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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2010

 

or

 

o

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number:  0-26994

 

ADVENT SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

94-2901952

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification Number)

 

600 Townsend Street, San Francisco, California 94103

(Address of principal executive offices and zip code)

 

(415) 543-7696

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No x

 

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2010 was 25,770,218.

 

 

 



Table of Contents

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

 

 

Condensed Consolidated Statements of Operations

 

 

Condensed Consolidated Statements of Cash Flows

 

 

Notes to Condensed Consolidated Financial Statements

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Item 4.

Controls and Procedures

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

Item 1A.

Risk Factors

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3.

Defaults Upon Senior Securities

 

Item 4.

Removed and Reserved

 

Item 5.

Other Information

 

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

51,910

 

$

57,877

 

Short-term marketable securities

 

70,126

 

31,273

 

Accounts receivable, net

 

44,735

 

44,246

 

Deferred taxes, current

 

15,145

 

15,081

 

Prepaid expenses and other

 

17,799

 

22,350

 

Current assets of discontinued operation

 

 

494

 

Total current assets

 

199,715

 

171,321

 

Property and equipment, net

 

41,534

 

33,945

 

Goodwill

 

146,460

 

144,827

 

Other intangibles, net

 

21,007

 

22,965

 

Long-term marketable securities

 

 

28,495

 

Deferred taxes, long-term

 

40,500

 

40,502

 

Other assets

 

9,719

 

10,142

 

Noncurrent assets of discontinued operation

 

2,095

 

2,095

 

 

 

 

 

 

 

Total assets

 

$

461,030

 

$

454,292

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

9,087

 

$

4,708

 

Accrued liabilities

 

28,526

 

31,066

 

Deferred revenues

 

135,661

 

140,186

 

Income taxes payable

 

9,190

 

1,616

 

Current liabilities of discontinued operation

 

162

 

719

 

Total current liabilities

 

182,626

 

178,295

 

Deferred revenue, long-term

 

5,968

 

5,879

 

Other long-term liabilities

 

14,073

 

12,969

 

Noncurrent liabilities of discontinued operation

 

5,200

 

5,115

 

 

 

 

 

 

 

Total liabilities

 

207,867

 

202,258

 

 

 

 

 

 

 

Commitments and contingencies (See Note 12)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

257

 

259

 

Additional paid-in capital

 

399,415

 

386,623

 

Accumulated deficit

 

(156,067

)

(145,584

)

Accumulated other comprehensive income

 

9,558

 

10,736

 

Total stockholders’ equity

 

253,163

 

252,034

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

461,030

 

$

454,292

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

 

 

 

 

Term license, maintenance and other recurring

 

$

61,971

 

$

55,346

 

$

181,055

 

$

166,416

 

Perpetual license fees

 

2,755

 

2,370

 

7,796

 

7,633

 

Professional services and other

 

7,261

 

6,066

 

19,096

 

19,126

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

71,987

 

63,782

 

207,947

 

193,175

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Term license, maintenance and other recurring

 

12,709

 

11,920

 

37,866

 

34,729

 

Perpetual license fees

 

61

 

65

 

199

 

255

 

Professional services and other

 

8,730

 

7,628

 

21,623

 

23,190

 

Amortization of developed technology

 

1,672

 

1,416

 

4,871

 

4,145

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

23,172

 

21,029

 

64,559

 

62,319

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

48,815

 

42,753

 

143,388

 

130,856

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

16,763

 

15,627

 

50,671

 

46,538

 

Product development

 

13,069

 

12,179

 

38,237

 

35,528

 

General and administrative

 

8,893

 

8,636

 

28,316

 

25,932

 

Amortization of other intangibles

 

331

 

438

 

977

 

1,315

 

Restructuring charges

 

26

 

36

 

610

 

92

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

39,082

 

36,916

 

118,811

 

109,405

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

9,733

 

5,837

 

24,577

 

21,451

 

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense), net

 

163

 

(194

)

(772

)

1,585

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

9,896

 

5,643

 

23,805

 

23,036

 

Provision for income taxes

 

3,915

 

1,741

 

8,734

 

6,612

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

5,981

 

$

3,902

 

$

15,071

 

$

16,424

 

 

 

 

 

 

 

 

 

 

 

Discontinued operation:

 

 

 

 

 

 

 

 

 

Net income (loss) from discontinued operation (net of applicable taxes of $(19), $223, $(69) and $1,409, respectively)

 

(23

)

770

 

(98

)

2,499

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,958

 

$

4,672

 

$

14,973

 

$

18,923

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.23

 

$

0.15

 

$

0.59

 

$

0.65

 

Discontinued operation

 

(0.00

)

0.03

 

(0.00

)

0.10

 

Total operations

 

$

0.23

 

$

0.18

 

$

0.58

 

$

0.75

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.22

 

$

0.15

 

$

0.56

 

$

0.63

 

Discontinued operation

 

(0.00

)

0.03

 

(0.00

)

0.10

 

Total operations

 

$

0.22

 

$

0.18

 

$

0.55

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to compute net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

25,634

 

25,527

 

25,735

 

25,352

 

Diluted

 

27,116

 

26,630

 

27,139

 

26,244

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

14,973

 

$

18,923

 

Adjustment to net income for discontinued operation

 

98

 

(2,499

)

Net income from continuing operations

 

15,071

 

16,424

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:

 

 

 

 

 

Stock-based compensation

 

13,638

 

13,975

 

Depreciation and amortization

 

13,289

 

12,432

 

Loss on dispositions of fixed assets

 

22

 

9

 

Provision for doubtful accounts

 

148

 

268

 

Provision for (reduction of) sales returns

 

(813

)

454

 

Gain on investment

 

 

(2,056

)

Deferred income taxes

 

(56

)

(1

)

Other

 

353

 

116

 

Effect of statement of operations adjustments

 

26,581

 

25,197

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(354

)

7,717

 

Prepaid and other assets

 

4,770

 

5,688

 

Accounts payable

 

4,347

 

483

 

Accrued liabilities

 

(2,214

)

(93

)

Deferred revenues

 

(3,889

)

(9,089

)

Income taxes payable

 

7,548

 

5,250

 

Effect of changes in operating assets and liabilities

 

10,208

 

9,956

 

 

 

 

 

 

 

Net cash provided by operating activities from continuing operations

 

51,860

 

51,577

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Cash used in acquisitions, net of cash acquired

 

(4,719

)

 

Purchases of property and equipment

 

(14,995

)

(2,860

)

Capitalized software development costs

 

(1,599

)

(2,000

)

Purchases of marketable securities

 

(29,000

)

 

Sales and maturities of marketable securities

 

19,000

 

 

Proceeds from disposition of fixed assets

 

 

37

 

Change in restricted cash

 

 

1,534

 

Proceeds from sale of investments

 

 

2,056

 

 

 

 

 

 

 

Net cash used in investing activities from continuing operations

 

(31,313

)

(1,233

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from common stock issued from exercises of stock options

 

10,943

 

6,318

 

Withholding taxes related to equity award net share settlement

 

(4,342

)

(2,026

)

Proceeds from common stock issued under the employee stock purchase plan

 

2,929

 

2,946

 

Repurchase of common stock

 

(35,881

)

(14,578

)

Repayment of long-term borrowing

 

 

(25,000

)

 

 

 

 

 

 

Net cash used in financing activities from continuing operations

 

(26,351

)

(32,340

)

 

 

 

 

 

 

Net cash transferred (to) from discontinued operation

 

(76

)

5,662

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(87

)

400

 

 

 

 

 

 

 

Net change in cash and cash equivalents from continuing operations

 

(5,967

)

24,066

 

Cash and cash equivalents of continuing operations at beginning of period

 

57,877

 

45,098

 

 

 

 

 

 

 

Cash and cash equivalents of continuing operations at end of period

 

$

51,910

 

$

69,164

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash flow from discontinued operation:

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(341

)

$

4,283

 

Net cash used in investing activities

 

 

(715

)

Net cash transferred (to) from continuing operations

 

76

 

(5,662

)

Effect of exchange rates on cash and cash equivalents

 

(1

)

(8

)

Net change in cash and cash equivalents from discontinued operations

 

(266

)

(2,102

)

Cash and cash equivalents of discontinued operation at beginning of period

 

266

 

3,253

 

Cash and cash equivalents of discontinued operation at end of period

 

$

 

$

1,151

 

 

The cash flows from the discontinued operation, as presented in the condensed consolidated statement of cash flows, relate to the operations of MicroEdge.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

ADVENT SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Basis of Presentation

 

The condensed consolidated financial statements include the accounts of Advent Software, Inc. (“Advent” or the “Company”) and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.

 

Advent has prepared these condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in these interim statements pursuant to such SEC rules and regulations. These interim financial statements should be read in conjunction with the audited financial statements and related notes included in Advent’s Annual Report on Form 10-K for the year ended December 31, 2009. Interim results are not necessarily indicative of the results to be expected for the full year, and no representation is made thereto.

 

These condensed consolidated financial statements include, in the opinion of management, all adjustments necessary to state fairly the financial position and results of continuing operations for each interim period shown. All such adjustments occur in the ordinary course of business and are of a normal, recurring nature.

 

Note 2—Recent Accounting Pronouncements

 

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2010, as compared to the recent accounting pronouncements described in Advent’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, that are of significance, or potential significance, to the Company.

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition) (“ASU 2009-13”) and ASU 2009-14,  Certain Arrangements That Include Software Elements, (amendments to FASB ASC Topic 985,  Software) (“ASU 2009-14”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company has not early adopted this guidance and does not expect adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on the Company’s condensed consolidated financial statements.

 

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for entities with a reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning April 1, 2011. The adoption of these changes had no material impact on the Company’s condensed consolidated financial statements.

 

Note 3 — Cash Equivalents and Marketable Securities

 

At September 30, 2010, cash equivalents and short-term marketable securities primarily consisted of money market mutual funds, US government and US Government Sponsored Entities (GSE’s) and high credit quality corporate debt securities that are guaranteed by the US government. The Company’s short-term marketable securities are classified as available-for-sale, with long-term investments, if applicable, having a maturity date greater than one year from the end of the period.

 

6



Table of Contents

 

At September 30, 2010, marketable securities were summarized as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Aggregate

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

27,580

 

$

18

 

$

(1

)

$

27,597

 

US government debt securities

 

42,512

 

19

 

(2

)

42,529

 

Total

 

$

70,092

 

$

37

 

$

(3

)

$

70,126

 

 

The following table summarizes marketable securities with unrealized gains and losses by contractual maturity dates at September 30, 2010 (in thousands):

 

 

 

Less than 12 months

 

 

 

 

 

Net

 

 

 

Amortized

 

Unrealized

 

 

 

Cost

 

Gains

 

 

 

 

 

 

 

Corporate debt securities

 

$

27,580

 

$

17

 

US government debt securities

 

42,512

 

17

 

Total

 

$

70,092

 

$

34

 

 

Advent regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition, credit quality and near-term prospects of the investee, and Advent’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

The gross unrealized losses related to investments are primarily due to a decrease in the fair value of debt securities as a result of an increase in interest rates since the acquisition of the securities. For fixed income securities that have unrealized losses as of September 30, 2010,  the Company has determined that (i) it does not have the intent to sell any of these investments and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, the Company has evaluated these fixed income securities and has determined that no credit losses exist. As of September 30, 2010, all securities in an unrealized loss position have been in an unrealized loss position for less than one year. The Company’s management has determined that the unrealized losses on its fixed income securities as of September 30, 2010 were temporary in nature.

 

During the nine months ended September 30, 2010, $19.0 million of marketable securities matured, which did not have any associated gross realized gains or losses, and were reinvested in the purchase of additional marketable securities.

 

Note 4—Discontinued Operation

 

During 2009, the Company decided to discontinue its operations in the not-for-profit business community to concentrate on its core investment management business. In connection with this decision, the Company completed the sale of MicroEdge on October 1, 2009 to an affiliate of Vista Equity Partners III, LLC (“Purchaser”). The Company sold net assets in MicroEdge totaling $3.0 million.  The total consideration received by the Company in connection with the divestiture was approximately $30 million in cash, of which $27 million in cash was paid on the closing date. The remaining $3 million of the Purchase Price has been placed in escrow for eighteen (18) months from the date of the close and will be held as security for losses incurred by the Purchaser in the event of certain breaches of the representations and warranties contained in the Agreement or certain other events. Any gain on sale associated with the $3.0 million held in escrow will be recorded when realized. In connection with the sale of MicroEdge, the Company recorded an associated gain of $13.6 million in “net income from discontinued operation, net of applicable taxes” in its fourth quarter of 2009 results.

 

As part of the disposition, certain assets and obligations of the Company’s discontinued operation were excluded from the sale and are reflected on the Company’s balance sheet as of September 30, 2010 and December 31, 2009. Assets excluded from the sale include cash and deferred tax assets.  Liabilities excluded from the sale include sales tax and other tax-related obligations, future payments related to a two year service and maintenance agreement, certain legal costs and employee related compensation payments incurred as of the period ended September 30, 2009, and continuing lease obligations included as part of the restructuring noted below. Legal costs and liabilities related to employee compensation were all paid as of December 31, 2009 and certain sales tax obligations have been paid through September 30, 2010.

 

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Table of Contents

 

In connection with the sale of MicroEdge, the Company vacated its MicroEdge facilities in New York and entered into a sub-lease agreement with the Purchaser whereby the Purchaser will sub-lease the premises for two years with the option to extend the sub-lease term through the end of the lease term in 2018.

 

The following table sets forth an analysis of the components of the restructuring charges related to the Company’s discontinued operation and the payments and non-cash charges made against the accrual during the nine months ended September 30, 2010 (in thousands):

 

 

 

Facility Exit

 

Severance and

 

 

 

 

 

Costs

 

Benefits

 

Total

 

 

 

 

 

 

 

 

 

Balance of restructuring accrual at December 31, 2009

 

$

5,115

 

$

 

$

5,115

 

 

 

 

 

 

 

 

 

Restructuring charges

 

6

 

 

6

 

Cash payments

 

(44

)

(8

)

(52

)

Adjustment of prior restructuring costs

 

123

 

8

 

131

 

 

 

 

 

 

 

 

 

Balance of restructuring accrual at September 30, 2010

 

$

5,200

 

$

 

$

5,200

 

 

Net revenues and income from the Company’s discontinued operation were as follows for the following periods (in thousands):

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

 

$

5,934

 

$

 

$

18,859

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from discontinued operation (net of applicable taxes of $(19), $223, $(69), and $1,409, respectively)

 

$

(23

)

$

770

 

$

(98

)

$

2,499

 

 

The following table sets forth the assets and liabilities of the MicroEdge discontinued operation included in the condensed consolidated balance sheets of the Company (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

266

 

Prepaid expenses and other

 

 

228

 

Total current assets of discontinued operation

 

$

 

$

494

 

 

 

 

 

 

 

Deferred taxes, long-term

 

$

2,095

 

$

2,095

 

Total noncurrent assets of discontinued operation

 

$

2,095

 

$

2,095

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accrued liabilities and income taxes payable

 

$

162

 

$

719

 

Total current liabilities of discontinued operation

 

$

162

 

$

719

 

 

 

 

 

 

 

Accrued restructuring, long-term portion

 

$

5,200

 

$

5,115

 

Total noncurrent liabilities of discontinued operation

 

$

5,200

 

$

5,115

 

 

8



Table of Contents

 

Note 5—Stock-Based Compensation

 

Equity Award Activity

 

A summary of the status of the Company’s stock option and stock appreciation right (“SAR”) activity for the period presented follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

Number of

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual Life

 

Value

 

 

 

(in thousands)

 

Price

 

(in years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2009

 

3,945

 

$

29.14

 

 

 

 

 

Options & SARs granted

 

485

 

$

43.56

 

 

 

 

 

Options & SARs exercised

 

(643

)

$

27.29

 

 

 

 

 

Options & SARs canceled

 

(105

)

$

36.67

 

 

 

 

 

Outstanding at September 30, 2010

 

3,682

 

$

31.15

 

6.34

 

$

77,502

 

Exercisable at September 30, 2010

 

2,282

 

$

26.60

 

5.07

 

$

58,420

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing stock price of $52.19 as of September 30, 2010 for options and SARs that were in-the-money as of that date.

 

The weighted average grant date fair value of options and SARs granted (as determined under ASC 718), total intrinsic value of options and SARs exercised and cash received from option exercises during the nine months ended September 30, 2010 and 2009 were as follows (in thousands, except weighted average grant date fair value):

 

 

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

Options and SARs

 

 

 

 

 

Weighted average grant date fair value

 

$

14.98

 

$

14.68

 

Total intrinsic value of awards exercised

 

$

12,445

 

$

5,261

 

 

 

 

 

 

 

Options

 

 

 

 

 

Cash received from exercises

 

$

10,943

 

$

6,318

 

 

The Company settles exercised stock options and SARs with newly issued common shares.

 

A summary of the status of the Company’s restricted stock unit (“RSU”) activity for the nine months ended September 30, 2010 is as follows:

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

 

 

Shares

 

Grant Date

 

 

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Outstanding and unvested at December 31, 2009

 

685

 

$

36.33

 

 

 

 

 

 

 

RSUs granted

 

218

 

$

43.73

 

 

 

 

 

 

 

RSUs vested

 

(211

)

$

42.41

 

 

 

 

 

 

 

RSUs canceled

 

(28

)

$

37.53

 

 

 

 

 

 

 

Outstanding and unvested at September 30, 2010

 

664

 

$

36.78

 

 

The weighted average grant date fair value was determined based on the closing market price of the Company’s common stock on the date of the award. The aggregate intrinsic value of RSUs outstanding at September 30, 2010 was $34.7 million, using the closing price of $52.19 per share as of September 30, 2010.

 

9



Table of Contents

 

Stock-Based Compensation Expense

 

Stock-based employee compensation expense recognized on Advent’s condensed consolidated statement of operations for the three and nine months ended September 30, 2010 and 2009 was as follows (in thousands):

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

Statement of operations classification

 

 

 

 

 

 

 

 

 

Cost of term license, maintenance and other recurring revenues

 

$

466

 

$

498

 

$

1,308

 

$

1,333

 

Cost of professional services and other revenues

 

294

 

336

 

846

 

967

 

Total cost of revenues

 

760

 

834

 

2,154

 

2,300

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

1,572

 

1,650

 

4,288

 

4,265

 

Product development

 

1,356

 

1,326

 

3,882

 

3,641

 

General and administrative

 

1,122

 

1,388

 

3,314

 

3,769

 

Total operating expenses

 

4,050

 

4,364

 

11,484

 

11,675

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

4,810

 

5,198

 

13,638

 

13,975

 

 

 

 

 

 

 

 

 

 

 

Tax effect on stock-based employee compensation

 

(2,244

)

(2,212

)

(6,213

)

(5,721

)

 

 

 

 

 

 

 

 

 

 

Effect on net income from continuing operations, net of tax

 

2,566

 

2,986

 

7,425

 

8,254

 

 

 

 

 

 

 

 

 

 

 

Effect on net income from discontinued operation, net of tax

 

 

(35

)

 

340

 

 

 

 

 

 

 

 

 

 

 

Effect on net income, net of tax

 

$

2,566

 

$

2,951

 

$

7,425

 

$

8,594

 

 

Advent capitalized stock-based employee compensation expense of $0.2 million during the nine months ended September 30, 2009 associated with the Company’s software development, internal-use software and professional services implementation projects. There were no capitalized stock-based employee compensation expenses during the nine months ended September 30, 2010.

 

As of September 30, 2010, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was $30.3 million and is expected to be recognized through the remaining vesting period of each grant, with a weighted average remaining period of 2.4 years.

 

Valuation Assumptions

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following assumptions:

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

Stock Options & SARs

 

 

 

 

 

 

 

 

 

Expected volatility

 

38.0% - 38.2%

 

43.1% - 48.3%

 

35.2% - 38.8%

 

43.1% - 57.7%

 

Expected life (in years)

 

4.96

 

5.1

 

3.86 - 4.96

 

4.17 - 5.47

 

Risk-free interest rate

 

1.5% - 1.9%

 

2.6% - 2.7%

 

1.5% - 2.7%

 

1.8% - 3.0%

 

Expected dividends

 

None

 

None

 

None

 

None

 

 

 

 

 

 

 

 

 

 

 

Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

 

Expected volatility

 

29.9%

 

58.3%

 

29.5% - 29.9%

 

58.3% - 72.8%

 

Expected life (in months)

 

6

 

6

 

6

 

6

 

Risk-free interest rate

 

0.2%

 

0.3%

 

0.2%

 

0.3% - 0.4%

 

Expected dividends

 

None

 

None

 

None

 

None

 

 

The expected stock price volatility was determined based on an equally weighted average of historical and implied volatility of the Company’s common stock. Advent believes that a blend of implied volatility and historical volatility is more reflective of the market conditions and a better indicator of expected volatility than using purely historical volatility. The expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The risk-free interest rate is based on the US Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The dividend yield assumption is based on the Company’s history of not paying dividends and the resultant future expectation of dividend payouts.

 

10



Table of Contents

 

Note 6—Net Income Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the sum of weighted average number of common shares outstanding and the potential number of dilutive common shares outstanding during the period, excluding the effect of any anti-dilutive securities. Potential common shares consist of the shares issuable upon the exercise of stock options and SARs, the vesting of restricted stock awards and from withholdings associated with the Company’s employee stock purchase plan. Potential common shares are reflected in diluted earnings per share by application of the treasury stock method, which in the current period includes consideration of unamortized stock-based compensation and windfall tax benefits.

 

The following table sets forth the computation of basic and diluted net income (loss) per share for continuing operations and the Company’s discontinued operation (in thousands, except per-share data):

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss):

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

5,981

 

$

3,902

 

$

15,071

 

$

16,424

 

Discontinued operation

 

(23

)

770

 

(98

)

2,499

 

 

 

 

 

 

 

 

 

 

 

Total operations

 

$

5,958

 

$

4,672

 

$

14,973

 

$

18,923

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic net income (loss) per share- weighted average shares outstanding

 

25,634

 

25,527

 

25,735

 

25,352

 

 

 

 

 

 

 

 

 

 

 

Dilutive common equivalent shares:

 

 

 

 

 

 

 

 

 

Employee stock options and other

 

1,482

 

1,103

 

1,404

 

892

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted net income (loss) per share-weighted average shares outstanding, assuming exercise of potential dilutive common shares

 

27,116

 

26,630

 

27,139

 

26,244

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.23

 

$

0.15

 

$

0.59

 

$

0.65

 

Discontinued operation

 

(0.00

)

0.03

 

(0.00

)

0.10

 

 

 

 

 

 

 

 

 

 

 

Total operations

 

$

0.23

 

$

0.18

 

$

0.58

 

$

0.75

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.22

 

$

0.15

 

$

0.56

 

$

0.63

 

Discontinued operation

 

(0.00

)

0.03

 

(0.00

)

0.10

 

 

 

 

 

 

 

 

 

 

 

Total operations

 

$

0.22

 

$

0.18

 

$

0.55

 

$

0.72

 

 

Weighted average stock options, SARs and RSUs of approximately 1.0 million and 0.9 million for the three and nine months ended September 30, 2010, respectively, were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive. Similarly, weighted average stock options, SARs and RSUs of approximately 1.9 million and 2.3 million for the three and nine months ended September 30, 2009, respectively, were excluded from the calculation of diluted net income per share.

 

11



Table of Contents

 

Note 7—Goodwill

 

The changes in the carrying value of goodwill for the nine months ended September 30, 2010 were as follows (in thousands):

 

 

 

Goodwill

 

 

 

 

 

Balance at December 31, 2009

 

$

144,827

 

Additions

 

3,175

 

Translation adjustments

 

(1,542

)

 

 

 

 

Balance at September 30, 2010

 

$

146,460

 

 

Additions to goodwill of $3.2 million relate to the acquisition of Goya AS. In March 2010, the Company’s wholly-owned Norwegian subsidiary, Advent Norway AS, acquired the entire share capital of Goya AS, a Norwegian software company that provides transfer agency-related solutions to mutual fund managers and mutual fund distributors. Cash consideration of $4.7 million, net of cash acquired, was paid upon closing in March 2010.

 

Foreign currency translation adjustments totaling $1.5 million reflect the general weakening of the US dollar versus European currencies during the nine months ended September 30, 2010.

 

Note 8—Other Intangibles

 

The following is a summary of other intangibles as of September 30, 2010 (in thousands):

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Amortization

 

Other

 

 

 

Other

 

 

 

Period

 

Intangibles,

 

Accumulated

 

Intangibles,

 

 

 

(Years)

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Purchased technologies

 

5.0

 

$

28,099

 

$

(17,867

)

$

10,232

 

Product development costs

 

3.0

 

13,134

 

(8,805

)

4,329

 

 

 

 

 

 

 

 

 

 

 

Developed technology sub-total

 

 

 

41,233

 

(26,672

)

14,561

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

6.0

 

27,581

 

(21,748

)

5,833

 

Other intangibles

 

4.0

 

1,584

 

(971

)

613

 

 

 

 

 

 

 

 

 

 

 

Other intangibles sub-total

 

 

 

29,165

 

(22,719

)

6,446

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2010

 

 

 

$

70,398

 

$

(49,391

)

$

21,007

 

 

12



Table of Contents

 

The following is a summary of other intangibles as of December 31, 2009 (in thousands):

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Amortization

 

Other

 

 

 

Other

 

 

 

Period

 

Intangibles,

 

Accumulated

 

Intangibles,

 

 

 

(Years)

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Purchased technologies

 

4.9

 

$

26,556

 

$

(15,416

)

$

11,140

 

Product development costs

 

3.0

 

11,468

 

(6,428

)

5,040

 

 

 

 

 

 

 

 

 

 

 

Developed technology sub-total

 

 

 

38,024

 

(21,844

)

16,180

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

6.0

 

27,038

 

(21,040

)

5,998

 

Other intangibles

 

3.9

 

1,507

 

(720

)

787

 

 

 

 

 

 

 

 

 

 

 

Other intangibles sub-total

 

 

 

28,545

 

(21,760

)

6,785

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

 

 

$

66,569

 

$

(43,604

)

$

22,965

 

 

The changes in the carrying value of other intangibles during the nine months ended September 30, 2010 were as follows (in thousands):

 

 

 

Other

 

 

 

Other

 

 

 

Intangibles,

 

Accumulated

 

Intangibles,

 

 

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

$

66,569

 

$

(43,604

)

$

22,965

 

Additions

 

3,891

 

 

3,891

 

Amortization

 

 

(5,848

)

(5,848

)

Translation adjustments

 

(62

)

61

 

(1

)

 

 

 

 

 

 

 

 

Balance at September 30, 2010

 

$

70,398

 

$

(49,391

)

$

21,007

 

 

Additions to intangible assets of $3.9 million during the nine months ended September 30, 2010 include intangible asset additions of $2.2 million from the acquisition of Goya AS and capitalized product development costs of approximately $1.7 million.

 

Based on the carrying amount of intangible assets as of September 30, 2010, the estimated future amortization is as follows (in thousands):

 

 

 

Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

Years Ended December 31

 

 

 

 

 

2010

 

2011

 

2012

 

2013

 

2014

 

Thereafter

 

Total

 

Estimated future amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

1,501

 

$

5,346

 

$

4,459

 

$

2,654

 

$

257

 

$

344

 

$

14,561

 

Other intangibles

 

294

 

1,169

 

1,169

 

1,124

 

989

 

1,701

 

6,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,795

 

$

6,515

 

$

5,628

 

$

3,778

 

$

1,246

 

$

2,045

 

$

21,007

 

 

13



Table of Contents

 

Note 9—Balance Sheet Detail

 

The following is a summary of prepaid expenses and other (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Prepaid commission

 

$

4,849

 

$

5,483

 

Prepaid contract expense

 

6,229

 

5,815

 

Prepaid royalty

 

822

 

1,138

 

Tenant improvement allowance

 

1,957

 

3,863

 

Other

 

3,942

 

6,051

 

 

 

 

 

 

 

Total prepaid expenses and other

 

$

17,799

 

$

22,350

 

 

The following is a summary of other assets (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Long-term investment

 

$

500

 

$

500

 

Long-term prepaid commissions

 

3,239

 

3,204

 

Deposits

 

2,900

 

2,821

 

Prepaid contract expense, long-term

 

3,080

 

3,617

 

 

 

 

 

 

 

Total other assets

 

$

9,719

 

$

10,142

 

 

Long-term investment is an equity investment in a privately held company. This equity investment is carried at the lower of cost or fair value at September 30, 2010 and December 31, 2009. Deposits include restricted cash balances of $1.4 million at each of September 30, 2010 and December 31, 2009 related to the Company’s San Francisco headquarters and facilities in Boston and New York.

 

The following is a summary of accrued liabilities (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Salaries and benefits payable

 

$

15,564

 

$

21,273

 

Accrued restructuring, current portion

 

728

 

518

 

Other

 

12,234

 

9,275

 

 

 

 

 

 

 

Total accrued liabilities

 

$

28,526

 

$

31,066

 

 

Accrued restructuring charges are discussed further in Note 11, “Restructuring Charges”. Other accrued liabilities include accruals for royalties, sales and business taxes, and other miscellaneous items.

 

The following is a summary of other long-term liabilities (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Deferred rent

 

$

11,271

 

$

10,595

 

Accrued restructuring, long-term portion

 

630

 

716

 

Other

 

2,172

 

1,658

 

 

 

 

 

 

 

Total other long-term liabilities

 

$

14,073

 

$

12,969

 

 

14



Table of Contents

 

Note 10—Comprehensive Income

 

The components of comprehensive income (loss) were as follows for the periods presented (in thousands):

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

5,981

 

$

3,902

 

$

15,071

 

$

16,424

 

Unrealized gain on marketable securities, net of taxes

 

3

 

 

82

 

 

Foreign currency translation adjustment

 

3,544

 

1,141

 

(1,260

)

2,693

 

Comprehensive income from continuing operations

 

9,528

 

5,043

 

13,893

 

19,117

 

Comprehensive income (loss) from discontinued operation

 

(22

)

726

 

(98

)

2,933

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

9,506

 

$

5,770

 

$

13,795

 

$

22,049

 

 

The Company recorded taxes of $6,000 and $57,000 during the three and nine months ended September 30, 2010, respectively, related to the marketable securities component of other comprehensive income.

 

The components of accumulated other comprehensive income, net of related taxes, were as follows (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Accumulated net unrealized gain (loss) on marketable securities

 

$

20

 

$

(62

)

Accumulated foreign currency translation adjustments

 

9,538

 

10,798

 

Accumulated other comprehensive income, net of taxes

 

$

9,558

 

$

10,736

 

 

Note 11—Restructuring Charges

 

Minor restructuring initiatives were implemented in the Company’s Advent Investment Management segment since 2006 to reduce costs and improve operating efficiencies. These initiatives have resulted in restructuring charges comprised primarily of costs related to properties abandoned in connection with facilities consolidation and associated write-down of leasehold improvements. Advent’s restructuring charges included accruals for estimated losses on facility costs based on the Company’s contractual obligations net of estimated sublease income. Advent reassesses this liability periodically based on market conditions.

 

During the nine months ended September 30, 2010, Advent recorded a restructuring charge of $0.6 million which primarily related to facility and exit costs associated with the relocation of one of its facilities in New York City in the second quarter of 2010. During the nine months ended September 30, 2009, the Company recorded a restructuring charge $0.1 million which related to the present value amortization of facility exit obligations partially offset by adjustments to facility exit assumptions.

 

The following table sets forth an analysis of the components of the payments and restructuring charges made against the accrual during the nine months ended September 30, 2010 (in thousands):

 

 

 

Facility Exit

 

 

 

Costs

 

 

 

 

 

Balance of restructuring accrual at December 31, 2009

 

$

1,234

 

Restructuring charges

 

570

 

Reversal of deferred rent related to facilities exited

 

14

 

Cash payments

 

(500

)

Adjustment of prior restructuring costs

 

40

 

 

 

 

 

Balance of total restructuring accrual at September 30, 2010

 

$

1,358

 

 

Of the remaining restructuring accrual of $1.4 million at September 30, 2010, $0.7 million and $0.6 million are included in accrued liabilities and other long-term liabilities, respectively, on the accompanying condensed consolidated balance sheet. The remaining excess facility costs of $1.4 million are stated at estimated fair value, net of estimated sublease income of approximately $1.3 million. Advent expects to pay the remaining obligations associated with the vacated facilities over the remaining lease terms, which expire on various dates through 2012.

 

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Note 12—Commitments and Contingencies

 

Lease Obligations

 

Advent leases office space and equipment under non-cancelable operating lease agreements, which expire at various dates through June 2025. Some operating leases contain escalation provisions for adjustments in the consumer price index. Advent is responsible for maintenance, insurance, and property taxes. Excluding leases and associated sub-leases for MicroEdge facilities, as of September 30, 2010, Advent’s remaining operating lease commitments through 2025 are approximately $65.4 million, net of future minimum rental receipts of $1.3 million to be received under non-cancelable sub-leases.

 

In connection with the sale of MicroEdge, the Company entered into a sub-lease agreement with the Purchaser, whereby Purchaser will sub-lease approximately 24,000 square feet of the 29,000 square feet of office space located at 619 West 54th Street in New York, New York from the Company. The Purchaser will sub-lease the premises for two years with the option to extend the sub-lease term through the end of the lease term in 2018. The sub-lease agreement became effective upon the close of sale of MicroEdge on October 1, 2009. The operating lease commitment related to this discontinued operation facility is approximately $8.7 million, less estimated sub-lease income for two years of $1.0 million. With the exception of the MicroEdge facilities in New York City, the leases related to MicroEdge have been transferred to the Purchaser.

 

Indemnifications

 

As permitted or required under Delaware law and to the maximum extent allowable under that law, Advent has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at Advent’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Advent could be required to make under these indemnification obligations is unlimited; however, Advent has a director and officer insurance policy that mitigates Advent’s exposure and enables Advent to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification obligations is minimal.

 

Legal Contingencies

 

On March 8, 2005, certain of the former shareholders of Kinexus Corporation and the shareholders’ representative filed suit against Advent in the Delaware Chancery Court. The complaint alleges that Advent breached the Agreement and Plan of Merger dated as of December 31, 2001 pursuant to which Advent acquired all of the outstanding shares of Kinexus due principally to the fact that no amount was paid by Advent on an earn-out of up to $115 million. The earn-out, which was payable in cash or stock at the election of Advent, was based upon Kinexus meeting certain revenue targets in both 2002 and 2003. The complaint seeks unspecified compensatory damages, an accounting and restitution for unjust enrichment. Advent advised the shareholders’ representative in January 2003 that the earn-out terms had not been met in 2002 and accordingly no earn-out was payable for 2002 and would not be payable for 2003. There has been no further activity in this case since additional document discovery and interrogatory answers were provided by the parties in December 2008. Advent disputes the plaintiff’s claim and believes that it has meritorious defenses and intends to vigorously defend this action. Management has not determined that any potential loss associated with this litigation is either probable or reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

 

From time to time, Advent is involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on the Company’s financial position or results of operations. However, litigation is subject to inherent uncertainties and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.

 

Note 13—Segment Information

 

Description of Segments

 

ASC 280, “Segment Reporting” establishes standards for reporting information about operating segments in a company’s financial statements. Advent’s organizational structure is based on a number of factors that the chief operating decision maker (“CODM”) uses to evaluate, view and run its business operations which include, but are not limited to, customer base, homogeneity of products and technology. Advent currently has one operating segment as determined by this organizational structure and information reviewed by Advent’s CODM to evaluate the operating segment results.

 

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Table of Contents

 

Major Customers

 

No single customer represented 10% or more of Advent’s total net revenues in any period presented.

 

Note 14—Debt

 

On February 14, 2007, Advent and certain of its subsidiaries entered into a senior secured $75 million credit facility agreement (the “Credit Facility”) with Wells Fargo Foothill, Inc. (the “Lender”) for a term of three years. As of December 31, 2009, there were no outstanding borrowings under the Credit Facility and the Company was in compliance with all associated covenants.

 

In February 2010, Advent’s Credit Facility expired in accordance with the terms of the senior secured facility agreement with the Lender. Advent elected not to renew the Credit Facility as the Company determined its existing cash, cash equivalents, short-term and long-term marketable securities, together with cash expected to be generated from operations, would be sufficient to fund its operating activities, anticipated capital expenditures and authorized stock repurchases.

 

Note 15—Income Taxes

 

The following table summarizes the activity relating to the Company’s unrecognized tax benefits during the nine months ended September 30, 2010 (in thousands):

 

 

 

Total

 

 

 

 

 

Balance at December 31, 2009

 

$

7,467

 

 

 

 

 

Gross increases related to current period tax positions

 

290

 

Balance at September 30, 2010

 

$

7,757

 

 

At September 30, 2010 and December 31, 2009, Advent had $7.8 million and $7.5 million of gross unrecognized tax benefits, respectively. During the nine months ended September 30, 2010, Advent increased the amount of unrecognized tax benefits by approximately $0.3 million relating to California research and enterprise zone credits. If recognized, the total unrecognized tax benefits would decrease Advent’s tax provision and increase net income by $6.4 million. The impact on net income reflects the liabilities for unrecognized tax benefits net of the federal tax benefit of state income tax items. The Company’s liabilities for unrecognized tax benefits relate to federal research credits, California research and enterprise zone tax credits and various state net operating losses.

 

Advent is subject to taxation in the US and various state and foreign jurisdictions. Advent does not anticipate the total amount of its unrecognized tax benefits to significantly change over the next 12 months. The material jurisdictions that are subject to examination by tax authorities include federal for tax years after 2005 and California for tax years after 2004. During the nine months ended September 30, 2010, New York concluded an income tax audit for tax years up through 2007 and there were no material income tax assessments. Advent is currently undergoing a franchise tax examination by the State of California for the 2006 and 2007 tax years.

 

Note 16—Fair Value Measurements

 

The accounting guidance for fair value measurements establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

 

Level Input

 

Input Definition

 

 

 

Level 1

 

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

 

 

Level 2

 

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.

 

 

 

Level 3

 

Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

 

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In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. The Company applied this valuation technique to measure the fair value of the Company’s Level 1 investments, such as treasury obligation money market mutual funds and US government debt securities. Money market funds consist of cash equivalents with remaining maturities of three months or less at the date of purchase and are composed primarily of US government debt securities and treasury obligation money market mutual funds. Advent’s US government debt securities are securities sponsored by the federal government.

 

If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. The Company classifies its corporate debt securities as having Level 2 inputs. These corporate debt securities are guaranteed by the US government. The valuation techniques used to measure the fair value of the Company’s financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. The Company’s procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale securities. The fair value of these certain financial assets was determined using the following inputs as of September 30, 2010 (in thousands):

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices in

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Money Market Funds (1)

 

$

31,559

 

$

31,559

 

$

 

$

 

US government debt securities (2)

 

42,529

 

42,529

 

 

 

Corporate debt securities (2)

 

27,597

 

 

27,597

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

101,685

 

$

74,088

 

$

27,597

 

$

 

 


(1)    Included in cash and cash equivalents on the Company’s condensed consolidated balance sheet

(2)    Included in short-term marketable securities on the Company’s condensed consolidated balance sheet

 

There were no material transfers between Level 1 and Level 2 assets during the nine months ended September 30, 2010 and the Company does not have any significant assets that utilize unobservable or Level 3 inputs.

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value based on the short-term maturities of these instruments.

 

The Company also has a direct investment in a privately-held company accounted for under the cost method which is not reported in the table of assets measured at fair value above. This investment, which has a carrying value of $0.5 million at September 30, 2010, is periodically assessed for other-than-temporary impairment. If Advent determines that an other-than-temporary impairment has occurred, the Company writes down the investment to its fair value. Advent estimates fair value using a variety of valuation methodologies. Such methodologies include comparing the private company with publicly traded companies in similar lines of business, applying revenue and price/earnings multiples to estimated future operating results for the private company and estimating discounted cash flows for that company.

 

Note 17—Common Stock Repurchase Program

 

Advent’s Board has approved common stock repurchase programs authorizing management to repurchase shares of the Company’s common stock. The timing and actual number of shares subject to repurchase are at the discretion of Advent’s management and are contingent on a number of factors, including the price of Advent’s stock, Advent’s cash balances and working capital needs, general business and market conditions, regulatory requirements, and alternative investment opportunities. Repurchased shares are returned to the status of authorized and unissued shares of common stock.

 

On October 30, 2008, Advent’s Board authorized the repurchase of up to 3.0 million shares of the Company’s common stock. In May 2010, Advent’s Board authorized the repurchase of up to an additional 1.0 million shares of the Company’s common stock. Consistent with prior repurchase programs, there was no expiration date and repurchases could be limited or terminated at any time at the discretion of management.

 

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Table of Contents

 

The following table provides a summary of the quarterly repurchase activity during the nine months ended September 30, 2010 under the stock repurchase program approved by the Board in October 2008 and May 2010 (in thousands, except per share data):

 

 

 

Total

 

 

 

Average

 

 

 

Number

 

 

 

Price

 

 

 

of Shares

 

 

 

Paid

 

 

 

Purchased

 

Cost

 

Per Share

 

 

 

 

 

 

 

 

 

Q1 2010

 

249

 

$

10,542

 

$

42.41

 

Q2 2010

 

555

 

23,857

 

43.02

 

Q3 2010

 

32

 

1,482

 

45.89

 

 

 

 

 

 

 

 

 

 

Total

 

836

 

$

35,881

 

$

42.95

 

 

At September 30, 2010, there remained approximately 1.1 million shares authorized by the Board for repurchase.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

You should read the following discussion in conjunction with our consolidated financial statements and related notes. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, including, but not limited to statements referencing our expectations relating to future revenues, expenses and operating margins. Forward-looking statements can be identified by the use of terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or other similar terms and the negative of such terms regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include, among others, statements regarding the future of the investment management market and opportunities for us related thereto, future expansion, acquisition, or investment in other businesses, the impact of our divestment of MicroEdge, projections of revenues, future cost and expense levels, expected timing and amount of amortization expenses related to past acquisitions, the adequacy of resources to meet future cash requirements, estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, future client wins, future hiring and future product introductions and acceptance. Such forward-looking statements are based on our current plans and expectations and involve known and unknown risks and uncertainties which may cause our actual results or performance to be materially different from any results or performance expressed or implied by such forward-looking statements. Such factors include, but are not limited to the “Risk Factors” set forth in “Item 1A. Risk Factors” in this Form 10-Q, as well as other risks identified from time to time in other Securities and Exchange Commission (“SEC”) reports. You should not place undue reliance on our forward-looking statements, as they are not guarantees of future results, levels of activity or performance and represent our expectations only as of the date they are made.

 

We report or otherwise provide to investors certain non-GAAP and operational information, including non-GAAP operating income and earnings per share, and our bookings metrics (expressed as annual contract value, “ACV”) and maintenance renewal rates, that is intended to provide investors with certain of the information that management uses as a basis for planning and forecasting of future periods. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. In addition, undue reliance should not be placed upon non-GAAP or operating information because this information is neither standardized across companies nor subjected to the same control activities and audit procedures that produce our GAAP financial results.

 

Unless expressly stated or the context otherwise requires, the terms “we”, “our”, “us”, the “Company” and “Advent” refer to Advent Software, Inc. and its subsidiaries.

 

Overview

 

We offer integrated software products and services for automating and integrating data and work flows across the investment management organization, as well as between the investment management organization and external parties. Our products are intended to increase operational efficiency, improve the accuracy of client information and enable better decision-making. Each solution focuses on specific mission-critical functions of the front, middle and back offices of investment management organizations and is designed to meet the needs of the particular client, as determined by size, assets under management and complexity of their investment process. Unless otherwise noted, discussion in this document pertains to our continuing operations.

 

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Table of Contents

 

Current Economic Environment

 

During the first nine months of 2010, our business continued to benefit from an improved economic environment which began during the last half of 2009. For example, we grew bookings, revenues and renewal rates during the first nine months of 2010 as compared to the comparable period of 2009. We maintain our expectations of an improved demand environment for the remainder of 2010, and are expecting to grow revenues by 8% to 9% in fiscal 2010 compared to the prior year primarily as a result of recent booking activity from the prior 12 months and our improved renewal rates. As the current economic situation evolves, we will continue to evaluate its impact on our business and we will remain focused on delivering innovative solutions for our customers. We remain positive about our relatively strong market position and we intend to remain focused on executing in the areas we can influence by continuing to provide high value products while managing our expenses and headcount growth.

 

Operating Overview

 

Operating highlights of our third quarter of 2010 include:

 

·                  New and incremental bookings. The term license and Advent OnDemand contracts signed in the third quarter of 2010 will contribute approximately $7.6 million in annual revenue (“annual contract value” or “ACV”), once they are fully implemented. This represents a 12% increase over the $6.8 million of ACV booked from term license and Advent OnDemand contracts signed in the third quarter of 2009.

 

·                  Improvement in Renewal Rate.  Our renewal rate improved to a 91% initial renewal rate for the second quarter of 2010. This represents a 4-point improvement over the same period of 2009.

 

·                  International traction and expansion.  We continue to execute on our international growth strategy, with revenues from international sources totaling 15% in the third quarter of 2010. This represents a 2-point improvement over the same period in 2009. Additionally, we signed new customers in Bahrain, Singapore, Sweden, Switzerland and the United Kingdom in the third quarter of 2010.

 

·                  Advent Client Conference. We hosted a very successful client conference in September 2010 with more than 1,100 attendees, which included executives from the many market segments we serve including: asset managers, financial advisors, hedge funds, prime brokers, fund administrators, family offices, banks, broker dealers and trusts.

 

·                  Launch of Moxy 7.0.  We launched the latest version of Moxy, which is designed to support the growing trends towards model-driven portfolio construction and management, combined with increased concerns about compliance.

 

·                  Build-out of new facilities. During 2009, we signed lease agreements for our future facilities in New York City (the “Grace Building”) and Boston, and commenced the build-out of those facilities during the first quarter of 2010.  We completed the build-out and consolidated our operations in New York City and Boston during the second and third quarters of 2010, respectively.

 

Acquisition of Goya AS

 

During the first quarter of 2010, our wholly-owned Norwegian subsidiary, Advent Norway AS, acquired the entire share capital of Goya AS, a Norwegian software company that provides transfer agency-related solutions to mutual fund managers and mutual fund distributors. Cash consideration of $4.7 million, net of cash acquired, was paid upon closing in March 2010.

 

Term License and Term License Deferral/Recognition

 

We are substantially through the process of converting the Company’s license revenues from a perpetual license model to a term license model. When a customer purchases a term license together with implementation services, we do not recognize any revenue under the contract until the implementation services are complete and the remaining services are substantially complete. If the implementation services are still in progress as of quarter-end, we will defer all of the contract revenues to a subsequent quarter. At the point professional services are substantially completed, we recognize a pro-rata amount of the term license revenue, professional services fees earned and related expenses, based on the elapsed time from the start of the term license to the substantial completion of professional services. Term license revenue for the remaining contract years and the remaining deferred professional services revenue and related expenses are recognized ratably over the remaining contract length.

 

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Table of Contents

 

The term license component of the deferred revenue balance related to implementations in process will increase or decrease in the future depending on the amount of new term license bookings relative to the number of implementations that reach substantial completion in a particular quarter. For the three months ended September 30, 2010 and 2009, the term license deferral/recognition (decreased) increased the Company’s revenues as follows (in millions):

 

 

 

Three Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

Term license revenues

 

$

(0.4

)

$

0.7

 

$

(1.1

)

Professional services and other

 

(0.1

)

1.5

 

(1.6

)

 

 

 

 

 

 

 

 

Total net revenues

 

$

(0.5

)

$

2.2

 

$

(2.7

)

 

Amounts of revenues and directly-related expenses deferred as of September 30, 2010 and December 31, 2009 associated with our term licensing deferral was as follows (in millions):

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

Deferred revenues

 

 

 

 

 

Short-term

 

$

22.1

 

$

20.1

 

Long-term

 

4.9

 

4.6

 

 

 

 

 

 

 

Total

 

$

27.0

 

$

24.7

 

 

 

 

 

 

 

Directly-related expenses

 

 

 

 

 

Short-term

 

$

6.8

 

$

6.2

 

Long-term

 

2.5

 

2.4

 

 

 

 

 

 

 

Total

 

$

9.3

 

$

8.6

 

 

Deferred net revenue and directly-related expenses are classified as “Deferred revenues” (short-term and long-term), and “Prepaid expenses and other,” and “Other assets,” respectively, on the condensed consolidated balance sheets.

 

Financial Overview

 

The components of revenue from continuing operations during the third quarters of 2010 and 2009, and associated dollar and percentage fluctuations were as follows (in thousands, except % change):

 

 

 

Three Months Ended September 30

 

$

 

%

 

 

 

2010

 

2009

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Term license revenues

 

$

28,168

 

$

24,282

 

$

3,886

 

16

%

Maintenance revenues

 

18,111

 

18,703

 

(592

)

-3

%

Other recurring revenues

 

15,692

 

12,361

 

3,331

 

27

%

Total term license, maintenance and other recurring revenues

 

61,971

 

55,346

 

6,625

 

12

%

Recurring revenue as % of total revenue

 

86

%

87

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset under administration (AUA) fees

 

1,521

 

1,199

 

322

 

27

%

Other perpetual license fees

 

1,234

 

1,171

 

63

 

5

%

Total perpetual license fees

 

2,755

 

2,370

 

385

 

16

%

 

 

 

 

 

 

 

 

 

 

Professional services and other

 

7,261

 

6,066

 

1,195

 

20

%

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

$

71,987

 

$

63,782

 

$

8,205

 

13

%

 

Total net revenues increased by $8.2 million or 13% during the third quarter of 2010, which was primarily attributed to an increase in term license revenues of $3.9 million due to our recent bookings activity from the previous 12 months, growth in sales of our Geneva and APX products and our improved renewal rates. Additionally, other recurring revenues increased by $3.3 million or 27% during the third quarter of 2010 compared to the same period of 2009, as we recognized revenues from recent outsourced services and data services contracts that went live in September 2009. These increases were partially offset by a decrease of $0.6 million in perpetual maintenance revenues primarily resulting from perpetual license customers’ migration to term licenses and to maintenance de-activations due to customer attrition.

 

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Perpetual license fees in the third quarter of 2010 increased 16% or $0.4 million compared to the third quarter of 2009 as our clients experienced modest growth in AUA balances. Professional services and other revenues also increased due to revenues generated by our annual client conference that we hosted in September 2010, and greater consulting activity as a result of the continued growth in bookings driving additional implementations during the third quarter of 2010.

 

Total recurring revenues, which we define as term license, perpetual maintenance, and other recurring revenues, increased by $6.6 million but decreased to 86% of total net revenues during the third quarter of 2010, as compared to the same period in 2009. The increase in absolute dollars was driven by the increase in term license and other recurring revenues, while the decrease as a percentage of total net revenues reflects faster growth in professional services and other revenues, in particular consulting revenues and conference revenues. During the third quarter of 2010, we experienced an increase in new service engagements resulting in the revenue increases in consulting services. Conference revenue increased as we returned to hosting our client conference in 2010.

 

The components of cost of revenues and operating expenses, operating income, interest and other income (expense) net, provision for income taxes and net income from continuing operations during the third quarters of 2010 and 2009, and associated dollar and percentage fluctuations, were as follows (in thousands, except % change):

 

 

 

Three Months Ended September 30

 

$

 

%

 

 

 

2010

 

2009

 

Change

 

Change

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Term license, maintenance and other recurring

 

$

12,709

 

$

11,920

 

$

789

 

7

%

Perpetual license fees

 

61

 

65

 

(4

)

-6

%

Professional services and other

 

8,730

 

7,628

 

1,102

 

14

%

Amortization of developed technology

 

1,672

 

1,416

 

256

 

18

%

 

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

23,172

 

21,029

 

2,143

 

10

%

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Sales and marketing expense

 

16,763

 

15,627

 

1,136

 

7

%

Product development

 

13,069

 

12,179

 

890

 

7

%

General and administrative

 

8,893

 

8,636

 

257

 

3

%

Amortization of other intangibles

 

331

 

438

 

(107

)

-24

%

Restructuring charges

 

26

 

36

 

(10

)

-28

%

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

39,082

 

36,916

 

2,166

 

6

%

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

9,733

 

5,837

 

3,896

 

67

%

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense), net

 

163

 

(194

)

357

 

-184

%

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before

 

 

 

 

 

 

 

 

 

income taxes

 

9,896

 

5,643

 

4,253

 

75

%

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

3,915

 

1,741

 

2,174

 

125

%

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

5,981

 

$

3,902

 

$

2,079

 

53

%

 

Total expenses from continuing operations, including cost of revenues, increased to $62.3 million in the third quarter of 2010 from $57.9 million in the third quarter of 2009. This increase reflected costs associated with our client conference, which did not occur in 2009, and investments made in product development to upgrade our products. Additionally, we made investments to expand our business which resulted in higher costs for travel and entertainment, payroll and related expenses, and facilities. The increase in facilities costs reflects new offices in Beijing and Singapore which were opened subsequent to September 30, 2009. Domestic facility costs also increased as we consolidated our offices in New York City and Boston during the first nine months of 2009. During 2009, we signed lease agreements for our new facilities in these cities and during the first quarter of 2010 we commenced the build-out. We occupied our former facilities in New York and Boston until the build-out for our new facilities was completed; as a result, we incurred rent and utilities expense in both our former and new facilities during 2010 in these cities. We completed the build-out of our new facilities in New York and Boston in May and August 2010, respectively, and moved our operations to consolidate our facility space in both locations.

 

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Table of Contents

 

Our operating income from continuing operations in the third quarter of 2010 increased to $9.7 million or 14% of revenue from $5.8 million or 9% of revenue in the third quarter of 2009, which is reflective of improved leverage in our operating expense categories. Sales and marketing, product development, and general and administrative costs were all down by at least one percentage point compared to the same period last year.

 

Interest and other income was $0.2 million in the third quarter of 2010 compared to expense of $(0.2) million in the comparable period of 2009. The income in the third quarter of 2010 primarily represents foreign exchange gains as the US dollar weakened against the Pound Sterling, the Euro and other European currencies.

 

Our continuing operations’ income tax expense was $3.9 million resulting in a 40% effective tax rate during the third quarter of 2010, compared to $1.7 million or 31%, respectively, in the third quarter of 2009. The increase in the effective tax rate in the third quarter of 2010 compared with the third quarter of 2009 is primarily due to the lapsing of the federal research credit for 2010.

 

Net income from continuing operations was $6.0 million, resulting in diluted earnings per share of $0.22 for the third quarter of 2010, compared to $3.9 million or $0.15 in the third quarter of 2009.

 

Our continuing operations generated operating cash flow of $21.6 million in the third quarter of 2010, compared to $19.8 million in the third quarter of 2009. During the third quarter of 2010, we repurchased approximately 32,000 shares of common stock under our Board authorized share repurchase program for a total cash outlay of $1.5 million and an average price of $45.89 per share.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and related notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.

 

On an ongoing basis, we evaluate the process we use to develop estimates. We base our estimates on historical experience and on other information that we believe is reasonable for making judgments at the time the estimates are made. Actual results may differ from our estimates due to actual outcomes being different from those on which we based our assumptions.

 

We believe the following accounting policies contain the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

 

·                  Revenue recognition and deferred revenues;

 

·                  Income taxes;

 

·                  Stock-based compensation;

 

·                  Restructuring charges and related accruals;

 

·                  Business combinations;

 

·                  Disposition;

 

·                  Goodwill;

 

·                  Impairment of long-lived assets;

 

·                  Legal contingencies; and

 

·                  Sales returns and accounts receivable allowances

 

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Table of Contents

 

There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2010  as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

Recent Accounting Pronouncements

 

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2010, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, that are of significance, or potential significance, to the Company.

 

In October 2009, the Financial Accounting and Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition ) (“ASU 2009-13”) and ASU 2009-14,  Certain Arrangements That Include Software Elements  (amendments to FASB ASC Topic 985,  Software ) (“ASU 2009-14”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company has not early adopted this guidance and does not expect adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on our condensed consolidated financial statements.

 

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us beginning with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us starting with the reporting period beginning April 1, 2011. The adoption of these changes had no material impact on our condensed consolidated financial statements.

 

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Table of Contents

 

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

 

The following table sets forth, for the periods indicated, certain financial information as a percentage of total net revenues. The financial information and the ensuing discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto:

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

 

 

 

 

Term license, maintenance and other recurring

 

86

%

87

%

87

%

86

%

Perpetual license fees

 

4

 

4

 

4

 

4

 

Professional services and other

 

10

 

10

 

9

 

10

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

100

 

100

 

100

 

100

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Term license, maintenance and other recurring

 

18

 

19

 

18

 

18

 

Perpetual license fees

 

*

 

*

 

*

 

*

 

Professional services and other

 

12

 

12

 

10

 

12

 

Amortization of developed technology

 

2

 

2

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

32

 

33

 

31

 

32

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

68

 

67

 

69

 

68

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

23

 

25

 

24

 

24

 

Product development

 

18

 

19

 

18

 

18

 

General and administrative

 

12

 

14

 

14

 

13

 

Amortization of other intangibles

 

*

 

1

 

*

 

1

 

Restructuring charges

 

*

 

*

 

*

 

*

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

54

 

58

 

57

 

57

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

14

 

9

 

12

 

11

 

Interest and other income (expense), net

 

*

 

*

 

*

 

1

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

14

 

9

 

11

 

12

 

Provision for income taxes

 

5

 

3

 

4

 

3

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

8

 

6

 

7

 

9

 

 

 

 

 

 

 

 

 

 

 

Discontinued operation:

 

 

 

 

 

 

 

 

 

Net income (loss) from discontinued operation

 

*

 

1

 

*

 

1

 

 

 

 

 

 

 

 

 

 

 

Net income

 

8

%

7

%

7

%

10

%

 


 *Less than 1%

 

NET REVENUES

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenues (in thousands)

 

$

71,987

 

$

63,782

 

$

8,205

 

$

207,947

 

$

193,175

 

$

14,772

 

 

Our net revenues are made up of three components: term license, maintenance and other recurring revenue; perpetual license fees; and professional services and other revenue. The revenues from a term license, which includes both software license and maintenance services, are earned under a time based contract. Maintenance revenues are derived from maintenance fees charged for perpetual license arrangements and other recurring revenues are derived from our subscription-based and transaction-based services. Perpetual license revenues are derived from the licensing of software products under a perpetual arrangement and include Assets Under Administration (“AUA”) fees for certain perpetual arrangements. Professional services and other revenues include fees for consulting, fees from training, and project management services and our client conferences. Sales returns, which we generally do not provide to customers, are accounted for as deductions to these three revenue categories based on our historical experience.

 

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Table of Contents

 

Since fiscal 2007, revenues from recurring sources have grown and conversely revenues from perpetual licenses have decreased as follows:

 

 

 

 

 

 

 

 

 

YTD

 

 

 

 

 

 

 

 

 

September

 

As a percentage of net revenues

 

2007

 

2008

 

2009

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenues from recurring sources

 

79

%

80

%

86

%

87

%

 

 

 

 

 

 

 

 

 

 

Revenues from perpetual license fees

 

11

%

7

%

4

%

4

%

 

As we continue to sign term license agreements for new customers, grow our subscription, data management and outsourced services revenues, and our customers renew their perpetual maintenance, we expect our revenue from recurring sources to continue to represent over 85% of our total net revenues.

 

Total net revenues increased $8.2 million in the third quarter of 2010 compared to the same quarter in 2009.  The year-over-year growth in total net revenues for the third quarter of 2010 was due to higher revenues from recurring sources, primarily term license and other recurring revenues, which reflected $6.6 million or 12% growth in the third quarter of 2010 compared to the same quarter in 2009. The increase in term license and other recurring revenue is primarily due to growth in sales of our Geneva and APX products, revenue being recognized from several large data service and outsourcing arrangements where implementation was completed in September 2009. The increase in professional services and other revenues was due to our client conference held in September 2010.

 

Revenues derived from international sales were $10.5 million and $30.2 million for the three and nine months ended September 30, 2010, which reflected an increase of $2.4 million and $4.0 million when compared to the comparable periods in 2009. The increase primarily reflects increased demand in international locations over the previous 12 months. We plan to continue expanding our international sales efforts, both in our current markets and elsewhere. The revenues from customers in any single international country did not exceed 10% of total net revenues.

 

We expect total net revenues from continuing operations to be between $72 million and $74 million in the fourth quarter of 2010.

 

Term License, Maintenance and Other Recurring Revenues

 

(in thousands, except percent of

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

total net revenues)

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term license revenues

 

$

28,168

 

$

24,282

 

$

3,886

 

$

79,268

 

$

74,855

 

$

4,413

 

Maintenance revenues

 

18,111

 

18,703

 

(592

)

54,970

 

56,196

 

(1,226

)

Other recurring revenues

 

15,692

 

12,361

 

3,331

 

46,817

 

35,365

 

11,452

 

Total term license, maintenance and other recurring revenues

 

$

61,971

 

$

55,346

 

$

6,625

 

$

181,055

 

$

166,416

 

$

14,639

 

Percent of total net revenues

 

86

%

87

%

 

 

87

%

86

%

 

 

 

Total recurring revenues, which we define as term license, perpetual maintenance, and other recurring revenues, increased to 87% of total net revenues during the nine months ended September 30, 2010, compared to 86% in the comparable period of 2009. Total recurring revenues decreased to 86% of total net revenues during the third quarter of 2010 as compared to 87% in the comparable period of 2009, due to faster growth in professional service and other non-recurring revenues, primarily consulting and conference revenues. In 2010, we hosted the Advent client conference which contributed $1.0 million to professional services and other revenues during the third quarter of 2010, compared to zero in the same period of 2009.

 

Revenues from term licenses, which include both the software license and maintenance services for term licenses, grew during the three and nine months ended September 30, 2010 compared to the comparable periods of 2009. The growth of term license revenues reflects continued market acceptance of our Geneva, APX, Partner, Tamale and Moxy products and the continued layering of incremental ACV sold in the previous 12 months into our term revenue.

 

These increases were partially offset by the net term license revenue deferral during the three months ended September 30, 2010. For our term licenses, we defer all revenue on new bookings until our implementation services are complete. For the three and nine months ended September 30, 2010 and 2009, the term license deferral/recognition increased (decreased) the Company’s term license revenues as follows (in millions):

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term license revenues

 

$

(0.4

)

$

0.7

 

$

(1.1

)

$

(2.3

)

$

3.8

 

$

(6.1

)

 

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Table of Contents

 

During the nine months ended September 30, 2009, the revenue recognized from completed implementations exceeded the revenue deferred from projects being implemented as several large implementations were completed, resulting in a net recognition of term license revenue of $0.7 million and $3.8 million during the three and nine months ended September 30, 2009, respectively. During the nine months ended September 30, 2010, we returned to our prior trend of net term license revenue deferral, as our ACV bookings during this period increased 38% compared to the nine months ended September 30, 2009, and we deferred net term license revenues of $0.4 million and $2.3 million during the three and nine months ended September 30, 2010, respectively.

 

Maintenance revenues decreased $0.6 million and $1.2 million during the three and nine months ended September 30, 2010, respectively, when compared to the same periods in 2009. The decrease in maintenance revenues was attributable to maintenance de-activations from customer attrition, maintenance level downgrades, reductions in products licensed or number of users by clients, perpetual license customers migrating to term licenses, and continued decrease in new perpetual license customers, partially offset by the impact of price increases.

 

Other recurring revenues, which primarily include revenues from the provision of software interfaces to download securities information from third party data providers, partial or full business process outsourcing, account aggregation, reconciliation, reference data management, and hosting of hardware and/or software, increased $3.3 million and $11.5 million during the three and nine months ended September 30, 2010, respectively when compared to the same periods in 2009. The increase in other recurring revenues is primarily due to growth in revenues from outsourced services, and in data services as several large arrangements went live in September 2009.

 

Our renewal rates are based on cash collections and are disclosed one quarter in arrears. We disclose our renewal rates one quarter in arrears in order to include substantially all payments received against the invoices for that quarter. We also update our renewal rates from the initially disclosed rates to include all cash collections subsequent to the initial disclosure. The following summarizes our initial and updated renewal rates (operational metric) for the previous five quarters:

 

Renewal Rates

 

Q310

 

Q210

 

Q110

 

Q409

 

Q309

 

Based on cash collections relative to prior year collections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initially Disclosed Rate (1)

 

91%

 

90%

 

89%

 

89%

 

87%

 

Updated Disclosed Rate (2)

 

n/a

 

95%

 

92%

 

89%

 

90%

 

 


(1)          “Initially Disclosed Rate” is based on cash collections and reported one quarter in arrears

 

(2)          “Updated Disclosed Rate” reflects initially disclosed rate updated for subsequent cash collections

 

 

We expect our revenue from recurring sources to continue to represent over 85% of our total net revenues as we continue to sign term license agreements and Advent OnDemand contracts with new customers.

 

Perpetual License Fees

 

(in thousands, except percent of

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

total net revenues)

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUA fees

 

$

1,521

 

$

1,199

 

$

322

 

$

4,284

 

$

4,052

 

$

232

 

Other perpetual license fees

 

1,234

 

1,171

 

63

 

3,512

 

3,581

 

(69

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total perpetual license fees

 

$

2,755

 

$

2,370

 

$

385

 

$

7,796

 

$

7,633

 

$

163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total net revenues

 

4

%

4

%

 

 

4

%

4

%

 

 

 

Total perpetual license fees increased $0.4 million and $0.2 million during the three and nine months ended September 30, 2010, respectively, as a result of increases in AUA balances of our clients. Incremental assets under administration fees from perpetual licenses increased by $0.3 million and $0.2 million during the three and nine months ended September 30, 2010, respectively, when compared to the same periods in 2009 as clients experienced growth in the market value of AUA balances during 2010 due to market conditions.

 

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Table of Contents

 

Professional Services and Other Revenues

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Professional services and other revenues (in thousands)

 

$

7,261

 

$

6,066

 

$

1,195

 

$

19,096

 

$

19,126

 

$

(30

)

Percent of total net revenues

 

10

%

10

%

 

 

9

%

10

%

 

 

 

Professional services and other revenues primarily include consulting, project management, custom integration, and training. Professional services projects related to Axys, Moxy and Partner products generally can be completed in a two- to six-month time period, while services related to Geneva and APX products may require a four- to twelve-month implementation period.

 

We defer professional services revenue for services performed on term license implementations that are not considered substantially complete. Service revenue is deferred until the implementation is complete and remaining services are substantially completed. Upon substantial completion, we recognize a pro-rata amount of professional services fees earned based on the elapsed time from the start of the term license to the substantial completion of professional services. The remaining deferred professional services revenue is recognized ratably over the remaining contract length.

 

Professional services and other revenues fluctuated due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2009 to 2010

 

2009 to 2010

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Increased consulting services

 

$

1,067

 

$

899

 

Increased conference

 

1,008

 

1,046

 

Increased reimbursable travel revenue

 

392

 

438

 

Decreased net term license implementation recognition

 

(1,615

)

(2,782

)

Various other items

 

343

 

369

 

 

 

 

 

 

 

Total change

 

$

1,195

 

$

(30

)

 

The fluctuations in professional services and other revenues during the three and nine months ended September 30, 2010 reflected increased revenue from consulting services and conference, partially offset by the revenue deferral impact associated with term license implementations. During the third quarter of 2010, we experienced an increase in new service engagements resulting in the revenue increases in consulting services. Conference revenue also increased as we returned to hosting our client conference in 2010.

 

The impact of our term license implementation recognition on professional services revenues for the three and nine months ended September 30, 2010 and 2009 was as follows (in thousands):

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Net (deferral) recognition of professional services revenue related to term license implementations

 

$

(67

)

$

1,548

 

$

(1,615

)

$

40

 

$

2,822

 

$

(2,782

)

 

During the three and nine months ended September 30, 2009, the revenue recognized from completed implementations exceeded the revenue deferred from projects being implemented as several large implementations were completed in the prior year, resulting in the net recognition of professional services revenue of $1.5 million and $2.8 million, respectively. During the three and nine months ended September 30, 2010, the net impact of the term license implementation recognition (deferral) was minimal as the revenue recognized from completed implementations was offset by revenue deferred from implementations in process at September 30, 2010.

 

COST OF REVENUES

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenues (in thousands)

 

$

23,172

 

$

21,029

 

$

2,143

 

$

64,559

 

$

62,319

 

$

2,240

 

Percent of total net revenues

 

32

%

33

%

 

 

31

%

32

%

 

 

 

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Table of Contents

 

Our cost of revenues is made up of four components: cost of term license, maintenance and other recurring; cost of perpetual license fees; cost of professional services and other; and amortization of developed technology. The increase in total cost of revenues in absolute dollars for the three and nine months ended September 30, 2010 was due principally to increases in the cost of term license, maintenance and other recurring related to new hires to support our increase in demand for technical support and outsourcing data services, costs related to our client conference and to an increase in amortization of developed technology costs, partially offset by decreased payroll and related costs from our professional services group during the first nine months of 2010. Cost of revenues as a percent of total net revenues decreased for the three and nine months ended September 30, 2010 due to growth in term license, maintenance and other recurring revenues and decreased payroll and related costs from our professional services group during the first nine months of 2010.

 

Cost of Term License, Maintenance and Other Recurring

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Cost of term license, maintenance and other recurring (in thousands)

 

$

12,709

 

$

11,920

 

$

789

 

$

37,866

 

$

34,729

 

$

3,137

 

Percent of total term license, maintenance and other recurring revenue

 

21

%

22

%

 

 

21

%

21

%

 

 

 

Cost of term license fees consists primarily of royalties and other fees paid to third parties, the fixed direct labor and third-party costs involved in producing and distributing our software, and cost of product media including duplication, manuals and packaging materials. Cost of maintenance and other recurring revenues is primarily comprised of the direct costs related to providing and supporting our outsourced services, providing technical support services under maintenance agreements and other services for recurring revenues, and royalties paid to third party subscription-based and transaction-based vendors. We defer revenues and direct costs associated with services performed on term license implementations until the project is reached substantially complete. Indirect costs such as management and other overhead expenses are recognized in the period in which they are incurred.

 

Cost of term license, maintenance and other recurring fluctuated due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2009 to 2010

 

2009 to 2010

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Increased payroll and related costs

 

$

199

 

$

1,597

 

Increased allocation-in of facility and infrastructure expenses

 

284

 

801

 

Increased travel and entertainment

 

281

 

645

 

Increased depreciation and amortization

 

146

 

477

 

Decreased royalty

 

(181

)

(780

)

Various other items

 

60

 

397

 

 

 

 

 

 

 

Total change

 

$

789

 

$

3,137

 

 

The increases in absolute dollars for the three and nine months ended September 30, 2010 were due primarily to an increase in compensation and related costs resulting from increases in salary costs and headcount which enables us to deliver the technical support services we provide to our growing number of clients in their day-to-day use of our software. We allocate facility and infrastructure expenses based on headcount and consistent with the increase in departmental headcount, we allocated more of these costs to our term license, maintenance and other recurring departments. The increase in travel and entertainment costs resulted from increased travel associated with our client conference and providing client support services. The impact of these increases was partially offset by lower royalty expenses resulting from decreased renewal activity with third party subscription-based and transaction-based vendors.

 

Cost of Perpetual License Fees

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of perpetual license fees (in thousands)

 

$

61

 

$

65

 

$

(4

)

$

199

 

$

255

 

$

(56

)

Percent of total perpetual license revenues

 

2

%

3

%

 

 

3

%

3

%

 

 

 

Cost of perpetual license fees consists primarily of royalties and other fees paid to third parties, the fixed direct labor and third-party costs involved in producing and distributing our software, and cost of product media including duplication, manuals and packaging materials. The decrease in cost of perpetual license fees for the three and nine months ended September 30, 2010 compared with the same periods in 2009 resulted primarily from a reduction in royalties and product media costs as we continue to transition away from perpetual licensing.

 

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Table of Contents

 

Cost of Professional Services and Other

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Cost of professional services and other (in thousands)

 

$

8,730

 

$

7,628

 

$

1,102

 

$

21,623

 

$

23,190

 

$

(1,567

)

Percent of total professional services and other revenues

 

120

%

126

%

 

 

113

%

121

%

 

 

 

Cost of professional services and other revenue consists primarily of personnel related costs associated with the client services organization in providing consulting, custom report writing and conversions of data from clients’ previous systems. Also included are direct costs associated with third-party consultants, travel expenses and our client conference. Additionally, we defer direct professional services costs until we have completed the term license implementation services.

 

Cost of professional services and other fluctuated due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2009 to 2010

 

2009 to 2010

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Increased marketing

 

$

1,569

 

$

1,557

 

Increased outside contractors

 

706

 

634

 

Increased travel and entertainment

 

361

 

539

 

Decreased payroll and related costs

 

(425

)

(2,075

)

Increased service cost deferral related to term implementations

 

(1,151

)

(2,000

)

Various other items

 

42

 

(222

)

 

 

 

 

 

 

Total change

 

$

1,102

 

$

(1,567

)

 

In lieu of hosting the Advent client conference in 2009, we elected to host a road show as customers and prospects were cautious about budgets during 2009. As the financial markets stabilized, we returned to hosting the Advent client conference in September 2010 resulting in the increases in marketing, and travel and entertainment costs during the three and nine months ended September 30, 2010. Outside contractor costs also increased during these periods as we increased our usage of third-party consultants for implementation projects. These increases were partially offset by decreases in payroll and related costs during the three and nine months ended September 30, 2010, as we redeployed consulting employees to other areas of our business during the past year.

 

We defer direct costs associated with services performed on term license implementations until a project reaches substantial completion. Indirect costs such as management and other overhead expenses are recognized in the period in which they are incurred, with no revenue to offset them. At the point professional services are substantially completed, we recognize a pro-rata amount of the term license revenue, professional services fees earned and related expenses, based on the elapsed time from the start of the term license to the substantial completion of professional services. Term license revenue for the remaining contract years and the remaining deferred professional services revenue and related expenses are recognized ratably over the remaining contract length.

 

During the three and nine months ended September 30, 2010, we returned to our prior trend of deferring costs. During the comparable periods of 2009, the costs recognized from completed implementations exceeded the costs deferred from projects being implemented as several large implementations were completed. The impact of our term license implementations on the recognition of professional services costs for the three and nine months ended September 30, 2010 and 2009 was as follows (in thousands):

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Net (deferral) recognition of professional services costs related to term license implementations

 

$

(359

)

$

792

 

$

(1,151

)

$

(562

)

$

1,438

 

$

(2,000

)

 

Gross margins for professional services and other were (20)%, and (13)% during the three and nine months ended September 30, 2010, respectively, compared to (26)% and (21)% in the comparable periods of 2009. The gross margin improvement for the three and nine months ended September 30, 2010 was primarily due to the redeployment of consulting employees to other areas of our business as we work more through third party providers, and higher utilization of our current consulting employees.

 

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Table of Contents

 

We expect cost of professional services and other in the fourth quarter of 2010 to decrease in dollar amount and decrease as a percentage of revenue, as compared to the third quarter of 2010, as costs associated with our annual user conference in the third quarter of 2010 will not re-occur in the fourth quarter.

 

Amortization of Developed Technology

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Amortization of developed techology (in thousands)

 

$

1,672

 

$

1,416

 

$

256

 

$

4,871

 

$

4,145

 

$

726

 

Percent of total net revenues

 

2

%

2

%

 

 

2

%

2

%

 

 

 

Amortization of developed technology represents amortization of acquisition-related intangibles, and amortization of capitalized software development costs previously capitalized under ASC 985. The increase during the three and nine months ended September 30, 2010 resulted from additional amortization from software development costs capitalized during 2009 and 2010, and to a lesser extent, amortization from technology related intangible assets associated with Goya AS which we acquired in March 2010, partially offset by decreased amortization from other developed technology assets that were fully amortized during 2009.

 

OPERATING EXPENSES

 

Sales and Marketing

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing (in thousands)

 

$

16,763

 

$

15,627

 

$

1,136

 

$

50,671

 

$

46,538

 

$

4,133

 

Percent of total net revenues

 

23

%

25

%

 

 

24

%

24

%

 

 

 

Sales and marketing expenses consist primarily of the costs of personnel involved in the sales and marketing process, sales commissions, advertising and promotional materials, sales facilities expense, trade shows, and seminars.

 

Sales and marketing expense fluctuated due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2009 to 2010

 

2009 to 2010

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Increased travel and entertainment

 

$

682

 

$

1,446

 

Increased marketing

 

303

 

778

 

Increased allocation-in of facility and infrastructure expenses

 

233

 

877

 

Increased payroll and related costs

 

97

 

1,240

 

Various other items

 

(179

)

(208

)

 

 

 

 

 

 

Total change

 

$

1,136

 

$

4,133

 

 

The increase in sales and marketing expenses for the three and nine months ended September 30, 2010 reflects the growth of our sales and marketing efforts in 2010. In the third quarter of 2010, we held our client conference and offsite meetings for our sales groups. The costs associated with these events contributed to the increase in travel and entertainment and in marketing costs during the three and nine months ended September 30, 2010. We have also grown our headcount to 202 at September 30, 2010 from 180 at September 30, 2009 as we continue to expand our sales and marketing efforts internationally, resulting in an increase in payroll related costs and allocation-in of facility and infrastructure expenses.

 

In the fourth quarter of 2010, we expect sales and marketing expenses to increase in dollar amount, as we increase our sales and marketing activities and travel in support of expanding our international sales efforts, both in our current markets and elsewhere.

 

Product Development

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development (in thousands)

 

$

13,069

 

$

12,179

 

$

890

 

$

38,237

 

$

35,528

 

$

2,709

 

Percent of total net revenues

 

18

%

19

%

 

 

18

%

18

%

 

 

 

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Table of Contents

 

Product development expenses consist primarily of salary and benefits for our development staff as well as contractors’ fees and other costs associated with the enhancements of existing products and services and development of new products and services.

 

Product development expenses fluctuated due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2009 to 2010

 

2009 to 2010

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Increased payroll and related costs

 

$

319

 

$

1,903

 

Increased allocation-in of facility and infrastructure expenses

 

373

 

1,108

 

Decreased capitalization of product development

 

603

 

434

 

Decreased outside services

 

(352

)

(889

)

Various other items

 

(53

)

153

 

 

 

 

 

 

 

Total change

 

$

890

 

$

2,709

 

 

The increase in total product development expenses for the three and nine months ended September 30, 2010 reflects increases in payroll and related costs, and allocation-in of facility and infrastructure expenses resulted from headcount additions to help continue the enhancement of our existing product suite including new versions of Geneva, APX, Moxy, Advent Rules Manager, Advent Revenue Center, Partner and Tamale RMS, and to a lesser extent, headcount additions in our China office during the fourth quarter of 2009 and in Norway where we acquired additional personnel from our acquisition of Goya AS during the first quarter of 2010. The fluctuations in the capitalization of our product development costs is attributable to timing of product releases during the three and nine months ended September 30, 2010 as we capitalized $0.2 million and $1.7 million, respectively, primarily associated with Geneva 8.0, Partner 7.3 and Moxy 7.0, as compared to $0.8 million and $2.1 million of costs associated in the comparable periods of 2009 primarily associated with Geneva 7.7, APX 3.0 and Partner 7.2. These increases in expense were partially offset by the decrease in outside service costs which resulted from the conversion of third party contractors in China to employees during the fourth quarter of 2009.

 

General and Administrative

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative (in thousands)

 

$

8,893

 

$

8,636

 

$

257

 

$

28,316

 

$

25,932

 

$

2,384

 

Percent of total net revenues

 

12

%

14

%

 

 

14

%

13

%

 

 

 

General and administrative expenses consist primarily of personnel costs for information technology, finance, administration, human resources, operations and general management, as well as legal and accounting expenses.

 

General and administrative expenses fluctuated due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2009 to 2010

 

2009 to 2010

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Increased facilities

 

$

633

 

$

2,341

 

Increased payroll and related costs

 

43

 

843

 

Increased travel and entertainment

 

121

 

509

 

Increased allocation-out of facility and infrastructure expenses

 

(573

)

(1,770

)

Various other items

 

33

 

461

 

 

 

 

 

 

 

Total change

 

$

257

 

$

2,384

 

 

The increase in total general and administrative expenses in absolute dollars during the three and nine months ended September 30, 2010 is primarily due to the increases in facilities costs. Subsequent to September 30, 2009, we opened new offices in Beijing and Singapore and relocated our operations in New York and Boston. During 2009, we signed lease agreements for our new facilities in New York City and Boston and commenced the build-out of those facilities in of the first quarter of 2010. We continued to occupy our former facilities in New York and Boston until the build-out for our new facilities was completed; as a result, we incurred rent and utilities expense in both our former and new facilities during 2010. We completed the build-out of our new facilities in New York and Boston in May and August 2010, respectively, and moved our operations to consolidate our facility space in both locations.

 

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Table of Contents

 

Payroll and other related costs increased during the three and nine months ended September 30, 2010 as a result of lower capitalization of payroll costs associated with our internally developed software projects, higher bonus costs and higher salary expense due to annual merit increases. The increase in travel and entertainment costs during the three and nine months ended September 30, 2010 is primarily due to higher travel-related activity by our general and administrative personnel associated with the growth of our business, international expansion and our client conference. These cost increases were partially offset by the allocation-out of corporate expenses to other departments. Corporate expenses, such as facility and information costs, are initially recognized in our general and administrative department and then allocated out to other departments based on headcount. As headcount in our other departments grew at a higher rate during the past year than our general and administrative department, we allocated-out more facility and information technology costs resulting in less general and administrative expense during the first nine months of 2010.

 

We anticipate facility expense to decrease slightly in the fourth quarter of 2010 as we consolidated into our new facilities in Boston in August 2010.

 

Amortization of Other Intangibles

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Amortization of other intangibles (in thousands)

 

$

331

 

$

438

 

$

(107

)

$

977

 

$

1,315

 

$

(338

)

Percent of total net revenues

 

0

%

1

%

 

 

0

%

1

%

 

 

 

Amortization of other intangibles represents amortization of non-technology related intangible assets. The decrease during 2010 is a result of an asset from a prior acquisition becoming fully amortized during 2009, partially offset by increased amortization from intangible assets associated with Goya AS, which we acquired in March 2010.

 

Restructuring Charges

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring charges (in thousands)

 

$

26

 

$

36

 

$

(10

)

$

610

 

$

92

 

$

518

 

Percent of total net revenues

 

0

%

0

%

 

 

0

%

0

%

 

 

 

During the nine months ended September 30, 2010, we recorded a restructuring charge of $0.6 million which primarily related to facility and exit costs associated with the relocation and consolidation of one of our facilities in New York City in the second quarter of 2010. During the nine months ended September 30, 2009, we recorded a restructuring charge $0.1 million which related to the present value amortization of facility exit obligations partially offset by adjustments to facility exit assumptions.

 

For additional analysis of the components of the payments and charges made against the restructuring accrual during the first nine months of 2010, see Note 11, “Restructuring Charges” to our condensed consolidated financial statements.

 

We expect to incur a restructuring charge at approximately $0.3 million during the fourth quarter of 2010 related to facility and exit costs associated with our former facilities in Boston.

 

Interest and Other Income (Expense), Net

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Interest and other income (expense), net (in thousands)

 

$

163

 

$

(194

)

$

357

 

$

(772

)

$

1,585

 

$

(2,357

)

Percent of total net revenues

 

0

%

0

%

 

 

0

%

1

%

 

 

 

Interest and other income (expense), net consists of interest expense and income, realized gains and losses on investments and foreign currency gains and losses.

 

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Table of Contents

 

Interest and other income (expense), net fluctuated due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2009 to 2010

 

2009 to 2010

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Decreased gain on sale of private equity investments

 

$

 

$

(2,062

)

Change in foreign exchange gains (losses)

 

265

 

(669

)

Decreased interest expense

 

82

 

343

 

Increased interest income

 

37

 

66

 

Various other items

 

(27

)

(35

)

 

 

 

 

 

 

Total change

 

$

357

 

$

(2,357

)

 

In April 2009, the Company received the final deferred contingent payment of $2.1 million as a result of the Company’s sale of its ownership in LatentZero Limited (“LatentZero”) to Fidessa group plc (formerly royalblue group plc) in April 2007. Total payments received by Advent from the sale of its LatentZero ownership were $15.4 million.

 

During the nine months ended September 30, 2010, the US dollar strengthened against the Pound Sterling, the Euro and other foreign currencies compared to the same period in 2009, resulting in the increase of $0.7 million in foreign exchange losses compared to the comparable period of 2009. During the three months ended September 30, 2010, the US dollar weakened against these currencies resulting in a foreign exchange gain of $0.1 million compared to a foreign exchange loss of $0.2 million during the comparable period of 2009.

 

The decrease in interest expense during the first nine months of 2010 resulted from zero debt outstanding during the period, compared to a debt balance of up to $25 million during the nine months ended September 30, 2009. In February 2010, Advent’s Credit Facility expired in accordance with the terms of the senior secured facility agreement with the Lender and Advent elected not to renew the Credit Facility.

 

The increase in interest income during the three and nine months ended September 30, 2010 reflects higher cash and investment balances in 2010 compared to the same periods in 2009.

 

Provision for Income Taxes

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

Provision for income taxes (in thousands)

 

$

3,915

 

$

1,741

 

$

2,174

 

$

8,734

 

$

6,612

 

$

2,122

 

Effective tax rate

 

40

%

31

%

 

 

37

%

29

%

 

 

 

Our effective tax rate was 37% during the nine months ended September 30, 2010 compared to 29% during the same period of 2009. The increase in effective tax rate for the nine months ended September 30, 2010 primarily reflects the impact of the suspension of a federal research and development credit for 2010 and was partially offset by an increase in the benefit recognized for employee disqualified dispositions of incentive stock options. Additionally, the effective tax rate of 29% during the nine months ended September 30, 2009 includes the impact of a tax benefit related to the release of the valuation allowance against capital loss carryforwards that resulted from our gain on the sale of our investment in LatentZero Limited.

 

We currently expect our annual effective tax rate for 2010 to be between 35% and 40%. Should Congress retroactively reinstate the federal research credit to the beginning of 2010, we would expect our effective tax rate for fiscal 2010 to be between 30% and 35%.

 

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Table of Contents

 

Discontinued Operation

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands)

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

 

$

5,934

 

$

(5,934

)

$

 

$

18,859

 

$

(18,859

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operation of discontinued operation (net of applicable taxes of $(19), $223, $(69), and $1,409, respectively)

 

(23

)

770

 

(793

)

(68

)

2,499

 

(2,567

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on disposal of discontinued operation (net of applicable taxes of $0, $0, $(20), and $0, respectively)

 

 

 

 

(30

)

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from discontinued operation

 

$

(23

)

$

770

 

$

(793

)

$

(98

)

$

2,499

 

$

(2,597

)

 

Net revenues from our discontinued operation, MicroEdge, were $5.9 million and $18.9 million for the three and nine months ended September 30, 2009, respectively.

 

On October 1, 2009, we completed the sale of MicroEdge and recorded an associated gain of $13.6 million, net of tax, in our fourth quarter of 2009 results. Pursuant to the Agreement and Plan of Merger, the purchase price was subject to certain adjustments for working capital. During the first quarter of 2010, the final working capital adjustment was settled, resulting in a downward adjustment to the gain on sale of MicroEdge of $30,000, net of tax.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following is a summary of our cash, cash equivalents and marketable securities (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,910

 

$

57,877

 

Short-term and long-term marketable securities

 

$

70,126

 

$

59,768

 

 

Cash and cash equivalents, and short-term and long-term marketable securities primarily consist of money market mutual funds, US government and US Government Sponsored Entities (GSE’s) and high credit quality corporate debt securities. Cash and cash equivalents are comprised of highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. Our short-term and long-term marketable securities are classified as available-for-sale, with long-term investments having a maturity date greater than one year from the end of the period.

 

The table below, for the periods indicated, provides selected cash flow information (in thousands):

 

 

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Net cash provided by operating activities from continuing operations

 

$

51,860

 

$

51,577

 

Net cash used in investing activities from continuing operations

 

$

(31,313

)

$

(1,233

)

Net cash used in financing activities from continuing operations

 

$

(26,351

)

$

(32,340

)

Net cash (used in) provided by operating activities from discontinued operation

 

$

(341

)

$

4,283

 

Net cash used in investing activities from discontinued operation

 

$

 

$

(715

)

 

Cash Flows from Operating Activities for Continuing Operations

 

Our cash flows from operating activities represent the most significant source of funding for our operations. The major uses of our operating cash include funding payroll (salaries, commissions, bonuses and benefits), general operating expenses (marketing, travel, computer and telecommunications, legal and professional expenses, and office rent) and cost of revenues. Our cash provided by operating activities generally follows the trend in our net revenues and operating results.

 

Our cash provided by operating activities of $51.9 million during the nine months ended September 30, 2010 was primarily the result of our net income and non-cash charges including stock-based compensation and depreciation and amortization. Cash inflows resulting from changes in assets and liabilities included decreases in prepaid and other assets, and increases in accounts payable and income taxes payable. The decrease in prepaid and other assets reflects the payment received on our tenant improvement allowance from our Grace Building landlord. Cash outflows resulting from changes in assets and liabilities included a decrease in deferred revenues and accrued liabilities. The decrease in accrued liabilities reflected cash payments of fiscal 2009 liabilities including year-end bonuses, commissions, and payroll taxes.

 

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Table of Contents

 

Our cash provided by operating activities from continuing operations of $51.6 million during the nine months ended September 30, 2009 was primarily the result of our net income and non-cash charges including stock-based compensation and depreciation and amortization, partially offset by a gain from our equity investment activity. Cash flows resulting from changes in assets and liabilities included decreases in accounts receivable, prepaid and other assets and deferred revenues. The decrease in accounts receivable primarily reflected an improvement in collections during the first nine months of 2009 of invoices billed in our previous fourth quarter. Days’ sales outstanding were 62, 60 and 55 days during the first, second and third quarters of 2009, respectively, compared to 67, 60 and 70 days during the first, second and third quarters of 2008. The decrease in deferred revenue reflected the recognition of revenue as several term license implementation projects reached substantial completion during the first nine months of 2009 and lower level of bookings.

 

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors including fluctuations in our net revenues and operating results, new bookings that increase deferred revenues, collection of accounts receivable, and timing of payments. We also expect that cash provided by operating activities will be between $25 million to $30 million during the fourth quarter of 2010.

 

Cash Flows from Investing Activities for Continuing Operations

 

Net cash used in investing activities from continuing operations of $31.3 million for the nine months ended September 30, 2010 reflects net cash used of $4.7 million related to the acquisition of Goya AS, purchases of marketable securities of $29.0 million, capitalized software development costs of $1.6 million and capital expenditures of $15.0 million primarily related to the build-out of our new facilities in New York and Boston and, to a lesser extent, computer and software equipment purchases. These expenditures were partially offset by proceeds received from the sales and maturities of short-term marketable securities of $19.0 million.

 

Net cash used in investing activities from continuing operations of $1.2 million for the nine months ended September 30, 2009 reflects capital expenditures of $2.9 million primarily related to the purchase of external software and capitalization of costs associated with internal use software, and capitalized software development costs of $2.0 million. These expenditures were partially offset by the receipt of $2.1 million for the final deferred contingent consideration from the sale of our ownership interest in LatentZero and a decrease in our restricted cash balance of $1.5 million due to the reduction in the letter of credit associated with the lease of our San Francisco headquarters.

 

As we completed our New York City and Boston buildouts during the nine months ended September 30, 2010, we expect capital expenditures to be between $2 million and $3 million during the fourth quarter of 2010.

 

Cash Flows from Financing Activities for Continuing Operations

 

Net cash used in financing activities from continuing operations of $26.4 million for the nine months ended September 30, 2010 reflects the repurchase of approximately 836,000 shares of our common stock for $35.9 million and payments totaling $4.3 million to satisfy withholding taxes on equity awards that are net share settled.  These financing cash outflows were partially offset by cash received from the exercise of employee stock options of $10.9 million and proceeds from the issuance of common stock under the employee stock purchase plan of $2.9 million.

 

Net cash used in investing activities from continuing operations of $1.2 million for the nine months ended September 30, 2009 reflects capital expenditures of $2.9 million primarily related to the purchase of external software and capitalization of costs associated with internal use software, and capitalized software development costs of $2.0 million. These expenditures were partially offset by the receipt of $2.1 million for the final deferred contingent consideration from the sale of our ownership interest in LatentZero and a decrease in our restricted cash balance of $1.5 million due to the reduction in the letter of credit associated with the lease of our San Francisco headquarters.

 

Cash Flows from Operating Activities for Discontinued Operation

 

Our cash used in operating activities from discontinued operation of $0.3 million during the nine months ended September 30, 2010 was primarily the result of its net loss. Cash flows resulting from changes in assets and liabilities included decreases in prepaid and other assets and accrued liabilities. The decrease in accrued liabilities primarily reflects cash payments of sales taxes. Other changes in assets and liabilities include a decrease in income taxes payable.

 

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Our cash provided by operating activities from discontinued operation of $4.3 million during the nine months ended September 30, 2009 was primarily the result of our net income and non-cash charges including stock-based compensation and depreciation and amortization. Cash flows resulting from changes in assets and liabilities included decreases in accounts receivable, prepaid and other assets, accounts payable, accrued liabilities and deferred revenues. The decrease in accounts receivable primarily reflected an improvement in collections during the first nine months of 2009 of invoices billed in our previous fourth quarter. Days’ sales outstanding were 51, 55 and 51 days during the first, second and third quarters of 2009, respectively, compared to 52, 52 and 52 days during the first, second and third quarters of 2008. The decrease in accounts payable and accrued liabilities reflected cash payments of fiscal 2008 liabilities including year-end payables and bonuses, commissions and payroll taxes. The decrease in deferred revenue reflected the recognition of revenue and lower level of bookings during the nine months ended September 30, 2009.

 

Cash Flows from Investing Activities for Discontinued Operation

 

Net cash used in investing activities from discontinued operation of $0.7 million for the nine months ended September 30, 2009 reflects capital expenditures of $0.6 million primarily related to the purchase of computer equipment and capitalization of costs associated with internal use software, and capitalized software development costs of $0.1 million.

 

Working Capital

 

At September 30, 2010, we had working capital of $17.3 million, compared to negative working capital of $(6.7) million at December 31, 2009. The increase in our working capital at September 30, 2010 is primarily due to the generation of operating cash flow of $51.9 million, and the shift of $28.5 million of marketable securities from long-term to short-term, partially offset by common stock repurchases of $35.9 million, capital expenditures of $15.0 million, and cash paid to acquire Goya AS of $4.7 million. Our negative working capital at the end of fiscal 2009 was due to our historical common stock repurchases and our deferred revenue balance. Excluding deferred revenues and deferred taxes, we had working capital of $137.8 million at September 30, 2010, compared to $118.4 million at December 31, 2009.

 

Credit Facility and Expiration

 

In February 2007, Advent and certain of our domestic subsidiaries entered into a senior secured credit facility agreement (the “Credit Facility”) with Wells Fargo Foothill, Inc. (the “Lender”). Under the Credit Facility, the Lender provided the Company with a revolving line of credit up to an aggregate amount of $75 million, subject to a borrowing base formula, to provide backup liquidity for general corporate purposes, including stock repurchases, or investment opportunities for a period of three years. As of December 31, 2009, there was no outstanding balance under the Credit Facility and the Company was in compliance with all associated covenants.

 

In the past, we had utilized the Credit Facility to facilitate the timing of stock repurchases. In February 2010, the Credit Facility expired and we elected not to renew the Credit Facility due to the limited expected use of the Credit Facility. We believe our existing cash, cash equivalents, short-term and long-term marketable securities, together with cash expected to be generated from operations, will be sufficient to fund our operating activities, anticipated capital expenditures and authorized stock repurchases. Although the expiration of the Credit Facility may restrict our liquidity, we believe the costs associated with the Credit Facility would exceed the anticipated benefit of the additional liquidity. For example, our interest expense and other fees related to the Credit Facility was approximately $2 million during the three-year term of the Credit Facility.

 

Common Stock Repurchases

 

On October 30, 2008, our Board authorized the repurchase of up to 3.0 million shares of the Company’s common stock. In May 2010, Advent’s Board authorized the repurchase of up to an additional 1.0 million shares of the Company’s common stock. During the nine months ended September 30, 2010, the Company repurchased approximately 836,000 shares of its common stock at a cost of $35.9 million. At September 30, 2010, there remained approximately 1.1 million shares authorized by the Board for repurchase.

 

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Off-Balance Sheet Arrangements and Contractual Obligations

 

The following table summarizes our contractual cash obligations, excluding cash obligations for our MicroEdge discontinued operation, as of September 30, 2010 (in thousands):

 

 

 

Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

Years Ended December 31

 

 

 

 

 

 

 

2010

 

2011

 

2012

 

2013

 

2014

 

Thereafter

 

Total

 

Operating lease obligations, net of sub-lease income

 

$

2,116

 

$

8,299

 

$

7,123

 

$

6,420

 

$

6,716

 

$

34,757

 

$

65,431

 

 

As of September 30, 2010, MicroEdge had operating lease commitments totaling $8.7 million, less sublease income of $1.0 million, which are not reflected in the above table. On October 1, 2009, we completed the sale of our MicroEdge subsidiary. In connection with the sale of MicroEdge, the Company entered into a sublease agreement with Microedge LLC, whereby Microedge LLC will sub-lease approximately 24,000 square feet of office space located at 619 West 54th Street in New York, New York from the Company. Microedge LLC will sub-lease the premises for two years with the option to extend the sub-lease term through the end of the lease term in 2018. The sub-lease agreement became effective upon the close of sale of MicroEdge on October 1, 2009. With the exception of the MicroEdge facilities in New York City, the leases related to MicroEdge have been transferred to the Purchaser.

 

At September 30, 2010 and December 31, 2009, we had a gross liability of $7.8 million and $7.5 million for uncertain tax positions. Since almost all of this liability relates to reserves against deferred tax assets that we do not expect to utilize in the short term, we cannot estimate the timing of potential future cash settlements and have not included any estimates in the table of contractual cash obligations above. Additionally, our cash payments for income taxes will continue to be nominal over the next few years as we have significant net operating losses, capital losses and tax credit carryforwards to utilize.

 

At September 30, 2010 and December 31, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Other Liquidity and Capital Resources Considerations

 

As noted above, we expect our cash payments for federal income taxes to remain nominal over the next few years as we have significant net operating losses and tax credit carryforwards to utilize against current income taxes. However, our cash payments for federal income taxes could increase as early as fiscal 2012.

 

Our liquidity and capital resources in any period could be affected by the exercise of outstanding employee stock options and issuance of common stock under our employee stock purchase plan, as cash received from these transactions would increase our liquidity. Conversely, our liquidity is negatively affected by an employee’s vesting of restricted stock units and exercise of stock-settled stock appreciation rights, as cash is used to satisfy withholding taxes on these equity awards which are net share settled. The resulting increase in the number of outstanding shares could also affect our per share results of operations. However, we cannot predict the timing or amount of proceeds from the exercise of these securities, or whether they will be exercised at all.

 

We expect that for the next year, our operating expenses will continue to constitute a significant use of cash flow. In addition, we may use cash to fund other acquisitions, repurchase additional common stock, or invest in other businesses, when opportunities arise. Based upon the predominance of our revenues from recurring sources, bookings performance and current expectations, we believe that our cash and cash equivalents, and cash generated from operations will be sufficient to satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases and financing activities for the next year.

 

If we identify opportunities that exceed our current expectation, we may choose to seek additional capital resources through debt or equity financing. However, such financing may not be available at all, particularly in an uncertain economic environment, or if available may not be obtainable on terms favorable to us and could be dilutive.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Since the acquisitions of Advent Denmark, Advent Norway, Advent Sweden, Advent Netherlands, Goya AS and Advent Europe’s remaining distributors in the United Kingdom and Switzerland, and the opening of offices in Hong Kong, China and Singapore, whose service and certain license revenues and capital spending are transacted in local country currencies, we have greater exposure to foreign currency fluctuations. As of September 30, 2010, approximately $43 million of goodwill and intangible assets are denominated in foreign currency. Therefore, a hypothetical change of 10% could increase or decrease our assets and equity by approximately $4 million. Additionally, as of September 30, 2010, approximately $5 million of monetary assets and liabilities are denominated in foreign currency. Therefore, a hypothetical change of 10% would cause the revaluation of these amounts resulting in a gain or loss of approximately $0.5 million on our consolidated results of operations.

 

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We maintain an investment portfolio of various holdings, types, and maturities. Our interest rate risk relates primarily to our investment portfolio, which consisted of $122.0 million in cash and cash equivalents and short-term marketable securities as of September 30, 2010. Our short-term securities are generally classified as available-for-sale and, consequently, are recorded on our consolidated balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income.

 

Fluctuations in interest rates have a direct impact on the fair value of our investment portfolio. As interest rates increase, the fair value of our investment portfolio decreases, and conversely, as interest rates decrease, the fair value of our investment portfolio increases. We do not currently hedge these interest rate exposures.

 

The following table presents hypothetical changes in fair value of our short-term securities of $70.1 million at September 30, 2010. For September 30, 2010, the market changes reflect an immediate hypothetical parallel shifts in the yield curve of plus or minus 25 basis points (“BPS”), 50 BPS and 100 BPS. For balances at September 30, 2010 the hypothetical fair values are as follows (in millions, except percentages):

 

 

 

Decrease in Interest Rates

 

Increase in Interest Rates

 

 

 

-100 Basis Points

 

-50 Basis Points

 

-25 Basis Points

 

25 Basis Points

 

50 Basis Points

 

100 Basis Points

 

Total Fair Value

 

$

70.5

 

$

70.3

 

$

70.3

 

$

70.1

 

$

70.0

 

$

69.9

 

% Change in Fair Value

 

0.44

%

0.22

%

0.11

%

-0.11

%

-0.22

%

-0.44

%

 

We have also invested in several privately-held companies. These non-marketable investments are classified as other assets on our consolidated balance sheets. Our investments in privately-held companies could be affected by an adverse movement in the financial markets for publicly-traded equity securities, although the impact cannot be directly quantified. These investments are inherently risky as the market for the technologies or products these privately-held companies have under development are typically in the early stages and may never materialize. It is our policy to review investments in privately held companies on a regular basis to evaluate the carrying amount and economic viability of these companies. This policy includes, but is not limited to, reviewing each of the companies’ cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. The evaluation process is based on information that we request from these privately held companies. This information is not subject to the same disclosure regulations as US publicly traded companies, and as such, the basis for these evaluations is subject to timing and the accuracy of the data received from these companies.

 

Our investments in privately held companies are assessed for impairment when a review of the investee’s operations indicates that a decline in value of the investment is other-than-temporary. Such indicators include, but are not limited to, limited capital resources, limited prospects of receiving additional financing, and prospects for liquidity of the related securities. Impaired investments in privately held companies are written down to estimated fair value. We estimate fair value using a variety of valuation methodologies. Such methodologies include comparing the private company with publicly traded companies in similar lines of business, applying revenue and price/earnings multiples to estimated future operating results for the private company and estimating discounted cash flows for that company. We could lose our entire investment in these companies. At September 30, 2010 and December 31, 2009, our net investment in a privately-held company totaled $0.5 million.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures.

 

The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(f) of the Securities and Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective as of September 30, 2010 to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to Advent’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in internal control over financial reporting.

 

There were no changes in our internal control over financial reporting which were identified in connection with the evaluation required by Rule 13a-15(e) of the Exchange Act that occurred during the third quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, Advent’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

On March 8, 2005, certain of the former shareholders of Kinexus Corporation and the shareholders’ representative filed suit against Advent in the Delaware Chancery Court. The complaint alleges that Advent breached the Agreement and Plan of Merger dated as of December 31, 2001 pursuant to which Advent acquired all of the outstanding shares of Kinexus due principally to the fact that no amount was paid by Advent on an earn-out of up to $115 million. The earn-out, which was payable in cash or stock at the election of Advent, was based upon Kinexus meeting certain revenue targets in both 2002 and 2003. The complaint seeks unspecified compensatory damages, an accounting and restitution for unjust enrichment. Advent advised the shareholders’ representative in January 2003 that the earn-out terms had not been met in 2002 and accordingly no earn-out was payable for 2002 and would not be payable for 2003. There has been no further activity in this case since additional document discovery and interrogatory answers were provided by the parties in December 2008. Advent disputes the plaintiffs’ claim and believes that it has meritorious defenses and intends to vigorously defend this action. Management believes that any potential loss associated with this litigation is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

 

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually or in the aggregate, is likely to have a material adverse effect on the Company’s financial position or results of operations. However, litigation is subject to inherent uncertainties and our view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.

 

Item 1A. Risk Factors

 

Investors should carefully consider the risks described below before making an investment decision. The trading price of our common stock could decline due to any of, but are not limited to, these risks. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q filed with the SEC, including our condensed consolidated financial statements and related notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2009.

 

If our existing customers do not renew their term license, perpetual maintenance or other recurring contracts, our business will suffer.

 

Total recurring revenues represented 87%, 86% and 80% of total net revenues during the first nine months of 2010, fiscal 2009 and 2008, respectively. We expect to continue to derive a significant portion of our revenue from our clients’ renewal of term license, perpetual maintenance and other recurring contracts and such renewals are critical to our future success. Some factors that may affect the renewal rate of our contracts include:

 

·                  The impact of the current economic environment and market volatility on our clients and prospects;

·                  The impact of customers consolidating or going out of business;

·                  The price, performance and functionality of our solutions;

·                  The availability, price, performance and functionality of competing products and services;

·                  The effectiveness of our maintenance and support services; and

·                  Our ability to develop complementary products and services.

 

Most of our perpetual license customers have historically renewed their annual maintenance although our customers have no obligation to renew such maintenance after the first year of their license agreements. In addition, our customers may select maintenance levels less advantageous to us upon renewal, which may reduce recurring revenue from these customers. Market downturns, such as the downturn beginning in the fall of 2008, caused, and may in the future cause, some clients not to renew their maintenance or reduce their level of maintenance, which would affect our renewal rates and revenue. Our renewal rates are based on cash collections and are disclosed one quarter in arrears. Our reported renewal rates for our quarterly periods of 2009 and first two quarters of 2010 were below the levels we disclosed for our quarterly periods of 2008. The decrease in renewal rates reflects reduced maintenance expenditures, customer attrition, and reductions in products licensed or number of users by clients, as well as from slower payments received from renewal clients.

 

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Since we commenced renewing term license contracts in the third quarter of 2007, we only have limited experience with renewals of our term license contracts.  These were the first three-year term license contracts to be renewed by Advent since our transition to a term pricing model began. Our customers have no obligation to renew their term license contracts and given the small number of contracts subject to renewal that were renewed in the second half of 2007 through the first two quarters of 2010, we cannot yet conclude whether customers will renew at a rate consistent with our perpetual maintenance customers. Additionally, we cannot predict whether the renewals will be less advantageous to us than the original term contract. For example, the renewal periods for our term license contracts are typically shorter than our original term license contract and customers may request a reduction in the number of users or products licensed, resulting in a lower annual term license fee.  Further, customers may elect to not renew their term license contracts at all. We may incur significantly more costs in securing our term license contract renewals than we incur for our perpetual maintenance renewals. If our term license contract customers renew under terms less favorable to us or choose not to renew their contracts, or if it costs significantly more to secure a renewal for us, our operating results may be harmed.

 

Our sales cycle is long and we have limited ability to forecast the timing and amount of specific sales and the timing of specific implementations.

 

The purchase of our software products often requires prospective customers to provide significant executive-level sponsorship and to make major systems architecture decisions. As a result, we must generally engage in relatively lengthy sales and contracting efforts. Sales transactions may therefore be delayed during the customer decision process because we must provide a significant level of education to prospective customers regarding the use and benefit of our products. Our business and prospects are subject to uncertainties in the financial markets that can cause customers to remain cautious about capital and information technology expenditures, particularly in uncertain economic environments, or to decrease their information technology budgets as an expense reduction measure. The sales cycle associated with the purchase of our solutions is typically between two and twelve months depending upon the size of the client, and is subject to a number of significant risks over which we have little or no control, including broader financial market volatility, adverse economic conditions, customers’ budgeting constraints, internal selection procedures, and changes in customer personnel, among others. Ongoing volatility in the US and global financial markets has further exacerbated this risk.

 

As a result of a lengthy and unpredictable sales cycle, we have limited ability to forecast the timing and amount of specific perpetual license sales, or term license sales which we report quarterly as annual contract value (ACV). The timing of large individual license sales is especially difficult to forecast, and we may not be successful in closing large license transactions on a timely basis or at all. Customers may postpone their purchases of our existing products or product enhancements in advance of the anticipated introduction of new products or product enhancements by us or our competitors. Accordingly, our level of ACV bookings and perpetual license revenue in any particular period is subject to significant fluctuation. For example, during fiscal 2009, our ACV bookings and perpetual license revenue decreased by 23% and 33%, respectively, compared to fiscal 2008. During the first nine months of 2010, our ACV bookings and perpetual license revenue increased by 38% and 2%, respectively, compared to the first nine months of 2009.

 

When a customer purchases a term license together with implementation services we do not recognize any revenue under the contract until the implementation services are substantially complete. The timing of large implementations is difficult to forecast. Customers may delay or postpone the timing of their particular projects due to the availability of resources or other customer specific priorities. If we are not able to complete an implementation project for a term license in a quarter, it will cause us to defer all of the proportionate contract revenues to a subsequent quarter. Because our expenses are relatively fixed in the near term, any shortfall from anticipated revenues could result in a significant variation in our operating results from quarter to quarter.

 

Our current operating results may not be reflective of our future financial performance.

 

During the first nine months of 2010, fiscal 2009 and 2008, we recognized 87%, 86% and 80%, respectively, of total net revenues from recurring sources, which we define as revenues from term license, maintenance on perpetual licenses, and other recurring revenue. We generally recognize revenue from these sources ratably over the terms of these agreements, which typically range from one to three years. As a result, almost all of our revenues in any quarter are generated from contracts entered into during previous periods.

 

Consequently, a significant decline in new business generated in any quarter may not materially affect our results of operations in that quarter but will have an impact on our revenue growth rate in future quarters. Additionally, a decline in renewals of term agreements, maintenance or data and other subscription contracts during a quarter will not be fully reflected in our financial performance in that quarter. For example, because we recognize revenue ratably, the non-renewal of term agreements or maintenance contracts late in a quarter may have very little impact on revenue for that quarter, but will reduce revenue in future quarters. In addition, we may be unable to adjust our costs in response to reduced revenue.

 

Further, because of the large percentage of revenue from recurring sources in our term license business model, our historical operating results on a generally accepted accounting principles (GAAP) basis will not necessarily be the sole or most relevant factor in predicting our future operating results. Accordingly, we report certain non-GAAP or operational information, including our quarterly bookings metrics (expressed as ACV) and maintenance renewal rates, that is intended to provide investors with certain of the information that management uses as a basis for planning and forecasting of future periods. However, we believe that undue reliance should not be placed upon non-GAAP or operating information because this information is neither standardized across companies nor subjected to the same control activities and audit procedures that produce our GAAP financial results.

 

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The market downturn beginning in fall 2008 caused, and other downturns in the future may cause clients not to renew their term licenses or perpetual license maintenance. Also, significant declines in market value of our clients affect their Assets Under Administration (AUA) or Assets Under Management (AUM).  Consequently, we may also experience a decline in the ACV of bookings since the pricing of some of our products is based upon our client’s AUA or AUM.  Furthermore, we have some contracts for which clients pay us fees based on the greater of a negotiated annual minimum fee or a calculated fee that is determined by the client’s AUA or AUM. If a client previously paid us based on the calculated fee, rather than the annual minimum fee, we would experience a decline in revenue as a result of any decline in those clients’ AUA or AUM.

 

Uncertain economic and financial market conditions adversely affect our business.

 

The market for investment management software systems has been and continues to be negatively affected by a number of factors, including reductions in capital expenditures by customers and volatile performance of major financial markets. The market downturn and fluctuations over the last 18 to 24 months, dissolution and acquisitions of our clients and prospects, the decline in Assets Under Administration (AUA) or Assets Under Management (AUM) as a result of significant declines in asset values of our clients and the accompanying market uncertainty affects and will continue to affect both our ability to sell our solutions and the amount of revenue we receive from such sales. The target clients for our products include a range of financial services organizations that manage investment portfolios. The success of many of our clients is intrinsically linked to the health of the financial markets. The demand for our solutions has been and continues to be disproportionately affected by fluctuations, disruptions, instability and downturns in the economy and financial services industry, which may cause clients and potential clients to exit the industry or delay, cancel or reduce any planned expenditures for investment management systems and software products. For example, as a result of the market downturn beginning in fall 2008, we experienced some clients and prospects delaying or cancelling additional license purchases and others went out of business, reduced personnel, or were acquired, which we expect to continue should the financial markets face future hardship.

 

In addition, the failure of existing investment firms or the slowdown in the formation of new investment firms could cause a decline in demand for our solutions. Consolidation of financial services firms and other clients will result in reduced technology expenditures or acquired customers using the acquirer’s own proprietary software and services solutions or the solutions of another vendor.  In some circumstances where both acquisition parties are customers of Advent, the combined entity may require fewer Advent products and services than each individually licensed, thus reducing our revenue. Challenging economic conditions may also cause our customers to experience difficulty with gaining timely access to sufficient credit or our customers may become unable to pay for the products or services they have purchased, which could result in their inability to fulfill or make timely payments to us. If that were to occur, our ability to collect receivables would be negatively affected, and our reserves for doubtful accounts and write-offs of accounts receivable may increase.

 

We have, in the past, experienced a number of market downturns in the financial services industry and resulting declines in information technology spending, which has caused longer sales and contracting cycles, deferral or delay of information technology projects and generally reduced expenditures for software and related services. The severity of the market downturn and volatility and uncertainty in the financial markets and the financial services sector in the last several years makes it difficult for us to forecast operating results and may result in a material adverse effect on our revenues and results of operations in the longer term.

 

Our stock price may fluctuate significantly.

 

Like many other companies, our stock price has been subject to wide fluctuations in recent quarters as a result of market volatility. If net revenues or earnings in any quarter or our financial guidance for future periods fail to meet the investment community’s expectations, our stock price is likely to decline. Even if our revenues or earnings meet or exceed expectations, our stock price is subject to decline in periods of high market volatility because our stock price is affected by trends in the financial services sector and by broader market trends unrelated to our performance. Unfavorable or uncertain economic and market conditions, which can be caused by many factors, including declines in economic growth, business activity or investor or business confidence; limitation on the availability or increases in the cost of credit or capital; increases in inflation, interest rates, exchange rate volatility, default rates or the price of basic commodities; corporate, political or other scandals that reduce investor confidence in capital markets; outbreaks of hostilities or other geopolitical instability; natural disasters or pandemics; or a combination of these or other factors, have adversely affected, and may in the future adversely affect, our business, profitability and stock price.

 

We operate in a highly competitive industry.

 

The market for investment management software is competitive and highly fragmented, is subject to rapid change and is sensitive to new product introductions and marketing efforts by industry participants. Our largest single source of competition is from proprietary systems used by existing and potential clients, many of whom develop their own software for their particular needs and therefore may be reluctant to license software products offered by third party vendors such as Advent. We also face significant competition from other providers of software and related services as well as providers of outsourced services. Many of our competitors have longer operating histories and greater financial, technical, sales and marketing resources than we do. In addition, consolidation has occurred among some of the competitors in our markets. Competitors vary in size, scope of services offered and platforms supported.

 

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In recent years, many of our competitors have merged with each other or with other larger third parties, and it is possible that even larger companies will emerge through additional acquisitions of companies and technologies. Consolidation among our competitors may result in stronger competitors in our markets and may therefore either result in a loss of market share or harm our results of operations. In addition, we also face competition from potential new entrants into our markets that may develop innovative technologies or business models. Furthermore, competitors may respond to weak market conditions by lowering prices, offering better contractual terms and attempting to lure away our customers and prospects to lower cost solutions. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure will not result in price reductions, reduced operating margins or loss of market share, any one of which could seriously harm our business. We must continue to introduce new products and product enhancements.

 

The market for our products is characterized by rapid technological change, changes in customer demands, evolving industry standards and new regulatory requirements. New products based on recent technologies or new industry standards can render existing products obsolete and unmarketable. As a result, our future success will continue to depend upon our ability to develop new products or product enhancements that address the future needs of our target markets and respond to their changing standards and practices. We continue to release numerous products and product upgrades and we believe our future success depends on continuing such releases. Additionally, in October 2008, we acquired Tamale Software which enables us to offer a new product in the nascent research management field and in March 2010, Advent Norway AS acquired Goya AS to allow us to provide transfer agency-related solutions to mutual fund managers and mutual fund distributors. However, it is too early to know whether these products will meet anticipated sales or will be broadly accepted in the market, that a market will develop as expected for these new products or that we will continue to introduce more products.

 

We may not be successful in developing, introducing, marketing and licensing our new products or product enhancements on a timely and cost effective basis, or at all, and our new products and product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. Delays in the commencement of commercial shipments of new products or enhancements or delays in client implementations or migrations may result in client dissatisfaction and delay or loss of product revenues. Additionally, existing clients may be reluctant to go through the process of migrating from our Axys product to our APX product, which may slow the migration of our customer base to APX. In addition, clients may delay purchases in anticipation of new products or product enhancements. Our ability to develop new products and product enhancements is also dependent upon the products of other software vendors, including certain system software vendors, such as Microsoft Corporation, database vendors and development tool vendors. If the products of such vendors have design defects or flaws, are unexpectedly delayed in their introduction, are unavailable on acceptable terms, or the vendors exit the business, our business could be seriously harmed.

 

We depend heavily on our Axys®, Geneva®, APX and Moxy® products.

 

We derive a majority of our net revenues from the license and maintenance revenues from our Axys, Geneva, APX and Moxy products. In addition, Moxy and many of our applications, such as Partner and various data services, have been designed to provide an integrated solution with Axys, Geneva and APX. As a result, we believe that for the foreseeable future a majority of our net revenues will depend upon continued market acceptance of Axys, Geneva, APX, and Moxy, and upgrades to those products. This is particularly true as a result of our divestiture of our MicroEdge grants management products, which further concentrates our revenue streams.

 

Our operating results may fluctuate significantly.

 

Revenues from recurring sources have grown from 80% in 2008, to 86% in 2009 and to 87% in the first nine months of 2010. During the first nine months of 2010, term license revenues comprised approximately 44% of term license, maintenance and other recurring revenues as compared to approximately 44% and 35% in fiscal 2009 and 2008, respectively. Term license contracts are comprised of both software licenses and maintenance services. Individual perpetual software licenses vary significantly in value, and the value and timing of these transactions can therefore cause our quarterly perpetual license revenues to fluctuate. As we continue to sign term license agreements for new customers, grow our subscription, data management and outsourced services revenues, and our customers renew their perpetual maintenance, we expect our revenue from recurring sources to continue to represent over 85% of our total net revenues.

 

When a customer purchases a term license together with implementation services, we do not recognize any revenue under the contract until the implementation services are substantially completed and then we recognize revenue ratably over the remaining length of the contract. If the implementation services are still in progress as of quarter-end, we will defer all of the contract revenues to a subsequent quarter. At the point professional services are substantially completed, we recognize a pro-rata amount of the term license revenue, professional services fees earned and related expenses, based on the elapsed time from the start of the term license to the substantial completion of professional services. During 2009, the revenue recognized from completed implementations exceeded the revenue deferred from projects being implemented, resulting in a net recognition of revenue of $6.1 million for fiscal 2009, composed of $3.5 million of term license revenue and $2.6 million of professional services revenue. Subsequently in 2010, we returned to our prior trend of net term license revenue deferral. In future periods, our revenues related to completed implementations may vary depending on the number of projects that reach substantial completion during the quarter. Term license revenue for the

 

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remaining contract years and the remaining deferred professional services revenue and related expenses are recognized ratably over the remaining contract length. The term license component of the deferred revenue balance will increase or decrease in the future depending on the amount of new term license bookings relative to the number of implementations that reach substantial completion in a particular quarter. Although our substantial revenue from  recurring sources under our term license model provides us with longer term stability and more visibility in the short term,  our quarterly net revenues and operating results may still fluctuate significantly depending on these and other factors. Our expense levels are relatively fixed in the short-term. Due to the fixed nature of these expenses, combined with the relatively high gross margin historically achieved on our products, an unanticipated decline in net revenues in any particular quarter may adversely affect our operating results.

 

In addition, we experience seasonality in our licensing. We believe that this seasonality results primarily from customer budgeting cycles and expect this seasonality to continue in the future.  The fourth quarter of the year typically has more licensing activity.  That can result in term license bookings and perpetual license fee revenue being the highest in the fourth quarter, followed by lower term license bookings and perpetual license revenue in the first quarter of the following year. This seasonality has been, and may be in the future, adversely affected by market downturns we experienced and uncertain economic conditions.  Also, term licenses entered into during a quarter may not result in recognition of associated revenue until later quarters, as we begin recognizing revenue for such licenses when the related implementation services are substantially complete. In addition, we may incur commission and bonus expenses in the period in which we enter into a license, but not recognize the associated revenue until later periods.

 

Because of the above factors, we believe that quarter-to-quarter comparisons of our operating results are not necessarily reliable indicators of future performance.

 

If our relationship with Financial Times/Interactive Data is terminated, our business may be harmed.

 

Many of our clients use our proprietary interface to electronically retrieve pricing and other data from Financial Times/Interactive Data (“FTID”). FTID pays us a commission based on their revenues from providing this data to our clients. Our software products have been customized to be compatible with their system and our software would need to be redesigned to operate with additional alternative data vendors if FTID’s services were unavailable for any reason. Non-renewal of our current agreement with FTID would require at least two years’ prior notice by either us or them and the agreement may be terminated upon 90 days advance notice for an uncured material breach of the other party. While we have contracts with other data vendors for substantially similar financial data with which our products can be used, if our relationship with FTID was terminated or their services were unavailable to clients for any reason, we cannot be certain that we could enter into contracts with additional alternative data providers, or that these other relationships would provide similar commission rates to us or if the amount of data used by our clients would remain the same, and our operating results could suffer or our resources could be constrained from the costs of redesigning our software.

 

If our large subscription-based clients or if our revenue sharing relationships are terminated, our business may be harmed.

 

In recent years, Advent has entered into contracts relating to our subscription, data management revenue streams and outsourced services with contract values that are substantially larger than we have customarily entered into in the past, including our agreement with TIAA-CREF.  It is too early to know whether we will be able to continue to sign large recurring revenue contracts of this nature or if such clients will renew their contracts at similar rates, if at all. Some of these agreements are subject to milestones, acceptance and penalties and there is no assurance that these agreements will be fully implemented.  In addition, we have revenue sharing agreements with other companies that provide revenue to Advent for our clients’ use of those companies’ services and products. Our operating results could be adversely impacted if these agreements are not fully implemented, terminated or not renewed, or if we are unable to continue to generate similar opportunities and enter similar or larger sized contracts in the future.

 

Our outsourcing and data integration services are subject to risks that may harm our business.

 

Our clients rely on our outsourcing and data services to meet their operational needs, including account aggregation and reconciliation.  Because our services are complex, we utilize third party data and other vendors, and our clients use our services in a variety of ways, our services may have undetected errors or defects, service disruptions, delays, or incomplete or incorrect data that could result in unanticipated downtime for our customers, failure to meet service levels and service disruptions.  In addition, our security measures could be breached or unauthorized access to our information or our customers’ information could occur.  Such potential errors, defects, delays, disruptions or other performance problems may damage our clients’ business, harm our reputation, result in losing future sales, cause clients to withhold payment or terminate or not renew their agreements with us, and subject us to litigation and other possible liabilities.

 

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We must recruit and retain key employees.

 

We believe that our future success is dependent on the continued employment of our senior management and our ability to identify, attract, motivate and retain qualified technical, sales and other personnel. Members of our executive management team have acquired specialized knowledge and skills with respect to Advent. We need technical resources such as our product development engineers to develop new products and enhance existing products; we rely upon sales personnel to sell our products and services and maintain healthy business relationships; we must recruit professional service consultants to support our implementations; we must hire client services personnel to provide technical support to our growing installed base of customers; and we must attract and retain financial and accounting personnel to comply with our public company reporting requirements. We need to identify, attract, motivate and retain such employees with the requisite education, backgrounds and industry experience.  However, experienced high quality personnel in the information technology industry continue to be in high demand and competition for their talents remains intense, especially in the San Francisco Bay Area where the majority of our employees are located.

 

We have relied on our ability to grant equity compensation as one mechanism for recruiting and retaining such highly skilled personnel. In making employment decisions, particularly in the high-technology industries and San Francisco Bay Area, job candidates often consider the value of the equity awards they are to receive in connection with their employment and market downturns may result in our equity incentives becoming less valuable. Additionally, accounting regulations requiring the expensing of equity compensation impair our ability to provide these incentives without reporting significant compensation costs.

 

We may also choose to create additional performance and retention incentives in order to retain our employees, including the granting of additional stock options, restricted stock, restricted stock units, stock appreciation rights, performance shares or performance units to employees or issuing incentive cash bonuses. Such incentives may either dilute our existing stockholder base or result in unforeseen operating expenses which may have a material adverse effect on our operating results, or could result in our stock price falling; or may not be valued as highly by our employees which may create retention issues.

 

We face challenges in expanding our international operations in which we may have limited experience and resources.

 

We market and sell our products in the United States and, to a growing extent, internationally. From 2001 through 2005, we acquired the subsidiaries of our independent distributor. In addition, we have begun to expand our sales in relatively new jurisdictions for Advent, such as the Middle East, Eastern Europe, and Asia. In 2006, we opened a branch office of Advent Europe Ltd. in the United Arab Emirates, and we established Advent Software (Asia) Ltd., a subsidiary of Advent Software, Inc., in Hong Kong in 2008.  In addition, we established a subsidiary of Advent Software (Asia), Ltd. in Beijing, China and established Advent Software Singapore Pte. Ltd., a subsidiary of Advent Software, Inc. in April 2010. In March 2010, our wholly-owned Norwegian subsidiary, Advent Norway AS, acquired the entire share capital of Goya AS, a Norwegian software company that provides transfer agency-related solutions to mutual fund managers and mutual fund distributors.

 

We cannot be certain that establishing businesses in other countries will produce the desired levels of revenues, such as in the case of our former Greek subsidiary, Advent Hellas, which produced less than satisfactory revenues and profitability before its sale by Advent in 2005. Also, worldwide volatility in financial markets may disrupt our sales efforts in overseas markets. We currently have limited experience in developing localized versions of our products and marketing and distributing our products internationally. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. For example, we previously outsourced certain engineering activities to a business partner located in China until Advent transitioned those contract developers to become employees of Advent’s Beijing office. In addition, international operations are subject to other inherent risks, including:

 

·                  The impact of recessions and market fluctuations in economies outside the United States;

·                  Adverse changes in foreign currency exchange rates;

·                  Greater difficulty in accounts receivable collection and longer collection periods;

·                  Difficulty of enforcement of contractual provisions in local jurisdictions;

·                  Unexpected changes in foreign laws and regulatory requirements;

·                  US and foreign trade-protection measures and export and import requirements;

·                  Difficulties in successfully adapting our products to the language, regulatory and technology standards of other countries;

·                  Resistance of local cultures to foreign-based companies and difficulties establishing local partnerships or engaging local resources;

·                  Difficulties in and costs of staffing and managing foreign operations;

·                  Reduced protection for intellectual property rights in some countries;

·                  Foreign tax structures and potentially adverse tax consequences; and

·                  Political and economic instability.

 

The revenues, expenses, assets and liabilities of our international subsidiaries are primarily denominated in local foreign currencies. We have not historically undertaken foreign exchange hedging transactions to cover potential foreign currency exposure. Future fluctuations in currency exchange rates may adversely affect revenues and accounts receivable from international sales and the US dollar value of our foreign subsidiaries’ revenues, expenses, assets and liabilities. Our international service revenues and certain license revenues from our European subsidiaries are generally denominated in local foreign currencies.

 

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Difficulties in integrating our acquisitions and expanding into new business areas have impacted and could continue to adversely impact our business and we face risks associated with potential acquisitions, investments, divestitures and expansion.

 

Periodically we seek to grow through the acquisition of additional complementary businesses. In October 2008, we completed the acquisition of Tamale Software, Inc., which provides research management software. More recently in March 2010, our wholly-owned Norwegian subsidiary, Advent Norway AS, acquired the entire share capital of Goya AS, a Norwegian software company that provides transfer agency-related solutions to mutual fund managers and mutual fund distributors.

 

The process of integrating our acquisitions has required and will continue to require significant resources, particularly in light of our relative inexperience in integrating acquisitions, potential regulatory requirements and operational demands. In particular, our Tamale acquisition reflects our entry into the research management software market, where we have no prior experience. Integrating these acquisitions in the past has been time-consuming, expensive and disruptive to our business. This integration process has strained our managerial resources, resulting in the diversion of these resources from our core business objectives and may do so in the future. Failure to achieve the anticipated benefits of these acquisitions or to successfully integrate the operations of these entities has harmed and could potentially harm our business, results of operations and cash flows in future periods. The assumptions we made in determining the value of, and relative risks, of these acquisitions could be erroneous. For example, in the first quarter of 2003, we closed our Australian subsidiary because it failed to perform at a satisfactory profit level and similarly in the fourth quarter of 2005, we disposed of our Advent Hellas subsidiary because of less than satisfactory profitability. In addition, as we have expanded into new business areas and built new offerings through strategic alliances and internal development, as well as acquisitions, some of this expansion has required significant management time and resources without generating required revenues. We have had difficulty and may continue to have difficulty creating demand for such offerings. Furthermore, we may face other unanticipated costs from our acquisitions, such as disputes involving earn-out and incentive compensation amounts.

 

We may make additional acquisitions of complementary companies, products or technologies in the future. In addition, we periodically evaluate the performance of all our products and services and may sell or discontinue current products, product lines or services, particularly as we focus on ways to streamline our operations. For example, in October 2009, we divested our MicroEdge subsidiary. Failure to achieve the anticipated benefits of any acquisition or divestiture could harm our business, results of operations and cash flows. Furthermore, we may have to incur debt, write-off investments, infrastructure costs or other assets, incur severance liabilities, write-off impaired goodwill or other intangible assets or issue equity securities to pay for any future acquisitions. Financing may not be available to us on sufficiently advantageous terms, or at all, and we have let our Credit Facility with Wells Fargo Foothill lapse. The issuance of equity securities could dilute our existing stockholders’ ownership. Finally, we may not identify suitable businesses to acquire or negotiate acceptable terms for future acquisitions.

 

Our investment portfolio may become impaired by deterioration of the capital markets.

 

Our cash equivalent, short-term and long-term investment portfolio as of September 30, 2010 consisted of US government and commercial debt securities. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.

 

As a result of adverse financial market conditions, investments in some financial instruments may pose risks arising from recent market liquidity and credit concerns. As of September 30, 2010, we had no impairment charges associated with our short-term or long-term investment portfolio relating to such adverse financial market conditions. Although we believe our current investment portfolio has very little risk of material impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain materially unimpaired. In addition, the decrease in interest rates has materially decreased the interest income we receive on our investments.

 

If we are unable to protect our intellectual property, we may be subject to increased competition that could seriously harm our business.

 

Our success depends significantly upon our proprietary technology. We currently rely on a combination of copyright, trademark, patent and trade secret law, as well as confidentiality procedures and contractual provisions to protect our proprietary rights. We have registered trademarks and copyrights for many of our products and services and will continue to evaluate the registration of additional trademarks and copyrights as appropriate. We generally enter into confidentiality agreements with our employees, customers, resellers, vendors and others. We seek to protect our software, documentation and other written materials under trade secret and copyright laws. We also have three issued patents. Despite our efforts, existing intellectual property laws may afford only limited protection. It may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use our proprietary information. In addition, we cannot be certain that others will not develop or acquire substantially

 

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equivalent or superseding proprietary technology, equivalent or better products will not be marketed in competition with our products, or others may not design around any patent that we have or that may be issued to us or other intellectual property rights of ours, thereby substantially reducing the value of our proprietary rights. We cannot be sure that we will develop proprietary products or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States and so our expansion into international markets may expose our proprietary rights to increased risks. Litigation may be necessary to protect our proprietary technology which may be time-consuming and expensive, with no assurance of success.  As a result, we cannot be sure that our means of protecting our proprietary rights will be adequate.

 

If we infringe the intellectual property rights of others, we may incur additional costs or be prevented from selling our products and services.

 

We cannot be certain that our products or services do not infringe the intellectual property rights of others. As a result, we may be subject to litigation and claims, including claims of misappropriation of trade secrets or infringement of patents, copyrights and other intellectual property rights of third parties that would be time-consuming and costly to resolve and may lead to unfavorable judgments or settlements. If we discovered that our products or services violated the intellectual property rights of third parties, we may have to make substantial changes to our products or services or obtain licenses from such third parties. We might not be able to obtain such licenses on favorable terms or at all, and we may be unable to change our products successfully or in a timely or cost-effective manner. Failure to resolve an infringement matter successfully or in a timely manner would damage our reputation and force us to incur significant costs, including payment of damages, redevelopment costs, diversion of management’s attention and satisfaction of indemnification obligations that we have with our clients, as well as prevent us from selling certain products or services.

 

Catastrophic events could adversely affect our business.

 

We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational, support, and sales activities. A disruption or failure of these systems in the event of major earthquake, fire, telecommunications failure, cyber-attack, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, delays in our product development and loss of critical data and could affect our ability to sell and deliver products and services and other critical functions of our business. Our corporate headquarters, a significant portion of our research and development activities, our data centers, and certain other critical business operations are located in the San Francisco Bay Area, which is a region of seismic activity. We have developed certain disaster recovery plans and certain backup systems to reduce the potentially adverse effect of such events, but a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected. Further, such disruptions could cause further instability in the financial markets or the spending of our clients and prospects upon which we depend. Although we are in the process of creating an enterprise risk management program to attempt to manage some of these risks, it is not currently implemented and, when implemented, may not adequately protect us.

 

In addition to the recent severe market conditions, other catastrophic events such as abrupt political change, terrorist acts, conflicts or wars may cause damage or disruption to the economy, financial markets and our customers. The potential for future attacks, the national and international responses to attacks or perceived threats to national security and other actual or potential conflicts or wars have created many economic and political uncertainties. Although it is impossible to predict the occurrences or consequences of any such events, they could unsettle the financial markets or result in a decline in information technology spending, which could have a material adverse effect on our revenues.

 

Undetected errors or failures found in new products and services may result in loss of or delay in market acceptance of our products and services that could seriously harm our business.

 

Our products and services may contain undetected errors or scalability limitations at any point in their lives, but particularly when first introduced or as new versions are released. For example, during the first nine months of 2010, we released new versions of Axys, Geneva, APX and Tamale RMS. Despite testing by us and by current and potential customers, errors may not be found in new products and services until after commencement of commercial shipments or use, resulting in a loss of or a delay in market acceptance, damage to our reputation, customer dissatisfaction and reductions in revenues and margins, any of which could seriously harm our business. Additionally, our agreements with customers that attempt to limit our exposure to liability claims may not be enforceable in jurisdictions where we operate, particularly as we expand into new international markets.

 

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Two of our principal stockholders have an influence over our business affairs and may make business decisions with which you disagree and which may adversely affect the value of your investment.

 

Our Chief Executive Officer and the Chairman of our board of directors own or control, indirectly or directly, a substantial number of shares of our common stock (approximately 6% and 30%, respectively, as of October 31, 2010). As a result, if these parties were to act together, they would have the ability to exert significant influence on matters submitted to our stockholders for approval, such as the election or removal of directors, amendments to our certificate of incorporation or the approval of a business combination. These actions may be taken even if they are opposed by other stockholders or it may be difficult to approve these actions without their consent. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares.

 

Changes in securities laws and regulations may increase our costs or may harm demand.

 

Most of our customers operate within a highly regulated environment. In light of the recent conditions in the US financial markets and economy, Congress and regulators have increased their focus on the regulation of the financial services industry. The information provided by, or resident in, the software or services we provide to our customers could be deemed relevant to a regulatory investigation or other governmental or private legal proceeding involving our customers, which could result in requests for information from us that could be expensive and time consuming for us. In addition, clients subject to investigations or legal proceedings may be adversely impacted possibly leading to their liquidation, bankruptcy, receivership, reductions in Assets Under Management or Assets Under Administration, or diminished operations that would adversely affect our revenues and collection of receivables.

 

Our customers must comply with governmental, self-regulatory organization and other rules, regulations, directives and standards.  New legislation or changes in such rules, regulations, directives or standards may reduce demand for our services or increase our expenses. We develop, configure and market products and services to assist customers in meeting these requirements. New legislation, or a significant change in rules, regulations, directives or standards, could cause our services to become obsolete, reduce demand for our services or increase our expenses in order to continue providing services to clients.

 

The recently enacted Dodd-Frank Wall Street Reform and Protection Act of 2010 (“Dodd-Frank Act”) represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new rules. While the general framework of the reforms is set forth in the Dodd-Frank Act, it provides for numerous studies and reports and the adoption and implementation of rules and regulations by regulatory agencies over the next four years to fully clarify and implement the Act’s requirements.

 

We believe that it is too early to know the precise long-term impact on our business of the increased regulation of financial institutions. While it could lead to increased demand for Advent’s products and services, demand could be negatively impacted by the deferral of purchase decisions by our customers until the new regulations have been adopted and the full impact and expense of the new regulatory environment is more clearly understood. The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on our operating environment in substantial and unpredictable ways. Accordingly, it is difficult to predict at this time what specific impact the Dodd-Frank Act and the forthcoming implementing rules and regulations will have on our business and the financial services industry.

 

Additionally, as a publicly-traded company, we are subject to significant regulations including the Dodd-Frank Act and the Sarbanes-Oxley Act (“the Sarbanes-Oxley Act”) of 2002. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas. Our efforts to comply with these requirements could result in an increase of our operating and compliance costs.

 

The Sarbanes-Oxley Act of 2002 required changes in some of our corporate governance and securities disclosure and/or compliance practices. As part of the Act’s requirements, the SEC enacted new rules on a variety of subjects, and the Nasdaq Stock Market enacted new corporate governance listing requirements. These developments have increased and may in the future increase our accounting and legal compliance costs and could also expose us to additional liability if we fail to comply with these or other new rules and reporting requirements. In fiscal 2009, 2008 and 2007, we incurred approximately $0.5 million, $0.8 million and $0.9 million, respectively, in Sarbanes-Oxley related expenses consisting of external consulting costs. In addition, such developments may make retention and recruitment of qualified persons to serve on our board of directors, or as executive officers, more difficult.

 

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Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges.

 

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by us, the SEC and various bodies formed to interpret and create accounting principles. A change in these principles or a change in the interpretations of these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Some of our accounting principles that have been or may be affected include:

 

·      Software revenue recognition;

·      Accounting for stock-based compensation;

·      Accounting for income taxes; and

·      Accounting for business combinations and related goodwill.

 

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

 

We are a US based multinational company subject to tax in multiple US and foreign tax jurisdictions. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in, or interpretation of, tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the US research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities.

 

In addition, we could be subject to examination of our income tax returns by the IRS and other domestic and foreign tax authorities. These examinations would be expected to focus on areas where considerable judgment is exercised by the company. We regularly assess the likelihood of outcomes resulting from an examination to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from an examination. We believe such estimates to be reasonable; however, there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

 

Security risks may harm our business.

 

Maintaining the security of computers, computer networks, hosted solutions and the transmission of confidential information over public networks is essential to commerce and communications, particularly in the market in which Advent operates. Efforts of others to seek unauthorized access to Advent’s or its clients’ information, computers and networks or introduce viruses, worms and other malicious software programs that disable or impair computers into our systems or those of our customers or other third parties, could disrupt or make our systems and services inaccessible or allow access to proprietary information and data of Advent or its clients.  Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments, could also result in compromises or breaches of our security systems. Our security measures may be inadequate to prevent security breaches, exposing us to a risk of data loss, financial loss, harm to reputation, business interruption, litigation and other possible liabilities, as well as possibly requiring us to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches.

 

Potential changes in securities laws and regulations governing the investment industry’s use of soft dollars may reduce our revenues.

 

Some of our clients utilized trading commissions (“soft dollar arrangements”) to pay for software products and services. During each of fiscal 2009, 2008 and 2007, the total value of Advent products and services paid with soft dollars was approximately 4% of our total billings. Such soft dollar arrangements could be impacted by changes in the regulations governing those arrangements.

 

In July 2006, the SEC published an Interpretive Release that provides guidance on money managers’ use of client commissions to pay for brokerage and research services under the safe harbor set forth in Section 28(e) of the Securities Exchange Act of 1934. The Interpretive Release clarifies that money managers may use client commissions (“soft dollars”) to pay only for eligible brokerage and research services. Among other matters, the Interpretive Release states that eligible brokerage includes those products and services that relate to the execution of the trade from the point at which the money manager communicates with the broker-dealer for the purpose of transmitting an order for execution, through the point at which funds or securities are delivered or credited to the advised account.  In addition, for potentially “mixed-use” items (such as trade order management systems) that are partly eligible and partly ineligible, the Interpretive Release states that money managers must make a reasonable allocation of client commissions in accordance with the eligible and ineligible uses of the items. Based on this guidance, our customers may change their method of paying all or a portion of certain Advent products or services from soft to hard dollars, and as a result reduce their usage of these products or services in order to avoid increasing expenses, which could cause our revenues to decrease.

 

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If we fail to maintain an effective system of internal control, we may not be able to accurately report our financial results or our filings may not be timely. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

 

Effective internal control is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal control that need improvement including control deficiencies that may constitute material weaknesses.

 

We do not expect that our internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Any failure to implement or maintain improvements in our internal control over financial reporting, or difficulties encountered in the implementation of these improvements in our controls, could cause significant deficiencies or material weaknesses in our internal controls and consequently cause us to fail to meet our reporting obligations. Any failure to implement or maintain required new or improved internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock. In addition, during 2009, we moved certain compliance functions from external providers to internal resources, and we cannot be certain that these changes will be as effective or will control costs as anticipated.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

Our Board of Directors (the “Board”) has approved common stock repurchase programs authorizing management to repurchase shares of the Company’s common stock in the open market. The timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, including the price of our stock, general market conditions and alternative investment opportunities. The purchases are funded from available working capital or debt.

 

On October 30, 2008, Advent’s Board authorized the repurchase of up to 3.0 million shares of the Company’s outstanding common stock. In May 2010, Advent’s Board authorized the repurchase of up to an additional 1.0 million shares of the Company’s common stock. During the third quarter of 2010, the Company repurchased approximately 32,000 shares of its common stock under the stock repurchase program approved by the Board in October 2008 for an average price per share of $45.89. At September 30, 2010, there remained approximately 1.1 million shares authorized by the Board for repurchase. The following table provides a month-to-month summary of the repurchase activity under the stock repurchase program approved by the Board in October 2008 and May 2010 during the three months ended September 30, 2010:

 

 

 

 

 

 

 

Maximum

 

 

 

Total

 

Average

 

Number of Shares That

 

 

 

Number

 

Price

 

May Yet Be Purchased

 

 

 

of Shares

 

Paid

 

Under Our Share

 

 

 

Purchased

 

Per Share

 

Repurchase Programs

 

 

 

(shares in thousands)

 

 

 

 

 

 

 

 

 

 

July 2010

 

32

 

$

45.89

 

1,143

 

August 2010

 

 

$

 

1,143

 

September 2010

 

 

$

 

1,143

 

 

 

 

 

 

 

 

 

Total

 

32

 

$

45.89

 

1,143

 

 

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In addition to the repurchases disclosed above, we withheld shares through net share settlements during the three months ended September 30, 2010. The following table provides a month-to-month summary of the purchase activity upon the employee vesting of restricted stock units and the exercise of stock-settled stock appreciation rights under our equity compensation plan to satisfy tax withholding and exercise obligations during the three months ended September 30, 2010 (in thousands, except per share data):

 

 

 

Total

 

 

 

Maximum Number

 

 

 

Number

 

Average

 

of Shares that May

 

 

 

of Shares

 

Price Per

 

Yet Be Purchased

 

Month

 

Purchased (1)

 

Share

 

Under the Plan

 

 

 

 

 

 

 

 

 

July

 

8

 

$

50.32

 

 

August

 

14

 

$

48.12

 

 

September

 

2

 

$

52.79

 

 

 

 

 

 

 

 

 

 

Total

 

24

 

$

49.32

 

 

 


(1)   These purchases represent shares cancelled when surrendered in lieu of cash payments for tax and exercise obligations due from employees. These shares were not purchased as part of a publicly announced program to purchase shares.

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 5.    Other Information

 

None.

 

Item 6.    Exhibits

 

3.1

 

Third Amended and Restated Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on June 8, 2010)

 

 

 

3.2

 

Amended and Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on June 8, 2010)

 

 

 

10.1

 

2002 Stock Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 8, 2010)

 

 

 

31.1

 

Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

ADVENT SOFTWARE, INC.

 

 

 

 

 

 

Dated: November 8, 2010

By:

/s/ James S. Cox

 

 

James S. Cox
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)

 

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