Advent Software (ADVS)

Q2 2012 Earnings Call

July 30, 2012 5:00 pm ET

Executives

Heidi Flaherty

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

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

Analysts

David M. Scharf - JMP Securities LLC, Research Division

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

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

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

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Advent Software Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the call over to your host, Ms. Heidi Flaherty. Please go ahead.

Heidi Flaherty

Thanks, Keith. Good afternoon, everyone. I'm Heidi Flaherty, Vice President of Finance and Investor Relations. Thank you for joining us today for Advent's second quarter 2012 earnings call. Hosting our call today are Pete Hess, Advent's Chief Executive Officer; and Jim Cox, Advent's Chief Financial Officer.

Most of you participating in this call are aware of the regulations regarding forward-looking statements. Accordingly, we would like to note that during the course of this conference call, we will make forward-looking statements regarding future events and the future performance of the company. We wish to caution you that such statements are just predictions that involve risks and uncertainties, and that actual events or results could differ materially. We discuss a number of these results in detail in the company’s SEC reports, including our quarterly reports on Form 10-Q and our Annual Report on Form 10-K, and any forward-looking statements must be considered in the context of such risks and uncertainties. The company disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

As a reminder, we include non-GAAP financial measures in our disclosures. These non-GAAP financial results are not meant to be considered in isolation or as a substitute for results prepared on a GAAP basis. Please refer to the tables entitled "Reconciliation of Selected Continuing Operations: GAAP Measures to Non-GAAP Measures" in our earnings release, which is filed with the SEC on a Form 8-K and available on our website for a reconciliation of GAAP to non-GAAP financial measures.

I'll now turn the call over to Jim.

James S. Cox

Thanks, Heidi. Advent had a solid second quarter, with record quarterly revenue, record second quarter ACV, non-GAAP operating margin over 22% and non-GAAP EPS of $0.20 -- $0.24 per share. This performance is all the more encouraging given the recent broader market headwind.

Let's start with booking. Our second quarter annual contract value or ACV of $7.2 million, an increase of 10% over the second quarter of last year, was well dispersed across all of our products and no individual deal was larger than 10% of our bookings total. Pete will provide more color about our new and expanded client relationships in his prepared remarks, but it's fair to say that our continued focus on our clients and their industries’ needs results in continued healthy demand for our products and services.

Turning to renewal. Our initially reported renewal rate, which is based on cash collections and therefore reported one quarter in arrears, was 91% in the first quarter. This rate is the same as the first quarter of last year but lower than the more recent trend due to longer negotiation cycles and slower cash collections in June. In fact, if the renewal rate were calculated today instead of on June 30, the renewal rate would be 93%, and there's still more cash to collect.

Speaking of slow collections, we were disappointed with our reported operating cash flow of $14.9 million in the second quarter, a decrease of $5.3 million compared to the second quarter of last year. The lower cash flows are mainly the result of 2 factors: first, there were slower collections particularly in Europe and the Middle East; second, we accommodated more clients that have asked for quarterly payment terms on their contract and a few new large customers asked for delayed billing dates. While these tools have spurred demand, which is good for the long-run trajectory of our business, it does pressure our cash flows in the short run, and we will continue to evaluate the use of these practices going forward.

Having said that, it's important to note that our cash flows still exceed both our GAAP and non-GAAP net income, which is a good indicator of the strong quality of our earnings.

Speaking of earnings, let's turn to the income statement. Revenue in the second quarter was up 12% over the second quarter of 2011 and recurring revenue represented 90% of total revenue. Recurring revenue grew 13% over the second quarter of 2011, while nonrecurring revenue grew 2%. As a percentage of total revenue, international revenue was lower at 17%. For the first half of 2012, international revenue grew by 5% over the first half of 2011.

Gross margins decreased one point to 65%, compared to the same period last year. That decrease was driven by lower than planned utilization in professional services, resulting in gross margins of negative 25% for nonrecurring revenue in the quarter.

Total second quarter operating expense was $46.3 million compared to $42.5 million in the same period last year, an increase of $3.8 million or 9%. Of the operating expense increase, $2 million was from product development, which, as a percentage of total revenue, remains 18%. The expense line grew to 14% over the same period last year.

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