Advent Software (ADVS)

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 June 30, 2008

 

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)

 

 

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

Large accelerated filer o                                                          Accelerated filer x

 

Non-accelerated filer o                                                      Smaller reporting company ¨

(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 July 31, 2008 was 26,818,384.

 

 

Table of Contents

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Submission of Matters to a Vote of Security Holders	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
Signatures		46

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

		June 30			December 31
		2008			2007
ASSETS
Current assets:
Cash and cash equivalents		$	82,443		$	49,589
Accounts receivable, net		41,401			47,574
Deferred taxes, current		10,288			10,288
Prepaid expenses and other		19,949			19,577
Total current assets		154,081			127,028
Property and equipment, net		33,558			27,779
Goodwill		108,600			106,520
Other intangibles, net		7,644			9,376
Deferred taxes, long-term		70,980			70,981
Other assets, net		11,122			10,645
Total assets		$	385,985		$	352,329
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,417		$	4,382
Accrued liabilities		23,734			29,328
Deferred revenues		124,287			115,398
Income taxes payable		3,065			1,086
Total current liabilities		158,503			150,194
Deferred income taxes		811			998
Deferred revenue, long-term		6,336			4,939
Other long-term liabilities		16,195			16,352
Total liabilities		181,845			172,483
Commitments and contingencies (See Note 10)
Stockholders’ equity:
Common stock		268			265
Additional paid-in capital		338,843			326,964
Accumulated deficit		(151,695		)	(161,685		)
Accumulated other comprehensive income		16,724			14,302
Total stockholders’ equity		204,140			179,846
Total liabilities and stockholders’ equity		$	385,985		$	352,329

 

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

 

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ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended June 30						Six Months Ended June 30
		2008			2007			2008			2007
Net revenues:
Term license, maintenance and other recurring		$	50,838		$	42,012		$	99,977		$	79,736
Perpetual license fees		5,242			5,689			10,867			11,616
Professional services and other		7,947			4,675			14,656			9,003
Total net revenues		64,027			52,376			125,500			100,355
Cost of revenues:
Term license, maintenance and other recurring		11,379			9,048			22,313			18,080
Perpetual license fees		224			219			541			414
Professional services and other		8,519			6,415			16,245			12,288
Amortization of developed technology		732			322			1,454			686
Total cost of revenues		20,854			16,004			40,553			31,468
Gross margin		43,173			36,372			84,947			68,887
Operating expenses:
Sales and marketing		15,626			13,985			31,016			26,874
Product development		13,008			10,816			25,898			20,672
General and administrative		9,232			7,837			18,459			16,621
Amortization of other intangibles		242			466			729			940
Restructuring charges (benefit)		(1		)	227			55			789
Total operating expenses		38,107			33,331			76,157			65,896
Income from operations		5,066			3,041			8,790			2,991
Interest and other income, net		3,559			3,868			3,786			4,386
Income before income taxes		8,625			6,909			12,576			7,377
Provision for income taxes		1,270			1,814			2,586			1,843
Net income		$	7,355		$	5,095		$	9,990		$	5,534
Net income per share:
Basic		$	0.28		$	0.19		$	0.37		$	0.21
Diluted		$	0.26		$	0.18		$	0.36		$	0.20
Weighted average shares used to compute net income per share:
Basic		26,712			26,519			26,641			26,950
Diluted		28,119			27,754			28,046			28,256

 

 

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

 

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ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Six Months Ended June 30
		2008			2007
Cash flows from operating activities:
Net income		$	9,990		$	5,534
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		7,252			6,828
Depreciation and amortization		6,220			5,426
Loss on dispositions of fixed assets		2			49
Provision for doubtful accounts		485			51
Provision for (reduction of) sales returns		4			(315		)
Gain on investments		(3,393		)	(4,265		)
Other-than-temporary loss on private equity investments		—			585
Deferred income taxes		(187		)	(132		)
Other		3			(5		)
Effect of statement of operations adjustments		10,386			8,222
Changes in operating assets and liabilities:
Accounts receivable		5,688			2,704
Prepaid and other assets		(571		)	(2,833		)
Accounts payable		3,034			599
Accrued liabilities		(5,870		)	(685		)
Deferred revenues		10,282			10,695
Income taxes payable		2,100			1,556
Effect of changes in operating assets and liabilities		14,663			12,036
Net cash provided by operating activities		35,039			25,792
Cash flows from investing activities:
Net cash used in acquisitions		—			(1,022		)
Purchases of property and equipment		(9,777		)	(5,337		)
Capitalized software development costs		(420		)	(514		)
Proceeds from sale of private equity investments		3,393			11,621
Sales and maturities of marketable securities		—			24,921
Change in restricted cash		(248		)	(359		)
Net cash provided by (used in) investing activities		(7,052		)	29,310
Cash flows from financing activities:
Proceeds from common stock issued from exercises of stock options		3,240			13,074
Withholding taxes related to equity award net share settlement		(1,271		)	(33		)
Proceeds from common stock issued under the employee stock purchase plan		2,576			1,829
Repurchase of common stock		—			(91,157		)
Proceeds from long-term borrowing		—			25,000
Net cash provided by (used in) financing activities		4,545			(51,287		)
Effect of exchange rate changes on cash and cash equivalents		322			58
Net change in cash and cash equivalents		32,854			3,873
Cash and cash equivalents at beginning of period		49,589			30,187
Cash and cash equivalents at end of period		$	82,443		$	34,060

 

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

 

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ADVENT SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Basis of Presentation

 

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

 

Advent has prepared these condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in these interim statements pursuant to such SEC rules and regulations. These interim financial statements should be read in conjunction with the audited financial statements and related notes included in Advent’s Annual Report on Form 10-K for the year ended December 31, 2007. 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 all adjustments necessary to state fairly the financial position and results of operations for each interim period shown. All such adjustments occur in the ordinary course of business and are of a normal, recurring nature.

 

Note 2—Recent Accounting Pronouncements

 

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2008, as compared to the recent accounting pronouncements described in Advent’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, that are of significance, or potential significance, to the Company.

 

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life or recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact, if any, that FSP 142-3 will have on its consolidated financial statements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect SFAS 162 to have a material impact on its consolidated financial statements.

 

Note 3—Stock-Based Compensation

 

Equity Award Activity

 

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

 

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							Weighted
				Weighted			Average
				Average			Remaining		Aggregate
		Number of		Exercise			Contractual Life		Intrinsic
		Shares		Price			(in years)		Value
		(in thousands)							(in thousands)
Outstanding at December 31, 2007		3,818		$	24.61
Options & SARs granted		724		$	43.15
Options & SARs exercised		(204	)	$	21.12
Options & SARs canceled		(59	)	$	31.64
Outstanding at June 30, 2008		4,279		$	27.82		6.66		$	43,224
Exercisable at June 30, 2008		2,262		$	22.16		5.11		$	32,354

 

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 $36.08 as of June 30, 2008 for options that were in-the-money as of that date.

 

The weighted average grant date fair value of options and SARs granted during the six months ended June 30, 2008 was $18.41 per share. The total intrinsic value of options exercised during the six months ended June 30, 2008 and 2007 was $5.1 million and $18.6 million, respectively. The total cash received from employees as a result of employee stock option exercises net of taxes paid for SARs exercised and restricted stock units (“RSU”) vested during the six months ended June 30, 2008 and 2007 was approximately $2.0 million and $13.0 million, respectively.

 

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

 

A summary of the status of the Company’s RSU activity for the six months ended June 30, 2008 is as follows:

 

				Weighted
				Average
		Number of		Grant Date
		Shares		Fair Value
		(in thousands)
Outstanding and unvested at December 31, 2007		571		$	34.62
RSUs granted		248		$	42.02
RSUs vested		(72	)	$	28.02
RSUs canceled		(19	)	$	36.86
Outstanding and unvested at June 30, 2008		728		$	37.72

 

The weighted average grant date fair value was determined based on the closing market price of the Company’s common stock on the date of the award. The aggregate intrinsic value of RSUs outstanding at June 30, 2008 was $26.3 million, using the closing price of $36.08 per share as of June 30, 2008.

 

Stock-Based Compensation Expense

 

The effect of stock-based employee compensation expense recognized on Advent’s condensed consolidated statement of operations for the three and six months ended June 30, 2008 and 2007 was as follows (in thousands, except per share data):

 

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		Three Months Ended June 30						Six Months Ended June 30
		2008			2007			2008			2007
Statement of operations classification
Cost of term license, maintenance and other recurring revenues		$	323		$	328		$	613		$	575
Cost of professional services and other revenues		258			182			495			357
Total cost of revenues		581			510			1,108			932
Sales and marketing		1,099			1,167			2,137			2,136
Product development		1,009			900			1,880			1,637
General and administrative		1,172			1,005			2,127			2,123
Total operating expenses		3,280			3,072			6,144			5,896
Total stock-based employee compensation expense		$	3,861		$	3,582		$	7,252		$	6,828
Tax effect on stock-based employee compensation		(1,351		)	(1,276		)	$	(2,651	)	$	(2,329	)
Net effect on net income		$	2,510		$	2,306		$	4,601		$	4,499

 

Advent capitalized stock-based employee compensation expense of $85,000 and $106,000 during the six months ended June 30, 2008 and 2007, respectively, associated with the Company’s software development, internal-use software and professional services implementation projects.

 

As of June 30, 2008, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was $36.2 million and is expected to be recognized through the remaining vesting period of each grant, with a weighted average remaining period of 3.2 years.

 

Valuation Assumptions

 

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

 

		Three Months Ended June 30				Six Months Ended June 30
		2008		2007		2008		2007
Stock Options & SARs
Expected volatility		42.8% - 43.5%		32.4% - 34.5%		41.8% - 43.5%		32.4% - 38.4%
Expected life (in years)		3.82 - 5.27		3.75 - 4.58		3.82 - 5.27		3.75 - 4.58
Risk-free interest rate		2.8% - 3.9%		4.6% - 5.2%		2.6% - 3.9%		4.5% - 5.2%
Expected dividends		None		None		None		None
Employee Stock Purchase Plan
Expected volatility		43.8% - 46.0%		35.5% - 36.5%		43.8% - 46.0%		35.5% - 36.5%
Expected life (in months)		6		6		6		6
Risk-free interest rate		2.0% - 3.4%		4.2% - 5.0%		2.0% - 3.4%		4.2% - 5.0%
Expected dividends		None		None		None		None

 

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

 

Note 4—Net Income Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the sum of weighted average number of common shares outstanding and the potential number of dilutive common shares outstanding during the period, excluding the effect of any anti-dilutive securities. Potential common shares consist of the shares issuable upon the exercise of stock options and SARs, the vesting of restricted stock awards and from withholdings associated with the Company’s employee

 

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stock purchase plan. Potential common shares are reflected in diluted earnings per share by application of the treasury stock method, which in the current period includes consideration of unamortized stock-based compensation and windfall tax benefits, as a result of the implementation of SFAS 123R.

 

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

 

		Three Months Ended June 30						Six Months Ended June 30
		2008			2007			2008			2007
Numerator:
Net income		$	7,355		$	5,095		$	9,990		$	5,534
Denominator:
Denominator for basic net income per share-weighted average shares outstanding		26,712			26,519			26,641			26,950
Dilutive common equivalent shares:
Employee stock options and other		1,407			1,235			1,405			1,306
Denominator for diluted net income per share-weighted average shares outstanding, assuming exercise of potential dilutive common shares		28,119			27,754			28,046			28,256
Basic net income per share		$	0.28		$	0.19		$	0.37		$	0.21
Diluted net income per share		$	0.26		$	0.18		$	0.36		$	0.20

 

Weighted average stock options, SARs and RSUs of approximately 1.4 million and 1.0 million for the three and six months ended June 30, 2008, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive. Similarly, weighted average stock options, SARs and RSUs of approximately 1.6 million and 1.5 million for the three and six months ended June 30, 2007, respectively, were excluded from the calculation of diluted net income per share.

 

Note 5—Goodwill

 

The changes in the carrying value of goodwill for the six months ended June 30, 2008 were as follows (in thousands):

 

		Goodwill
Balance at December 31, 2007		$	106,520
Translation adjustments		2,080
Balance at June 30, 2008		$	108,600

 

Foreign currency translation adjustments totaling $2.1 million reflect the weakening of the U.S. dollar versus European currencies during the six months ended June 30, 2008.

 

Note 6—Other Intangibles

 

The following is a summary of other intangibles as of June 30, 2008 (in thousands):

 

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		Average
		Amortization		Other						Other
		Period		Intangibles,			Accumulated			Intangibles,
		(Years)		Gross			Amortization			Net
Purchased technologies		4.9		$	16,526		$	(13,401	)	$	3,125
Product development costs		3.0		6,738			(3,137		)	3,601
Developed technology sub-total				23,264			(16,538		)	6,726
Customer relationships		5.5		22,954			(22,125		)	829
Other intangibles		3.6		404			(315		)	89
Other intangibles sub-total				23,358			(22,440		)	918
Balance at June 30, 2008				$	46,622		$	(38,978	)	$	7,644

 

The following is a summary of other intangibles as of December 31, 2007 (in thousands):

 

		Average
		Amortization		Other						Other
		Period		Intangibles,			Accumulated			Intangibles,
		(Years)		Gross			Amortization			Net
Purchased technologies		4.9		$	16,529		$	(13,001	)	$	3,528
Product development costs		3.0		6,290			(2,081		)	4,209
Developed technology sub-total				22,819			(15,082		)	7,737
Customer relationships		5.5		22,673			(21,130		)	1,543
Other intangibles		3.6		404			(308		)	96
Other intangibles sub-total				23,077			(21,438		)	1,639
Balance at December 31, 2007				$	45,896		$	(36,520	)	$	9,376

 

The changes in the carrying value of other intangibles during the six months ended June 30, 2008 were as follows (in thousands):

 

		Other						Other
		Intangibles,			Accumulated			Intangibles,
		Gross			Amortization			Net
Balance at December 31, 2007		$	45,896		$	(36,520	)	$	9,376
Additions		420			—			420
Stock-based compensation additions		28			—			28
Amortization		—			(2,183		)	(2,183		)
Translation adjustments		278			(275		)	3
Balance at June 30, 2008		$	46,622		$	(38,978	)	$	7,644

 

Based on the carrying amount of intangible assets as of June 30, 2008, the estimated future amortization is as follows (in thousands):

 

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