing our relationships with our clients, build new relationships with prospective clients and debut all of the new and enhanced functionality within our platforms. During the event, we announced the beta launch of the second release of our platform for asset management, which includes new levels of functionality and integration between Advent Portfolio Exchange or APX, Moxy, and their associated add-on products.

Some highlights of the release include enhanced functionality for private equity and sinking funds, as well as new trading and reconciliation workflow support. The general release of this version of the platform will take place in the coming weeks.

We now have more than 850 clients using APX and in the third quarter, we added TDAM and Wealth Management, a registered investment advisor that was named "Best Private Wealth Manager Over 5 billion" by the Private Asset Manager Awards 2012, and we also signed Stephens, Incorporated, a full-service privately held independent financial services firm who use the Advent technology to support their wealth and asset management businesses. Additionally, APX won best-in-class across 4 categories of the industry analyst, TowerGroup's Portfolio Management Systems Technology Analysis, which is a fantastic accomplishment.

On the topic of awards, I'm also proud to say that for the fourth year in a row, Advent was named Best Portfolio Management Systems provider in Waters Magazine's annual readers choice rankings.

Black Diamond success continues in the advisory market. One of our big wins for the quarter was Clarfeld Financial Advisors, a company that was ranked by Barron's as New York's #1 independent investment advisor for the fourth year in a row, and ranked third overall in the list of America's top 100 independent investment advisors.

Black Diamond has also added rebalancing functionality and support for alternative investments to its platform, which we announced at AdventConnect. The new rebalancing workflows ensure advisors that their individual client and household investment portfolios mirror their intended investment strategies, irrespective of where the assets are held, and Black Diamond's new alternative investment functionality makes accounting and reporting on alternative assets a significant competitive advantage for our Black Diamond clients.

In other APX and Black Diamond news, I'm pleased to announce today that Advent has entered into an agreement with Schwab Intelligent Technologies to integrate 2 of our portfolio management platforms, Black Diamond and APX, via Advent OnDemand with the Schwab OpenView Gateway. We have a long-standing relationship with Schwab and this new agreement will enable both Advent and Schwab to better serve our joint clients with improved integration and service.

Tamale continued to gain momentum with another great quarter. We signed 2 of the world's largest asset managers, as well as several smaller shops, proving that Tamale is a great fit for firms of all sizes. Despite the current economy in the EMEA region, we continue to secure new clients such as Clariden Leu, a Swiss private bank based in Zurich, who will be implementing APX.

We had significant wins outside of Europe as well, in Brazil, China and South Africa. Following last quarter's announcement that the Brazilian hedge fund, Da Vinci Partners, selected Advent, in Q3, we signed 2 new Brazilian clients on to Geneva including BTG Pactual, which is the largest independent investment bank in Latin America.

Spanning the globe, we landed our first mainland Chinese hedge fund, which will also be running their business on Geneva. One of our new Syncova clients from this quarter is Rand Merchant Bank. Already an APX, Moxy and Geneva client across their wealth management and prime brokerage businesses, RMB is a leading African investment bank in South Africa.

Our business gets stronger one product release and one client at a time. So with all of our progress in the third quarter, you can see why I'm so encouraged by the momentum of our business.

In my opening, I mentioned exciting news about our go-forward strategy. What I wanted to highlight next specifically pertains to changes we're making to Advent's organizational structure. Before I provide details of the reorganization, let me remind us all what Advent and our clients are working to accomplish together. Our purpose is to help our clients thrive and to transform the investment management industry. We will fulfill this promise by doing what we've always done: empowering our clients with the best technology so they can differentiate and succeed. Going forward, we will strive more than ever to eliminate boundaries between systems, information and people, to help our clients provide higher levels of service while operating with a minimum of cost and operational risk.

As I mentioned at our investor day back in May, while Advent's purpose remains the same, the way we will fulfill our purpose is changing. We now focus on global requirements first rather than after. We have a whole new level of commitment to the ease of implementation, adoption and ownership of our solutions. We recognize that clients are diversifying their lines of business. Traditional high net worth asset managers are getting into pure advisory. Traditional institutional managers are starting hedge funds. Hedge funds are getting into private equity, and the list goes on. Some firms do all of the above. Advent is uniquely positioned to help our clients diversify their lines of business, given the breadth of our solutions and our experience in the different segments of the market.

Our commitment to our clients and the market is that Advent will lead our industry forward by staying focused on the solutions we have started, to be the best at the things our clients expect from us and to keep pace with important business and technology paradigm shifts. To do so, we must look at the workflows that are common across our clients' different lines of business, and we must consolidate our efforts and investment to deliver the best common solutions for enterprise and cloud deployment, as well as desktop, web and mobile access. Consolidated investment on common workflow solutions like reconciliation, billing and fee management, performance and composite management, compliance, client reporting, and more, will enable Advent to deliver the best solutions going forward for the workflows our clients expect from us. To that end, we are reorganizing from a business unit structure to a global functional structure.

Our business unit structure that was first implemented in 2004 has been critical to the market specialization strategy that in turn has been key to our growth over the past 8 years. Market specialization is now in our DNA. We no longer need organizational structure to ensure we understand and address the specific needs of our different types of clients. Going forward, our primary need is to combine efforts on common workflows across our client base. As our clients have increasingly expanded their lines of business, they need new combinations of our solutions that require a more agile and flexible organizational structure of Advent. Collaboration on common enterprise and cloud solutions is now the priority, and our new organizational structure will make it much easier for us to adapt to the changing needs of our clients. At the same time, the new structure will enable Advent to operate more effectively and efficiently. Jim will provide more details on the financial impact of the organizational shift in his comments to follow.

The modified structure will include: a global sales and solutions strategy team, which will be led by Chris Momsen; a global solutions development group, which will be managed by Todd Gottula; and finally, a global services organization to help our clients derive maximum value from our applications, which will be headed by Anthony Sperling. Black Diamond will be only partially integrated into the structure as we keep product development and service delivery intact as one organization under new general manager, Dave Welling. Dave assumes Reed Colley's role of day-to-day GM, as Reed shifts his focus purely to advisory and corporate strategy, continuing to report directly to me. Lastly, Håkan Valberg, who has run our EMEA business over the past 7 years, will continue to report directly to me, focusing purely on sales and business development in the EMEA region.

As we look ahead, we have a strong pipeline to end the year well, and I'm excited about the organizational change we're making to more effectively and efficiently execute on our business strategy. We are putting the right plans in place to enable us to fulfill our purpose for the benefit of clients, employees, investors and the investment management industry long into the future.

Now I'd like to turn the call over to Jim, who will provide us with further detail on the third quarter numbers.

James S. Cox

Thanks, Pete. Advent had a solid third quarter with record results in revenues, non-GAAP earnings per share and operating profit on both a GAAP and non-GAAP basis. Given the recent market headwinds, we're focused on managing for increased profitability and our third quarter results reflect our first steps in that direction. While this quarter's bookings and renewal rates were a bit lower than expected, we see plenty of opportunity for our products and services and, competitively speaking, we feel as strong as ever.

Now let's cover some of the details about the quarter, starting with bookings. Third quarter annual contract value or ACV of $7.1 million, while down from the prior year's third quarter, contributes to a year-to-date increase in ACV of 8%. As with prior years, bookings can be lumpy, but as Pete said in his prepared remarks, our focus on end-users' needs has continued to drive healthy incremental demand for our products throughout the world.

Turning to renewals. Our initially reported renewal rate, which is based on cash collections and therefore reported 1 quarter in arrears, was 87% for the second quarter. There were 3 sizable EMEA customers that reduced the reported renewal rate in Q2 by 3 points. We expect the second quarter renewal rate to increase into the low 90% range once all cash is collected. We don't expect the same impact from EMEA attrition when we report Q3 renewals next quarter.

You'll also notice our Q1 renewal rate, which we reported last quarter, has increased by 3 points and is now 94%.

Turning to cash. We reported Q3 operating cash flows of $25.3 million, a 6% increase over last year and a record for the third quarter. Last quarter, we talked about the slower payment cycles, delayed billing and payment term accommodations we made for some clients. We are pleased to say that we've made progress on all of those issues in the third quarter, and it's encouraging to see cash flow return to a more normalized level.

Let's turn to the income statement. Revenue in the third quarter was up 7% over the third quarter of 2011, and recurring revenue represented 90% of total revenue. Term license and recurring revenue grew nicely, but were partially offset by perpetual maintenance and professional services revenue line items. Perpetual maintenance has been decreasing over the last 4 years as we continue to migrate legacy-access clients to higher value-term contracts on our newer platforms. As a percentage of total revenue, international revenue was 16%, down 1 point from the third quarter of 2011. Year-to-date, international revenue has grown by only 3% over 2011. As I said before, the Europe and Middle East regions' renewal rate have been lower than other regions' renewal rate, and we have definitely seen more caution in their buying decisions, which is causing international revenue to grow more slowly. It's definitely a tough market environment in Europe and the Middle East right now, when you note that domestically, we've grown 13% year-to-date over 2011.

Third quarter gross margin remained flat at 64% compared with the same period last year. Both periods include the negative gross margin impact of Advent's annual client contracts. Total third quarter operating expense was $44.7 million, an increase of 4% over the same period last year. Product development expense increased by $2.7 million or 19% over the same period last year, while other operating expense line items decreased slightly. The $2.7 million increase was principally related to increased headcount.

That leads us to profitability. In the third quarter, Advent set new records for non-GAAP earnings per share and operating income on both GAAP and non-GAAP basis. This result is particularly impressive when you compare sequential quarterly results. We increased GAAP operating income by $600,000 from the second to the third quarter, despite a $2.6 million change in the margin impact from the term service deferral and a $1.2 million swing in software capitalization. With a $3.8 million headwind in third quarter operating income, we still improved total profitability by actively controlling our expenses and slowing hiring. In light of the market environment, we believe it's important to accelerate our profitably growth and we've seen some progress already.

Turning to financial position and liquidity. Cash and marketable securities were $143.5 million on September 30 after we repurchased $15.1 million of our common stock in the third quarter at an average price of $23.71. Debt was just over $46 million on September 30, of which $5 million was in short term. Deferred revenue was $162.4 million, up slightly over the same period last year.

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 fourth quarter, we expect revenue to be between $89 million and $93 million, up between 4% to 8% over the fourth quarter of 2011. This is a larger quarterly revenue range than we have guided in the recent past because there are several sizable implementations nearing completion, so the resulting estimate for our term service deferral has greater variability than usual, based on whether those implementations will be completed in the fourth quarter. As for annual guidance, we're reducing our full year revenue guidance to $356 million to $360 million, which reflects 9% to 10% growth over the full year of 2011, down from our previous guidance range of $358 million to $362 million. Again, this range reflects the variability in the timing of our fourth quarter implementations.

Pete mentioned our new organization structure that will help us to operate more effectively and efficiently. The purpose of the organizational change is to make it easier for us to adapt to the changing needs of our clients. However, there are definitely efficiencies that we will be able to achieve in a functional organization by combining teams and eliminating some positions. As a result, we plan to reduce about 50 positions over the next 3 months and expect to take a pretax restructuring charge of between $2 million and $4 million in the fourth quarter. We expect this action to reduce our annualized spending run rate by $5 million to $8 million next year.

With respect to operating cash flow, we're reiterating our annual guidance of $83 million to $86 million, which implies at least 6% growth in the fourth quarter cash flows over the prior year.

In summary, we are proud of the progress we've made in the third quarter, both increasing profitability and returning to cash flow growth. As always, we continue to love that we have a great business model and we serve a very strong and resilient set of customers. We're very excited both about the opportunity ahead of us and on our plans to capitalize on that opportunity.

Now let me pass the call back to Pete.

David Peter F. Hess

Thanks, Jim. I'm excited about our plan for the future and confident that we will execute it well. We are committed to being the best at what our clients expect from us. We will enable them to take advantage of critical business and technology paradigm shifts, and by doing so, Advent's business will grow stronger. We're here to build tremendous value for shareholders, and we know that by doing what we do best and staying focused, we can. This is truly an exciting time in Advent, and I appreciate your taking an interest in our progress. Thank you for joining us. And now, I'd like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from Gil Luria from Wedbush Securities.

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

I wanted to start, first of all, with the deal with Schwab. You've pointed out that you have had a relationship with them for a while. You've gotten some referrals for them. What's different about the new agreement you have? And how is that going to increase the number of opportunities you get through Schwab?

David Peter F. Hess

Gil, this is Pete, good question. So we've had an informal relationship with Schwab. They've been an integration partner and they have -- when their clients were good fits for Advent, they've been gracious and they've steered us a lot of leads over the years. But they've also had their own solution. And so what Schwab strategies evolved a bit, where they have an open architecture similar to what the other RIA custodians are offering, and now Advent is part of that open architecture with formal integration agreements. So there's no financial -- there are no financials exchanging hands between Schwab and Advent on this, it's more a commitment to deliver better client experience to our joint clients.

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

Got it. And then you mentioned a 3-point drag from the EMEA customers but that means that domestically, you would've still had only 90% renewal rate initial for second quarter. What's contributing to that in terms of -- how is the slowdown in the economy and for your clients translating into low renewal rates? Is it less fee for less products, less some departures, some competitive losses? And then specifically, in your last Q, you mentioned TIAA, and the fact that you got a letter from them about your renewal next year, can you give us an update on that? How big that relationship is? Is there a chance that -- what are the chances of you renewing in that full rate?

David Peter F. Hess

So I'll take -- the first part of your question is about the renewal rate, and Jim's comment was that there were 3 specific accounts in EMEA that accounted for 3 percentage points on the renewal. But there were other headwinds from an EMEA renewals perspective besides just those 3 accounts. And those 3 accounts, it was a combination of firm going out of business, downsizing substantially, and then another was a client relationship that it was just really kind of a bad product fit that we had been working and struggling through for a number of years. So it was -- so those -- we have those types of things happen, but we don't tend to see them all happen in the same quarter and that's what happened to us in this instance. And some of it I think was precipitated just by the tough environment over in Europe. Domestically, our renewals picture actually is fairly constant. We're not seeing anything anomalistic with regard to renewals, and that domestically, most of the challenges that we faced over the past 2 quarters have been about the EMEA client base. So that's to that one, and with regard to TIAA, TIAA does come up for renewal next year. We are in discussions with TIAA on renewing that. I can't provide you with any real details on it other than that both parties want to work together and so we're just trying to find common ground on how to renew that contract.

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

Got it, and then finally, Jim, can you tell us what cash tax rate you expect for this year? And given the visibility you have at this point in today, what cash tax will you expect for next year?

James S. Cox

So we see ourselves at about 10% for this year, and as we're still always finalizing that information, Gil, and if we can get Congress to figure out what they're going to do with the R&D tax credit, I could give you a better number for next year. But I would say, somewhere around 20% for next year.

Operator

The next question is from Chris Donat with Sandler O'Neill.

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

Jim, just a follow-up on that last question. If the -- if Congress were to pass an R&D tax credit, what would the swing be? Is that worth like 2% tax rate or 5% or just kind of a ballpark?

James S. Cox

It would be reasonably significant for us. So in our provisional rate calculation for the full year, it would be between 3% and 5%, that number. The impact on the fourth quarter in our GAAP numbers, Chris, would be obviously very significant. I think we have some precedents for this, back in a couple of years ago. You can see that we actually had a slight tax benefit in the fourth quarter a couple of years ago, when we had the same circumstance occur. With respect to the cash taxes, it's obviously less impactful than that in the current year.

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

Okay. And then, Jim, on -- I want to make sure I got this right. You said, 16 -- I think, 16% of revenue was international. Of that 16%, how much of that is Europe? And I'm just trying to figure out how sort of your exposure to, with the kind of a lagging geography.

James S. Cox

Yes. It's about, 14% of that is in Europe, in the Middle East and Africa, and about 2% is in Asia.

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

Okay. And then just one for Pete here, also, my last one here. On the new organizational structure, just so you can help me understand what's some of the motivation from it, you gave examples of like an asset manager starting up a hedge fund. In the past, was it automatic that you would win business with that hedge fund? Is it -- was it created by the asset manager? Or was it not always a done deal, and are you now trying to position yourself, so that is something healthy or am I barking up the wrong tree here?

David Peter F. Hess

Well, I think what I noticed -- what I started to notice, and it's been a mounting thing and it just got to a point where it was time to switch, is we were redundantly building the same functionality across our platforms so that our -- each business unit could address the needs, the evolving needs of their client base. Rather than recommend the system of the neighbor business unit, they would just build the same functionality out on their own. And that manifests itself increasingly, and as you look at accounting and then you start to work to more of the peripheral workflows that we offer, we were investing $10, let's say, in reconciliation, but we were building 3 different systems with 3 and a third dollars [ph] invested in each. And the outcome is a reconciliation workflow solution that isn't really as robust as if we could have put $6 into it or $7. And it's a common workflow. We don't need to be building 3 of these things. And so what -- and then add to that, the need for us to build out our cloud platform, which we don't need 3 separate cloud platforms. And so, it really got to a point where there were so many interdependencies between the units on common development work, and when we had so many clients who needed us to be able to represent the whole breadth of Advent's offerings, that it just made sense for us to go to a functional structure. And that's what we're doing.

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

Okay. So then, global development will now effectively will be the traffic cop on what products are going forward and who will be the client, the internal clients on them?

David Peter F. Hess

Well, so it's a combination. Chris Momsen, he's got sales and also solutions strategies. So he is sort of the business driver, paired up with Todd Gottula, who will be the product development head. And so those 2 gentlemen have been running the global accounts group, the business -- the Geneva business for past 5 years -- 6 years, and have been really good at understanding the market, balancing, getting deals done, with also having the discipline to make sure that we're building the right things into the products. So they've earned the right to really guide the whole ship. And Anthony, whose background prior to being the AMG Group General Manager, he ran services at Advent. And one of the things that we want to focus on is our professional services performance, financial performance and Anthony, the best -- one of the best in the industry at that, his business unit actually has done a very good job with their professional services practice, so now we're consolidating that effort under Anthony as well, so that we can grab that low-hanging fruit.

Operator

The next question is from David Scharf with JMP Securities.

David M. Scharf - JMP Securities LLC, Research Division

I want to just dig in a little more on the re-org. Can you, first, just in terms of the quantification of the charges, the $2 million to $4 million, given that the low and high end of the range represent a factor or 2, can you give a sense for what would lead to the low end versus the high end, if most of it is just severance?

James S. Cox

Well, I think we're finalizing the list and determining that across. Obviously, when you're merging business units into functional organizations, you have management stacks that are duplicated as a result of doing that. And so obviously, there's a fair level of efficiency that you can pull out of that. And so depending on how much gets done there, that affects that. We also are redeploying people to try and make sure that their focused on our best opportunities. And so that also impacts that decision.

David M. Scharf - JMP Securities LLC, Research Division

But the general function -- current functions of the 50-odd headcount, has that been identified, or is that...

James S. Cox

Yes.

David M. Scharf - JMP Securities LLC, Research Division

Okay. Shifting to U.S. demand. I know there was a commentary a few questions go about renewal rates in the U.S., but can you give us any better sense for whether the ground has shifted at all in these last 3 months on end-market demand domestically? I know that all the talk has been about EMEA thus far. And without dwelling on the tragedy right now out east, whether we should expect it, the typical robust fourth quarter bookings period, if you expect it to be considerably lower just given the events for the last 24 hours?

David Peter F. Hess

I don't know. I mean, your guess is as good as mine about what the reaction to the hurricane and the election and we've got different things in play right now. I don't know. What I do know is that we have a really good-looking fourth quarter pipeline and some of that is -- and so quantitatively, it is very solid. Qualitatively, I would say it's as solid as we've ever had, except some of the deals that are in this fourth quarter pipeline are deals that we thought were going to close in the third quarter. And so there is this trend which I'm sure you're hearing from other folks, too, is that decisions are taking longer. It's certainly most pronounced in Europe, but it is also true to some extent in the U.S. relative to last year. So it makes predicting what's going to happen in the fourth quarter, it's always difficult to predict. We know that the fourth quarter will be our best quarter. That happens every year. Whether we're going to hit it out of the park, or whether we're just going to have a respectable fourth quarter, I don't know yet.

David M. Scharf - JMP Securities LLC, Research Division

Got it. And then lastly, would you characterize the lengthening sales cycle, the longer decision-making, would you characterize it as 100% macro-related? Or is there any element of a longer RFP process, perhaps more competitors submitting RFPs, pricing considerations, or is it all just top down?

David Peter F. Hess

I think it's mostly macro, and it's not all just about the health of the economy. When -- there are other, what I would characterize as kind of macro trends, being new firm formation, and there a lot of things that create sales opportunities for us, and we're not seeing as much new firm formation as we saw last year, this year, which is one of the headwinds. But it's certainly not -- it's not an issue of the competitive landscape getting tougher. I think our win rates are higher than they've ever been. I mean, when we walk the halls here at Advent, we feel really good about where we are competitively. We've got, obviously, a lot that we're doing that we think will give us more of a quantum advantage with regard to things we're doing with the cloud, et cetera. But nevertheless, we feel good about our competitive status and the win rate. So it's a combination of these macro trends that I think are really creating that demand environment, but it's not quite as robust as it was last year.

Operator

The next question is from Peter Heckmann with Avondale Partners.

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

When we look at those -- the reduction in force, can you talk about what percentage of that might be occurring within the professional services bench and some of your expectations for trying to improve utilization there? We saw gross margins erode in the nonrecurring revenue portion of the business. And can we talk about kind of the 4- or 5-quarter plan to kind of get that line item more towards the breakeven?

David Peter F. Hess

Yes. So good question about professional services. I called it low-hanging fruit earlier. So what we've done, the way that -- by consolidating the practices, first of all, we gained some efficiencies in the overhead to run the practices. So that's part 1. And part 2 is that our supply has exceeded the demand for our professional services, and so we got out ahead of ourselves in hiring particularly in the EMEA region. And so that's again, that's work that we're addressing through the reorganization process. And then lastly, the commercialization practices for our professional services, we're going to be looking to modify those as well. We got into the habit of discounting professional services pretty dramatically, and it was a combination of what I would characterize as self-imposed problems, one being, we just allowed the practices the way that our teams are aligned from a compensation perspective, et cetera. It all sort of enabled us to discount professional services without, at the front line level, there being much in the way of consequence. And so going forward, we're going to start to link everybody's interests more closely to the performance of the professional services practice. And that's again an easy thing to do. It's something that we're going to implement in January. And in the meantime, we've put some controls in place to make sure that we're not discounting professional services any more than we want to be right now. So there's some controls that are going in. But the whole solution goes into place next year. And our goal isn't to turn it into a 30% margin business, but we certainly think we can get it to be a breakeven business in -- within 2 years. We're very optimistic on that goal and maybe we'll set a higher goal as we progress. But that's kind of the outlook on it.

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

All right, that's fair. And then, you continue to build a pretty respectable cash position. Can you talk about some of the opportunities that you might be seeing out there in terms of M&A, and kind of the thought process of allocating some of that cash to repurchases versus M&A?

James S. Cox

Pete, this is Jim. So we did buy back about $15 million worth of stock in the third quarter. With respect to M&A, there are always things out there and there are always things that we will evaluate. But as history shows, we're very selective in that process. And so I think -- we think of all of those as viable and reasonable uses of our cash right now.

Operator

We have no further questions at this time. I would like to turn it over it to Pete Hess, CEO, for closing remarks.

David Peter F. Hess

Well, thank you, everybody, for taking the time. I'm sure it was not convenient to call in today, but we really appreciate everybody adjusting their schedules, and we look forward to our next earnings call in January. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes the Q3 2012 Advent Software Earnings Conference call. Thank you all for participating. You may now disconnect.

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Source: Advent Software Management Discusses Q3 2012 Results - Earnings Call Transcript
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