News Column

ADVENT SOFTWARE INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 6, 2014

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, regarding the future of the investment management market and opportunities for us related thereto, future expansion, product releases, 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, 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.

Recent Developments † Quarterly cash dividend. On April 28, 2014, the Company announced that its Board of Directors had approved a quarterly cash dividend to the Company's shareholders. A quarterly cash dividend payment of $0.13 per common share will be made on July 15, 2014 to shareholders of record as of June 30, 2014. Operating Overview



Operating highlights of our first quarter of 2014 include:

† Annualized Recurring Run Rate. Annualized Recurring Run Rate of all of our contracted recurring revenue streams was $375.8 million at March 31, 2014, an increase of 6% compared to $352.9 million at March 31, 2013.

† Renewal rates. Renewal rates, which are based on cash collections and therefore reported one quarter in arrears, were 95% for the fourth quarter of 2013. This represents an increase of 4 percentage points over the same period last year. † New and incremental bookings. The term license Advent OnDemand and Black Diamond contracts signed in the first quarter of 2014 will contribute approximately $5.1 million in annual revenue ("annual contract value" or "ACV") once they are fully implemented compared to $8.7 million of ACV booked from contracts signed in the same period last year.



† Operating cash flows. Cash flows from operations in the first quarter of 2014 were $20.9 million which represents an increase of 21% compared with $17.2 million in the same period last year.

19 --------------------------------------------------------------------------------

Table of Contents Financial Overview



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

Percentage / Three Months Ended March 31 Margin 2014 2013 Change Net revenues $ 96,804$ 92,490 5 % Gross margin $ 68,322$ 64,011 7 % Gross margin percentage 70.6 % 69.2 % 1.4 pts Operating income $ 19,313$ 16,213 19 % Operating margin percentage 20.0 % 17.5 % 2.5 pts



Net income from continuing operations $ 10,907$ 12,057

-10 % Net income from continuing operations per diluted share $ 0.20 $ 0.23 -12 % Operating cash flows $ 20,875$ 17,190 21 %



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 months ended March 31, 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 March 31 2014 2013 Change Term license revenues $ (272 )$ (1,675 )$ 1,403 Professional services and other 1,665 (1,451 ) 3,116 Total net revenues $ 1,393$ (3,126 )$ 4,519 Professional services costs $ 1,102 $ (893 ) $ 1,995 Sales commissions costs 115 (285 ) 400 Total net costs $ 1,217$ (1,178 )$ 2,395 Operating income $ 176 $ (1,948 )$ 2,124 20

--------------------------------------------------------------------------------



Table of Contents

As of March 31, 2014 and December 31, 2013, deferred revenue and directly related expense balances associated with our term licensing deferral were as follows (in thousands): March 31 December 31 2014 2013 Deferred revenues Short-term $ 31,725$ 33,505 Long-term 7,146 6,758 Total $ 38,871$ 40,263 Directly-related expenses Short-term $ 9,740$ 11,055 Long-term 4,565 4,467 Total $ 14,305$ 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 first quarter of 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

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 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. 21 --------------------------------------------------------------------------------



Table of Contents

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31 2014 2013 Net revenues: Recurring revenues 92 % 91 % Non-recurring revenues 8 9 Total net revenues 100 100 Cost of revenues: Recurring revenues 19 18 Non-recurring revenues 8 10 Amortization of developed technology 2 3 Total cost of revenues 29 31 Gross margin 71 69 Operating expenses: Sales and marketing 20 19 Product development 18 18 General and administrative 11 11 Amortization of other intangibles 1 1 Restructuring charges * 3 Total operating expenses 51 52 Income from continuing operations 20



18

Interest and other income (expense), net (2 )



*

Income from continuing operations before income taxes 18



17

Provision for income taxes 6



4

Net income from continuing operations 11



13

Discontinued operation: Net loss from discontinued operation * * Net income 11 % 13 %



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 March 31 2014 2013 Change



Total net revenues (in thousands) $ 96,804$ 92,490$ 4,314

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 from recurring and non-recurring sources, as a percentage of total net revenues for the periods presented, were as follows:

Three Months Ended March 31 (as a percentage of total net revenues) 2014 2013 Revenues from recurring sources 92 % 91 % Revenues from non-recurring sources 8 % 9 % Revenues derived from sales outside the U.S. were 18% and 19% of total net revenues in the first quarter of 2014 and 2013, respectively. The decrease as a percentage of total revenues during the first quarter of 2014 primarily reflects relatively slower sales activity 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 $96 million and $98 million in the second quarter of 2014.

Recurring Revenues Three Months Ended March 31 (in thousands, except percent of total net revenues) 2014 2013 Change Term license revenues $ 47,039$ 41,252$ 5,787 Maintenance revenues 16,142 16,436 (294 ) Other recurring revenues 25,948 26,795 (847 ) Total recurring revenues $ 89,129$ 84,483$ 4,646 Percent of total net revenues 92 % 91 % Revenues from term licenses, which include both software license and maintenance services for term licenses, increased $5.8 million during the first quarter of 2014 compared to the same quarter of 2013. The growth of term license revenues reflects strong renewals, the continued layering of incremental annual contract value (ACV) of term licenses sold in previous periods into our term revenue, the continued market acceptance of our products and less deferral of term license revenue. 23

--------------------------------------------------------------------------------



Table of Contents

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 as follows (in thousands):

Three Months Ended March 31 2014 2013 Change

Term license revenues $ (272 ) $ (1,675 ) $ 1,403 During the first quarter of 2014, more projects completed the implementation phase than commenced compared to the first quarter of 2013, resulting in less deferral of term license revenues. Generally, we sell very few perpetual licenses to new customers. Maintenance revenues from perpetual licenses decreased by $0.3 million during the first quarter of 2014 when compared to the same quarter of 2013. This decrease was 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 expect the downward trend in maintenance revenues from perpetual licenses to continue as we continue to sell predominantly 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 decrease of $0.8 million in other recurring revenues for first quarter of 2014 compared to the same quarter of 2013 primarily reflected lower fees of $2.2 million from a renewed agreement with one of our larger clients effective in the third quarter of 2013. In addition, incremental assets under administration fees from perpetual licenses in the first quarter of 2013 included $1.1 million due to an AUA report received in the first quarter of 2013 that typically reports in the fourth quarter. These decreases were partially offset by continued growth in our Black Diamond product of $1.7 million and, to a lesser extent, growth in revenues from data services, outsourced services, and web-based services. 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 fourth quarter of 2012: Renewal Quarter Renewal Rates Q114 Q413 Q313 Q213 Q113 Q412 Based on cash collections relative to prior year collections Initially Disclosed Renewal Rate (1) (2 ) 95 % 97 % 92 % 94 % 91 % Updated Disclosed Renewal Rate (3) n/a n/a 99 % 95 % 99 % 96 %



--------------------------------------------------------------------------------

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

(2) The initially disclosed renewal rate for the first 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 March 31 (in thousands, except percent of total net revenues) 2014



2013 Change

Professional services and other revenues $ 7,243 $ 7,052 $ 191 Perpetual license fees 432 955 (523 ) Total non-recurring revenues $ 7,675 $ 8,007 $ (332 ) Percent of total net revenues 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. 24

--------------------------------------------------------------------------------



Table of Contents

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 Q113 to Q114 Increased revenue related to term license implementation deferral $ 3,116 Decreased consulting services (1,158 ) Decreased project management (516 ) Decreased custom reports (359 ) Decreased data conversion (334 ) Various other items (558 ) Total change $ 191 The slight increase in professional services and other revenues during the first quarter of 2014, compared to the same period last year, primarily reflects the increase in recognition of net deferred revenue resulting from more projects being completed during the first quarter of 2014 compared to the first quarter of 2013. This was partially offset by a decrease in billable utilization for professional services resources due to a decrease in recent bookings activity. The change in our term license implementation deferral increased/(decreased) professional services and other revenues for the three months ended March 31, 2014, as follows (in thousands): Three Months Ended March 31 2014 2013 Change



Professional services and other $ 1,665$ (1,451 )$ 3,116

Total perpetual license fees decreased $0.5 million 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 March 31 (in thousands, except percent of total net revenues) 2014



2013 Change

Stock-based compensation expense $ 1,217 $ 870 $ 347 All other cost of revenues $ 27,265$ 27,609$ (344 ) Percent of total net revenues 28 % 30 % Total cost of revenues $ 28,482$ 28,479$ 3 Percent of total net revenues 29 % 31 % 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 following discussion. Gross margin improved to 71% in the first quarter of 2014 from 69% in the first quarter of 2013 as we expanded our recurring revenue gross margins from our improved efficiency in our global support organization and also decreased amortization expense from fully amortized technology-related intangible assets. Gross margin in the first quarter of 2014 includes the impact of increased stock-based compensation expense associated with the equity award modification in the second quarter of 2013, as disclosed previously in our 2013 Annual Report on Form 10-K. 25 --------------------------------------------------------------------------------

Table of Contents Cost of Recurring Revenues Three Months Ended March 31 (in thousands, except percent of total net revenues) 2014



2013 Change

Stock-based compensation expense $ 842 $ 488 $ 354 All other cost of recurring revenues $ 17,785$ 15,924$ 1,861 Percent of total recurring revenues 20 % 19 % Total cost of recurring revenues $ 18,627$ 16,412$ 2,215 Percent of total recurring revenues 21 % 19 % 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.



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

Change From Q113 to Q114 Increased payroll and related $ 982 Increased outside services 900 Increased stock-based compensation 354 Various other items (21 ) Total change $ 2,215 The increase in the cost of recurring revenues for the first quarter of 2014 was primarily due to increased payroll and related costs, increased outside services and the increase in stock-based compensation expense associated with our equity award modification in the second quarter of 2013. Headcount in our client support group increased to 341 at March 31, 2014 from 330 at March 31, 2013.



Cost of Non-Recurring Revenues

Three Months Ended March 31 (in thousands, except percent of total net revenues) 2014



2013 Change

Stock-based compensation expense $ 375 $ 382 $ (7 ) All other cost of non-recurring revenues $ 7,680 $ 9,186 $ (1,506 ) Percent of total non-recurring revenues 100 % 115 % Total cost of non-recurring revenues $ 8,055 $ 9,568 $ (1,513 ) Percent of total non-recurring revenues 105 % 119 % 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. 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. 26 --------------------------------------------------------------------------------



Table of Contents

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

Change From Q113 to Q114 Decreased outside contractors $ (1,331 ) Decreased payroll and related (1,141 ) Decreased travel and entertainment (369 ) Decreased allocation-in of facility and infrastructure expenses (256 ) Increased cost related to term license implementation deferral 1,995 Various other items (411 ) Total change $ (1,513 ) The decrease in the first quarter of 2014 primarily reflects decreased utilization of third-party contractors due to lower demand of implementation projects and lower travel and entertainment costs, primarily due to less travel activity by consultants. Payroll and related costs also decreased due to lower salary and bonus expense as headcount in our professional services group decreased to 113 at March 31, 2014 from 135 at March 31, 2013 as a result of the 2012 reorganization plan. Facility and infrastructure expenses, which are allocated based on headcount, also decreased. These decreases were partially offset by an increase in deferred professional services costs as more projects were completed in the first quarter of 2014 compared to the first quarter of 2013.



The change in our term license deferral increased/(decreased) professional services costs for the three months ended March 31, 2014 and 2013 as follows (in thousands):

Three Months Ended March 31 2014 2013 Change



Professional services costs $ 1,102 $ (893 )$ 1,995

Gross margins for non-recurring revenues were (5)% and (19)% during the first quarter of 2014 and 2013, respectively. Non-recurring gross margins for the first quarter of 2014 continued to be negative, but improved primarily as a result of the release of professional services revenues and costs associated with our term license implementation. We defer only the direct costs associated with services performed on these arrangements. Indirect costs such as management and other overhead expenses are recognized in the period in which they are incurred, with no revenue to offset them. When the deferred professional service revenues and costs are released, our gross margins benefit as was the case in the first quarter of 2014.



Amortization of Developed Technology

Three Months Ended March 31 2014 2013 Change Amortization of developed technology (in thousands) $ 1,800 $ 2,499 $ (699 ) Percent of total net revenues 2 % 3 % Amortization of developed technology represents amortization of acquisition-related intangibles and capitalized software development costs. The decrease in the first quarter of 2014 compared to the same period last year resulted from decreased amortization from technology-related intangible assets associated with Tamale Software, Inc., which we acquired in October 2008, and fully amortized subsequent to the first quarter of 2013. 27 --------------------------------------------------------------------------------

Table of Contents OPERATING EXPENSES Sales and Marketing Three Months Ended March 31 (in thousands, except percent of total net revenues) 2014



2013 Change

Stock-based compensation expense $ 2,635$ 1,523$ 1,112 All other sales and marketing $ 17,094$ 15,681$ 1,413 Percent of total net revenues 18 % 17 % Total sales and marketing expense $ 19,729$ 17,204$ 2,525 Percent of total net revenues 20 % 19 %



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

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

Change From Q113 to Q114



Increased payroll and related $ 1,399 Increased stock-based compensation

1,112 Decreased marketing (281 ) Various other items 295 Total change $ 2,525 The increase in total sales and marketing expenses during the first quarter of 2014 compared to the same period last year was primarily due to the increase in payroll and related expenses, due to higher salary and bonus expense as headcount in our sales and marketing group increased to 186 at March 31, 2014 from 176 at March 31, 2013 to expand sales capacity to support the launch of Advent Direct. Additionally, stock-based compensation expense increased due to the equity award modification in the second quarter of 2013, which was partially offset by lower marketing costs. Product Development Three Months Ended March 31 (in thousands, except percent of total net revenues) 2014



2013 Change

Stock-based compensation expense $ 1,925$ 1,326$ 599 All other product development expense $ 15,714$ 15,636$ 78 Percent of total net revenues 16 % 17 % Total product development expense $ 17,639$ 16,962$ 677 Percent of total net revenues 18 % 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 Q113 to Q114 Increased payroll and related $ 864 Increased stock-based compensation 599 Increased capitalization of internal use software (785 ) Increased capitalization of software development (472 ) Various other items 471 Total change $ 677 28

--------------------------------------------------------------------------------



Table of Contents

The increase in total product development expenses during the first quarter of 2014 was primarily due to an increase in payroll and related costs due to increased utilization of third-party contractors for our new cloud offering, Advent Direct, and an increase in stock-based compensation costs associated with our equity award modification in 2013. These increases were partially offset by increased cost capitalization for development of internal use software related to our cloud offering, Advent Direct, and related to development of our product releases. General and Administrative Three Months Ended March 31 (in thousands, except percent of total net revenues) 2014



2013 Change

Stock-based compensation expense $ 1,851$ 1,298$ 553 All other general and administrative expense $ 8,707$ 9,062$ (355 ) Percent of total net revenues 9 % 10 % Total general and administrative expense $ 10,558$ 10,360$ 198 Percent of total net revenues 11 % 11 %



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 Q113 to Q114 Increased stock-based compensation $



553

Increased allocation-out of facility and infrastructure expenses (346 ) Decreased payroll and related (38 ) Various other items 29 Total change $ 198 The increase in total general and administrative expenses for first quarter of 2014 was primarily due to increased stock-based compensation expense associated with our equity award modification in the second quarter of 2013. The increase was partially offset by an increase in the allocation-out of corporate expenses to other departments and a decrease in payroll and related costs. 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 first quarter of 2014.



Amortization of Other Intangibles

Three Months Ended March 31 2014 2013 Change Amortization of other intangibles (in thousands) $ 909 $ 957 $ (48 ) Percent of total net revenues 1 % 1 % Other intangibles represent amortization of non-technology related to acquired intangible assets. The slight decrease in the first quarter of 2014 compared to the same period last year represents less amortization from assets associated with Tamale Software, Inc., which we acquired in October 2008. Restructuring Charges Three Months Ended March 31 2014 2013 Change Restructuring charges (in thousands) $ 174 $ 2,315 $ (2,141 ) Percent of total net revenues 0 % 3 % 29

--------------------------------------------------------------------------------



Table of Contents

Restructuring charges of $0.2 million in the first quarter of 2014 and $2.3 million in the first quarter of 2013 were associated with employee termination benefits related to the re-organization plan which was approved in October 2012 to align strategy and function, reduce operating costs and improve profitability.



For additional analysis of the components of the payments and charges made against the restructuring accrual in the first quarter of 2014 and 2013, see Note 13, "Restructuring Charges" to the accompanying condensed consolidated financial statements for additional information.

Interest and Other Income (Expense), Net

Three Months Ended March 31 2014 2013 Change Interest and other income (expense), net (in thousands) $ (2,225 )$ (303 )$ (1,922 ) Percent of total net revenues (2 )% 0 %



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 Q113 to Q114 Increase in interest expense $ (1,527 ) Impact of foreign exchange (273 ) Decrease in interest income (152 ) Various other items 30 Total change $ (1,922 ) Interest and other income (expense), net increased during the first quarter of 2014 compared to the same quarter of 2013, primarily due to increased interest expense and, to a lesser extent, the impact of foreign exchange and decreased interest income. Interest expense increased in the first quarter of 2014 as a result of increased borrowings on long-term debt and debt issuance costs incurred in connection with the recapitalization in the second quarter of 2013. Our outstanding debt balance was $295.0 million at March 31, 2014 and was $92.5 million at March 31, 2013. The change in foreign exchange impact was due to fluctuations in the U.S. Dollar exchange rate against certain foreign currencies. Interest income decreased primarily due to a decrease in cash, cash equivalents and marketable securities to $45.0 million at March 31, 2014 from $246.6 million at March 31, 2013. Provision for Income Taxes Three Months Ended March 31 2014 2013 Change



Provision for income taxes (in thousands) $ 6,181 $ 3,853 $ 2,328 Effective tax provision rate

36 % 24 % The effective tax rate for the first quarter of 2014 is significantly higher than the rate for the same period of the prior year. As of March 31, 2014, the federal research credit was currently suspended for 2014, resulting in a higher tax rate for the first three 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 during the first three months of 2013.



We expect our annual effective tax rate for 2014 to be between 35% and 40%.

30 --------------------------------------------------------------------------------



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):

March 31December 31 2014 2013



Cash and cash equivalents $ 44,964$ 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): Three Months Ended March 31 2014 2013 Net cash provided by operating activities from continuing operations $ 20,875



$ 17,190 Net cash (used in) provided by investing activities from continuing operations

$ (2,557 )



$ 697 Net cash (used in) provided by financing activities from continuing operations

$ (6,987 ) $ 499 Net cash used in operating activities from discontinued operation $ (161 ) $ (151 )



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 $20.9 million during the three months ended March 31, 2014 was primarily the result of our net income plus non-cash charges including stock-based compensation, net of related excess tax benefit, and depreciation and amortization. Cash flows resulting from changes in assets and liabilities include decreases in accounts payable, accrued liabilities, deferred revenues, accounts receivable and an increase in income taxes payable. Accounts payable decreased as cash was used to pay down open invoices. Accrued liabilities decreased primarily as a result of cash payments for fiscal 2013 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 three months ended March 31, 2014, and the release of deferred revenue associated with our term license implementations. Accounts receivable decreased as amounts previously billed were collected. Days' sales outstanding were 46 days during the three months ended March 31, 2014, compared to 54 days in the same period of 2013. Income taxes payable increased as there were no research and development tax credits available as of the end of the first quarter of 2014, whereas taxes payable in the first quarter of 2013 included the impact of both the 2013 and 2012 years' tax credits. Other changes in assets and liabilities included a decrease in prepaid expenses and other. Our cash provided by operating activities from continuing operations of $17.2 million during the three months ended March 31, 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 a decrease in accounts receivable, accrued liabilities and deferred revenues. Days' sales outstanding were 54 days during the first quarter of 2013, compared to 62 days in the first quarter of 2012. The decrease in deferred revenue is primarily a result of less renewal activity during the first quarter of 2013 compared to the fourth quarter of 2012. The decrease in accrued liabilities reflects cash payments of fiscal 2012 liabilities including year-end bonuses, commissions, and payroll taxes. Other changes in assets and liabilities included a decrease in prepaid and other assets and income taxes payable. 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 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 $2.6 million for the first quarter of 2014 reflects capital expenditures of $2.1 million primarily related to internally developed software and the expansion of our Beijing office, and $0.5 million of capitalized software development costs.

31 --------------------------------------------------------------------------------



Table of Contents

Net cash provided by investing activities from continuing operations of $0.7 million for the first quarter of 2013 reflects sales and maturities of marketable securities of $41.4 million, partially offset by purchases of marketable securities of $39.7 million and capital expenditures of $1.0 million primarily related to information technology purchases.



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 $7.0 million for first quarter of 2014 compared to cash provided by financing activities of $0.5 million during the first quarter of 2013. The increased use of financing cash flows of $7.5 million primarily reflects the increased repayment of long-term debt of $7.5 million to pay down additional borrowing resulting from the 2013 recapitalization. We expect cash used in financing activities to increase by approximately $7.0 million per quarter to pay future quarterly cash dividends, subject to Board approval. On April 28, 2014, our Board of Directors approved a cash dividend to the Company's shareholders of $0.13 per common share that will be paid on July 15, 2014 to shareholders of record as of June 30, 2014.



Working Capital and Stockholders' Deficit

As of March 31, 2014, our continuing operations had negative working capital of $(90.2) million, compared to negative working capital of $(105.5) million at December 31, 2013. The increase in our working capital of $15.3 million during the three months ended March 31, 2014 was primarily due to cash generated from operating activities and a reduction in deferred revenue, partially offset by the payment of annual bonuses and incentives. Our negative working capital at March 31, 2014 includes approximately $179.3 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 recurring revenue gross margins of approximately 80% during the three month periods ended March 31, 2014 and 2013. 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. As of March 31, 2014, our cash and cash equivalents totaled $45.0 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 declaring the Special Dividend of $470.1 million in June 2013, there remains a stockholders deficit balance of $(91.1) million and $(111.8) million on our balance sheet as of March 31, 2014 and December 31, 2013, respectively. Despite the stockholders deficit balance at March 31, 2014 and December 31, 2013, we believe the Company is solvent as 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.



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. 32 --------------------------------------------------------------------------------



Table of Contents

At March 31, 2014, we had a total debt balance of $295.0 million under our Restated Credit Agreement, of which $85.0 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 March 31, 2014 as follows: Ratio Calculation Covenant as of Covenant Requirement March 31, 2014 Leverage ratio (1) Maximum 4.0x 2.6x



Interest coverage ratio (2) Minimum 2.5x 12.7x

(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. At June 30, 2014, the leverage ratio covenant requirement will lower to a maximum of 3.75x.

(2) 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.

Off-Balance Sheet Arrangements and Contractual Obligations

The following table summarizes our contractual cash obligations as of March 31, 2014 (in thousands): Nine Months Ending December 31 Years Ending December 31 2014 2015 2016 2017 2018 Thereafter Total Operating lease obligations, net of sub-lease income $ 8,031 $ 10,303$ 9,577$ 4,633$ 3,631$ 18,418$ 54,593 Debt* 15,000 20,000 20,000 20,000 220,000 - 295,000 Total $ 23,031$ 30,303$ 29,577$ 24,633$ 223,631$ 18,418$ 349,593



*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 March 31, 2014, the principal outstanding balance under our Restated Credit Agreement was $295.0 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 March 31, 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 March 31, 2014, we had a gross liability of $14.8 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 $12.2 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 March 31, 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.



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. 33 --------------------------------------------------------------------------------



Table of Contents

We expect that for the next two years, our debt service costs and other operating expenses 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 continue to invest indefinitely all earnings and cash outside of the United States of all non-U.S. subsidiaries to fund investments or meet working capital and property, plant and equipment requirements in those locations. At March 31, 2014, we had approximately $4.7 million of cash in our non-U.S. subsidiaries.


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters