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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, 2014

 

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 x  No o

 

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

 

Large accelerated filer x

 

Accelerated filer ¨

 

 

 

Non-accelerated filer ¨

 

Smaller reporting company ¨

(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 ¨ No x

 

The number of shares of the registrant’s common stock outstanding as of October 31, 2014 was 51,699,021.

 

 

 



Table of Contents

 

INDEX

 

 

PART I. FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Income

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

 

PART II. OTHER INFORMATION

36

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

Defaults Upon Senior Securities

49

Item 4.

Mine Safety Disclosures

49

Item 5.

Other Information

49

Item 6.

Exhibits

49

Signatures

51

 

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

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

36,692

 

$

33,828

 

Accounts receivable, net

 

55,280

 

58,717

 

Deferred taxes, current

 

24,897

 

24,898

 

Prepaid expenses and other

 

24,724

 

30,114

 

Current assets of discontinued operation

 

 

100

 

Total current assets

 

141,593

 

147,657

 

Property and equipment, net

 

28,502

 

31,698

 

Goodwill

 

205,178

 

207,818

 

Other intangibles, net

 

21,004

 

27,392

 

Deferred taxes, long-term

 

21,213

 

23,020

 

Other assets

 

14,055

 

17,372

 

Noncurrent assets of discontinued operation

 

1,337

 

1,337

 

 

 

 

 

 

 

Total assets

 

$

432,882

 

$

456,294

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

10,155

 

$

5,348

 

Dividends payable

 

6,712

 

 

Accrued liabilities

 

34,677

 

41,625

 

Deferred revenues

 

176,288

 

186,107

 

Current portion of long-term debt

 

20,000

 

20,000

 

Current liabilities of discontinued operation

 

632

 

600

 

Total current liabilities

 

248,464

 

253,680

 

Deferred revenue, long-term

 

7,250

 

7,809

 

Long-term income taxes payable

 

7,667

 

7,667

 

Long-term debt

 

235,000

 

285,000

 

Other long-term liabilities

 

8,447

 

11,171

 

Noncurrent liabilities of discontinued operation

 

2,324

 

2,782

 

 

 

 

 

 

 

Total liabilities

 

509,152

 

568,109

 

 

 

 

 

 

 

Commitments and contingencies (See Note 13)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

Common stock

 

516

 

513

 

Additional paid-in capital

 

58,394

 

42,533

 

Accumulated deficit

 

(142,765

)

(165,870

)

Accumulated other comprehensive income

 

7,585

 

11,009

 

Total stockholders’ deficit

 

(76,270

)

(111,815

)

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$

432,882

 

$

456,294

 

 

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

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

 

 

 

 

Recurring revenues

 

$

90,689

 

$

88,116

 

$

272,352

 

$

260,862

 

Non-recurring revenues

 

8,293

 

8,651

 

23,804

 

24,518

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

98,982

 

96,767

 

296,156

 

285,380

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Recurring revenues

 

20,088

 

17,782

 

59,304

 

52,173

 

Non-recurring revenues

 

8,106

 

11,501

 

23,675

 

31,088

 

Amortization of developed technology

 

1,690

 

2,508

 

5,178

 

7,405

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

29,884

 

31,791

 

88,157

 

90,666

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

69,098

 

64,976

 

207,999

 

194,714

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

17,658

 

18,546

 

55,687

 

58,967

 

Product development

 

16,962

 

17,369

 

51,805

 

52,254

 

General and administrative

 

10,846

 

10,894

 

32,115

 

43,895

 

Amortization of other intangibles

 

809

 

953

 

2,588

 

2,863

 

Recapitalization costs

 

 

 

 

6,041

 

Restructuring charges (benefit)

 

2,579

 

(157

)

4,494

 

2,959

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

48,854

 

47,605

 

146,689

 

166,979

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

20,244

 

17,371

 

61,310

 

27,735

 

Interest and other income (expense), net

 

(1,423

)

(2,977

)

(5,596

)

(4,610

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

18,821

 

14,394

 

55,714

 

23,125

 

Provision for income taxes

 

6,818

 

4,561

 

20,149

 

5,390

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

12,003

 

$

9,833

 

$

35,565

 

$

17,735

 

 

 

 

 

 

 

 

 

 

 

Discontinued operation:

 

 

 

 

 

 

 

 

 

Net (loss) income from discontinued operation (net of applicable taxes of $(14), $(16), $(38) and $45, respectively)

 

(20

)

(20

)

(57

)

68

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,983

 

$

9,813

 

$

35,508

 

$

17,803

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.23

 

$

0.19

 

$

0.69

 

$

0.35

 

Discontinued operation

 

(0.00

)

(0.00

)

(0.00

)

0.00

 

Total operations

 

$

0.23

 

$

0.19

 

$

0.69

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.22

 

$

0.18

 

$

0.66

 

$

0.33

 

Discontinued operation

 

(0.00

)

(0.00

)

(0.00

)

0.00

 

Total operations

 

$

0.22

 

$

0.18

 

$

0.66

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to compute net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

51,579

 

51,576

 

51,464

 

51,241

 

Diluted

 

53,877

 

53,937

 

53,574

 

53,329

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.13

 

$

 

$

0.26

 

$

 

 

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

Net income (loss) per share is based on actual calculated values and totals may not sum due to rounding.

 

4



Table of Contents

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,983

 

$

9,813

 

$

35,508

 

$

17,803

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of taxes

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(4,413

)

3,495

 

(3,424

)

(155

)

Unrealized gain on marketable securities (net of applicable taxes of $0, $(11), $0 and $(20), respectively)

 

 

36

 

 

11

 

Total other comprehensive (loss) income, net of taxes

 

(4,413

)

3,531

 

(3,424

)

(144

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

7,570

 

$

13,344

 

$

32,084

 

$

17,659

 

 

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

 

5



Table of Contents

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

35,508

 

$

17,803

 

Adjustment to net income for discontinued operation net loss (income)

 

57

 

(68

)

Net income from continuing operations

 

35,565

 

17,735

 

 

 

 

 

 

 

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

 

 

 

 

 

Stock-based compensation

 

22,571

 

40,597

 

Excess tax benefit from stock-based compensation

 

(9,003

)

(4,220

)

Depreciation and amortization

 

16,138

 

18,903

 

Amortization of debt issuance costs

 

1,079

 

593

 

Loss on disposal of fixed assets

 

2,786

 

 

(Reduction of) provision for doubtful accounts

 

(6

)

290

 

Reduction of sales reserves

 

(538

)

(196

)

Deferred income taxes

 

10,370

 

6,281

 

Other

 

(500

)

(45

)

Effect of statement of operations adjustments

 

42,897

 

62,203

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

3,443

 

4,181

 

Prepaid and other assets

 

7,789

 

(860

)

Accounts payable

 

3,919

 

3,843

 

Accrued liabilities

 

(12,279

)

(9,801

)

Deferred revenues

 

(9,841

)

(10,210

)

Income taxes payable

 

84

 

(5,190

)

Effect of changes in operating assets and liabilities

 

(6,885

)

(18,037

)

 

 

 

 

 

 

Net cash provided by operating activities from continuing operations

 

71,577

 

61,901

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(6,845

)

(2,161

)

Capitalized software development costs

 

(1,427

)

(2,556

)

Change in restricted cash

 

(173

)

 

Purchases of marketable securities

 

 

(57,863

)

Sales and maturities of marketable securities

 

 

228,619

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities from continuing operations

 

(8,445

)

166,039

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from common stock issued from exercises of stock options

 

3,171

 

18,382

 

Proceeds from common stock issued under the employee stock purchase plan

 

3,493

 

3,211

 

Excess tax benefits from stock-based compensation

 

9,003

 

4,220

 

Withholding taxes related to equity award net share settlement

 

(5,665

)

(8,043

)

Proceeds from debt issuance

 

 

375,000

 

Repayment of debt

 

(50,000

)

(120,000

)

Debt issuance costs

 

 

(5,725

)

Repurchase of common stock

 

(12,878

)

(41,256

)

Payment of cash dividend

 

(6,693

)

(470,133

)

 

 

 

 

 

 

Net cash used in financing activities from continuing operations

 

(59,569

)

(244,344

)

 

 

 

 

 

 

Net cash transferred to discontinued operation

 

(383

)

(358

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(316

)

(75

)

 

 

 

 

 

 

Net change in cash and cash equivalents from continuing operations

 

2,864

 

(16,837

)

Cash and cash equivalents of continuing operations at beginning of period

 

33,828

 

58,217

 

 

 

 

 

 

 

Cash and cash equivalents of continuing operations at end of period

 

$

36,692

 

$

41,380

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Noncash investing activities:

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

1,019

 

$

738

 

 

 

 

 

 

 

Cash flows from discontinued operation of MicroEdge, Inc.:

 

 

 

 

 

Net cash used in operating activities

 

$

(383

)

$

(358

)

Net cash transferred from continuing operations

 

383

 

358

 

 

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

 

6



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. and its subsidiaries (collectively “Advent” or the “Company”). All inter-company amounts and transactions have been eliminated.

 

Advent has prepared these condensed consolidated financial statements in accordance with the rules and regulations of the U.S. 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 fiscal year ended December 31, 2013. 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, results of continuing operations and cash flows for each interim period shown. All such adjustments occur in the ordinary course of business and are of a normal, recurring nature.

 

Recent Accounting Pronouncements

 

With the exception of the below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2014, as compared to the recent accounting pronouncements described in Advent’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, that are of significance, or potential significance, to the Company’s condensed consolidated financial statements.

 

In April 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures for discontinued operations and disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, which means that it will be effective for Advent’s fiscal year beginning January 1, 2015. Early adoption of ASU 2014-08 is permitted, but only for disposals or assets held for sale that have not been reported in previously issued (or available to be issued) financial statements. Advent has not early adopted the provisions of ASU 2014-08. Advent expects to adopt this new standard in the first quarter of fiscal year 2015 and does not expect the adoption to have a material impact on the Company’s condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective. ASU 2014-09 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2016, which means that it will be effective for Advent’s fiscal year beginning January 1, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt the standard and early adoption is not permitted. The Company is evaluating the impact of the adoption of ASU 2014-09 on its condensed consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015, which means that it will be effective for Advent’s fiscal year beginning January 1, 2016. Early adoption of ASU 2014-12 is permitted. The Company will adopt ASU 2014-12 effective January 1, 2016 and does not expect the adoption to have a material impact on the Company’s condensed consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to evaluate, at each annual and interim reporting period, whether there are

 

7



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conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures.  ASU 2014-15 is effective for the annual reporting period ending after December 15, 2016, and for annual and interim periods thereafter, which means that it will be effective for Advent’s fiscal year beginning January 1, 2017. Early adoption of ASU 2014-15 is permitted. The Company will adopt ASU 2014-15 effective January 1, 2017 and does not expect the adoption to have a material impact on the Company’s condensed consolidated financial statements.

 

Note 2—Financial Statement Detail

 

Recurring and non-recurring revenues

 

The following is a summary of recurring and non-recurring revenues (in thousands):

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Term license revenues

 

$

48,558

 

$

47,087

 

$

144,862

 

$

133,369

 

Perpetual maintenance revenues

 

15,778

 

16,632

 

48,490

 

49,401

 

Assets under administration revenues

 

1,481

 

1,471

 

5,477

 

6,376

 

Other recurring revenues

 

24,872

 

22,926

 

73,523

 

71,716

 

 

 

 

 

 

 

 

 

 

 

Total recurring revenues

 

$

90,689

 

$

88,116

 

$

272,352

 

$

260,862

 

 

 

 

 

 

 

 

 

 

 

Professional services and other revenues

 

$

7,956

 

$

8,281

 

$

22,492

 

$

22,675

 

Perpetual license fees

 

337

 

370

 

1,312

 

1,843

 

 

 

 

 

 

 

 

 

 

 

Total non-recurring revenues

 

$

8,293

 

$

8,651

 

$

23,804

 

$

24,518

 

 

Prepaid expenses and other

 

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

 

 

 

September 30

 

December 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Prepaid contract expense

 

$

9,071

 

$

10,139

 

Deferred commissions

 

6,346

 

6,552

 

Debt issuance costs

 

1,417

 

1,417

 

Prepaid income tax

 

 

2,659

 

Other

 

7,890

 

9,347

 

 

 

 

 

 

 

Total prepaid expenses and other

 

$

24,724

 

$

30,114

 

 

Other assets

 

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

 

 

 

September 30

 

December 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Prepaid contract expense, long-term

 

$

3,973

 

$

4,466

 

Long-term deferred commissions

 

3,099

 

4,098

 

Debt issuance costs

 

3,837

 

4,899

 

Deposits

 

2,917

 

2,608

 

Other

 

229

 

1,301

 

 

 

 

 

 

 

Total other assets

 

$

14,055

 

$

17,372

 

 

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Table of Contents

 

Deposits include a restricted cash balance of $1.5 million at September 30, 2014 and $1.3 million at December 31, 2013 primarily related to the Company’s San Francisco headquarters and facilities in New York. Refer to Note 13, “Commitments and Contingencies” for additional information.

 

Dividend Payable

 

In September 2014, Advents Board of Directors (the “Board”) declared a cash dividend of $0.13 per common share payable to shareholders of record as of September 30, 2014. On October 15, 2014, the Company paid this dividend which totaled $6.7 million. Any future dividends are subject to the approval of the Board.

 

Accrued liabilities

 

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

 

 

 

September 30

 

December 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Salaries and benefits payable

 

$

17,656

 

$

26,425

 

Accrued dividend equivalents on restricted stock units

 

3,245

 

3,171

 

Deferred rent, current portion

 

2,004

 

2,138

 

Accrued restructuring, current portion

 

1,237

 

998

 

Other

 

10,535

 

8,893

 

 

 

 

 

 

 

Total accrued liabilities

 

$

34,677

 

$

41,625

 

 

Accrued restructuring charges are discussed further in Note 14, “Restructuring Charges” contained herein. As part of the recapitalization in 2013, as disclosed in Advent’s 2013 Annual Report on Form 10-K, holders of restricted stock units (RSUs) have the right to receive a dividend equivalent payment of $9.00 per RSU upon vesting. At September 30, 2014 and December 31, 2013, “Other” accrued liabilities included accruals for sales and business taxes and other miscellaneous items.

 

Deferred revenues

 

The following table sets forth the composition of total short-term and long-term deferred revenues (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Term license deferred revenue

 

$

93,066

 

$

99,473

 

Term implementations deferred revenue

 

39,794

 

40,221

 

Perpetual license/maintenance deferred revenue

 

28,771

 

32,657

 

Other recurring deferred revenue

 

21,907

 

21,565

 

 

 

 

 

 

 

Total deferred revenues

 

$

183,538

 

$

193,916

 

 

Other long-term liabilities

 

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

 

 

 

September 30

 

December 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Deferred rent

 

$

6,332

 

$

8,677

 

Long-term deferred tax liability

 

1,540

 

1,982

 

Other

 

575

 

512

 

 

 

 

 

 

 

Total other long-term liabilities

 

$

8,447

 

$

11,171

 

 

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Note 3—Goodwill

 

The changes in the carrying value of goodwill for the nine months ended September 30, 2014 were as follows (in thousands):

 

 

 

Carrying
Value

 

 

 

 

 

Balance at December 31, 2013

 

$

207,818

 

Translation adjustments

 

(2,640

)

 

 

 

 

Balance at September 30, 2014

 

$

205,178

 

 

Translation adjustments reflect the impact of translating goodwill balances denominated in various foreign currencies to the U.S. Dollar. The $(2.6) million in translation adjustments resulted from a strengthening of the U.S. Dollar exchange rate versus other currencies during the nine months ended September 30, 2014.

 

Note 4—Other Intangibles, Net

 

Other intangibles are summarized as follows (in thousands, except weighted average amortization period):

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Amortization

 

 

 

 

 

 

 

 

 

Period

 

 

 

Accumulated

 

 

 

 

 

(Years)

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Purchased technologies

 

5.1

 

$

50,907

 

$

(42,697

)

$

8,210

 

Product development costs

 

3.0

 

21,978

 

(18,789

)

3,189

 

 

 

 

 

 

 

 

 

 

 

Developed technology sub-total

 

 

 

72,885

 

(61,486

)

11,399

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

6.4

 

40,971

 

(31,991

)

8,980

 

Other intangibles

 

4.1

 

4,647

 

(4,022

)

625

 

 

 

 

 

 

 

 

 

 

 

Other intangibles sub-total

 

 

 

45,618

 

(36,013

)

9,605

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014

 

 

 

$

118,503

 

$

(97,499

)

$

21,004

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Amortization

 

 

 

 

 

 

 

 

 

Period

 

 

 

Accumulated

 

 

 

 

 

(Years)

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Purchased technologies

 

5.1

 

$

50,711

 

$

(38,877

)

$

11,834

 

Product development costs

 

3.0

 

20,524

 

(17,183

)

3,341

 

 

 

 

 

 

 

 

 

 

 

Developed technology sub-total

 

 

 

71,235

 

(56,060

)

15,175

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

6.4

 

40,936

 

(29,786

)

11,150

 

Other intangibles

 

4.1

 

4,645

 

(3,578

)

1,067

 

 

 

 

 

 

 

 

 

 

 

Other intangibles sub-total

 

 

 

45,581

 

(33,364

)

12,217

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

 

 

$

116,816

 

$

(89,424

)

$

27,392

 

 

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The changes in the carrying value of other intangibles during the nine months ended September 30, 2014 are summarized as follows (in thousands):

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

116,816

 

$

(89,424

)

$

27,392

 

Additions

 

1,453

 

 

1,453

 

Amortization

 

 

(7,766

)

(7,766

)

Translation adjustments

 

234

 

(309

)

(75

)

 

 

 

 

 

 

 

 

Balance at September 30, 2014

 

$

118,503

 

$

(97,499

)

$

21,004

 

 

Based on the carrying amount of other intangibles as of September 30, 2014, the estimated future amortization is as follows (in thousands):

 

 

 

Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Months Ending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

Years Ending December 31

 

 

 

 

 

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

1,585

 

$

5,918

 

$

3,493

 

$

382

 

$

18

 

$

3

 

$

11,399

 

Other intangibles

 

808

 

3,231

 

2,720

 

1,885

 

942

 

19

 

9,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,393

 

$

9,149

 

$

6,213

 

$

2,267

 

$

960

 

$

22

 

$

21,004

 

 

Note 5—Debt

 

On June 12, 2013, Advent entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated Advent’s prior Credit Agreement, dated November 30, 2011. The Restated Credit Agreement provides for (i) a $200 million revolving credit facility, with a $25 million letter of credit sublimit and a $10 million swingline loan sublimit and (ii) a $225 million term loan facility. Advent may request revolving loans, swingline loans or the issuance of letters of credit until June 12, 2018, subject to demonstrating pro forma compliance with the financial covenant requirement under the Restated Credit Agreement. The Restated Credit Agreement also contains an incremental facility permitting Advent, subject to certain requirements, to arrange with the Lenders and/or new lenders for up to an aggregate of $75 million in additional commitments in the form of revolving loans or term loans. The proceeds of the revolving loans and term loans under the Restated Credit Agreement may be used for general purposes, including to finance dividends, repurchase common shares, finance acquisitions, or to finance other investments.

 

Minimum principal payments with respect to the term loans are due in 20 equal consecutive quarterly principal installments of $5.0 million, commencing on September 13, 2013, with the remaining outstanding principal balance and all accrued and unpaid interest due on June 12, 2018. Principal payments with respect to the revolving loans, together with all accrued and unpaid interest, are due on June 12, 2018. Advent may prepay the term loans and revolving loans at any time without penalty.

 

The revolving loans and term loans bear interest, at Advent’s option, at the alternate base rate plus a margin of 0.25% to 1.25% or an adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 1.25% to 2.25%, in each case with such margin being determined based on the consolidated leverage ratio for the preceding four fiscal quarter period. The “alternate base rate” means the highest of (i) the Agent’s prime rate, (ii) the federal funds rate plus a margin equal to 0.50% and (iii) the adjusted LIBOR rate for a one-month interest period plus a margin equal to 1.00%. Swingline loans accrue interest at a per annum rate based on the alternate base rate plus the applicable margin for alternate base rate loans. Advent is also obligated to pay other customary closing fees, arrangement fees, administration fees, commitment fees and letter of credit fees for a credit facility of this size and type.

 

The obligations under the Restated Credit Agreement are guaranteed by Advent’s present and future domestic subsidiaries, subject to certain exceptions. The loan is secured by substantially all of the assets of Advent and the guarantors party thereto, including all of the capital stock of Advent’s domestic subsidiaries and 66% of the capital stock of Advent’s or a guarantor’s first-tier foreign subsidiaries.

 

The Restated Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict Advent and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, pay dividends or make distributions, make investments, make acquisitions, prepay certain indebtedness, enter into certain transactions with affiliates, enter into sale and leaseback transactions, enter into swap agreements and enter into restrictive agreements, in each case subject to customary exceptions for a credit facility of this size and type. Advent is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. At September 30, 2014, Advent had a total debt balance of $255.0 million under its Restated Credit Agreement, of which $55.0 million was under the revolving

 

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credit facility; and at December 31, 2013, Advent had a total debt balance of $305.0 million under its Restated Credit Agreement, of which $90.0 million was under the revolving credit facility.

 

Advent was in compliance with all associated covenants as of September 30, 2014 as follows:

 

 

 

 

 

Ratio Calculation

 

 

 

Covenant

 

as of

 

Covenant

 

Requirement

 

September 30, 2014

 

 

 

 

 

 

 

Leverage ratio (1)

 

Maximum 3.75x (2)

 

2.0x

 

 

 

 

 

 

 

Interest coverage ratio (3)

 

Minimum 2.5x

 

15.6x

 

 


(1)         Calculated as the ratio of total debt to EBITDA, as defined by the Restated Credit Agreement, for the period of four consecutive fiscal quarters on the measurement date.

 

(2)         The leverage ratio covenant requirement lowers to a maximum of 3.50x on June 30, 2015 and 3.25x on June 30, 2016.

 

(3)         Calculated as the ratio of EBITDA to interest expense, as defined by the Restated Credit Agreement, for the period of four consecutive fiscal quarters on the measurement date.

 

The Restated Credit Agreement includes customary events of default that include, among other things, non-payment defaults, defaults due to the inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, defaults due to an unenforceability of the security documents or guarantees, and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the Restated Credit Agreement. A default interest rate will apply on all obligations during the existence of a payment event of default under the Restated Credit Agreement at a per annum rate equal to 2.00% above the otherwise applicable interest rate.

 

Note 6—Stockholders’ Deficit

 

Accumulated Other Comprehensive Income

 

The components of accumulated other comprehensive income, net of related taxes, at September 30, 2014 and December 31, 2013, included accumulated foreign currency translation adjustments of $7.6 million and $11.0 million, respectively.

 

Dividends

 

In April 2014, Advent’s Board declared the Company’s first quarterly cash dividend of $0.13 per common share payable to shareholders of record as of June 30, 2014. On July 15, 2014, the Company paid this dividend which totaled $6.7 million. In September 2014, the Board declared a cash dividend of $0.13 per common share payable to shareholders of record as of September 30, 2014. On October 15, 2014, the Company paid this dividend which totaled $6.7 million. Any future dividends are subject to the approval of the Board.

 

Common Stock Repurchases

 

The Company repurchased approximately 426,000 shares of our common stock for a total cash outlay of $12.4 million at an average price of $29.11 per share during the second quarter of 2014, and during the third quarter of 2014 repurchased approximately 15,000 shares for a total cash outlay of $0.5 million at an average price of $30.94 per share.

 

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Note 7—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.

 

In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. 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 measures certain financial assets and liabilities at fair value on a recurring basis. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, dividends payable and accrued liabilities approximate fair value based on the short-term maturities of these instruments. The carrying amount of debt approximates fair value as the underlying variable interest rate approximates current market rates and the Company’s credit risk has not changed significantly since the date of issuance. At September 30, 2014 and December 31, 2013, Advent had outstanding debt of $255.0 million and $305.0 million, respectively, which was valued using level 2 inputs.

 

There were no transfers between Level 1 and Level 2 assets during the nine months ended September 30, 2014, and Advent does not have any significant assets or liabilities that utilize unobservable or Level 3 inputs.

 

Note 8—Stock-Based Compensation

 

Stock-Based Compensation Expense

 

Stock-based compensation expense related to stock options, stock appreciation rights (“SARs”), employee stock purchase plan (“ESPP”) shares, and restricted stock units (“RSUs”) was recognized in the Company’s condensed consolidated statements of operations for the periods presented as follows (in thousands):

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2014

 

2013

 

2014

 

2013

 

Statement of operations classification

 

 

 

 

 

 

 

 

 

Cost of recurring revenues

 

$

793

 

$

853

 

$

2,469

 

$

2,647

 

Cost of non-recurring revenues

 

293

 

578

 

1,022

 

2,690

 

Total cost of revenues

 

1,086

 

1,431

 

3,491

 

5,337

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

2,461

 

2,874

 

7,757

 

10,920

 

Product development

 

2,005

 

2,083

 

5,853

 

6,941

 

General and administrative

 

1,707

 

2,003

 

5,470

 

17,399

 

Total operating expenses

 

6,173

 

6,960

 

19,080

 

35,260

 

 

 

 

 

 

 

 

 

 

 

Total stock-based employee compensation expense

 

7,259

 

8,391

 

22,571

 

40,597

 

 

 

 

 

 

 

 

 

 

 

Tax effect on stock-based employee compensation expense

 

(2,733

)

(2,938

)

(8,641

)

(16,100

)

 

 

 

 

 

 

 

 

 

 

Effect on net income from continuing operations, net of tax

 

$

4,526

 

$

5,453

 

$

13,930

 

$

24,497

 

 

As of September 30, 2014, total compensation cost related to unvested awards not yet recognized under all equity compensation plans was $50.8 million and is expected to be recognized over the remaining vesting period of each grant, with a weighted average remaining period of 2.5 years for the group as a whole.

 

Valuation Assumptions

 

Advent uses the Black-Scholes option pricing model and the straight-line attribution approach to determine the grant date fair value of stock options, SARs and the ESPP. The fair value of RSUs is equal to the Company’s closing stock price on the date of grant.

 

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The following Black-Scholes option pricing model assumptions were used for stock options and SARs granted in the following periods:

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2014

 

2013

 

2014

 

2013

 

Stock Options & SARs

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.7% - 1.9%

 

1.5% - 1.8%

 

1.2% - 1.9%

 

0.5% - 1.8%

 

Volatility

 

32.4% - 32.7%

 

35.1% - 38.3%

 

32.4% - 35.1%

 

33.4% - 38.8%

 

Expected life (in years)

 

4.85

 

5.06

 

3.69 - 4.85

 

3.94 - 5.06

 

Expected dividend yield

 

1.6% - 1.7%

 

0%

 

0% - 1.8%

 

0%

 

 

 

 

 

 

 

 

 

 

 

Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

 

 

 

0.1%

 

0.1%

 

Volatility

 

 

 

 

 

32.1%

 

31.8%

 

Expected life (in years)

 

 

 

 

 

0.5

 

0.5

 

Expected dividend yield

 

 

 

 

 

1.7%

 

0%

 

 

Volatility for the periods presented was calculated using an equally weighted average of the Company’s historical and implied volatility of its common stock. The Company believes that this blended calculation of volatility is the most appropriate indicator of expected volatility and best reflects expected market conditions.

 

Expected life for the periods presented was determined based on the Company’s historical experience of similar awards, giving consideration to the contractual terms or offering periods, vesting schedules and expectations of future employee behavior.

 

Risk-free interest rate for the periods presented was based on the U.S. Treasury yield curve in effect at the date of grant for periods corresponding with the expected life.

 

The expected dividend yield for each grant was determined by annualizing the most recent dividend declared and dividing the result by the Company’s closing stock price on the date of grant. The dividend yield assumption for grants prior to April 28, 2014 was based on the Company’s history of not paying regular dividends and the future expectation of no recurring dividend payouts at the time of grant.

 

Equity Award Activity

 

The Company’s stock option and SAR activity for the nine months ended September 30, 2014 was as 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, 2013

 

5,590

 

$

15.05

 

 

 

 

 

Options & SARs granted

 

748

 

29.19

 

 

 

 

 

Options & SARs exercised

 

(800

)

13.86

 

 

 

 

 

Options & SARs canceled

 

(181

)

20.65

 

 

 

 

 

Outstanding at September 30, 2014

 

5,357

 

$

17.01

 

6.62

 

$

78,069

 

Exercisable at September 30, 2014

 

2,773

 

$

13.35

 

4.84

 

$

50,503

 

 

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 $31.56 on September 30, 2014 for options and SARs that were in-the-money as of that date.

 

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Table of Contents

 

The weighted average grant date fair value of options and SARs granted, total intrinsic value of options and SARs exercised and cash received from options exercised during the periods presented were as follows (in thousands, except weighted average grant date fair value):

 

 

 

Nine Months Ended September 30

 

 

 

2014

 

2013

 

Options and SARs

 

 

 

 

 

Weighted average grant date fair value

 

$

8.06

 

$

10.44

 

Total intrinsic value of awards exercised

 

$

14,138

 

$

34,259

 

 

 

 

 

 

 

Options

 

 

 

 

 

Cash received from exercises

 

$

3,171

 

$

18,382

 

 

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

 

The Company’s RSU activity for the nine months ended September 30, 2014 was as follows:

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

 

 

Shares

 

Grant Date

 

 

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Outstanding and unvested at December 31, 2013

 

1,159

 

$

20.16

 

RSUs granted

 

767

 

30.16

 

RSUs vested

 

(322

)

29.10

 

RSUs canceled

 

(95

)

27.85

 

Outstanding and unvested at September 30, 2014

 

1,509

 

$

22.85

 

 

In March 2014, the Company granted approximately 334,000 RSUs with performance-based criteria to certain of its executives and other key employees under its 2002 Stock Plan. These awards are scheduled to vest three years from the date of grant and expense is being recognized on a straight-line basis in proportion to the number of shares expected to vest. The number of shares that will ultimately vest will vary from 0% to 100% of the granted shares, depending upon the amount of cumulative recurring revenue (35% weight) and cumulative non-GAAP operating profit (65% weight) during the three-year period. On a quarterly basis, the Company assesses the number of shares that will ultimately vest and, if necessary, will record a cumulative adjustment to stock-based compensation expense recognized in the quarter the assessment changes.

 

The weighted average grant date fair value of RSUs 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, 2014 was $47.6 million based on the Company’s closing stock price of $31.56 per share on that date.

 

Note 9—Derivative Financial Instruments

 

The Company periodically enters into foreign currency forward contracts with financial institutions to reduce the risk that the Company’s cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. These forward contracts are not designated for trading or speculative purposes and are not designated as hedging instruments. The Company uses foreign currency forward contracts to hedge a portion of its receivable balances denominated in Euro, Swedish Krona, British Pounds, South African Rand and Norwegian Kroner. The Company recognizes gains and losses on these contracts, as well as related costs, in “Interest and other income (expense), net” in the condensed consolidated statement of operations along with the gains and losses of the related hedged items. The Company records the fair value of derivative instruments as either “Prepaid expenses and other” or “Accrued liabilities” in the condensed consolidated balance sheet based on current market rates.

 

As of September 30, 2014, Advent had no outstanding foreign currency forward contracts and there was no impact to the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2014. At September 30, 2013, the Company had no net derivative assets. The effect of the derivative financial instruments on the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2013 was to increase foreign exchange gains by approximately $45,000, which reflects net realized and unrealized gains related to our derivative financial instruments.

 

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Note 10—Income Taxes

 

The following table summarizes the activity relating to the Company’s unrecognized tax benefits during the nine months ended September 30, 2014 (in thousands):

 

 

 

Total

 

 

 

 

 

Balance at December 31, 2013

 

$

14,678

 

Gross increases related to current period tax positions

 

469

 

Balance at September 30, 2014

 

$

15,147

 

 

At September 30, 2014 and December 31, 2013, Advent had gross unrecognized tax benefits of $15.1 million and $14.7 million, respectively. During the nine months ended September 30, 2014, the Company increased the amount of unrecognized tax benefits by approximately $0.5 million related primarily to state research credits. If recognized, the total unrecognized tax benefits would decrease Advent’s tax provision and increase net income by approximately $12.4 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 primarily to federal research credits, state research credits and enterprise zone tax credits and various state net operating losses.

 

Advent is subject to taxation in the U.S. and various states and jurisdictions outside the U.S. Advent is currently undergoing a State of California franchise tax examination for the 2006 and 2007 tax years and a state of New York corporate income tax examination for the 2011, 2012, and 2013 tax years. At September 30, 2014, Advent was not under examination in any other income tax jurisdiction and at the present time 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 2010 and California for tax years after 2005.

 

As of September 30, 2014, Advent made no provision for a cumulative total of $23.3 million of undistributed earnings for certain non-U.S. subsidiaries, which are deemed to be permanently reinvested.

 

Note 11—Discontinued Operation

 

During 2009, the Company discontinued the operations of its wholly-owned subsidiary, MicroEdge, Inc. (“MicroEdge”). 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 contracted to sub-lease the premises through the end of the amended lease term in November 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, 2014 (in thousands):

 

 

 

Facility Exit

 

 

 

Costs

 

 

 

 

 

Balance of restructuring accrual at December 31, 2013

 

$

3,351

 

Restructuring charges

 

21

 

Cash payments

 

(521

)

Accretion of prior restructuring costs

 

73

 

 

 

 

 

Balance of restructuring accrual at September 30, 2014

 

$

2,924

 

 

Of the remaining restructuring accrual of $2.9 million at September 30, 2014, $0.6 million is included in “Current liabilities of discontinued operation” in the accompanying condensed consolidated balance sheet. The facility exit costs will be paid over the remaining lease term through November 2018.

 

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Note 12—Net Income (Loss) Per Share

 

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss):

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

12,003

 

$

9,833

 

$

35,565

 

$

17,735

 

Discontinued operation

 

(20

)

(20

)

(57

)

68

 

 

 

 

 

 

 

 

 

 

 

Total operations

 

$

11,983

 

$

9,813

 

$

35,508

 

$

17,803

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

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

 

51,579

 

51,576

 

51,464

 

51,241

 

 

 

 

 

 

 

 

 

 

 

Dilutive common equivalent shares:

 

 

 

 

 

 

 

 

 

Employee stock options and other

 

2,298

 

2,361

 

2,110

 

2,088

 

 

 

 

 

 

 

 

 

 

 

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

 

53,877

 

53,937

 

53,574

 

53,329

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share (1):

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.23

 

$

0.19

 

$

0.69

 

$

0.35

 

Discontinued operation

 

(0.00

)

(0.00

)

(0.00

)

0.00

 

 

 

 

 

 

 

 

 

 

 

Total operations

 

$

0.23

 

$

0.19

 

$

0.69

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.22

 

$

0.18

 

$

0.66

 

$

0.33

 

Discontinued operation

 

(0.00

)

(0.00

)

(0.00

)

0.00

 

 

 

 

 

 

 

 

 

 

 

Total operations

 

$

0.22

 

$

0.18

 

$

0.66

 

$

0.33

 

 


(1) Net income (loss) per share is based on actual calculated values and totals may not sum due to rounding.

 

Weighted average stock options, SARs and RSUs of approximately 0.8 million and 1.4 million for the three and nine months ended September 30, 2014, 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 1.3 million and 2.4 million were excluded in the comparable periods of 2013, respectively.

 

Note 13—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, utilities and property taxes. Excluding leases and associated sub-leases for MicroEdge facilities, as of September 30, 2014, Advent’s remaining operating lease commitments through 2025 were approximately $51.5 million.

 

On October 1, 2009, Advent completed the sale of the Company’s MicroEdge subsidiary. At September 30, 2014, the gross operating lease commitments and sub-lease income related to this discontinued operation facility totaled $5.4 million and $2.4 million, respectively.

 

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

 

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recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification obligations is minimal.

 

Legal Contingencies

 

From time to time, in the course of its operations, the Company is a party to litigation matters and claims, including claims related to employee relations, business practices and other matters, but does not consider these matters to be material either individually or in the aggregate at this time. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and related events unfold. An unfavorable outcome in any legal matter, if material, could have a material adverse effect on the Company’s financial position, liquidity or results of operations in the period in which the unfavorable outcome occurs and potentially in future periods.

 

Advent reviews the status of each litigation matter or other claim and records a provision for a liability when it is considered both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed quarterly and adjusted as additional information becomes available. If either or both of the criteria are not met, the Company reassesses whether there is at least a reasonable possibility that a loss, or additional losses, may be incurred. If there is a reasonable possibility that a loss may be incurred, the Company discloses the estimate of the amount of loss or range of loss, discloses that the amount is immaterial (if true), or discloses that an estimate of loss cannot be made. In assessing potential loss contingencies, the Company considers a number of factors, including those listed in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 450-20, Contingencies—Loss Contingencies, regarding assessing the probability of a loss occurring and assessing whether a loss is reasonably estimable. The Company expenses legal fees as incurred.

 

Based on currently available information, the Company’s management does not believe that the ultimate outcome of unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

Note 14—Restructuring Charges

 

The following table sets forth an analysis of the changes in the restructuring accrual during the nine months ended September 30, 2014 (in thousands):

 

 

 

Facility Exit

 

Severance and

 

 

 

 

 

Costs

 

Benefits

 

Total

 

 

 

 

 

 

 

 

 

Balance of restructuring accrual at December 31, 2013

 

$

185

 

$

813

 

$

998

 

Restructuring charges

 

2,758

 

1,736

 

4,494

 

Non-cash write-off of leasehold improvements

 

(2,786

)

 

(2,786

)

Reversal of deferred rent related to facilities exited

 

1,113

 

 

1,113

 

Cash payments

 

(270

)

(2,312

)

(2,582

)

 

 

 

 

 

 

 

 

Balance of restructuring accrual at September 30, 2014

 

$

1,000

 

$

237

 

$

1,237

 

 

Restructuring charges of $4.5 million during the nine months ended September 30, 2014 were primarily due to employee termination benefits associated with the re-organization plan approved in April 2014 and exit costs associated with the consolidation of facilities in San Francisco and Boston during the third quarter of 2014. The remaining restructuring accrual of $1.2 million at September 30, 2014 is included in “Accrued liabilities” in the accompanying condensed consolidated balance sheet. As a result of these restructuring activities, Advent expects annual operating expense run rate savings of approximately $5 million which will be used to fund investments in other areas of the business to improve productivity, efficiency and client experience.

 

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Table of Contents

 

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 and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes included under Item 1 of this Form 10-Q. 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,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “intends” 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 referencing our expectations relating to future revenues, expenses and operating margins, product releases, the future of the investment management market and opportunities for us related thereto, future expansion, acquisition, divestment of or investment in other businesses, projections of revenues, future cost and expense levels, expected timing and amount of amortization expenses related to past acquisitions, future effective tax rates, future exchange rates, the adequacy of resources to meet future cash requirements, renewal rates, expected cash flow, capital expenditures, future financing activities, future dividends, 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.

 

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 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 investment management organization (portfolio accounting and reporting; trade order management and post-trade processing; research management; account management; and custodial reconciliation) and is tailored to meet the needs of the particular market segment of the investment management industry, as determined by size, assets under management and complexity of the investment process.

 

The results of MicroEdge, a former subsidiary which we sold in 2009, have been reclassified as a discontinued operation for all periods presented. Unless otherwise noted, discussion in this document pertains to our continuing operations.

 

Operating Overview

 

Operating highlights of our third quarter of 2014 include:

 

·                  Cash dividend. In September 2014, our Board of Directors declared a cash dividend of $0.13 per common share payable to the Company’s shareholders of record as of September 30, 2014. On October 15, 2014, we paid this dividend which totaled $6.7 million.

 

·                  Annualized Recurring Run Rate. The Annualized Recurring Run Rate of all of our contracted recurring revenue streams was $375.5 million at September 30, 2014, an increase of 6% compared to $353.9 million at September 30, 2013.

 

·                  Renewal rates. Initially disclosed renewal rates, which are based on cash collections and therefore reported one quarter in arrears, were 95% for the second quarter of 2014, compared to 92% for the second quarter of 2013.

 

·                  Operating cash flows.  Cash flows from operations in the third quarter of 2014 were $28.3 million, which represents an increase of 24% compared with $22.8 million in the same period last year.

 

·                  New and incremental bookings. The term license, Advent OnDemand and Black Diamond contracts signed in the third quarter of 2014 will contribute approximately $7.2 million in annual revenue (“annual contract value” or “ACV”) once they are fully implemented, compared to $7.1 million of ACV booked from contracts signed in the same period last year.

 

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Financial Overview

 

Financial highlights of our third quarter of 2014 and 2013 were as follows (in thousands, except per share amounts, percentage and margin changes):

 

 

 

 

 

 

 

Percentage /

 

 

 

Three Months Ended September 30

 

Margin

 

 

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

Net revenues

 

$

98,982

 

$

96,767

 

2

%

Gross margin

 

$

69,098

 

$

64,976

 

6

%

Gross margin percentage

 

69.8

%

67.1

%

2.7

pts

Operating income

 

$

20,244

 

$

17,371

 

17

%

Operating margin percentage

 

20.5

%

18.0

%

2.5

pts

Net income from continuing operations

 

$

12,003

 

$

9,833

 

22

%

Net income from continuing operations per diluted share

 

$

0.22

 

$

0.18

 

22

%

Operating cash flows

 

$

28,265

 

$

22,835

 

24

%

 

Term License and Term License Deferral

 

Term license revenues comprise substantially all of our license 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 complete. If the implementation services are still in progress as of quarter-end, we defer all of the contract revenues to a subsequent quarter. When 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 term.

 

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 completion in a particular quarter. For the three and nine months ended September 30, 2014 and 2013, changes in the net term license component of deferred revenues increased (decreased) the Company’s revenues, costs and operating income as follows (in thousands):

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term license revenues

 

$

(1,922

)

$

314

 

$

(2,236

)

$

(1,427

)

$

(1,155

)

$

(272

)

Professional services and other

 

(827

)

154

 

(981

)

1,896

 

(1,847

)

3,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

$

(2,749

)

$

468

 

$

(3,217

)

$

469

 

$

(3,002

)

$

3,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional services costs

 

$

(482

)

$

12

 

$

(494

)

$

1,491

 

$

(1,264

)

$

2,755

 

Sales commissions costs

 

(296

)

154

 

(450

)

(2

)

(62

)

60

 

Total net costs

 

$

(778

)

$

166

 

$

(944

)

$

1,489

 

$

(1,326

)

$

2,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

(1,971

)

$

302

 

$

(2,273

)

$

(1,020

)

$

(1,676

)

$

656

 

 

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As of September 30, 2014 and December 31, 2013, deferred revenue and directly related expense balances associated with our term license deferral were as follows (in thousands):

 

 

 

September 30

 

December 31

 

 

 

2014

 

2013

 

Term implementation deferred revenues

 

 

 

 

 

Short-term

 

$

33,551

 

$

33,505

 

Long-term

 

6,243

 

6,758

 

 

 

 

 

 

 

Total

 

$

39,794

 

$

40,263

 

 

 

 

 

 

 

Directly-related expenses

 

 

 

 

 

Short-term

 

$

10,059

 

$

11,055

 

Long-term

 

3,973

 

4,467

 

 

 

 

 

 

 

Total

 

$

14,032

 

$

15,522

 

 

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

 

Critical Accounting Policies and Estimates

 

There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2014 as compared to those 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 fiscal year ended December 31, 2013.

 

Recent Accounting Pronouncements

 

With the exception of the below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2014, as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, that are of significance, or potential significance, to our condensed consolidated financial statements.

 

In April 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures for discontinued operations and disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, which means that it will be effective for our fiscal year beginning January 1, 2015. Early adoption of ASU 2014-08 is permitted, but only for disposals or assets held for sale that have not been reported in previously issued (or available to be issued) financial statements. We have not early adopted the provisions of ASU 2014-08. We expect to adopt this new standard in the first quarter of fiscal year 2015 and do not expect the adoption to have a material impact on our condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective. ASU 2014-09 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2016, which means that it will be effective for our fiscal year beginning January 1, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt the standard and early adoption is not permitted. We are evaluating the impact of the adoption of ASU 2014-09 on our condensed consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015, which means that it will be effective for our fiscal year beginning January 1, 2016. Early adoption of ASU 2014-12 is

 

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permitted. We will adopt ASU 2014-12 effective January 1, 2016 and do not expect the adoption to have a material impact on our condensed consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures.  ASU 2014-15 is effective for the annual reporting period ending after December 15, 2016, and for annual and interim periods thereafter, which means that it will be effective for our fiscal year beginning January 1, 2017. Early adoption of ASU 2014-15 is permitted. We will adopt ASU 2014-15 effective January 1, 2017 and do not expect the adoption to have a material impact on our condensed consolidated financial statements.

 

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

 

The following table summarizes, for the periods indicated, certain items in the condensed consolidated statements of operations as a percentage of 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

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

 

 

 

 

Recurring revenues

 

92

%

91

%

92

%

91

%

Non-recurring revenues

 

8

 

9

 

8

 

9

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

100

 

100

 

100

 

100

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Recurring revenues

 

20

 

18

 

20

 

18

 

Non-recurring revenues

 

8

 

12

 

8

 

11

 

Amortization of developed technology

 

2

 

3

 

2

 

3

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

30

 

33

 

30

 

32

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

70

 

67

 

70

 

68

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

18

 

19

 

19

 

21

 

Product development

 

17

 

18

 

17

 

18

 

General and administrative

 

11

 

11

 

11

 

15

 

Amortization of other intangibles

 

1

 

1

 

1

 

1

 

Recapitalization costs

 

*

 

*

 

*

 

2

 

Restructuring charges (benefit)

 

3

 

*

 

2

 

1

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

49

 

49

 

50

 

59

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

20

 

18

 

21

 

10

 

Interest and other income (expense), net

 

(1

)

(3

)

(2

)

(2

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

19

 

15

 

19

 

8

 

Provision for income taxes

 

7

 

5

 

7

 

2

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

12

 

10

 

12

 

6

 

 

 

 

 

 

 

 

 

 

 

Discontinued operation:

 

 

 

 

 

 

 

 

 

Net loss from discontinued operation

 

*

 

*

 

*

 

*

 

 

 

 

 

 

 

 

 

 

 

Net income

 

12

%

10

%

12

%

6

%

 

Percentages are based on actual values. Totals may not sum due to rounding.

 


* Less than 1%.

 

22



Table of Contents

 

NET REVENUES

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenues (in thousands)

 

$

98,982

 

$

96,767

 

$

2,215

 

$

296,156

 

$

285,380

 

$

10,776

 

 

We derive our revenues from two sources: recurring revenues and non-recurring revenues. Recurring revenues are comprised of term license, perpetual maintenance arrangements and other recurring revenues (which includes revenues from Black Diamond, Advent OnDemand and incremental Assets Under Administration (“AUA”) fees from perpetual licenses). 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 on perpetual license arrangements. Other recurring revenues are derived from our subscription services and transaction-based services as well as AUA fees for certain perpetual arrangements. Non-recurring revenues consists of professional services and other revenue and perpetual license fees. Professional services and other revenues include fees for consulting, fees from training, project management services and our client conferences. Perpetual license revenues are derived from the licensing of software products under a perpetual arrangement. Sales returns, which we generally do not provide to customers, are accounted for as deductions to these two revenue categories based on our historical experience.

 

Revenues derived from sales outside the U.S. were 19% and 18% of total net revenues in the third quarter of 2014 and 2013, respectively, and were 18% for the nine months ended September 30, 2014 and 2013. The increase as a percentage of total revenues during the third quarter of 2014 primarily reflects higher average billings to customers outside the U.S. We plan to continue expanding our sales efforts outside the U.S., both in our current markets and elsewhere. Except for the U.S., the revenues from customers in any single country did not exceed 10% of total net revenues.

 

We expect total net revenues from continuing operations to be between $99 million and $102 million in the fourth quarter of 2014.

 

Recurring Revenues

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term license revenues

 

$

48,558

 

$

47,087

 

$

1,471

 

$

144,862

 

$

133,369

 

$

11,493

 

Maintenance revenues

 

15,778

 

16,632

 

(854

)

48,490

 

49,401

 

(911

)

Other recurring revenues

 

26,353

 

24,397

 

1,956

 

79,000

 

78,092

 

908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring revenues

 

$

90,689

 

$

88,116

 

$

2,573

 

$

272,352

 

$

260,862

 

$

11,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total net revenues

 

92

%

91

%

 

 

92

%

91

%

 

 

 

Revenues from term licenses, which include both software license and maintenance services for term licenses, increased $1.5 million and $11.5 million during the three and nine months ended September 30, 2014, respectively, when compared to the same periods of 2013. This growth reflects strong renewals, the continued layering of incremental annual contract value (ACV) of term licenses sold in previous periods into our term revenue, and the continued market acceptance of our products, partially offset by more deferral of term license revenue in both of the three and nine month comparative periods.

 

For our term licenses, we defer all revenue on new bookings until our implementation services are complete. The change in our term license implementation deferral increased/(decreased) term license revenues for the periods presented as follows (in thousands):

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term license revenues

 

$

(1,922

)

$

314

 

$

(2,236

)

$

(1,427

)

$

(1,155

)

$

(272

)

 

The net deferral of term license revenues for the three and nine months ended September 30, 2014, compared to the same periods last year, was primarily due to the dollar value associated with projects that commenced the implementation phase exceeding the dollar value of projects that completed the implementation phase. This resulted in a corresponding decrease in term license revenues of $2.2 million and $0.3 million during the three and nine months ended September 30, 2014.

 

Maintenance revenues from perpetual licenses decreased $0.9 million during the three and nine months ended September 30, 2014, respectively, when compared to the same periods last year. Generally, we sell very few perpetual licenses to new customers and therefore have seen a trend of declining maintenance revenues due 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 a decrease in new perpetual license customers, partially offset by the impact of price increases. We

 

23



Table of Contents

 

expect to continue to see a long-term downward trend in maintenance revenues from perpetual licenses as substantially all of our license revenue now is from term licenses.

 

Other recurring revenues primarily include revenues from incremental assets under administration (“AUA”) fees from perpetual licenses, data services, outsourced services, Advent OnDemand, web-based services and Black Diamond. The increases of $2.0 million and $0.9 million in other recurring revenues for the three and nine months ended September 30, 2014, respectively, compared to the same periods last year, primarily reflect growth in Black Diamond revenues. The increase for the nine months ended September 30, 2014 was partially offset by lower incremental assets under administration fees from perpetual licenses of $1.1 million due to an AUA report received in the first quarter of 2013 that typically reports in the fourth quarter.

 

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) since the second quarter of 2013:

 

 

 

Renewal Quarter

 

Renewal Rates 

 

Q314

 

Q214

 

Q114

 

Q413

 

Q313

 

Q213

 

Based on cash collections relative to prior year collections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initially Disclosed Renewal Rate (1)

 

(2

)

95

%

94

%

95

%

97

%

92

%

Updated Disclosed Renewal Rate (3)

 

n/a

 

n/a

 

97

%

101

%

100

%

95

%

 


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

(2)         The initially disclosed renewal rate for the third quarter of 2014 is not currently available as it is disclosed one quarter in arrears in order to include substantially all payments against invoices for this quarter.

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

 

Non-Recurring Revenues

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional services and other revenues

 

$

7,956

 

$

8,281

 

$

(325

)

$

22,492

 

$

22,675

 

$

(183

)

Perpetual license fees

 

337

 

370

 

(33

)

1,312

 

1,843

 

(531

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-recurring revenues

 

$

8,293

 

$

8,651

 

$

(358

)

$

23,804

 

$

24,518

 

$

(714

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total net revenues

 

8

%

9

%

 

 

8

%

9

%

 

 

 

Non-recurring revenues consists of perpetual license fees, professional services and other revenues. Professional services and other revenues include fees for consulting, project management, custom implementation and integration, custom report writing, training and our client conference. Perpetual license revenues are derived from the licensing of software products under a perpetual arrangement. Professional services and other revenues in the three months ended September 30, 2014 and 2013 included conference-related revenues of $1.1 million and $1.0 million, respectively.

 

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 four to nine months. 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 term.

 

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

 

 

 

Change From

 

Change From

 

 

 

2013 to 2014

 

2013 to 2014

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Impact of term license implementation (deferral) release

 

$

(981

)

$

3,743

 

Decreased custom reports

 

(272

)

(884

)

Decreased training

 

(168

)

(662

)

Decreased project management

 

(153

)

(991

)

Increased (decreased) consulting services

 

1,105

 

(462

)

Increased (decreased) data conversion

 

31

 

(720

)

Various other items

 

113

 

(207

)

 

 

 

 

 

 

Total change

 

$

(325

)

$

(183

)

 

24


 


Table of Contents

 

The decrease in professional services and other revenues during the three and nine months ended September 30, 2014 was primarily due to decreased demand from new client implementations during 2014. The decrease in the third quarter of 2014 was partially offset by higher consulting services resulting from higher billable utilization.

 

The change in our term license implementation deferral increased/(decreased) professional services and other revenues for the three and nine months ended September 30, 2014, as follows (in thousands):

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional services and other

 

$

(827

)

$

154

 

$

(981

)

$

1,896

 

$

(1,847

)

$

3,743

 

 

During the nine months ended September 30, 2014, revenue increased $3.7 million compared to the same period last year due to a term license implementation revenue release of $1.9 million (relatively more projects completed than were in the implementation stage) during the 2014 period versus a revenue deferral of $1.8 million (relatively more projects were in the implementation stage than completed) in the 2013 period. During the three months ended September 30, 2014, revenue decreased $1.0 million compared to the same period last year due to a revenue deferral of $0.8 million in the third quarter of 2014 as relatively more projects were in the implementation stage than completed during this period.

 

Total perpetual license fees were flat and decreased $0.5 million in the three and nine month periods ended September 30, 2014, respectively, primarily due to a decrease in sales of perpetual seat licenses and modules to our existing perpetual client base as we now sell predominantly term licenses.

 

COST OF REVENUES

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

1,086

 

$

1,431

 

$

(345

)

$

3,491

 

$

5,337

 

$

(1,846

)

All other cost of revenues

 

$

28,798

 

$

30,360

 

$

(1,562

)

$

84,666

 

$

85,329

 

$

(663

)

Percent of total net revenues

 

29

%

31

%

 

 

29

%

30

%

 

 

Total cost of revenues

 

$

29,884

 

$

31,791

 

$

(1,907

)

$

88,157

 

$

90,666

 

$

(2,509

)

Percent of total net revenues

 

30

%

33

%

 

 

30

%

32

%

 

 

 

Cost of revenues is made up of three components: cost of recurring revenues, cost of non-recurring revenues and amortization of developed technology, and are discussed individually in the narrative below. Gross margin increased to 70% in the three and nine months ended September 30, 2014 from 67% and 68%, respectively, in the comparable periods of 2013 as we improved efficiency in our global support organization and recognized less amortization expense as certain technology-related intangible assets became fully amortized. Gross margin in the three and nine months ended September 30, 2014 reflects lower stock-based compensation expense associated with the equity award modification as compared with the same periods last year, as expense related to fully vested shares was recognized entirely in the second quarter of 2013, as disclosed previously in our 2013 Annual Report on Form 10-K. Additionally, gross margin improvement reflected lower payroll and related costs in our professional service practice due to lower headcount and utilization of third-party contractors resulting from lower demand for implementation projects. This was partially offset by higher payroll costs to support our recurring revenues. Prior to April 1, 2014, we had a number of employees who had a dual role of both client satisfaction and revenue retention and were classified within sales and marketing expense. Beginning in the second quarter of 2014, we divided the team and reclassified those employees that were exclusively focused on client success into cost of recurring revenue resulting in approximately of $3.0 million of additional cost during the nine months ended September 30, 2014.

 

Cost of Recurring Revenues

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

793

 

$

853

 

$

(60

)

$

2,469

 

$

2,647

 

$

(178

)

All other cost of recurring revenues

 

$

19,295

 

$

16,929

 

$

2,366

 

$

56,835

 

$

49,526

 

$

7,309

 

Percent of total recurring revenues

 

21

%

19

%

 

 

21

%

19

%

 

 

Total cost of recurring revenues

 

$

20,088

 

$

17,782

 

$

2,306

 

$

59,304

 

$

52,173

 

$

7,131

 

Percent of total recurring revenues

 

22

%

20

%

 

 

22

%

20

%

 

 

 

Cost of recurring revenues consists of the direct costs related to providing and supporting our outsourced services, providing technical support services under maintenance and term license agreements and other services for recurring revenues, and royalties paid to third party vendors.

 

25



Table of Contents

 

Cost of recurring revenues changed due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2013 to 2014

 

2013 to 2014

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Increased outside services

 

$

1,014

 

$

3,290

 

Increased allocation-in of facility and infrastructure expenses

 

486

 

1,128

 

Increased payroll and related

 

378

 

2,160

 

Various other items

 

428

 

553

 

 

 

 

 

 

 

Total change

 

$

2,306

 

$

7,131

 

 

The increase in the cost of recurring revenues for the three and nine months ended September 30, 2014 was primarily due to increased outside services, the allocation of facility and infrastructure expenses and payroll and related costs. The increase in outside services costs reflects increased utilization of third-party contractors related to our new cloud platform, Advent Direct. Headcount in our client support group increased to 356 at September 30, 2014 from 339 at September 30, 2013, which resulted in higher payroll and related costs and allocation of facility and infrastructure expenses. During the second quarter of 2014, we re-categorized 15 relationship management employees from sales and marketing to cost of recurring as their responsibilities have changed to focus primarily on customer satisfaction.

 

Cost of Non-Recurring Revenues

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

293

 

$

578

 

$

(285

)

$

1,022

 

$

2,690

 

$

(1,668

)

All other cost of non-recurring revenues

 

$

7,813

 

$

10,923

 

$

(3,110

)

$

22,653

 

$

28,398

 

$

(5,745

)

Percent of total non-recurring revenues

 

94

%

126

%

 

 

95

%

116

%

 

 

Total cost of non-recurring revenues

 

$

8,106

 

$

11,501

 

$

(3,395

)

$

23,675

 

$

31,088

 

$

(7,413

)

Percent of total non-recurring revenues

 

98

%

133

%

 

 

99

%

127

%

 

 

 

Cost of non-recurring revenues consists of expenses associated with professional services and other fees, and perpetual license fees. Costs associated with professional services and other revenue consists primarily of personnel-related costs associated with the professional services organization in providing consulting, custom report writing and data conversion from clients’ previous systems. Costs associated with 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. Also included are direct costs associated with third party consultants. Cost of non-recurring revenues included approximately $2.2 million and $2.3 million of conference-related costs during the three months ended September 30, 2014 and 2013, respectively.

 

At the point professional services are substantially completed, we recognize a pro-rata amount of the related expenses based on the elapsed time from the start of the term license to the substantial completion of professional services. The remainder of the related expenses is recognized ratably over the remaining contract term. Indirect costs such as management and other overhead expenses are recognized in the period in which they are incurred.

 

Cost of non-recurring revenues changed due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2013 to 2014

 

2013 to 2014

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Decreased payroll and related

 

$

(1,154

)

$

(3,176

)

Decreased outside contractors

 

(865

)

(3,337

)

Impact of term license implementation (deferral) release

 

(494

)

2,755

 

Decreased allocation-in of facility and infrastructure expenses

 

(390

)

(988

)

Decrease stock-based compensation

 

(285

)

(1,668

)

Decreased travel and entertainment

 

(117

)

(699

)

Various other items

 

(90

)

(300

)

 

 

 

 

 

 

Total change

 

$

(3,395

)

$

(7,413

)

 

26



Table of Contents

 

The decrease in cost of non-recurring revenues during the three and nine months ended September 30, 2014 primarily reflects decreases in payroll and related cost, outside contractor utilization and stock-based compensation. Payroll and related costs, and the allocation of facility and infrastructure expenses reflect a reduction in headcount in our professional services group to 94 at September 30, 2014 from 123 at September 30, 2013 as a result of the reorganization plan approved in the fourth quarter of 2012. Third-party contractor costs and related travel and entertainment costs decreased due to lower demand for implementation projects. Stock-based compensation cost decreased in the three and nine months ended September 30, 2014 compared to the same periods last year as headcount decreased and due to higher expense in 2013 resulting from the equity award modification in the second quarter of 2013. The decreases for the nine months ended September 30, 2014 were partially offset by the release of deferred professional services costs (and associated revenue) as more projects were completed compared to the same period last year.

 

The change in our term license deferral increased/(decreased) professional services costs for the three and nine months ended September 30, 2014 and 2013 as follows (in thousands):

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional services costs

 

$

(482

)

$

12

 

$

(494

)

$

1,491

 

$

(1,264

)

$

2,755

 

 

Gross margins for non-recurring revenues were 2% and (33)% for the three months ended September 30, 2014 and 2013, respectively, and were 1% and (27)% for the nine months ended September 30, 2014 and 2013, respectively. Non-recurring gross margins improved primarily as a result of improved efficiency in our global support organization, higher billable utilization and less incremental stock-based compensation expense associated with the modification of equity awards in 2013. Gross margins were negatively impacted by our annual user conference that is typically held in the third quarter, with costs, net of associated revenues, of approximately $1.1 million and $1.3 million in the three months ended September 30, 2014 and 2013, respectively.

 

Amortization of Developed Technology

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangibles

 

$

1,194

 

$

1,883

 

$

(689

)

$

3,572

 

$

5,664

 

$

(2,092

)

Amortization of developed software

 

496

 

625

 

(129

)

1,606

 

1,741

 

(135

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amortization of developed technology

 

$

1,690

 

$

2,508

 

$

(818

)

$

5,178

 

$

7,405

 

$

(2,227

)

Percent of total net revenues

 

2

%

3

%

 

 

2

%

3

%

 

 

 

Amortization of developed technology represents amortization of acquisition-related intangibles and capitalized software development costs. The decrease for the three and nine months ended September 30, 2014 compared to the same periods last year resulted primarily from decreased amortization from certain technology-related intangible assets associated with Tamale Software, Inc. in the third quarter of 2013, which we acquired in October 2008, and other capitalized software development assets that fully amortized.

 

OPERATING EXPENSES

 

Sales and Marketing

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

2,461

 

$

2,874

 

$

(413

)

$

7,757

 

$

10,920

 

$

(3,163

)

All other sales and marketing

 

$

15,197

 

$

15,672

 

$

(475

)

$

47,930

 

$

48,047

 

$

(117

)

Percent of total net revenues

 

15

%

16

%

 

 

16

%

17

%

 

 

Total sales and marketing expense

 

$

17,658

 

$

18,546

 

$

(888

)

$

55,687

 

$

58,967

 

$

(3,280

)

Percent of total net revenues

 

18

%

19

%

 

 

19

%

21

%

 

 

 

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.

 

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Table of Contents

 

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

 

 

 

Change From

 

Change From

 

 

 

2013 to 2014

 

2013 to 2014

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Decreased payroll and related

 

$

(956

)

$

(460

)

Decreased stock-based compensation

 

(413

)

(3,163

)

Recruiting expenses

 

191

 

148

 

Various other items

 

290

 

195

 

 

 

 

 

 

 

Total change

 

$

(888

)

$

(3,280

)

 

The decrease in total sales and marketing expenses during the three and nine months ended September 30, 2014 compared to the same periods last year was primarily due to decreased payroll and related expense and decreased stock-based compensation expense as a result of the equity award modification in the second quarter of 2013, partially offset by increased recruiting expenses. Payroll and related expense decreased during the three and nine months ended September 30, 2014 primarily due to lower salary and bonus expense as headcount in our sales and marketing group decreased to 173 at September 30, 2014 from 184 at September 30, 2013. During the second quarter of 2014, we re-categorized 15 relationship management employees from sales and marketing to cost of recurring revenues as their responsibilities have changed to focus primarily on customer satisfaction.

 

Product Development

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

2,005

 

$

2,083

 

$

(78

)

$

5,853

 

$

6,941

 

$

(1,088

)

All other product development expense

 

$

14,957

 

$

15,286

 

$

(329

)

$

45,952

 

$

45,313

 

$

639

 

Percent of total net revenues

 

15

%

16

%

 

 

16

%

16

%

 

 

Total product development expense

 

$

16,962

 

$

17,369

 

$

(407

)

$

51,805

 

$

52,254

 

$

(449

)

Percent of total net revenues

 

17

%

18

%

 

 

17

%

18

%

 

 

 

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 changed due to the following (in thousands):

 

 

 

Change From

 

Change From

 

 

 

2013 to 2014

 

2013 to 2014

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Increased capitalization of internal use software

 

$

(891

)

$

(2,693

)

Decreased stock-based compensation

 

(78

)

(1,088

)

Increased outside contractors

 

604

 

1,971

 

Decreased capitalization of software development

 

175

 

1,128

 

Increased payroll and related

 

90

 

15

 

Various other items

 

(307

)

218

 

 

 

 

 

 

 

Total change

 

$

(407

)

$

(449

)

 

The decrease in total product development expenses during the three and nine months ended September 30, 2014 compared to the same periods last year was primarily due to increased capitalization of internal use software costs related to our cloud platform, Advent Direct, and decreased stock-based compensation expense as a result of the equity award modification in the second quarter of 2013. These decreases to expense were partially offset by increased costs from higher utilization of third-party contractors on product development activities primarily related to Advent Direct and, to a lesser extent, decreased capitalization of software development costs associated with the timing of our product releases resulting in less costs being capitalized in 2014.

 

General and Administrative

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands, except percent of total net revenues)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

1,707

 

$

2,003

 

$

(296

)

$

5,470

 

$

17,399

 

$

(11,929

)

All other general and administrative expense

 

$

9,139

 

$

8,891

 

$

248

 

$

26,645

 

$

26,496

 

$

149

 

Percent of total net revenues

 

9

%

9

%

 

 

9

%

9

%

 

 

Total general and administrative expense

 

$

10,846

 

$

10,894

 

$

(48

)

$

32,115

 

$

43,895

 

$

(11,780

)

Percent of total net revenues

 

11

%

11

%

 

 

11

%

15

%

 

 

 

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Table of Contents

 

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

 

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

 

 

 

Change From

 

Change From

 

 

 

2013 to 2014

 

2013 to 2014

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Decreased legal and professional fees

 

$

(928

)

$

(852

)

Increased allocation-out of facility and infrastructure expenses

 

(414

)

(1,167

)

Decreased stock-based compensation

 

(296

)

(11,929

)

Increased computers and telecom

 

780

 

1,545

 

Increased charitable contributions

 

364

 

13

 

Increased outside services

 

247

 

874

 

Various other items

 

199

 

(264

)

 

 

 

 

 

 

Total change

 

$

(48

)

$

(11,780

)

 

The decrease in total general and administrative expenses for the three and nine months ended September 30, 2014 was primarily due to decreased legal and professional fees, decreased stock-based compensation expense as a result of the equity award modification as a result of the special dividend declared in the second quarter of 2013 and the increased allocation-out of facility and infrastructure expense. The decrease in legal and professional fees during these periods was primarily due to transaction related fees of $0.6 million incurred in the third quarter of 2013 associated with the secondary offering of our common stock by our largest shareholder. 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 relative headcount. As our facility costs increased and headcount in our other departments grew at a higher rate than our general and administrative department, we allocated-out more facility and information technology costs during the three and nine months ended September 30, 2014 than in the comparable periods last year. These cost decreases were partially offset by increased computers and telecom due to costs from more maintenance contracts and higher phone usage, increased outside services costs, as well as charitable contributions made in the three and nine months ended September 30, 2014.

 

Amortization of Other Intangibles

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of other intangibles (in thousands)

 

$

809

 

$

953

 

$

(144

)

$

2,588

 

$

2,863

 

$

(275

)

Percent of total net revenues

 

1

%

1

%

 

 

1

%

1

%

 

 

 

Other intangibles represent amortization of non-technology related to acquired intangible assets. The slight decrease in the three and nine months ended September 30, 2014 compared to the same periods last year reflects certain assets that fully amortized in the third quarter of 2013 and first half of 2014.

 

Recapitalization Costs

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recapitalization costs (in thousands)

 

$

 

$

 

$

 

$

 

$

6,041

 

$

(6,041

)

Percent of total net revenues

 

0

%

0

%

 

 

0

%

2

%

 

 

 

We had no recapitalization costs during 2014. During the nine months ended September 30, 2013, in conjunction with the debt modification, special dividend and equity award modification, we incurred a total of $6.0 million in operating expenses related to advisory fees from third parties including financial advisory fees, legal fees and valuation fees.

 

Restructuring Charges

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring charges (benefit) (in thousands)

 

$

2,579

 

$

(157

)

$

2,736

 

$

4,494

 

$

2,959

 

$

1,535

 

Percent of total net revenues

 

3

%

0

%

 

 

2

%

1

%

 

 

 

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Table of Contents

 

We incurred restructuring charges of $4.5 million in the nine months ended September 30, 2014, which was primarily due to employee termination benefits associated with the re-organization plan approved in April 2014, and exit costs related to consolidation of facilities in San Francisco and Boston in the third quarter of 2014. In our continuous efforts to expand operating margins, we will replace approximately 32 functional roles with lower cost resources or move them to lower cost regions and have vacated approximately 40,000 square feet of office space in high cost areas. As a result of these restructuring activities, we expect annual operating expense run rate savings of approximately $5 million which will be used to fund investments in other areas of our business to improve productivity, efficiency and client experience.

 

During the nine months ended September 30, 2013, we continued the re-organization plan which was approved in October 2012 to align strategy and function, reduce operating costs and improve profitability. As a result, we incurred restructuring charges of $3.0 million during the nine months ended September 30, 2013 for employee termination benefits associated with a workforce reduction.

 

For additional analysis of the components of the payments and charges made against the restructuring accrual during the first nine months of 2014, see Note 14, “Restructuring Charges” to the accompanying condensed consolidated financial statements.

 

Interest and Other Income (Expense), Net

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(1,423

)

$

(2,977

)

$

1,554

 

$

(5,596

)

$

(4,610

)

$

(986

)

Percent of total net revenues

 

(1

)%

(3

)%

 

 

(2

)%

(2

)%

 

 

 

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

 

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

 

 

 

Change From

 

Change From

 

 

 

2013 to 2014

 

2013 to 2014

 

 

 

QTD

 

YTD

 

 

 

 

 

 

 

Decrease (increase) in interest expense

 

$

901

 

$

(1,018

)

Decrease in interest income

 

(11

)

(294

)

Impact of foreign exchange

 

649

 

286

 

Various other items

 

15

 

40

 

 

 

 

 

 

 

Total change

 

$

1,554

 

$

(986

)

 

Interest and other income (expense), net decreased during the three months ended September 30, 2014 compared to the same period last year primarily due to a decrease in interest expense resulting from a lower outstanding debt balance and, to a lesser extent, foreign exchange impact due to fluctuations in the U.S. Dollar exchange rates against foreign currencies. Our average outstanding debt balance was approximately $280 million and $317 million for the third quarters of 2014 and 2013, respectively.

 

Interest and other income (expense), net increased during the nine months ended September 30, 2014 compared to the same period last year primarily due to an increase in interest expense resulting from a higher outstanding debt balance and, to a lesser extent, a decrease in interest income. Our average outstanding debt balance was approximately $292 million and $168 million for the nine months ended September 30, 2014 and 2013, respectively. Interest income decreased for the nine months ended September 30, 2014 compared to the same period last year due to lower invested cash balances as we sold our investments to help fund the special dividend in the second quarter of 2013.

 

Provision for Income Taxes

 

 

 

Three Months Ended September 30

 

 

 

Nine Months Ended September 30

 

 

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes (in thousands)

 

$

6,818

 

$

4,561

 

$

2,257

 

$

20,149

 

$

5,390

 

$

14,759

 

Effective tax provision rate

 

36

%

32

%

 

 

36

%

23

%

 

 

 

The effective tax rates for the three and nine months ended September 30, 2014 were higher than the rates for the same periods last year. As of September 30, 2014, the federal research credit was suspended for 2014, resulting in a higher tax rate for the first nine months of 2014.  Additionally, the reinstatement of the federal research credit in January 2013 resulted in our recognition of the benefit of the entire 2012 credit in the first quarter of 2013.

 

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Table of Contents

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash, Cash Equivalents and Cash Flows

 

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

 

 

 

September 30

 

December 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,692

 

$

33,828

 

 

Cash and cash equivalents primarily consist of cash and money market mutual funds purchased with an original or remaining maturity of 90 days or less at the date of purchase.

 

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

 

 

 

Nine Months Ended September 30

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net cash provided by operating activities from continuing operations

 

$

71,577

 

$

61,901

 

Net cash (used in) provided by investing activities from continuing operations

 

$

(8,445

)

$

166,039

 

Net cash used in financing activities from continuing operations

 

$

(59,569

)

$

(244,344

)

Net cash used in operating activities from discontinued operation

 

$

(383

)

$

(358

)

 

Cash Flows from Operating Activities for Continuing Operations

 

Our cash flows from operating activities for continuing operations 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), cost of revenues, interest from debt service and taxes. Our cash provided by operating activities generally follows the trend in our net revenues, operating results and bookings.

 

Our cash provided by operating activities from continuing operations of $71.6 million during the nine months ended September 30, 2014 was primarily the result of our net income plus non-cash charges including stock-based compensation, net of related excess tax benefit, depreciation and amortization, loss on disposal of fixed assets and deferred income taxes. Cash flows resulting from changes in assets and liabilities include decreases in deferred revenues, accrued liabilities, accounts receivable and prepaid and other assets; and increases in accounts payable and income taxes payable. The decrease in deferred revenues primarily resulted from the ratable recognition of deferred term license, maintenance and other recurring revenues over their contract period during the nine months ended September 30, 2014, and the release of deferred revenue associated with our term license implementations. Accrued liabilities decreased primarily as a result of cash payments for fiscal 2013 liabilities including year-end bonuses, commissions, RSU dividend equivalents and payroll taxes. Accrued liabilities include accrued dividend equivalent payments on restricted stock units (RSUs) in connection with the equity modification associated with the special dividend in 2013. During the nine months ended September 30, 2014, we made dividend equivalent payments of $2.9 million to RSU holders compared to $0.2 million during the nine months ended September 30, 2013. Prepaid and other assets decreased due to amortization of prepaid balances and a reduction in income taxes receivable. Accounts payable increased due to invoices received that were not paid during the period. Days’ sales outstanding were 51 days during the nine months ended September 30, 2014, compared to 54 days during the same period last year.

 

Our cash provided by operating activities from continuing operations of $61.9 million during the nine months ended September 30, 2013 was primarily the result of our net income plus non-cash charges including stock-based compensation, and depreciation and amortization. Cash flows resulting from changes in assets and liabilities include decreases in accounts receivable, accrued liabilities and deferred revenue. Days’ sales outstanding were 54 days during the nine months ended September 30, 2013, compared to 55 days in the same period of 2012. Accrued liabilities decreased primarily as a result of a decrease in accrued restructuring costs of $2.6 million as the October 2012 re-organization plan neared completion, and cash payments for fiscal 2012 liabilities including year-end bonuses, commissions, and payroll taxes. The decrease in deferred revenue primarily resulted from the ratable recognition of deferred term license, maintenance and other recurring revenues over their contract period during the nine months ended September 30, 2013, and the release of deferred revenue associated with our term license implementations. Other changes in assets and liabilities included an increase in accounts payable and a decrease in income taxes payable. Additionally, we paid $5.4 million during the third quarter of 2013 to option and SAR holders in connection with the equity award modification.

 

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Table of Contents

 

We expect that cash provided by operating activities for continuing operations may fluctuate in future periods as a result of a number of factors including fluctuations in our net revenues and operating results, new term license bookings and renewals that increase deferred revenue, collection of accounts receivable, payment of federal income taxes and timing of payments. We expect cash provided by operating activities to be between $105 million and $115 million for fiscal year 2014.

 

Cash Flows from Investing Activities for Continuing Operations

 

Net cash used in investing activities from continuing operations of $8.4 million for the nine months ended September 30, 2014 reflected capital expenditures of $6.8 million primarily related to internally developed software and the expansion of our Beijing office, and $1.4 million of capitalized software development costs.

 

Net cash provided by investing activities from continuing operations of $166.0 million for the nine months ended September 30, 2013 reflects sales and maturities of marketable securities of $228.6 million, partially offset by purchases of marketable securities of $57.9 million, capitalized software development costs of $2.6 million and capital expenditures of $2.2 million primarily related to information technology purchases. Proceeds from the sales and maturities of marketable securities were used to partially finance the special dividend of $470.1 million that was paid in July 2013.

 

We expect capital expenditures to be between $8 million and $11 million for fiscal year 2014, which includes our normal rate of capital expenditure plus an additional investment for technology investments to improve productivity, efficiency and client experience, and further build out of our Beijing and Jacksonville offices.

 

Cash Flows from Financing Activities for Continuing Operations

 

Net cash used in financing activities was $59.6 million for the nine months ended September 30, 2014 and primarily reflected the net repayment of debt of $50.0 million, the repurchase of $12.9 million of the our common stock and the payment of cash dividends totaling $6.7 million, partially offset by tax benefits relating to excess stock-based deductions of $9.0 million, which represents the reduction in income taxes payable resulting from tax deductions from stock-based compensation, and $6.7 million of proceeds from the issuance of common stock.

 

Net cash used in financing activities was $244.3 million for the nine months ended September 30, 2013 and primarily reflects the payment of the special dividend of $470.1 million, the repurchase of $41.3 million of the Company’s common stock, debt issuance costs of $5.7 million associated with our restated credit agreement and payments of $8.0 million to satisfy withholding taxes on equity awards that are net settled. These cash outflows were partially offset by cash inflows from net debt proceeds of $255.0 million to help fund our special dividend and proceeds from stock option exercises and employee stock purchase plan purchases totaling $21.6 million.

 

Net cash used in operating activities from discontinued operation of $0.4 million during the nine months ended September 30, 2014 and 2013 primarily reflect a decrease in accrued restructuring related to cash payments of its facility lease.

 

In September 2014, our Board of Directors declared our second quarterly cash dividend of $0.13 per common share payable to shareholders of record as of September 30, 2014. We paid this dividend totaling $6.7 million on October 15, 2014.

 

We expect cash used in financing activities to include approximately $7 million per quarter to pay future quarterly cash dividends, subject to approval of the Company’s Board of Directors.

 

Working Capital and Stockholders’ Deficit

 

As of September 30, 2014, our continuing operations had negative working capital of $(106.2) million, compared to negative working capital of $(105.5) million at December 31, 2013. Our negative working capital as of these dates was primarily due to payment of the special dividend of $470.1 million in July 2013 and stock repurchases. We repurchased common stock totaling $41.3 million in the second half of 2013 and $12.9 million during the nine months ended September 30, 2014. The decrease in our working capital of $0.7 million during the nine months ended September 30, 2014 primarily reflected cash generated from operating activities and a reduction in deferred revenues, partially offset by the pay down of long-term debt, cash dividends paid and repurchases of our common stock. Our negative working capital at September 30, 2014 includes approximately $176.3 million of short-term deferred revenues, which represent invoiced bookings not yet recognized as revenue. Generally, deferred revenues do not require cash settlement. Instead, these represent revenue to recognize upon fulfillment of an obligation to customers. The cash costs incurred in fulfilling the obligation are a fraction of the amount of deferred revenue and are evidenced by the Company’s historic gross margins of approximately 70%. As a result, we do not believe that our negative working capital balance reflects an inability to service our obligations over the next 12 months.

 

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Table of Contents

 

As of September 30, 2014, our cash and cash equivalents totaled $36.7 million. We have additional borrowing capacity under our credit facility, as well as future cash flows generated by operating activities, to fund our working capital needs.

 

After making the special dividend of $470.1 million in July 2013 and stock repurchases totaling $41.3 million in the second half of 2013, there remained a stockholders’ deficit balance of $(111.8) million on our balance sheet as of December 31, 2013, which has declined to a stockholders’ deficit of $(76.3) million as of September 30, 2014. We believe the Company generates significant liquidity from our backlog, predominance of recurring revenues and historically high renewal rates that are in the mid-90% range, and we believe our cash balances, cash generated from operations and availability under our debt agreement will be sufficient to satisfy our working capital needs, capital expenditures, interest payments, repayment of debt principal, share repurchases and payment of quarterly dividends (subject to Board approval) on common shares for the next 12 to 24 months.

 

Term Loan and Revolving Credit Facility

 

On June 12, 2013, we entered into a Restated Credit Agreement. The Restated Credit Agreement amended and restated Advent’s prior Credit Agreement, dated November 30, 2011. The Restated Credit Agreement provides for (i) a $200 million revolving credit facility, with a $25 million letter of credit sublimit and a $10 million swingline loan sublimit and (ii) a $225 million term loan facility. Advent may request revolving loans, swingline loans or the issuance of letters of credit until June 12, 2018, subject to demonstrating pro forma compliance with the financial covenant requirement under the Restated Credit Agreement. The Restated Credit Agreement also contains an incremental facility permitting Advent, subject to certain requirements, to arrange with the Lenders and/or new lenders for up to an aggregate of $75 million in additional commitments in the form of revolving loans or term loans. The proceeds of the revolving loans and term loans under the Restated Credit Agreement may be used for general purposes, including to finance dividends, repurchase common shares, finance acquisitions, or to finance other investments.

 

At September 30, 2014, we had a total debt balance of $255.0 million under our Restated Credit Agreement, of which $55.0 million was under the revolving credit facility; and at December 31, 2013, we had a total debt balance of $305.0 million under our Restated Credit Agreement, of which $90.0 million was under the revolving credit facility.

 

We were in compliance with all covenants associated with our Restated Credit Agreement as of September 30, 2014 as follows:

 

 

 

 

 

Ratio Calculation

 

 

Covenant

 

as of

Covenant

 

Requirement

 

September 30, 2014

 

 

 

 

 

Leverage ratio (1)

 

Maximum 3.75x (2)

 

2.0x

 

 

 

 

 

Interest coverage ratio (3)

 

Minimum 2.5x

 

15.6x

 


(1)         Calculated as the ratio of total debt to EBITDA, as defined by the Restated Credit Agreement, for the period of four consecutive fiscal quarters on the measurement date.

 

(2)         The leverage ratio covenant requirement lowers to a maximum of 3.50x on June 30, 2015 and 3.25x on June 30, 2016.

 

(3)         Calculated as the ratio of EBITDA to interest expense, as defined by the Restated Credit Agreement, for the period of four consecutive fiscal quarters on the measurement date.

 

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Table of Contents

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

The following table summarizes our contractual cash obligations as of September 30, 2014 (in thousands):

 

 

 

Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Months Ending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

Years Ending December 31

 

 

 

 

 

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

 

Operating lease obligations, net of sub-lease income*

 

$

2,720

 

$

10,348

 

$

9,278

 

$

4,269

 

$

3,265

 

$

17,608

 

$

47,487

 

Debt**

 

5,000

 

20,000

 

20,000

 

20,000

 

190,000

 

 

255,000

 

Total

 

$

7,720

 

$

30,348

 

$

29,278

 

$

24,269

 

$

193,265

 

$

17,608

 

$

302,487

 

 


*The decrease in our operating lease obligations in 2017 reflects the end of the current lease term for our San Francisco headquarters in October 2016; however, we currently expect to maintain our corporate headquarters in San Francisco and, therefore, expect to enter into a new lease arrangement prior to the end of the current lease term.

**Excludes interest payments on our variable rate debt as amounts are uncertain. Refer to Note 5 “Debt” in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, for information about the terms of our debt.

 

As of September 30, 2014, the principal outstanding balance under our Restated Credit Agreement was $255.0 million, which is due in full no later than June 12, 2018. Our Restated Credit Agreement includes covenants requiring us to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. As of September 30, 2014, we were in compliance with all of our covenants. We believe maintaining compliance with these covenants will not restrict our ability to execute our business plan in this fiscal year.

 

At September 30, 2014, we had a gross liability of $15.1 million for uncertain tax positions. If recognized, the impact on our statement of operations would be to decrease our income tax expense and increase our net income by $12.4 million. The impact on net income reflects the liabilities for unrecognized tax benefits net of the federal tax benefit of state income tax items. 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. We expect our cash payments for federal income taxes will be 20% or less of taxable income through 2014 as we have significant net operating losses and tax credit carryforwards to utilize.

 

At September 30, 2014, 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.

 

Dividends

 

In September 2014, our Board of Directors (the “Board”) declared a cash dividend of $0.13 per common share payable to shareholders of record as of September 30, 2014. On October 15, 2014, we paid this dividend which totaled $6.7 million. Any future dividends are subject to the approval of the Board.

 

Other Liquidity and Capital Resources Considerations

 

Our liquidity and capital resources in any period could also be affected by the exercise of outstanding employee stock options and SARs, and issuance of common stock under our employee stock purchase plan. The resulting increase in the number of outstanding shares from this and from the issuance of common stock from our RSUs 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 two years, our debt service costs and other operating expenses and any future quarterly dividends declared by our Board of Directors will constitute a significant use of cash flow. Accordingly, we anticipate having less available cash to fund 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 balances, cash generated from operations and availability under our debt agreement will be sufficient to satisfy our working capital needs, capital expenditures and interest, repayment of debt principal, share repurchases and payment of quarterly dividends (subject to Board approval) on common shares for the next 12 to 24 months.  However, we may identify opportunities that require us to raise funds, such as acquisitions or other investments in complementary businesses, products or technologies, and may raise such additional funds through public or private debt or additional borrowings under our current line of credit facility or equity financing.  However, such financing may not be available at all, or if available, may not be obtainable on favorable terms, and could be dilutive.

 

The Company has reviewed its needs in the United States for possible repatriation of undistributed earnings or cash of its non-U.S. subsidiaries. The Company presently intends to use all earnings and cash outside of the United States of all non-U.S.

 

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subsidiaries to fund investments or meet working capital and property, plant and equipment requirements in those locations. At September 30, 2014, we had approximately $8.4 million of cash in our non-U.S. subsidiaries.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

In the normal course of business, we are exposed to financial market risks, including changes in interest rates on outstanding debt and changes in foreign currency exchange rates on non-U.S. dollar denominated assets and liabilities. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures.

 

Foreign Currency Exchange Rate Risk

 

The Company transacts in various foreign currencies and periodically offsets the risks associated with the effects of certain foreign currency exposures by entering into foreign currency forward contracts with financial institutions. These forward contracts are not designated as hedging instruments, nor are they for trading or speculative purposes. Foreign currency exposures typically arise from sales on account to customers that are denominated in currencies such as the Euro, Swedish Krona, British Pound, South African Rand and Norwegian Kroner.

 

We recognize gains and losses on these contracts, as well as related costs, in “Interest and other income (expense), net” in the accompanying condensed consolidated statements of operations, along with the gains and losses of the related hedged items. We record the fair value of derivative instruments as either “Prepaid expenses and other” or “Accrued liabilities” in the accompanying condensed consolidated balance sheets based on current market rates.

 

The effect of the derivative financial instruments on the condensed consolidated statements of operations for the nine months ended September 30, 2014 and 2013 was to increase foreign exchange gains by approximately $0 and $45,000 respectively, which reflects net realized and unrealized gains related to our derivative financial instruments. As of September 30, 2014, we had no outstanding foreign currency forward contracts.

 

Interest Expense Risk

 

We have interest rate risk relating to debt and associated interest expense under our Restated Credit Agreement, which is indexed to JPMorgan Chase Bank, N.A.’s prime rate, federal funds rate or LIBOR. At any time, a rise in interest rates could have a material adverse impact on our earnings and cash flows. Conversely, a decrease in interest rates could result in a material increase in earnings and cash flows. We estimate that a hypothetical plus or minus of 100 BPS would increase or decrease, respectively, our interest expense and cash flows by approximately $2.6 million on an annual basis, based on our $255.0 million debt balance at September 30, 2014.

 

The revolving loans and term loans bear interest, at our option, at the alternate base rate plus a margin of 0.25% to 1.25% or an adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 1.25% to 2.25%, in each case with such margin being determined based on the consolidated leverage ratio for the preceding four fiscal quarter period. The “alternate base rate” means the highest of (i) the Agent’s prime rate, (ii) the federal funds rate plus a margin equal to 0.50% and (iii) the adjusted LIBOR rate for a one-month interest period plus a margin equal to 1.00%. Swingline loans accrue interest at a per annum rate based on the alternate base rate plus the applicable margin for alternate base rate loans. We are also obligated to pay other customary closing fees, arrangement fees, administration fees, commitment fees and letter of credit fees for a credit facility of this size and type.

 

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(e) 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, 2014 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.

 

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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(f) of the Exchange Act that occurred during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, Advent’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.         Legal Proceedings

 

From time to time, in the course of its operations, the Company is a party to litigation matters and claims, including claims related to employee relations, business practices and other matters not specifically identified, but that the Company does not consider to be material either individually or in the aggregate at this time. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. An unfavorable outcome in any legal matter, if material, could have a material adverse effect on the Company’s financial position, liquidity or results of operations in 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 fiscal year ended December 31, 2013.

 

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

 

Total recurring revenues, which we define as term license, other recurring revenue, maintenance from perpetual arrangements and Asset Under Administration (AUA) fees for certain perpetual arrangements, represented 91% of total net revenues during 2013. We expect to continue to derive a significant portion of our revenue from our clients’ renewal of term license, other recurring and perpetual maintenance contracts and such renewals are critical to our future success, although we expect revenues from perpetual maintenance arrangements to continue their downward trend. Some factors that may affect the renewal rate of our contracts include:

 

·                  The impact of the 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;

·                  The legacy nature of our perpetual maintenance revenues; and

·                  Our ability to develop complementary products and services.

 

We have experience with renewals of our term license contracts since approximately 2008 and we have less experience with renewals of certain other recurring contracts, such as our SaaS-based offerings, Advent OnDemand and Black Diamond. Our customers have no obligation to renew their term license or other recurring contracts and given the relatively limited number of years in which we have experience renewing term license and other recurring contracts and fluctuations in term license renewal rates, it is difficult to predict expected renewal rates. Additionally, we cannot predict whether the renewals will be less advantageous to us than the original term or other recurring 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 lower annual term license fees. Further, customers may elect to not renew their term license or other recurring contracts at all. We may incur significantly more costs in securing our term license or other recurring contract renewals than we incur for our perpetual maintenance renewals. If our term license or other recurring 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.

 

Most of our base of 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. Our perpetual license maintenance revenues decreased 2% in the nine months ended September 30, 2014 compared to the same period last year and have been trending downward as reflected by annual decreases of 2% and 5% during fiscal years 2013 and 2012, respectively, compared to the preceding years. It is expected that this trend will continue into the future.

 

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In addition, market downturns, such as the downturn beginning in the fall of 2008 and subsequent market fluctuations, and other factors have caused, and may in the future cause, some clients not to renew their maintenance; reduce their level of maintenance; not renew their term license contracts; or renew such term licenses for fewer products or users, all of which adversely affects our renewal rates and revenue from these customers. Our renewal rates are based on cash collections and are disclosed one quarter in arrears. Our reported quarterly renewal rate for perpetual maintenance and term license renewals may fluctuate. For example, our disclosed quarterly renewal rates during 2011 and 2010 were higher than the corresponding periods in 2009, but below those in 2008, and our disclosed quarterly renewal rates for 2012 fluctuated both above and below the previous year rates. Our disclosed quarterly renewal rates for 2013 exceeded the quarterly renewal rates in the corresponding periods of 2012. Decreases in renewal rates reflect reduced maintenance expenditures, reduced term license renewals, customer attrition, and reductions in products licensed or number of users by clients, as well as from slower payments received from renewal clients.

 

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 licensing of our software products and services 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 that have impacted our sales and over which we have little or no control, including broader financial market volatility, adverse economic conditions, customers’ budgeting constraints, internal selection procedures, competitive products, and changes in customer personnel, among others.

 

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, as well as term license, Advent OnDemand and Black Diamond sales, which we report quarterly as annual contract value (ACV) bookings and also include as part of our Annualized Recurring Run Rate metric. 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, such as we have experienced with our recently introduced Advent Direct cloud platform that we have begun to make more broadly available. Accordingly, our level of ACV bookings and Annualized Recurring Run Rate in any particular period is subject to significant fluctuation. For example, during 2013 and 2012, our ACV bookings decreased by 5% and 3%, respectively, compared to previous periods, which also affected our Annualized Recurring Run Rate. Our ACV bookings increased 1% in the third quarter of 2014 compared to the third quarter of 2013, but decreased 6% in the third quarter of 2014 compared to the second quarter of 2014. Our Annualized Recurring Run Rate, which is a broader metric than ACV that includes all of our contracted recurring revenue streams at the end of a particular quarter, has increased 6% as of September 30, 2014 compared to September 30, 2013 and increased 3% compared to June 30, 2014.

 

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 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.

 

We derive most of our revenue from recurring sources. During 2013, 2012 and 2011, we recognized 91%, 90% and 89%, respectively, of total net revenues from recurring sources. 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. We also experience fluctuations and seasonality in our new business generated each quarter. ACV for fiscal 2013 and 2012 decreased 5% and 3%, respectively, over the prior year; and ACV in 2011 increased by 6% over 2010. Also, the type of recurring revenue may vary and  our Annualized Recurring Run Rate, which includes all of our contracted recurring revenue streams, not just ACV, may fluctuate as well.  For example, our Annualized Recurring Run Rate increased as of September 30, 2014, compared to September 30, 2013 and June 30, 2014, but our June 30, 2014 Annualized Recurring Run Rate decreased 2% compared to March 31, 2014.

 

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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 U.S. 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), maintenance and term license renewal rates and Annualized Recurring Run Rate, 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.

 

Uncertain economic and financial market conditions adversely affect our business.

 

The market for investment management software systems has been and may in the future be negatively affected by a number of factors, including reductions in capital expenditures by customers and volatile performance of major financial markets. For example, U.S. and European economies showed signs of weakening during periods in 2012 due to uncertainty about the fate of the eurozone and continued weakness in U.S. labor markets. With this volatile environment and general uncertainty as a backdrop, our customers became cautious and slowed buying decisions which elongated some sales and cash collection cycles. Also, our new contract bookings were lower than expected during 2013. Market conditions have also impacted our performance in the past.  For example, macroeconomic concerns in 2011 and again in 2012, such as the European default risk and U.S. debt ceiling debate, resulted in a cautious buying environment and elongated sales cycles in some instances. Also, during the fall of 2008 through 2010, we experienced some clients and prospects delaying or cancelling additional license purchases, while others went out of business, reduced personnel, or were acquired. 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.

 

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 prior to becoming a combined entity, 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 market downturns and volatility and uncertainty in financial markets and the financial services sector that we have experienced in the past and may experience again also 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. In addition, other events such as the federal government’s struggles to reach agreement on the federal budget and debt ceiling have contributed, and may in the future contribute, to macroeconomic problems that result in a cautious buying environment with elongated sales cycles with our clients.

 

The market downturn beginning in the fall of 2008 and subsequent economic uncertainty 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 and Annualized Recurring Run Rate 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.

 

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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. 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, particularly for SaaS businesses where barriers to entry are relatively lower. Furthermore, competitors may respond to weak market conditions by lowering prices, offering better contractual terms and attempting to lure away our customers and prospects with 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 may not be successful in introducing new and enhanced products.

 

We also 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 or acquire new products and product enhancements that address the 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. In October 2008, we acquired Tamale Software which enabled 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. In February 2011, Advent Software, Inc. acquired Syncova Solutions, Ltd., a United Kingdom-based company that provides margin management and debt finance reconciliation and optimization software and in June 2011, we acquired Black Diamond, a Florida-based company that provides a web-based, outsourced portfolio management and reporting platforms for investment advisors. In late 2013, we introduced Advent Direct, our new cloud platform, on a beta release basis, and we have begun to make Advent Direct more broadly available, although we do not anticipate receiving significant revenues related to it until 2015. However, it may take longer than we expect to make Advent Direct broadly available or develop related solutions, and we cannot be certain whether new products and enhancements will meet anticipated sales projections or will be broadly accepted in the market, whether a market will develop as expected for new products and enhancements or whether we will be able to continue to introduce more products and enhancements.

 

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 availability 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 have shown some reluctance to go through the process of migrating from our Axys product to our Advent Portfolio Exchange (APX) or Geneva products, or our Black Diamond platform, which has slowed the migration of our customer base to APX. In addition, clients may delay purchases in anticipation of new products or product enhancements, such as we have experienced and continue to experience with our recently introduced, but not yet broadly available, Advent Direct cloud platform. Our ability to develop new products and product enhancements is also dependent upon the products of other software and service vendors, including certain system software vendors, such as Microsoft Corporation, database vendors, Software-as-a-Service (“SaaS”) providers, hosting and authentication services, 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.

 

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 ACV bookings, Annualized Recurring Run Rate 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 ACV bookings, Annualized Recurring Run Rate, 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

 

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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.

 

In addition, the Company initiated a quarterly dividend in April 2014 and periodically repurchases shares of its stock (each subject to authorization by its Board), but is under no obligation to continue either action or to do so in certain amounts. Also, our debt repayment and other financial obligations may limit or prevent our ability to issue dividends or repurchase shares of our common stock.  If the Company reduces the expected value of future dividends or ceases to issue dividends, which are subject to declaration by its Board of Directors, or fails to meet expectations related to future dividends or share repurchases, investors may lose confidence or we may not attract the same type of investors and our stock price may decline significantly.

 

We depend heavily on our Geneva®, Advent Portfolio Exchange®, Axys® and Moxy® products, and our Black Diamond platform.

 

We derive a majority of our net revenues from the license and maintenance revenues from our Geneva, Advent Portfolio Exchange (APX), Axys and Moxy products and our Black Diamond platform. In addition, Moxy and many of our applications, such as Partner and various data services, have been designed to provide an integrated solution with Geneva, APX and Axys. As a result, we believe that for the foreseeable future a majority of our net revenues will depend upon continued market acceptance of Geneva, APX, Axys, Moxy and Black Diamond, and related upgrades.

 

Our operating results may fluctuate significantly.

 

Most of our revenue comes from recurring sources, which grew to 91% in 2013, from 90% in 2012 and 89% in 2011. During fiscal 2013, term license revenues comprised approximately 52% of recurring revenues as compared to approximately 49% and 46% in fiscal years 2012 and 2011, respectively.

 

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 term 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 the professional services fees earned and related expenses, and a pro-rata amount of the term license revenue based on the elapsed time from the start of the term license to the substantial completion of professional services. For example, we deferred net revenues of $9.5 million in 2011 and recognized net revenues of $1.0 million in 2012. During 2013, the revenue deferred from projects in the process of being implemented exceeded the revenue recognized from completed implementations, resulting in a net deferral of revenue of $3.9 million for fiscal 2013.

 

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 remaining contract years and the remaining deferred professional services revenue and related expenses are recognized ratably over the remaining contract term. 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; however, this was not the case in the fourth quarter of 2013. That can result in ACV 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, and which also may result in larger quarterly increases in Annualized Recurring Run Rate for the fourth quarter than in other quarters, although changes in other recurring revenue sources during a quarter may decrease or increase such run rate as well. This seasonality has been, and may be in the future, adversely affected by market downturns 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.

 

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

 

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Our increased emphasis on delivering our products as Software-as-a-Service (SaaS) may give rise to risks that could harm our business.

 

Currently, we offer our suite of products to our customers on premise and over the web on an Advent-hosted or third party-hosted basis. Advent OnDemand and Black Diamond are delivered over the web as our current SaaS product offerings. In addition, we introduced Advent Direct, our new cloud platform, on a beta release basis, and we have begun to make Advent Direct more broadly available. We plan to continue to expand our current and future SaaS product offerings, including availability on mobile devices, and we believe that over time our SaaS-based product offerings will comprise an increasing share of our total recurring revenues as more customers adopt SaaS as their preferred solution. Our SaaS-based delivery models may vary from the way we price and deliver our products to customers on premise under term licenses or amongst our various SaaS offerings. The SaaS-based model will require continued investment in product development and SaaS operations, and may give rise to a number of risks, including the following:

 

·                  Increased competition from current or new SaaS-based solutions providers that offer lower priced or more advanced solutions;

·                  Concerns among our installed, term license customer base about our  increased focus on SaaS-based products;

·                  Increased price competition with current or new competitors, resulting in eroding profit margins;

·                  Customers postponing their purchases of our existing products or product enhancements in anticipation of the introduction of new SaaS-based offerings; and

·                  Incurring higher operating costs and customer information security risks associated with hosting and processing large quantities of customer information.

 

In addition, our reliance upon third-party service providers may expose us to risks arising from disruptions to, or failures in, the facilities and systems operated by such third parties. We currently serve customers from third-party-operated data center facilities located in the United States and other countries. We do not control, or in some cases have limited control over, the operation of the data center facilities we use, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, and to adverse events caused by operator error. We cannot rapidly switch to new data centers or move customers from one data center to another in the event of any adverse event. Despite precautions taken at these facilities, natural disasters, acts of terrorism or misconduct, closure of facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service and the loss of customer data.  Our disaster recovery procedures may not be adequate and our service could be interrupted.

 

Any damage to, or failure of, the systems in any data center (whether operated by us or by a third-party service provider) could result in impairment of, or interruptions in, our service. Impairment of or interruptions in our service may reduce our revenues, cause clients to request credits or penalties from us, subject us to claims and litigation, cause our customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers and retain existing customers. Even with respect to data centers that are operated for us by third-party service providers, we may not be able to negotiate service contracts with these service providers that will fully protect us from these risks. Our business will also be harmed if our customers and potential customers believe our service is unreliable.

 

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

 

Our clients rely on our outsourcing data and other services to meet their operational needs, including account aggregation and reconciliation. Our services involve the storage and transmission of customer and other information. The amount and type of client-related data hosted by Advent is substantially increasing, and we are providing outsourcing, data and other services in more jurisdictions outside the U.S. Furthermore, our business is becoming increasingly reliant on providing outsourcing, data and other services. This exposes the Company to many risks.  Our security measures and those of third parties upon whom we rely could be breached, whether as part of cyber-attacks or other attempts at unauthorized access, resulting in unauthorized access to our information or our clients’ information.  Furthermore, due to the complexity of our services and because we also utilize third-party data and other vendors, our services and those of our third-party vendors may have previously-undetected errors or defects, service disruptions, delays, or incomplete or incorrect data that could result in unanticipated downtime for our customers, misrouted or unauthorized access to data, failure to meet service levels and service disruptions. Such potential errors, defects, delays, disruptions, performance problems and security breaches may damage our clients’ business, harm our reputation, result in the loss of future sales, require us to undertake expensive remediation steps, cause clients to withhold payment or terminate or not renew their agreements with us, and subject us to litigation, regulatory fines and penalties, indemnity obligations, contractual obligations and liabilities and other possible liabilities.

 

Security breaches, computer viruses and computer hacking attacks could harm our business and results of operations.

 

We collect, store and transmit customer data and other proprietary information of, or on behalf of, our customers. We take steps to protect the security, integrity and confidentiality of the information we collect, store or transmit, including our own proprietary and confidential information and that of our customers, their end users, and other third parties, but there is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry and may occur on our systems or those of our information technology vendors in the future. Any security breach caused by hacking, which involves

 

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efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, or the inadvertent transmission of computer viruses, worms or other harmful software code could result in unauthorized disclosure, misuse, or loss of information, legal claims and litigation, indemnity obligations, regulatory fines and penalties, contractual obligations and liabilities, and other liabilities. In addition, if our security measures, or those of our vendors, are breached or unauthorized access to consumer data otherwise occurs, our solutions may be perceived as not being secure and our customers may reduce the use of or stop using our solutions.

 

While we have security measures in place with respect to our systems, networks and SaaS solutions, these systems, networks and solutions are subject to ongoing threats and, therefore, these security measures may be breached as a result of employee error, failure to implement appropriate processes and procedures, malfeasance, third-party action, including cyber-attacks or other intentional misconduct by computer hackers or otherwise. This could result in one or more third parties obtaining unauthorized access to our customers’ data or our data, including personally identifiable information or other end user data, intellectual property and other confidential business information. Third parties may also attempt to fraudulently induce employees into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers’ data or our data, including intellectual property and other confidential business information.

 

Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we and our vendors may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our network infrastructure or otherwise to maintain the confidentiality, security, and integrity of data that we store or otherwise maintain may harm our reputation and our ability to retain existing clients and attract new clients. Additionally, we may be required to expend significant capital and other resources to protect against the threat of interruptions and security breaches or to alleviate problems they may cause. Any of these could harm our business, financial condition and results of operations.

 

Because our platform could be used to collect and store personal information of our customers’ employees or customers, privacy concerns could result in additional cost and liability to us or inhibit use of our platform.

 

Personal privacy has become a significant issue in the United States and in many other countries where we offer our solutions or may offer them in the future. The regulatory framework for privacy issues worldwide is currently evolving, is not uniform and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use, disclosure, control, security and deletion of personal information. In the United States, these include, without limitation, laws and regulations promulgated by states, as well as rules and regulations promulgated under the authority of the Federal Trade Commission and federal financial regulatory bodies. Internationally, most of the jurisdictions in which we operate have established their own data security and privacy legal frameworks, many of which are broader in scope, more restrictive and impose greater obligations on us and our customers. Many of these obligations are updated frequently and require ongoing monitoring. In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us.

 

As a result of uncertainty regarding the interpretation and application of privacy and data protection-related laws, regulations, and self-regulatory requirements, it is possible that these laws, regulations, and requirements may be interpreted and applied in a manner that is inconsistent with our existing data handling practices or the technological features of our solutions. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have an adverse effect on our business. Any inability to adequately address privacy or data protection-related concerns, even if unfounded, or comply with applicable privacy or data protection-related laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, standards and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. Also, privacy concerns, whether valid or not valid, may inhibit market adoption of our solutions, particularly in foreign countries.

 

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

 

In recent years, Advent has periodically 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. We do not 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 and terms, if at all. For example, we renewed our agreement with TIAA-CREF in the second quarter of 2013, but at lower annual fees than the original agreement, which will result in a decrease in revenues associated with that agreement. In addition, some of these types of agreements are subject to milestones, acceptance and penalties and there is no assurance that these agreements will be fully implemented. We also 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

 

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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.

 

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

 

Many of our clients use our proprietary interface to retrieve pricing and other data electronically from Financial Times/Interactive Data (“FTID”). FTID pays us a royalty which we classify as other recurring revenues. The royalty is based on FTID’s 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 party 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 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.

 

We must recruit, retain and provide adequate facilities for key employees, including facilities in high cost areas such as our San Francisco-based corporate headquarters.

 

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 San Francisco where the largest number of our employees are located. In addition, from time to time, we may reorganize our business or reduce our workforce, as we did in late 2012, which may result in increased difficulty in hiring and retaining qualified personnel. Such reorganizations or reductions may distract our management and employees and may negatively impact our near-term financial results.

 

We also have begun a strategy to move certain functions from high cost areas like San Francisco, New York City and Boston, to lower cost areas such as Jacksonville and Beijing to reduce our overall costs of operations.  While we believe this strategy will have significant benefits, we may not be able to recruit and retain qualified personnel in such lower cost areas.  Additionally, such a strategy may negatively impact our ability to retain and hire in our other office locations. Also, our operating results may be adversely impacted by changes in our lease commitments as a result of increasing real estate costs in certain markets in which we operate such as San Francisco where we intend to maintain our corporate headquarters. As a result, we may renew or enter into lease agreements at relatively higher cost, reduce our office space needs, or consolidate or exit some of our real estate locations, which in most cases require a modification of an existing lease agreement and could have a significant adverse effect on our financial results.

 

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.

 

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, 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 operations outside the United States.

 

We market and sell our products in the United States and, to a growing extent, outside the U.S. Revenues derived from sales outside the U.S. comprised 18%, 18% and 17% of our total revenues in the nine months ended September 30, 2014 and fiscal years 2013 and 2012, respectively. We have international subsidiaries in Canada, China, Denmark, England, Ireland, Hong Kong, Netherlands, Norway, Singapore, Sweden, Switzerland and the United Arab Emirates.

 

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We cannot be certain that establishing businesses or seeking sales in other countries will produce the desired levels of revenues. If we are not successful in international market expansion, our overall future growth prospects may be limited. Also, worldwide and regional political instability and volatility in financial markets may disrupt our sales efforts in overseas markets. We have relatively limited experience in developing localized versions of our products and marketing and distributing our products outside the U.S. In other instances, we may rely on the efforts and abilities of business partners in such markets. For example, we previously outsourced certain engineering activities to a business partner located in China until we transitioned those contract developers to become employees of our Beijing office. In addition, our operations are subject to other inherent risks, including:

 

·                  The impact of recessions and market fluctuations in economies both within and 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;

·                  Compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

·                  Trade and intellectual property protection measures and export and import requirements;

·                  Difficulties in successfully adapting our products to language, regulatory and technology standards;

·                  Cultural resistance to expansion into other countries and difficulties establishing local partnerships or engaging local resources;

·                  Difficulties in and costs of staffing and managing geographically dispersed operations;

·                  Different or lesser levels of intellectual property right protections;

·                  Sovereign debt issues;

·                  Tax structures and potentially adverse tax consequences; and

·                  Political and economic instability.

 

The revenues, expenses, assets and liabilities of our subsidiaries outside the United States are primarily denominated in their respective local currencies. Future fluctuations in currency exchange rates may adversely affect revenues and accounts receivable recognized by these subsidiaries and the U.S. dollar value of related revenues, expenses, assets and liabilities reported by Advent. Our service revenues and certain license revenues from our European subsidiaries are generally denominated in their respective local currencies.

 

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

 

Periodically we seek to grow through the acquisition of additional complementary businesses. For example, in February 2011, we acquired Syncova Solutions, Ltd., a United Kingdom-based company that provides margin management and debt finance reconciliation and optimization software and in June 2011, we acquired Black Diamond, a Florida-based company that provides web-based, outsourced portfolio management and reporting platforms for independent advisors.

 

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 2008 acquisition of Tamale Software, Inc. was an entry into the research management software market, where we had no prior experience. Integrating these acquisitions in the past has been time-consuming, expensive and disruptive to our business. We have faced difficulties in integrating new personnel and in maintaining relationships with customers and partners of acquired businesses, as well as in incorporating acquired technology and rights into our solutions and maintaining quality standards consistent with our brand. Integration also has required us to implement additional controls, policies, and procedures. 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 integrate the operations of these entities successfully 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 and relative risks of these acquisitions could be erroneous. 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. 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. Sufficient financing may not be available to us on sufficiently advantageous terms, or at all, and if our existing credit facility is inadequate to meet our needs, its existence may make it significantly more

 

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difficult to acquire any additional debt. 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.

 

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 seven 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 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 operate to cover the differentiating features of our products and services, 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 copy aspects of our products or to obtain and use information that we regard as proprietary and we may not have any effective practical remedy against such parties. In addition, the laws of some countries do not protect proprietary rights to as great an extent as do the laws of the United States and so our expansion into markets outside the U.S. 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, and from time to time we receive notices alleging infringement or other intellectual property-related claims. 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 such infringement or misappropriation claims are made against our customers because of our products and services, we may also be contractually required to indemnify such customers from and against such claims and resulting liabilities. 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 and outsourced 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, misconduct 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, or any data centers or systems of our vendors used to support our business, 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.

 

In addition to the severe market conditions in recent years, 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 responses to attacks or perceived threats to national security and other actual or potential conflicts, wars or political unrest have created many economic and political uncertainties in various countries and regions in which we operate. Although it is impossible

 

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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 our 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. We frequently release new versions of our products, such as during 2013, when we released new versions of APX, Axys, Geneva, Moxy and Tamale RMS, among others. We also recently introduced Advent Direct, our new cloud platform and different aspects of the platform and related solutions are in various stages of development. 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 availability 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 markets outside the U.S.

 

Borrowings under our credit agreement could limit our available working capital, adversely affect our financial results and ability to operate our business and must be repaid in full if we fail to comply with certain covenants.

 

In June 2013, we entered into the Restated Credit Agreement which provides us (i) a $225 million term loan facility and (ii) a $200 million revolving credit facility, with a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. We have in the past, and may in the future, borrow under the Restated Credit Agreement in order to fund working capital requirements, make share repurchases of our common stock, pay dividends or fund acquisitions. In addition, if our anticipated cash flow from our recurring sources of revenue is materially impaired due to customer defaults or failure to renew term licenses, other recurring agreements or maintenance contracts, our ability to meet our debt service payment obligations or continue to meet the contractual covenants may be impaired, and our ability to make further borrowings may be compromised.

 

As a result of the special dividend declared in June 2013, we had a stockholders deficit balance on our balance sheet as of December 31, 2013. To fund the special dividend payment on July 9, 2013 and the repurchase of Advent’s common stock in August 2013, we drew down an aggregate $375 million of debt under our Restated Credit Agreement and as of December 31, 2013, approximately $305.0 million of debt was outstanding. As a result of these borrowings, we are obligated to make periodic principal and interest payments on the debt of approximately $28 million annually. This amount will fluctuate due to changes in interest rates, future borrowings and repayments. Our ability to make payments on our indebtedness and to fund planned working capital requirements will depend on our ability to generate cash flow in the future. In addition, the existence of this indebtedness could have adverse consequences. For example, it could:

 

·                  Require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes;

 

·                  Increase our vulnerability to and limit our flexibility in planning for, or reacting to, change in our business and the industry in which we operate;

 

·                  Expose us to the risk of increased interest rates as borrowings under our Restated Credit Agreement are subject to variable rates of interest;

 

·                  Place us at a competitive disadvantage compared to our competitors that have less debt; and

 

·                  Limit our ability to borrow additional funds.

 

Our continued ability to borrow under our credit agreement is subject to compliance with certain financial and non-financial covenants. The financial covenants require us to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. Our failure to comply with such covenants could cause default under the agreement, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unfavorable terms. In the event of a default which is not remedied within the prescribed timeframe, the assets of the Company (subject to the amount borrowed) may be attached or seized by the lender.

 

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

 

Most of our customers operate within a highly regulated environment. Congress and regulators have increased their focus on the regulation of the financial services industry in recent years. The information provided by, or resident in, the software or services we

 

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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 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, established the new federal Consumer Financial Protection Bureau (the “CFPB”), and required the CFPB 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, which are ongoing.

 

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 fully 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.

 

Additionally, as a publicly-traded company, we are subject to significant regulations including the Dodd-Frank Act and the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”). These regulations increase our accounting, operating 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. There are also 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, which may further increase our costs.

 

Changes in, or interpretations of, accounting principles could significantly impact our reported financial information and operational processes.

 

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by us, the SEC and various bodies formed to interpret and create accounting principles and guidance. 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. Additionally, proposed accounting standards could have a significant impact on our operational processes, revenues and expenses, and could cause unexpected financial reporting fluctuations. 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.

 

For example, the U.S.-based Financial Accounting Standards Board (“FASB”) is currently working together with the International Accounting Standards Board (“IASB”) on several projects intended to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards (“IFRS”). These efforts by the FASB and IASB may result in different accounting principles under GAAP that may result in different financial results for us in areas including, but not limited to, principles for recognizing revenue, lease accounting and financial statement presentation. A change in accounting principles may have a material impact on our financial statements and may retroactively adversely affect previously reported transactions.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is a new revenue recognition model that requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective for Advent for our fiscal year beginning January 1, 2017, and early adoption of ASU 2014-09 is not permitted. Under ASU 2014-09, companies may use either a full retrospective or a modified

 

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retrospective approach to adopt ASU 2014-09. Advent is evaluating the impact of the adoption of ASU 2014-09 on its condensed consolidated financial statements.

 

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

 

We are a U.S.-based multinational company subject to tax in multiple U.S. and non-U.S. 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 changes in state apportionment, by lapses of the availability of the U.S. 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 state tax authorities, the U.S. Internal Revenue Service and other tax authorities outside the U.S. For example, we are currently undergoing a State of California franchise tax examination for the 2006 and 2007 tax years. Examinations generally 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.

 

If we fail to maintain an effective system of internal control, we may not be able to report our financial results accurately 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.

 

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. At September 30, 2014 there were approximately 1.0 million shares previously authorized by the Board available for repurchase.

 

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The following table provides a summary of the monthly repurchase activity during the three months ended September 30, 2014 under the stock repurchase program approved by the Board (in thousands, except per share data):

 

 

 

 

 

 

 

Maximum

 

 

 

Total

 

Average

 

Number of Shares That

 

 

 

Number

 

Price

 

May Yet Be Purchased

 

 

 

of Shares

 

Paid

 

Under Our Share

 

 

 

Purchased

 

Per Share

 

Repurchase Programs

 

 

 

 

 

 

 

 

 

July

 

 

$

 

967

 

August

 

 

$

 

967

 

September

 

15

 

$

30.94

 

952

 

 

 

 

 

 

 

 

 

Total

 

15

 

$

30.94

 

952

 

 

We withheld shares through net share settlements during the three months ended September 30, 2014. The following table provides a monthly 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 and exercise withholding obligations during the three months ended September 30, 2014 (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

 

9

 

$

32.06

 

 

August

 

4

 

$

30.83

 

 

September

 

4

 

$

32.88

 

 

 

 

 

 

 

 

 

 

Total

 

17

 

$

31.98

 

 

 


(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 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information

 

None.

 

Item 6.   Exhibits

 

Index to exhibits

 

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Exhibit

 

 

 

Incorporated by Reference

 

Filed

 

Furnished

Number

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

 

Herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

1.1

 

Underwriting Agreement, dated August 13, 2014 between a stockholder of Advent Software, Inc. and UBS Securities LLC, the underwriter thereto

 

8-K

 

8/15/2014

 

1.1

 

 

 

 

31.1

 

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

 

 

 

 

 

 

 

X

 

 

31.2

 

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

 

 

 

 

 

 

 

X

 

 

32.1

 

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

 

 

 

 

 

 

 

 

 

X

32.2

 

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

 

 

 

 

 

 

 

 

 

X

101. INS

 

XBRL Instance

 

 

 

 

 

 

 

X

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

 

 

 

 

 

 

X

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation

 

 

 

 

 

 

 

X

 

 

101. LAB

 

XBRL Taxonomy Extension Labels

 

 

 

 

 

 

 

X

 

 

101.PRE

 

XBRL Extension Presentation

 

 

 

 

 

 

 

X

 

 

101.DEF

 

XBRL Taxonomy Extension Definition

 

 

 

 

 

 

 

X

 

 

 


*

 

Denotes management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-Q.

 

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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 7, 2014

By:

/s/ James S. Cox

 

 

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

 

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