Description

Advent Software is a leading provider of portfolio management, automation and reporting tools to asset managers of all sizes. Recent problems with a conversion of licensing agreements to term licenses, and delayed purchasing decisions due to the downturn in the investment industry provide and opportunity to purchase a company with a tremendous competitive position and strong growth prospects at a reasonable price.



The company estimates it has over 6,500 installations of its lead software Axys managing over $8 trillion in assets. Its competitors are primarily Sungard Data Systems, Checkfree and IDS with all three combined having an installation base of approximately 1,500. Advents order processing and trading software Moxy enjoys a similar impressive market share. Because there is a tremendous amount of learning time in using these programs and because these companies already have there data for a number of years on Advent's software, and finally because psychologically people do not like to change from what they are currently using Advent has a tremendous moat around it. The switch costs for an investment adviser who is already using Advents software would be tremendous. An additional competitive advantage to Advents software is the integration of its products from front-end order entry to back-end reporting and administration which differentiates it from other vendors and provides tremendous cross selling opportunities.



Advent went public in 1995 and since that time has experienced the following growth.

1995 2001 2002e Growth%

Sales per share 1.26 5.00 5.00 21.7

Earnings per share .15 .89 -.45

Oper.Cash Flow per share.19 1.23 1.0 26.8



Despite problems this year due to a delay in spending by their customers, Advent has been able to make up the lower license and development fees with higher recurring maintenance fees. We believe advents strategy of converting from perpetual licenses to term licenses is a good one as it will allow advent to raise licensing fees in the future at the cost of current licensing fees. In talking with Advent marketing reps one example of their strategy is their conversion of the data feeds from point to point licenses to ACD which is a process where all vendors send their data to Advent for them to cleanse and put in proper format and then Advent sends data to investment adviser. This change in the process is a tremendous advantage for the investment adviser because now they can get data from any custodian which was a problem in the past. The pricing for this service has gone from a large one time fee for the point to point license plus a fixed maintenance fee to a per account fee. The fees for current customers are now comparable however in the future as their customers grow Advent now has a pricing method which allows their maintenance fees to grow with the growth of their current investment advisor clients. In addition because the product makes it much easier for investment advisers to use Axys with different custodians it encourages growth in accounts with Axys.

Advent has a number of other growth prospects. They understand the wealth management market like no other vendor. They understand that accumulating information from a number of different places is a tremendous problem for advisers so they have come up with solutions in the last few years which will drive growth. In addition they have targeted the hedge fund market and have developed and are developing products which will take advantage of the tremendous growth in hedge funds. In addition they are making acquisitions which fit with and allow Advent to provide additional services to their existing client base and expand on their knowledge of and strength in the investment business. Analysts are concerned recent acquisitions of Techfi(lower end portfolio management software) and Kinexus (account aggregation and manual data management system)will cause integration problems and distractions. And they may cause integration problems in the short term but these products which Advent invested approximately $67 million Advent can leverage tremendously with its existing customers and or infrastructure.

Looking at the loss year to date it is primarily a result of increased spending in sales and marketing and product development as Advent has invested with new product launches, integration costs of purchased businesses, and additional costs related to handling the conversion from perpetual to term licenses. These expenses are an investment in the future at the expense of the current year. Given Advents competitive advantage we believe this is the right move to make.

At $13.51 Advent is down from a 52 week high of $62 and sells at 1.2 times book. Advent has no debt and has $5.20 a share in cash. With estimated normalized earnings next year of .80 to $1.00 and a price net of cash of $8.30 the stock trades at 8 to 10 times normalized earnings. This is cheap for this moat and growth potential but normalized earnings may not develop to 2004. The stock has been cheaper with a 52 week low of $9.28 and if catalyst takes some time developing may get back to that level but long term I think it is a buy at these levels.

Catalyst

Improvement in investment industry.
Completion of transition from perpetual to term licenses and improvement in sales on newer products