Advent Software 10-Q 2007 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ýQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2007

or

oTransition 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer ¨    Accelerated filer x    Non-accelerated filer ¨

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 April 30, 2007 was 27,177,550.

INDEX

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVENT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

	March 31			December 31
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	42,961		$	30,187
Marketable securities	—			24,881
Accounts receivable, net	35,169			41,336
Deferred taxes, current	7,950			7,950
Prepaid expenses and other	13,958			12,685
Total current assets	100,038			117,039
Property and equipment, net	28,007			27,338
Goodwill	98,812			98,382
Other intangibles, net	5,465			6,294
Deferred taxes, long-term	75,594			75,594
Other assets, net	14,837			15,000
Total assets	$	322,753		$	339,647
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,398		$	5,083
Accrued liabilities	21,060			22,992
Deferred revenues	88,853			84,260
Income taxes payable	4,704			4,989
Total current liabilities	118,015			117,324
Deferred income taxes	161			225
Deferred revenue, long-term	2,273			1,053
Other long-term liabilities	10,845			11,418
Total liabilities	131,294			130,020
Commitments and contingencies (See Note 11)
Stockholders’ equity:
Common stock	270			272
Additional paid-in capital	311,955			309,993
Accumulated deficit	(131,972		)	(111,387		)
Accumulated other comprehensive income	11,206			10,749
Total stockholders’ equity	191,459			209,627
Total liabilities and stockholders’ equity	$	322,753		$	339,647

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 March 31
	2007			2006
Net revenues:
Term license, maintenance and other recurring	$	37,724		$	31,171
Perpetual license fees	5,927			8,159
Professional services and other	4,328			4,326
Total net revenues	47,979			43,656
Cost of revenues:
Term license, maintenance and other recurring	9,032			7,917
Perpetual license fees	195			229
Professional services and other	5,873			4,924
Amortization of developed technology	364			394
Total cost of revenues	15,464			13,464
Gross margin	32,515			30,192
Operating expenses:
Sales and marketing	12,889			12,142
Product development	9,856			7,935
General and administrative	8,784			7,946
Amortization of other intangibles	474			979
Restructuring charges	562			141
Total operating expenses	32,565			29,143
Income (loss) from operations	(50		)	1,049
Interest income and other expense, net	518			1,346
Income before income taxes	468			2,395
Provision for (benefit from) income taxes	29			(1,007		)
Net income	$	439		$	3,402
Net income per share:
Basic	$	0.02		$	0.11
Diluted	$	0.02		$	0.11
Weighted average shares used to compute net income per share:
Basic	27,389			30,764
Diluted	28,756			31,819

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)

	Three Months Ended March 31
	2007			2006
Cash flows from operating activities:
Net income	$	439		$	3,402
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation	3,246			3,174
Depreciation and amortization	2,790			3,540
Loss on dispositions of fixed assets	3			82
Provision for doubtful accounts	137			7
Reduction of sales returns	(6		)	(717		)
(Gain) loss on investments	(18		)	35
Deferred income taxes	(65		)	30
Other	13			(11		)
Changes in operating assets and liabilities:
Accounts receivable	6,030			2,960
Prepaid and other assets	(1,117		)	(3,876		)
Accounts payable	(685		)	(1,285		)
Accrued liabilities	(2,505		)	(19		)
Deferred revenues	5,819			3,781
Income taxes payable	(284		)	(1,843		)
Net cash provided by operating activities	13,797			9,260
Cash flows from investing activities:
Net cash used in acquisitions	(1,022		)	—
Purchases of property and equipment	(2,620		)	(2,981		)
Capitalized software development costs	—			(781		)
Purchases of marketable securities	—			(17,379		)
Sales and maturities of marketable securities	24,921			12,867
Change in restricted cash	—			(1,200		)
Net cash provided by (used in) investing activities	21,279			(9,474		)
Cash flows from financing activities:
Proceeds from issuance of common stock	7,806			2,559
Repurchase of common stock	(30,120		)	(33,712		)
Net cash used in financing activities	(22,314		)	(31,153		)
Effect of exchange rate changes on cash and cash equivalents	12			23
Net change in cash and cash equivalents	12,774			(31,344		)
Cash and cash equivalents at beginning of period	30,187			70,941
Cash and cash equivalents at end of period	$	42,961		$	39,597

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/A for the year ended December 31, 2006. 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.

Certain prior year amounts have been reclassified to conform to the current presentation. These reclassifications do not affect total net revenues, net income or stockholders’ equity. Specifically, as Advent is now more than halfway through its transition to a term license model (from a perpetual license model), the Company changed its presentation of revenues and associated cost of revenues during the first quarter of 2007 to more clearly show the growth of term license revenues. Historically, the Company has separated term license arrangement fees between license and maintenance revenue and allocated those revenues on a 55%/45% basis, respectively. As a result of the increasing significance of term license revenues for the Company, Advent has discontinued this practice during the first quarter of 2007, and now classifies all term license revenues, along with perpetual maintenance and other recurring revenues, in the caption “Term license, maintenance and other recurring” revenues. The Company believes the current presentation more clearly reflects its business as well as the principal underlying factors impacting long-term growth and predictability.

Advent currently categorizes its revenues as follows: “Term license, maintenance and other recurring,” “Perpetual license fees” and “Professional services and other.” Prior period amounts have been reclassified to conform to this current presentation.

Note 2—Recent Accounting Pronouncements

No recent accounting pronouncements have been issued which would currently have a material effect on Advent’s condensed consolidated financial position, results of operations, or cash flows.

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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:

					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, 2006	5,292		$	20.08
Options & SAR’s granted	437		$	36.85
Options & SAR’s exercised	(636	)	$	12.27
Options & SAR’s canceled	(158	)	$	23.80
Outstanding at March 31, 2007	4,935		$	22.45	6.54	$	63,376
Exercisable at March 31,2007	2,584		$	20.06	5.02	$	39,409

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 $34.87 as of March 31, 2007 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 three months ended March 31, 2007 was $13.83 per share. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $14.2 million and $1.6 million, respectively. The total cash received from employees as a result of employee stock option exercises during the three months ended March 31, 2007 and 2006 was approximately $7.8 million and $2.6 million, respectively.

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

A summary of the status of the RSUs for the three months ended March 31, 2007 is as follows:

			Weighted
	Number of		Average
	Shares		Grant Date
	(in thousands)		Fair Value
Outstanding at December 31, 2006	266		$	29.81
RSU’s granted	262		$	36.94
RSU’s canceled	(8	)	$	30.92
Outstanding at March 31, 2007	520		$	33.38

At March 31, 2007, none of the RSUs outstanding were vested.

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 March 31, 2007 was $18.1 million, using the closing price of $34.87 per share as of March 31, 2007.

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Stock-Based Compensation Expense

The effect of stock-based employee compensation expense recognized on Advent’s condensed consolidated statement of operations for the first quarter of 2007 and 2006 were as follows (in thousands, except per share data):

	Three Months Ended			Three Months Ended
	March 31, 2007			March 31, 2006
Statement of operations classification
Cost of term license, maintenance and other recurring revenues	$	247		$	258
Cost of professional services and other revenues	175			205
Total cost of revenues	422			463
Sales and marketing	969			1,143
Product development	737			744
General and administrative	1,118			824
Total operating expenses	2,824			2,711
Total stock-based employee compensation expense	$	3,246		$	3,174
Tax effect on stock-based employee compensation	(1,053		)	—		(1)
Net effect on net income	$	2,193		$	3,174

(1)Assumes an effective tax rate of 0% for the three months ended March 31, 2006 due to the full valuation allowance established against the Company’s deferred tax assets during the fourth quarter of 2003. The valuation allowance was subsequently decreased during the fourth quarter of 2006.

Approximately $3,000 and $98,000 of stock-based compensation was capitalized as internal use software and software development costs, respectively, in the first quarters of 2007 and 2006.

As of March 31, 2007, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was $30.3 million and is expected to be recognized through the remaining vesting period of each grant, with a weighted average remaining period of 4.3 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 March 31
Stock Options & SAR’s	2007	2006
Expected volatility	35.1% - 38.4%	46.3% - 48.5%
Expected life (in years)	4.58	4.9 - 5.4
Risk-free interest rate	4.5% - 4.8%	4.3% - 4.7%
Expected dividends	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 March 31
	2007		2006
Numerator:
Net income	$	439	$	3,402
Denominator:
Denominator for basic net income per share-weighted average shares outstanding	27,389		30,764
Dilutive common equivalent shares:
Employee stock options and other	1,367		1,055
Denominator for diluted net income per share-weighted average shares outstanding, assuming exercise of potential dilutive common shares	28,756		31,819
Basic net income per share	$	0.02	$	0.11
Diluted net income per share	$	0.02	$	0.11

For the quarters ended March 31, 2007 and 2006, weighted average stock options and RSUs of approximately 1.5 million and 1.3 million, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.

Note 5—Goodwill

The changes in the carrying value of goodwill for the three months ended March 31, 2007 were as follows (in thousands):

	Goodwill
Balance at December 31, 2006	$	98,382
Additions	22
Translation adjustments	408
Balance at March 31, 2007	$	98,812

Foreign currency translation adjustments totaling $408,000 reflect the weakening of the U.S. dollar versus European currencies during the first quarter of 2007. Additions to goodwill of $22,000 reflected an additional payment related to the acquisition of East Circle Solutions, Inc.

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Note 6—Other Intangibles

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

	Average
	Amortization	Other					Other
	Period	Intangibles,		Accumulated			Intangibles,
	(Years)	Gross		Amortization			Net
Purchased technologies	4.9	$	13,556	$	(12,776	)	$	780
Product development costs	3.0	3,001		(1,100		)	1,901
Developed technology sub-total		16,557		(13,876		)	2,681
Customer relationships	5.6	22,218		(19,441		)	2,777
Other intangibles	2.5	307		(300		)	7
Other intangibles sub-total		22,525		(19,741		)	2,784
Balance at March 31, 2007		$	39,082	$	(33,617	)	$	5,465

The following is a summary of other intangibles as of December 31, 2006 (in thousands):

	Average
	Amortization	Other					Other
	Period	Intangibles,		Accumulated			Intangibles,
	(Years)	Gross		Amortization			Net
Purchased technologies	4.9	$	13,556	$	(12,665	)	$	891
Product development costs	3.0	3,001		(847		)	2,154
Developed technology sub-total		16,557		(13,512		)	3,045
Customer relationships	5.6	22,175		(18,952		)	3,223
Other intangibles	2.5	307		(281		)	26
Other intangibles sub-total		22,482		(19,233		)	3,249
Balance at December 31, 2006		$	39,039	$	(32,745	)	$	6,294

The changes in the carrying value of other intangibles during the three months ended March 31, 2007 were as follows (in thousands):

	Other					Other
	Intangibles,		Accumulated			Intangibles,
	Gross		Amortization			Net
Balance at December 31, 2006	$	39,039	$	(32,745	)	$	6,294
Amortization	—		(838		)	(838		)
Translation adjustments	43		(34		)	9
Balance at March 31, 2007	$	39,082	$	(33,617	)	$	5,465

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Based on the carrying amount of intangible assets as of March 31, 2007, the estimated future amortization is as follows (in thousands):

	Nine
	Months Ended
	December 31		Years Ended December 31
	2007		2008		2009		2010		Total
Estimated future amortization of:
Developed technology	$	925	$	1,072	$	494	$	190	$	2,681
Other intangibles	1,380		949		448		7		2,784
Total	$	2,305	$	2,021	$	942	$	197	$	5,465

Note 7—Balance Sheet Detail

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

	March 31		December 31
	2007		2006
Prepaid commission	$	3,314	$	3,121
Prepaid contract expense	3,534		2,704
Prepaid royalty	2,489		2,027
Other	4,621		4,833
Total prepaid expenses and other	$	13,958	$	12,685

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

	March 31			December 31
	2007			2006
Long-term investments, gross	$	13,800		$	13,800
Accumulated write-downs due to other-than-temporary decline in value	(5,341		)	(5,341		)
Long-term investments, net	8,459			8,459
Long-term prepaid assets	3,581			4,098
Deposits	2,797			2,443
Total other assets	$	14,837		$	15,000

Long-term investments include equity investments in several privately held companies. These equity investments are carried at the lower of cost or fair value at March 31, 2007 and December 31, 2006. Deposits include restricted cash of $1.3 million to secure a bank letter of credit associated with the Company’s entry into a definitive lease agreement with Toda Development, Inc. (“Toda”) in January 2006 for its headquarters facility.

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

	March 31		December 31
	2007		2006
Salaries and benefits payable	$	8,531	$	13,624
Accrued restructuring	3,318		2,650
Other	9,211		6,718
Total accrued liabilities	$	21,060	$	22,992

Accrued restructuring charges are discussed further in Note 9, “Restructuring Charges.” Other accrued liabilities include accruals for royalties, sales and business taxes, acquisition related costs, and other miscellaneous items.

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

	March 31		December 31
	2007		2006
Deferred rent	$	6,852	$	6,451
Accrued restructuring, long-term portion	2,926		3,941
Other	1,067		1,026
Total other long-term liabilities	$	10,845	$	11,418

Note 8—Comprehensive Income

The components of comprehensive income were as follows for the periods presented (in thousands):

	Three Months Ended March 31
	2007		2006
Net income	$	439	$	3,402
Unrealized gain on marketable securities	8		49
Foreign currency translation adjustment	449		998
Total comprehensive income	$	896	$	4,449

The components of accumulated other comprehensive income were as follows (in thousands):

	March 31		December 31
	2007		2006
Accumulated net unrealized loss on marketable securities	$	—	$	(8	)
Accumulated foreign currency translation adjustments	11,206		10,757
Total accumulated other comprehensive income	$	11,206	$	10,749

Note 9—Restructuring Charges

Restructuring initiatives have been implemented in the Company’s Advent Investment Management and Other operating segments to reduce costs and improve operating efficiencies by better aligning the Company’s resources to its near-term revenue opportunities. These initiatives have resulted in restructuring charges comprised primarily of costs related to properties abandoned in connection with facilities consolidation, related write-down of leasehold improvements and severance and associated employee termination costs related to headcount reductions. Advent’s restructuring charges included accruals for estimated losses on facility costs based on the Company’s contractual obligations net of estimated sublease income. Advent reassesses this liability periodically based on market conditions.

During the three months ended March 31, 2007, Advent recorded a net restructuring charge of $562,000 due to the update of certain sub-lease assumptions for Advent’s prior San Francisco headquarters facility located at 301 Brannan Street, which the Company exited in October 2006. During the three months ended March 31, 2006, Advent recorded a net restructuring charge of $141,000 primarily to adjust original estimates for facilities in San Francisco, California and New York, New York.

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The following table sets forth an analysis of the components of the payments and restructuring charges made against the accrual during the first quarter of 2007 (in thousands):

	Facility Exit			Severance &
	Costs			Benefits		Total
Balance of restructuring accrual at December 31, 2006	$	6,587		$	4	$	6,591
Restructuring charges	476			—		476
Cash payments	(909		)	—		(909		)
Accretion adjustment	86			—		86
Balance of restructuring accrual at March 31, 2007	$	6,240		$	4	$	6,244

Of the remaining restructuring accrual of $6.2 million at March 31, 2007, $3.3 million and $2.9 million are included in accrued liabilities and other long-term liabilities, respectively, on the accompanying condensed consolidated balance sheet. The remaining excess facility costs of $6.2 million are stated at estimated fair value, net of estimated sublease income of approximately $7.4 million. Advent expects to pay the remaining obligations associated with the vacated facilities no later than over the remaining lease terms, which expire on various dates through 2012.

Note 10—Common Stock Repurchase Program

Advent’s Board has approved common stock repurchase programs authorizing management to repurchase shares of the Company’s common stock to enhance shareholder value. The timing and actual number of shares subject to repurchase are at the discretion of Advent’s management and are contingent on a number of factors and limitations, including the price of Advent’s stock, corporate and regulatory requirements, alternative investment opportunities and other market conditions. The stock repurchase programs specify a maximum number of shares subject to repurchase, do not have an expiration date and may be limited or terminated at any time without prior notice. Repurchased shares are returned to the status of authorized and un-issued shares of common stock.

On February 9, 2007, the Company’s Board authorized the repurchase of up to an additional 2.25 million shares of outstanding common stock.

The following table provides a summary of the repurchase activity during the first quarter of 2007 under the stock repurchase programs approved by the Board in July 2006 and February 2007 (in thousands, except per share data):

	Total Number
	of Shares			Average Price
	Purchased	Cost		Paid Per Share
Q1 2007	837	$	30,120	$	36.00

As of March 31, 2007, 1.7 million shares were available to be repurchased under the most recent Board authorized repurchase plan approved in February 2007.

Note 11—Commitments and Contingencies

Lease Obligations

Advent leases office space and equipment under non-cancelable operating lease agreements, which expire at various dates through December 2018. Some operating leases contain escalation provisions for adjustments in the consumer price index. Advent is responsible for maintenance, insurance, and property taxes. In March 2007, the Company executed an amendment to the lease agreement for its 600 Townsend Street headquarters facility whereby the Company will lease an additional 21,000 square feet. As of March 31, 2007, Advent’s remaining operating lease commitments through 2018 were approximately $52.2 million, net of future minimum rental receipts of $8.5 million to be received under non-cancelable sub-leases.

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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 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, Advent is involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on Advent’s financial position or results of operations. However, litigation is subject to inherent uncertainties and Advent’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on Advent’s financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.

On March 8, 2005, certain of the former shareholders of Kinexus and the shareholders’ representative filed suit against Advent in the Delaware Chancery Court. The complaint alleges that Advent breached the Agreement and Plan of Merger dated as of December 31, 2001 pursuant to which Advent acquired all of the outstanding shares of Kinexus due principally to the fact that no amount was paid by Advent on an earn-out of up to $115 million. The earn-out, which was payable in cash or stock at the election of Advent, was based upon Kinexus meeting certain revenue targets in both 2002 and 2003. The complaint seeks unspecified compensatory damages, an accounting and restitution for unjust enrichment. Advent advised the shareholders’ representative in January 2003 that the earn-out terms had not been met in 2002 and accordingly no earn-out was payable for 2002 and would not be payable for 2003. Advent disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend this action. Management believes that any potential loss associated with this litigation is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

On July 11, 2006, a former independent consultant filed suit against Advent in the Supreme Court of the State of New York.  The complaint alleges that Advent failed to pay plaintiff commissions due for his services as a consultant to Advent.  The plaintiff is seeking approximately $101,000 in commissions and $2.0 million in unspecified consequential damages, as well as interest and attorney’s fees.  Advent disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend this action.  Management believes that any potential loss associated with this litigation is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

Note 12—Segment Information

Description of Segments

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in annual financial statements and requires disclosure of selected information about operating segments in interim reports. It also established standards for related disclosures about products and services, major customers and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. Advent’s CODM is the Chief Executive Officer.

Advent’s organizational structure is based on a number of factors that the CODM uses to evaluate, view and run its business operations which include, but are not limited to, customer base, homogeneity of products and technology. Advent’s operating segments are based on this organizational structure and information reviewed by Advent’s CODM to evaluate the operating segment results. Advent has determined that its operations are organized into two reportable segments:  1) Advent Investment Management; and 2) MicroEdge. Future changes to this organizational structure may result in changes to the business segments disclosed. A description of the types of products and services provided by each operating segment follows.

Advent Investment Management is the Company’s core business and derives revenues from the development, marketing and sale of software products, data interfaces and related maintenance and services that automate, integrate and

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support certain mission critical functions of investment management organizations. MicroEdge derives revenues from the sale of software and services for grant management, matching gifts and volunteer tracking for the grantmaking community.

Segment Data

The results of the operating segments are derived directly from Advent’s internal management reporting system. The accounting policies used to derive operating segment results are substantially the same as those used by the consolidated company. Management measures the performance of each operating segment based on several metrics, including income (loss) from operations. These results are used, in part, to evaluate the performance of, and to assign resources to, each of the operating segments. Certain operating expenses, including stock-based employee compensation expense, and amortization of developed technology and other intangibles, which Advent manages separately at the corporate level, are not allocated to the operating segments. Advent does not separately accumulate and review asset information by segment.

Segment information for the periods presented is as follows (in thousands):

	Three Months Ended March 31
	2007			2006
Net revenues:
Advent Investment Management	$	42,555		$	38,593
MicroEdge	5,424			4,852
Other	—			211
Total net revenues	$	47,979		$	43,656
Income (loss) from operations:
Advent Investment Management	$	2,860		$	5,113
MicroEdge	1,174			951
Other	—			(468		)
Unallocated corporate operating costs and expenses:
Stock-based employee compensation	(3,246		)	(3,174		)
Amortization of developed technology	(364		)	(394		)
Amortization of other intangibles	(474		)	(979		)
Total income (loss) from operations	$	(50	)	$	1,049

Major Customers

No single customer represented 10% or more of Advent’s total net revenues in any period presented.

Note 13—Related Party Transactions

As of December 31, 2006, Legg Mason owned approximately 17% of the voting stock of Advent. Advent recognized approximately $107,000 and $118,000 of revenue from Legg Mason during the first quarter of fiscal 2007 and 2006, respectively. The Company’s accounts receivable from Legg Mason were $252,000 and $10,000 as of March 31, 2007 and December 31, 2006, respectively.

Advent acts as trustee for the Company’s short-term disability plan—Advent Software California Voluntary Disability Plan (“VDI”). Employee withholdings were $95,000 and $123,000 during the three months ended March 31, 2007 and 2006, respectively. Disbursements were $83,000 and $68,000 during the three months ended March 31, 2007 and 2006, respectively. Cash held by Advent related to the VDI was $317,000 and $305,000 as of March 31, 2007 and December 31, 2006, respectively, and are included in “Other assets, net” on the condensed consolidated balance sheets.

Note 14—Line of Credit

On February 14, 2007, Advent and certain of its subsidiaries entered into a senior secured credit facility agreement (the “Facility”) with Wells Fargo Foothill, Inc. (the “Lender”) for a term of three years. Under the Facility, the Lender will provide the Company with a revolving line of credit up to an aggregate amount of $75 million to fund the repurchase of outstanding common stock, working capital, capital expenditures and general corporate requirements. The Company has the option of selecting an interest rate for any drawdown under the Facility equal to either: (a) the Base Rate; or (b) the then

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applicable LIBOR Rate plus 1.50% per annum. The loan is secured by the Company’s property and assets and is subject to a financial covenant. The financial covenant in the Facility is limited to a maximum ratio of senior debt to adjusted earnings before interest, taxes, depreciation, amortization (EBITDA), and non-cash stock-based employee compensation. Covenant testing will commence upon either the occurrence of an event of default or when excess availability under the Facility plus qualified cash and cash equivalents is less than $50 million. As of March 31, 2007, the Company has yet to draw down on the Facility.

Note 15—Income Taxes

On January 1, 2007, Advent adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). As of January 1, 2007, Advent had $4.9 million of unrecognized tax benefits. If recognized, the portion of unrecognized tax benefits that would decrease the Company’s provision for income taxes and increase net income is $4.1 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 adoption resulted in no significant cumulative impact to accumulated deficit. As of March 31, 2007, Advent’s unrecognized tax benefits totaled $4.1 million and are included in “Income taxes payable” on the condensed consolidated balance sheet. The total unrecognized tax benefits at the beginning and the end of the first quarter of 2007 relate primarily to research and other California tax credits, various state net operating losses, and potential penalties and interest on amended state and local tax returns.

Advent recognizes interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable settlements within “Provision for (benefit from) income taxes” on the condensed consolidated statement of operations. As of March 31, 2007, the Company had $0.2 million of interest and penalties accrued associated with unrecognized tax benefits.

Advent is subject to taxation in the U.S. and various states and foreign jurisdictions. Advent is not under examination in any income tax jurisdiction at the present time.  The material jurisdictions that are subject to examination by tax authorities include California for tax years after fiscal 2001 and the U.S. and New York for tax years after 2002.

Note 16—Subsequent Event

On April 16, 2007, the Company, together with other LatentZero Limited (“LatentZero”) shareholders, entered into a conditional agreement to sell their ownership in LatentZero to royalblue group plc. The maximum possible consideration to the Company from the sale of its ownership interest in LatentZero is approximately $17 million, which is comprised of initial consideration of $10 million, payable at completion of the sale transaction and subject to certain closing contingencies and fees, and up to an aggregate $7 million of deferred contingent consideration for fiscal years 2007 and 2008. For fiscal 2007 and 2008, the payment of the deferred contingent consideration is dependent on the achievement of performance objectives related to revenue and operating profit. Consideration is denominated in Pounds Sterling (GBP) in the conditional agreement and the actual amounts of consideration in U.S. dollars to be received by the Company may differ depending on foreign exchange rates at the time of payment. On April 30, 2007, the sale transaction was completed and the Company received the initial consideration of $10 million.

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 in conjunction with our consolidated financial statements and related notes. 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 and expenses. Forward-looking statements can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” 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 regarding growth in the investment management market and opportunities for us related thereto; future expansion, acquisition or investment in other businesses; projections of revenues, future cost and expense levels (including for the second quarter of 2007); expected timing and amount of amortization expenses related to past acquisitions; the adequacy of resources to meet future cash requirements; estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities; future client wins; future hiring; and future product introductions including those planned for 2007. Such forward-looking statements are based on our current plans and expectations, and involve known and unknown risks and uncertainties that 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

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include, but are not limited to, those 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 integrated software solutions for automating and integrating data and work flows across the investment management organization, as well as the information flows 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 and is tailored to meet the needs of the particular client, as determined by size, assets under management and complexity of the investment environment.

Our business is organized into two reportable segments, Advent Investment Management (“AIM”) and MicroEdge. Advent Investment Management is our core business and derives revenues from the development, marketing and sale of software products, data interfaces and related maintenance and services that automate, integrate and support certain mission-critical functions of investment management organizations in the United States, Europe, Middle East and Africa. MicroEdge derives revenues from the sale of software and services for grant management, matching gifts and volunteer tracking for the grant-making community. For additional information regarding our reportable segments, see Note 12, “Segment Information,” to our condensed consolidated financial statements.

During the first quarter of 2007, we continued to execute on our strategy of strengthening and growing our core business.

We experienced continued demand for our products evidenced by the signing of 64 new customer agreements in the first quarter. We added 15 new customers for Advent Portfolio Exchange (“APX”), 5 new customers for Geneva, and achieved a new milestone for Moxy, our trade order management system, with 750 total customers now live on Moxy.

We continued to invest in product development during the first quarter of 2007, as we plan to launch more new products and new releases of existing products in 2007 than any other year in Advent’s history. Product development expenses were $9.9 million during the first quarter of 2007, which represented 21% of total net revenues, as compared to $7.9 million (or 18% of total net revenues) in the same quarter of 2006. During the first quarter of 2007, we launched Advent Revenue Center, an automated billing and revenue management solution. Advent Revenue Center automates and improves a client’s operational efficiency by simplifying the costly and lengthy billing process from managing multiple and diverse billing structures. This product, which integrates with both APX and Axys, is currently live at several client sites.

We are currently engaged in validation and beta cycles for major new releases of several key products, including APX, Geneva and Moxy. In the latter half of 2007, we plan to release Geneva 7.0, which offers improved workflow, a new user interface, and a new reporting front-end. The new release of Moxy, which is planned to be released mid—year, will feature a highly scalable, dot-net architecture as well as improved workflow and user interface. Later in 2007, we will be introducing two new products to the Advent suite of products: 1) a trading compliance solution; and, 2) an analytics solution that will enable managers to analyze not only the “how” but also the “why” of portfolio performance and make better informed investment choices.

Financial highlights of our first quarter of 2007 include:

·Term contract bookings were $9.8 million, an increase of 24% from $7.9 million in the first quarter of 2006. With an average term of 3.4 years, these first quarter contracts, once implemented, will add approximately $2.9 million in annual revenue;

·Revenues were $48.0 million, which was a 10% increase from $43.7 million in the same quarter of 2006;

·Revenues recognized from recurring sources represented 79% of total revenues for the first quarter of 2007, compared to 71% in the first quarter of 2006; and

·Cash provided by operating activities was $13.8 million, representing a 49% increase from $9.3 million in the first quarter of 2006.

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Net revenues for the first quarter of 2007 grew 10% over the first quarter of 2006 while term license, maintenance and other recurring revenues were up 21% year over year. Despite our transition to a term licensing model, we have been able to show top-line growth, measured year over year, for two reasons:

·Our diverse mix of products allowed us to phase in term licensing by product; and

·We have a large installed base of customers, who we are not requiring to convert to term licenses for either products they already own, or when they expand the usage of products they already own, such as ordering additional seats.

We are in the process of converting the Company’s license revenues from a perpetual model to a term model, and during the three months ended March 31, 2007, quarterly term license revenues exceeded revenues from perpetual licenses for the first time. Under a perpetual pricing model, customers purchase a license to use our software indefinitely and generally we recognize all license revenue at the time of sale; maintenance is purchased under an annual renewable contract, and recognized ratably over the contract period. Under a term pricing model, customers purchase a license to use our software and receive maintenance for a limited period of time and we recognize all of the revenue ratably over the length of the contract. This has the effect of lowering revenues in the early stages of the transition, but increasing the total potential value of the customer relationship. Moving AIM’s new customer sales from a perpetual to a term licensing model has had the effect of lowering our reported revenue growth rates over the past two years and will, depending on our new term license bookings, continue to have an impact through 2007 and possibly 2008. However, because our products are used by customers for an average of approximately eight years, we believe this change to our business model is extremely significant for the long-term growth and value of the business. For example, over an eight- year period, a customer may enter into two or more contracts for the same software product and services under a term license model.

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. If the implementation services are still in progress as of quarter-end, we will defer all of the contract revenues to a subsequent quarter. During the first quarter of 2007, we deferred net revenues of $3.3 million and deferred directly related expenses of $0.9 million. The impact of these deferrals on our operating income was approximately $2.4 million. As of March 31, 2007, we have deferred a total of approximately $12.6 million in net revenues and $3.8 million of directly related expenses (which are classified as “Deferred revenues” (short-term and long-term) and “Prepaid expenses and other,” respectively, on the condensed consolidated balance sheet) as the implementation services associated with the related term license arrangements were in progress as of March 31, 2007. As of December 31, 2006, $9.4 million and $2.9 million of net revenues and directly related expenses, respectively, were deferred.

The transition to a term model also has the effect of decreasing operating cash flows in the early stages of the transition. Under perpetual pricing, the entire license fee is generally billed and collected at the commencement of the arrangement. Under term pricing, a typical contract term is three years. We generally bill and collect license fees over the term of the arrangement in equal installments in advance of each annual period. The amount of the annual term billing is less than the perpetual billing, resulting in lower cash flows in the initial annual term license period. Annual term billing results in an increase in deferred revenues and an increase in operating cash flows at the commencement of each annual billing period.

During the first quarter of 2007, we recognized approximately 79% of total net revenue from recurring sources, which we define as revenues from term license, maintenance on perpetual licenses and other recurring. These recurring revenue sources provide us with increased ability to make strategic decisions to invest in our business while remaining confident that our operating results will be more predictable. As we are now more than half-way through our transition to a term licensing model, we have changed our presentation of revenue and associated cost of revenues during the first quarter of 2007 to more clearly show the nature and components of our revenues under a term licensing model and the predominance of revenue from recurring revenue sources. We believe the current presentation more clearly reflects our business as well as the principal underlying factors impacting our long-term growth and predictability. We currently categorize our revenues as follows: “Term license, maintenance and other recurring,” “Perpetual license fees” and “Professional services and other.”

Historically, we have separated term license arrangement fees between license and maintenance revenue. During the first quarter of 2007, we have discontinued this practice, and now report all term license revenues, along with perpetual maintenance and other recurring revenues, in the “Term license, maintenance and other recurring” revenues caption, which represent revenue from all of our recurring sources. Term license, maintenance and other recurring revenues increased to $37.7 million or 79% of total net revenues in the first quarter of 2007, compared to $31.2 million and 71%, respectively, in the same period of 2006.

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The “Perpetual license fees” revenue caption principally includes revenue from:

·Perpetual license sales of Advent products into our existing installed base customers who have not yet converted to term;

·Perpetual license sales for MicroEdge products which are sold on a perpetual model; and

·Asset-based fees from fund administrators who licensed our software on a perpetual license basis.

We recorded stock-based compensation expense of $3.2 million, total amortization expense of $0.8 million, and restructuring charges of $0.6 million in the first quarter of 2007; these expenses totaled $4.6 million (or 10% of total net revenues). We achieved net income of $0.4 million, resulting in diluted earnings per share of $0.02. In addition, we generated operating cash flow of approximately $13.8 million during the first quarter of 2007.

In February 2007, our Board authorized the repurchase of up to an additional 2.25 million shares of outstanding common stock. During the first quarter of 2007, we repurchased 837,000 shares under our Board-authorized share repurchase plans for a total cash outlay of $30.1 million and an average price of $36.00.

Also in February 2007, we and certain of our domestic subsidiaries entered into a senior secured credit facility agreement (the “Facility”) with Wells Fargo Foothill, Inc. (the “Lender”). Under the Facility, we have a revolving line of credit up to an aggregate amount of $75 million, subject to a borrowing base formula, to provide backup liquidity for a period of three years for general corporate purposes, including stock repurchases, or investment opportunities. This Facility provides us with the flexibility to run our business with lower cash balances.

Looking forward, we continue to focus on improving our long-term profitability as we are now more than half-way through our transition to a term licensing model. While recent economic trends have been positive and our customers have been more willing to commit to new software purchases, improving our profitability will depend on our introducing new products, licensing software to new and existing customers, selling services to new and existing customers, and renewing license and maintenance contracts at similar levels to those we achieved during fiscal 2006. The success of our transition to a term license model will also depend on future renewal rates, which we will evaluate as our term license contracts expire. While we will continue our focus on managing costs, we will also continue to invest in areas of the business as we deem appropriate as reflected in our recent investments in new products.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements and related notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.

On an ongoing basis, we evaluate the process we use to develop estimates. We base our estimates on historical experience and on other information that we believe are reasonable for making judgments at the time they are made. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions.

We believe the following accounting policies contain the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

·Goodwill;

·Revenue recognition and deferred revenues;

·Income taxes;

·Stock-based compensation;

·Restructuring charges and related accruals;

·Impairment of long-lived assets;

·Legal contingencies; and

·Sales returns and accounts receivable allowances

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There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2007 as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K/A for the year ended December 31, 2006, except for “Revenue recognition” and “Income taxes”.

Revenue recognition. We recognize revenue from term license, maintenance and other recurring; perpetual license fees, and professional services and other. We offer a wide variety of products and services to a large number of financially sophisticated customers. While many of our lower-priced license transactions, maintenance contracts, subscription-based transactions and professional services projects conform to a standard structure, many of our larger transactions are complex and may require significant review and judgment in our application of generally accepted accounting principles.

Software licenses. We recognize revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is reasonably assured. We generally use a signed license agreement as evidence of an arrangement. Sales through our distributors are evidenced by a master agreement governing the relationship together with binding order forms and signed contracts from the distributor’s customers. Revenue is recognized once shipment to the distributor’s customer has taken place and when all other revenue recognition criteria have been met. Delivery occurs when a product is delivered to a common carrier F.O.B shipping point. Some of our arrangements include acceptance provisions, and if such acceptance provisions are present, delivery is deemed to occur upon acceptance. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. We assess whether the collectibility of the resulting receivable is reasonably assured based on a number of factors, including the credit worthiness of the customer determined through review of credit reports, our transaction history with the customer, other available information and pertinent country risk if the customer is located outside the United States. Our standard payment terms are due at 180 days or less, but payment terms may vary based on the country in which the agreement is executed. Software licenses are sold with maintenance and, frequently, professional services.

Licenses.  We typically license our products on a per server, per user basis with the price per customer varying based on the selection of the products licensed, the number of site installations and the number of authorized users. We have continued our transition from selling mostly perpetual licenses to selling a mix of term and perpetual licenses, and we expect term license revenue to increase as a proportion of total recurring revenues (which we define as term license, maintenance and other recurring revenues) in the future. Term license revenue comprised approximately 19% and 8% of term license, maintenance and other recurring revenues during the first quarter of 2007 and 2006, respectively. Revenue recognition for software licensed under term and perpetual license models differs depending on which type of contract a customer signs:

·Term licenses

Term license contract prices include fees for both the software license and maintenance. We offer multi-year term licenses by which a customer makes a binding commitment that typically spans three years. For multi-year term licenses, we have not established VSOE of fair value for the term license and maintenance components and, as a result, in situations where we are also performing related professional services, we defer all revenue and directly related expenses under the arrangement until the professional services are substantially complete. At the point professional services are substantially completed, we recognize a pro-rata amount of the term license and maintenance 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 and maintenance revenue for the remaining contract years and the remaining deferred professional services revenue and related expenses are recognized ratably over the remaining contract length. When multi-year term licenses are sold and do not include related professional services, we recognize the entire term license and maintenance revenue ratably over the period of the contract term from the effective date of the license agreement assuming all other revenue recognition criteria have been met. Revenues from term licenses are included in “Term license, maintenance and other recurring” revenues on the condensed consolidated statement of operations.

·Perpetual licenses

We allocate revenue to delivered components, normally the license component of the arrangement, using the residual method, based on vendor specific objective evidence, or VSOE, of fair value of the undelivered elements (generally the maintenance and professional services components), which is specific to us. We determine the fair value of the undelivered elements based on the historical evidence of the Company’s stand-alone sales of these elements to third parties. If VSOE of fair value does not exist for any undelivered elements, then the entire arrangement fee is deferred until delivery of that element has occurred. Revenues from perpetual licenses are included in “Perpetual license fees” revenue on the condensed consolidated statement of operations.

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Certain of our perpetual and term license contracts include asset-based fee structures that provide additional revenues based on the assets that the client manages using our software (“Assets Under Administration” or “AUA”).  Contracts containing an AUA fee structure have a defined measurement period which requires the client to self report actual AUA in arrears of the specified period. AUA fees above the stated minimum fee for the same period are considered incremental fees. Because incremental fees are not determinable until the conclusion of the measurement period, they are both earned and recognized in arrears, on a quarterly or annual basis. Incremental fees from perpetual AUA contracts are included in “Perpetual license fees” on the condensed consolidated statement of operations.  Incremental fees from term AUA contracts are included in “Term license, maintenance and other recurring revenue” revenue on the condensed consolidated statement of operations.

For certain term AUA contracts signed in 2006, which will be entering the second year of the arrangement in 2007, we began accruing the minimum AUA component of the fees in the applicable period during the first quarter of 2007 rather than in arrears as was the treatment for earlier contracts. We have gained more experience in working with these types of arrangements and are able to conclude that the minimum fees are fixed and determinable. The change in the first quarter of 2007 to our revenue recognition practice to start to accrue for minimum fees is based on an affirmative experience with all existing AUA-based arrangements where our historical experience has shown that we have received the AUA report, invoiced the client for both the minimum and incremental amounts, and received payment in all of the cases.  Therefore, beginning in the first quarter of 2007, we will recognize AUA contract minimum fees in the period to which they are applicable, whereas we will continue recognizing incremental fees in arrears once our clients contractually report them to us, because the incremental fees are not determinable until reported. The impact of this change for the first quarter of 2007 was an increase to term license revenue of approximately $25,000.

For existing term license arrangements signed prior to 2006 which are in their second or third year where we had previously begun billing in arrears of the measurement period, we will continue to recognize revenue for the minimum (and incremental) value of the AUA fees upon receipt of the customer’s AUA report.

Maintenance and other recurring revenues. We offer annual maintenance programs on perpetual licenses that provide for technical support and updates to our software products. Maintenance fees are bundled with perpetual license fees in the initial licensing year and charged separately for renewals of annual maintenance in subsequent years. Fair value for maintenance is based upon renewal rates stated in the perpetual license contracts or, in limited cases, separate sales of renewals to customers. Generally, we recognize maintenance revenue ratably over the contract term.

We offer other recurring revenue services that are either subscription-based or transaction-based, and primarily include the provision of software interfaces to, and the capability to download securities information from, third party data providers. We recognize revenue from recurring revenue transactions either ratably over the subscription period or as the transactions occur.

Maintenance and other recurring revenues are included in the caption “Term license, maintenance and other recurring” revenues on the consolidated statement of operations.

Professional services and other revenues. We offer a variety of professional services that include project management, implementation, data conversion, integration, custom report writing and training. We base fair value for professional services upon separate sales of these services to customers. Our professional services are generally billed based on hourly rates together with reimbursement for travel and accommodation expenses. We recognize revenue as professional services are performed, except in the case of multi-year term license contracts which are described in the “term licenses” section above. Certain professional services arrangements involve acceptance criteria and in these cases, revenue and related expenses are recognized upon acceptance. Professional services and other revenues also include revenue from our user conferences.

Income taxes. We account for worldwide income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities be recognized as deferred tax assets and liabilities. Significant judgment is required to determine our worldwide income tax provision.  In the ordinary course of business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Many of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that have differing or preferential tax treatment and segregation of foreign and domestic income and expense to the appropriate taxing jurisdictions to reasonably allocate earnings. Although we believe that our judgments and estimates are reasonable, the final outcome could be different from that which is reflected in our income tax provision and accruals.

A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in the

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jurisdiction where the tax asset is located. We consider forecasted earnings, future taxable income and prudent and reasonable tax planning strategies in determining the need for a valuation allowance.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year.  Adjustments based on filed returns are generally recorded in the period when the return is filed and the tax implication is known.

We recognize interest and penalties accrued on unrecognized tax benefits as well as interest received form favorable settlements within “Provision for (benefit from) income taxes” on the condensed consolidated statement of operations. We are subject to audits by state, federal and foreign tax authorities. Our estimates for the potential outcome of any uncertain tax matter are judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters.  However, our future results may include adjustments to our estimated tax liabilities.

Recent Accounting Pronouncements

No recent accounting pronouncements have been issued which would currently have a material effect on our condensed consolidated financial position, results of operations, or cash flows.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

The following table sets forth, for the periods indicated, certain financial information as a percentage of total 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
	2007		2006
Net revenues:
Term license, maintenance and other recurring	79	%	71	%
Perpetual license fees	12		19
Professional services and other	9		10
Total net revenues	100		100
Cost of revenues:
Term license, maintenance and other recurring	19		18
Perpetual license fees	0		1
Professional services and other	12		11
Amortization of developed technology	1		1
Total cost of revenues	32		31
Gross margin	68		69
Operating expenses:
Sales and marketing	27		28
Product development	21		18
General and administrative	18		18
Amortization of other intangibles	1		2
Restructuring charges	1		0
Total operating expenses	68		67
Income (loss) from operations	(0	)	2
Interest income and other expense, net	1		3
Income before income taxes	1		5
Provision from (benefit from) income taxes	0		(2	)
Net income	1	%	8	%

NET REVENUES

	Three Months Ended March 31
	2007		2006		Change
Total net revenues (in thousands)	$	47,979	$	43,656	$	4,323

Our net revenues are made up of three components: term license, maintenance and other recurring; perpetual license fees; and, professional services and other.

Historically, our components of revenue varied as a percentage of net revenues due principally to the relative size and timing of individual perpetual software licenses and the timing of new product introductions. In addition, the size of client implementations, the resulting proportion of the maintenance and professional services components of license transactions and the amount of client use of pricing and related data can impact variability. We are now more than halfway through our transition to a term licensing model, and we expect that in 2007 and beyond, over 80% of our net revenues will come from our recurring revenue sources and that perpetual license fees will decrease as a percentage of net revenues. As we substantially complete our transition to term licensing in fiscal 2009, we expect less variability between our major categories of revenues because the variation from large perpetual license deals will decrease.

We expect total net revenues for the second quarter of 2007 to be between $49 million and $51 million.

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Term License, Maintenance and Other Recurring Revenues

	Three Months Ended March 31
(in thousands, except percent of total net revenues)	2007			2006			Change
Term license revenues	$	7,012		$	2,468		$	4,544
Maintenance revenues	20,504			19,424			1,080
Other recurring revenues	10,208			9,279			929
Total term license, maintenance and other recurring revenues	$	37,724		$	31,171		$	6,553
Percent of total net revenues	79		%	71		%

Term license revenues, which includes software license and maintenance fees, increased $4.5 million or 184% during the first quarter of 2007 compared to the same quarter in 2006, and represented 19% of total term license, maintenance and other recurring revenues as compared to 8% in the first quarter of 2006. As we sell more products on a term license model, we defer a greater portion of license revenue over the term of the contract, instead of recognizing the license revenue up front as with perpetual licenses. In addition, in multi-year term licenses where we perform professional services, we defer all revenue and directly related expenses until the professional services are complete. The net effect, assuming most customers renew their contracts upon expiration of the initial term, is to build a long-term recurring revenue stream and also enhance predictability. We continue to sign more contracts on a term basis as term license bookings were $9.8 million in the first quarter of 2007 compared to $7.9 million in the same period of 2006.

Maintenance revenues increased $1.1 million or 6% during the first quarter of 2007 compared to the same quarter of 2006, reflecting the impact of price increases on annual perpetual maintenance renewals purchased by our installed customer base and, to a lesser extent, an increase in new perpetual maintenance support contracts, partially offset by maintenance de-activations and downgrades. We disclose our maintenance renewal rate one quarter in arrears in order to include substantially all payments received against the maintenance invoices for that quarter. Our maintenance renewal rate has been in the range of 88% to 92% over the past five quarters and was 92% for the fourth quarter of 2006.

Other recurring revenues increased $0.9 million or 10% during the first quarter of 2007, as a result of an increase in the amount of revenue we receive from transaction charges generated by a partner using our software, as well as growth in our subscription and data management revenue streams, especially Advent Custodial Data (ACD).

We expect that term license, maintenance and other recurring revenues will increase in the second quarter of 2007 compared to the first quarter as we anticipate additional term license revenue as we continue to layer revenue into our term license model, and higher maintenance revenues from a higher volume of contracts and expected price increases.

Perpetual License Fees

	Three Months Ended March 31
	2007			2006			Change
Perpetual license fees (in thousands)	$	5,927		$	8,159		$	(2,232	)
Percent of total net revenues	12		%	19		%

Although we believe the overall economic outlook and conditions within the financial services industry remained positive in the first quarter of 2007, which resulted in continuing capital expenditures by our customers, the transition of our core products to a term pricing model has resulted in a decrease in perpetual license fees to $5.9 million in the first quarter of 2007, compared to $8.2 million in the same quarter of 2006. Incremental AUA fees from perpetual licenses included in the “Perpetual license fees” caption were $1.8 million in the first quarter of 2007 and were flat with the same quarter of 2006.

We expect perpetual license fees in the second quarter to be approximately flat compared to the first quarter.

Professional Services and Other Revenues

	Three Months Ended March 31
	2007			2006			Change
Professional services and other revenues (in thousands)	$	4,328		$	4,326		$	2
Percent of total net revenues	9		%	10		%

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Professional services and other revenues primarily include consulting, project management, custom integration, custom work, and training. 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 a four- to nine-month implementation period.

In the first quarter of 2007, increases in our general consulting and project management revenues associated with Advent Office and Geneva implementations were offset by the net deferral of professional services revenue for services performed on term license implementations. When services are performed with term license implementations, service revenue is deferred until the implementation is complete. Then service revenues are recognized over the remaining license term. We have experienced an increase in implementation services after the launch of our APX product and the sales success of our Geneva product, which are sold under a term license model. There were more term license implementation projects in progress at March 31, 2007 compared with March 31, 2006, and as a result there was a significant increase in the deferral of professional services revenue. We deferred net professional services revenue of approximately $2.1 million in the first quarter of 2007 as compared to $1.4 million in the same period of 2006. We expect that revenues from professional services and other will be flat to slightly up in the second quarter of 2007 relative to the first quarter as we expect to recognize revenue from  service implementation projects for term licenses that commenced in 2006 deals which we will complete during the second quarter of 2007.

Revenues by Segment

	Three Months Ended March 31
(in thousands)	2007		2006		Change
Advent Investment Management	$	42,555	$	38,593	$	3,962
MicroEdge	5,424		4,852		572
Other	—		211		(211		)
Total net revenues	$	47,979	$	43,656	$	4,323

We have two reportable segments: Advent Investment Management (“AIM”) and MicroEdge. AIM derives revenues from the development, marketing and sale of software products, data interfaces and related maintenance and services that automate, integrate and support certain mission critical functions of investment management organizations. MicroEdge derives revenues from the sale of software and services for grant management, matching gifts and volunteer tracking for the grant-making community.

The 10% increase in AIM’s revenue in the three months ended March 31, 2007 primarily reflects generally healthy economic conditions and growth in financial markets, as well as the continued focus on selling our Axys, APX, Moxy, Partner and Geneva products. AIM’s revenue increase during the first quarter of 2007 also reflected an increase in new maintenance support contracts as a result of new license deals and price increases for maintenance contracts from our installed customer base, partially offset by attrition from within our existing installed customer base.

The technology spending patterns of organizations in MicroEdge’s primary markets (independent foundations, community foundations and corporations) are directly affected by economic fluctuations as foundation budgets are largely driven by endowment income which often contains market-exposed components. Foundation spending typically decreases in an economic downturn. Community foundations are subject to similar influences, compounded by the fact that in many cases much of their ongoing funding and endowment comes from active donors who may increase or reduce their giving depending on the economic climate and the related effect on their income and wealth. Corporations typically fund charitable activities from operating budgets, and the allocation to charitable donations and supporting company charitable operations is often closely tied to a company’s performance. Thus, corporate philanthropy and spending on related technology are correlated with company and overall economic performance.

The 12% increase in MicroEdge revenue in the first quarter of 2007 reflects the generally healthy economic conditions and general trend of increased charitable contributions that has persisted for the past few years. This increase in charitable contributions received by the foundations sector has enabled foundations to increase their information technology expenditures which resulted in the increase in MicroEdge revenue in the first quarter of 2007.

The revenue decrease in our “Other” segment resulted from the winding down of the soft dollar component of our broker/dealer subsidiary in fiscal 2006.

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COST OF REVENUES

	Three Months Ended March 31
	2007			2006			Change
Total cost of revenues (in thousands)	$	15,464		$	13,464		$	2,000
Percent of total net revenues	32		%	31		%

Our cost of revenues is made up of four components: cost of term license, maintenance and other recurring; cost of perpetual license fees; cost of professional services and other; and amortization of developed technology.

Cost of Term License, Maintenance and Other Recurring

	Three Months Ended March 31
	2007			2006			Change
Cost of term license, maintenance and other recurring (in thousands)	$	9,032		$	7,917		$	1,115
Percent of total term license, maintenance and recurring revenue	24		%	25		%

Cost of term license fees consists primarily of royalties and other fees paid to third parties, the fixed direct labor involved in producing and distributing our software, and cost of product media including duplication, manuals and packaging materials. Cost of maintenance and other recurring revenues is primarily comprised of the direct costs of providing technical support and other services for recurring revenues and royalties paid to third party subscription-based and transaction-based vendors. The increase in dollar amount in the first quarter of 2007 was primarily due to an increase in compensation and related costs including bonuses and fringe benefits of $1.2 million as a result of an increase in headcount. This increase in headcount enables us to improve the services we provide to our clients in their day-to-day use of our software.

We expect cost of term license, maintenance and other recurring revenue in the second quarter of 2007 to increase slightly in dollar amount as compared to the first quarter due to higher payroll expenses from annual merit increases and the continued hiring of personnel to provide technical support to our growing installed base of customers.

Cost of Perpetual License Fees

	Three Months Ended March 31
	2007			2006			Change
Cost of perpetual license fees (in thousands)	$	195		$	229		$	(34	)
Percent of total perpetual license revenues	3		%	3		%

Cost of perpetual license fees consists primarily of royalties and other fees paid to third parties, the fixed direct labor involved in producing and distributing our software, and cost of product media including duplication, manuals and packaging materials. The cost of perpetual license fees has remained consistent with the same period in the prior fiscal year. We expect cost of perpetual license fees to be flat in the second quarter of 2007.

Cost of Professional Services and Other

	Three Months Ended March 31
	2007			2006			Change
Cost of professional services and other (in thousands)	$	5,873		$	4,924		$	949
Percent of total professional services and other revenues	136		%	114		%

Cost of professional services and other revenue consists primarily of personnel related costs associated with the client services organization in providing consulting, custom report writing and conversions of data from clients’ previous systems. Also included are direct costs associated with third-party consultants and travel expenses. The increase in the first quarter of 2007 reflects increases in payroll related expenses of $0.6 million as a result of the increase in headcount to address the general increase in demand for consulting and training services demanded as a result of higher license sales. Consistent with the increase in headcount, recruiting costs increased by $264,000 during the first quarter of 2007. In addition, travel expenses increased by $130,000 during the three months ended March 31, 2007 due to travel associated with more service projects.

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These cost increases were partially offset by larger net deferrals of professional services costs under SOP 97-2 related to services performed on term license implementations. We have experienced an increase in implementation services with the launch of our APX product and sales of our Geneva product, which are principally sold under the term license model. As there were more term license implementation projects in progress as of March 31, 2007 compared to March 31, 2006, we have experienced an increase in the deferral of professional service costs. We deferred net professional service costs of $0.8 million during the three months ended March 31, 2007, compared to $0.5 million in the same period of 2006.

Gross margins for the first quarter of 2007 were reduced by the larger deferral of professional services revenues and costs under SOP 97-2, as we defer only the direct costs associated with services performed on term license arrangements. As a result, 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. In addition, we have added headcount in our consulting group. Since these new employees undergo a training period typically of six months before becoming fully billable, their associated costs have a near-term negative impact on gross margins.

We expect cost of professional services and other in the second quarter of 2007 to increase as compared to the first quarter due to higher payroll expenses from annual merit increases and the continued hiring of consultants to support product implementations.

Amortization of Developed Technology

	Three Months Ended March 31
	2007			2006			Change
Amortization of developed techology (in thousands)	$	364		$	394		$	(30	)
Percent of total net revenues	1		%	1		%

Amortization of developed technology represents amortization of acquisition-related intangible assets and internal product development costs.  The decrease in amortization of developed technology reflected technology related intangible assets from prior acquisitions becoming fully amortized during fiscal 2006. We expect amortization of developed technology to be slightly lower in the second quarter of 2007 as compared to the first quarter.

OPERATING EXPENSES

Sales and Marketing

	Three Months Ended March 31
	2007			2006			Change
Sales and marketing (in thousands)	$	12,889		$	12,142		$	747
Percent of total net revenues	27		%	28		%

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. The increase in expenses in the first quarter of 2007 was primarily due to increases in payroll and other related costs of $917,000 as a result of an increase in headcount to 169 at March 31, 2007 from 148 at March 31, 2006. This was partially offset by a decrease in broker fees of approximately $384,000 during the first quarter of 2007, associated with the winding down of our soft dollar business in fiscal 2006. We expect sales and marketing expenses to be up slightly in the second quarter of 2007 relative to the first quarter due to increased marketing spending, and payroll costs from additional headcount and annual merit increases.

Product Development

	Three Months Ended March 31
	2007			2006			Change
Product development (in thousands)	$	9,856		$	7,935		$	1,921
Percent of total net revenues	21		%	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. We account for product development costs in accordance with SFAS 2, “Accounting for Research and Development Costs”, and SFAS 86, “Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”, which specifies that costs incurred to develop computer software products should be charged to expense as incurred until technological feasibility is reached for the products. Once technological feasibility is reached, all software costs should be

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capitalized until the product is made available for general release to customers. The capitalized costs will be amortized using the greater of the ratio of the product’s current gross revenues to the total of current expected gross revenues or on a straight-line basis over the software’s estimated economic life of approximately three years.

The increase in product development expense during the first quarter of 2007 was primarily due to increases in payroll and other related costs of $2.0 million, as a result of an increase in headcount to help us meet our expanded new product delivery schedules for fiscal 2007 and less capitalization of product development costs in the first quarter of 2007. We capitalized zero costs related to product development during the first quarter of 2007 as we had no products in their final beta stage, compared to $0.9 million in the first quarter of 2006. We expect product development expenses to be down slightly in the second quarter of 2007 as compared to the first quarter due to increased amounts capitalized under SFAS 86, partially offset by higher payroll expenses from annual merit increases.

General and Administrative

	Three Months Ended March 31
	2007			2006			Change
General and administrative (in thousands)	$	8,784		$	7,946		$	838
Percent of total net revenues	18		%	18		%

General and administrative expenses consist primarily of personnel costs for finance, administration, operations and general management, as well as legal and accounting expenses. The increase in expenses in the first quarter of 2007 is primarily due to the increase in payroll and other related costs of $1.3 million as a result of an increase in headcount, as well as increased business taxes of $0.4 million. This increase was offset by a decrease in rent and building related expense of $0.8 million for the three months ending March 31, 2007 as we are no longer incurring rent and facility expenses related to our prior San Francisco headquarters facility located at 301 Brannan Street, which we exited in October 2006. We entered into a definitive lease agreement in January 2006 for our new headquarters facility located at 600 Townsend Street in San Francisco, California resulting in rent expense at both 600 Townsend and our prior headquarters facility causing higher rent expense for the first quarter of 2006. We expect general and administrative expenses to be down slightly in the second quarter of 2007 due to lower audit fees and business and payroll taxes as compared to the first quarter, partially offset by higher payroll expenses from annual merit increases.

Amortization of Other Intangibles

	Three Months Ended March 31
	2007			2006			Change
Amortization of other intangibles (in thousands)	$	474		$	979		$	(505	)
Percent of total net revenues	1		%	2		%

Amortization of other intangibles represents amortization of non-technology related intangible assets. The decrease in amortization of other intangibles in the first quarter of 2007 was attributed to assets becoming fully amortized during fiscal 2006. We expect amortization of other intangibles to be slightly lower in the second quarter of 2007 as compared to the first quarter.

Restructuring Charges

	Three Months Ended March 31
	2007			2006			Change
Restructuring charges (in thousands)	$	562		$	141		$	421
Percent of total net revenues	1		%	0		%

Restructuring initiatives have been implemented in our AIM operating segment to reduce costs and improve operating efficiencies by better aligning our resources to near-term revenue opportunities. These initiatives have resulted in restructuring charges comprised primarily of costs related to properties abandoned in connection with facilities consolidation, related write-down of leasehold improvements and severance and associated employee termination costs related to headcount reductions. Our restructuring charges included accruals for estimated losses on facility costs based on our contractual obligations net of estimated sublease income. We reassess this liability periodically based on market conditions.

During the first quarter of 2007, we recorded a restructuring charge of $562,000 due to the update of certain sub-lease assumptions for our prior San Francisco headquarters facility located at 301 Brannan Street, which the Company exited in

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October 2006. During the first quarter of 2006, we recorded a net restructuring charge of $141,000 primarily to adjust original estimates for facilities in San Francisco, California and New York, New York.

The following table sets forth an analysis of the components of the payments and restructuring charges made against the accrual during the first quarter of 2007 (in thousands):

	Facility Exit			Severance &
	Costs			Benefits		Total
Balance of restructuring accrual at December 31, 2006	$	6,587		$	4	$	6,591
Restructuring charges	476			—		476
Cash payments	(909		)	—		(909		)
Accretion adjustment	86			—		86
Balance of restructuring accrual at March 31, 2007	$	6,240		$	4	$	6,244

Operating Income (Loss) by Segment

	Three Months Ended March 31
(in thousands)	2007			2006			Change
Advent Investment Management	$	2,860		$	5,113		$	(2,253	)
MicroEdge	1,174			951			223
Other	—			(468		)	468
Unallocated corporate operating costs and expenses
Stock-based employee compensation	(3,246		)	(3,174		)	(72		)
Amortization of developed technology	(364		)	(394		)	30
Amortization of other intangibles	(474		)	(979		)	505
Total operating income (loss)	$	(50	)	$	1,049		$	(1,099	)

Operating income for the AIM segment decreased by approximately $2.3 million in the first quarter of 2007 compared with the first quarter of 2006 primarily as a result of an increase in total expenses of $6.2 million during the first quarter of 2007. The increase is primarily due to payroll and other related costs from higher headcount of 753 employees at March 31, 2007 from 660 at March 31, 2006, as the AIM segment has added personnel primarily in the client support, product development, professional services and sales and marketing groups. This increase in AIM’s expenses was partially offset by AIM’s revenue growth of $4.0 million during the first quarter of 2007.

MicroEdge’s operating income increased by $223,000 from the first quarter of 2006 primarily due to an increase in revenues of $572,000, partially offset by an increase in total costs of $348,000. Operating loss for our “Other” segment was $468,000 for the first quarter of 2006 compared to zero in the first quarter of 2007, as we completed the wind down of the soft dollar component of our broker/dealer in 2006.

Interest Income and Other Expense, Net

	Three Months Ended March 31
	2007			2006			Change
Interest income and other expense, net (in thousands)	$	518		$	1,346		$	(828	)
Percent of total net revenues	1		%	3		%

Interest income and other, net consists of interest income, realized gains and losses on investments and foreign currency gains and losses. Interest income was $0.5 million during the three months ended March 31, 2007 compared to $1.4 million in the same quarter of 2006. This decrease was a result of our lower cash balance during the first quarter of 2007, as we liquidated part of our portfolio to fund our significant stock repurchases in fiscal 2006 and the first quarter of 2007.

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Provision for (Benefit from) Income Taxes

	Three Months Ended March 31
	2007			2006			Change
Provision for (benefit from) income taxes (in thousands)	$	29		$	(1,007	)	$	1,036
Effective tax rate	6		%	-42		%

During the three months ended March 31, 2007, we recorded a provision of $29,000. This provision reflects a projected fiscal 2007 effective tax rate of 45.5%, less the discrete tax benefit generated in the first quarter of 2007 for disqualifying dispositions of incentive stock options and employee stock purchase plan shares whose associated stock-based employee compensation expense under FAS 123R has been expensed. The fiscal 2007 effective tax rate exceeds the statutory rate primarily as a result of non-deductible stock-based employee compensation relating to incentive stock options and the Company’s employee stock purchase plan, partially offset by the benefit from federal and California research credits.  During the three months ended March 31, 2006, we continued to carry a full valuation allowance against our deferred tax assets which resulted in a tax provision (benefit) primarily based on current income tax expense. The benefit from income taxes of $1.0 million for the three months ended March 31, 2006 primarily reflects the receipt of a state income tax refund of $0.5 million and a reduction in other projected tax liabilities associated with the expiration of federal income tax return contingency of approximately $0.6 million slightly offset by federal alternative minimum tax and various state obligations.

LIQUIDITY AND CAPITAL RESOURCES

Our aggregate cash, cash equivalents and marketable securities were $43.0 million at March 31, 2007, compared with $55.1 million at December 31, 2006. Cash equivalents are comprised of highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase.

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

	Three Months Ended March 31
	2007			2006
Net cash provided by operating activities	$	13,797		$	9,260
Net cash provided by (used in) investing activities	$	21,279		$	(9,474	)
Net cash used in financing activities	$	(22,314	)	$	(31,153	)

Cash Flows from Operating Activities

Our cash flows from operating activities 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) and cost of revenues. Our cash provided by operating activities generally follows the trend in our net revenues, operating results and the increase in deferred revenues resulting from term license bookings.

 Our cash provided by operating activities of $13.8 million during the three months ended March 31, 2007 was primarily the result of our net income and non-cash charges including stock-based compensation and depreciation and amortization during the quarter. Cash flows resulting from changes in assets and liabilities included decreases in accounts receivable and increases in deferred revenue. The decrease in accounts receivable primarily reflected improved collections during the quarter. Days’ sales outstanding decreased to 67 days during the first quarter of 2007 from 75 days in the fourth quarter of 2006. The increase in deferred revenue primarily reflected our continued transition to the term license model. Under the term model, we generally bill and collect for a term agreement in equal installments in advance of each annual period. These amounts are deferred at billing and recognized over the annual term period. This has the effect of increasing deferred revenue when compared to a perpetual license model where no license revenue is deferred. See further discussion of the effects of our transition to a term model in the “Overview” section. Other changes in assets and liabilities included an increase in our prepaid and other assets and decreases in accounts payable and accrued liabilities. The decreases in accounts payable and accrued liabilities reflected cash payments of fiscal 2006 liabilities including year-end payables and bonuses, commissions and payroll taxes.

Our cash provided by operating activities of $9.3 million during the three months ended March 31, 2006 was primarily the result of our net income and non-cash charges including stock-based compensation and depreciation and amortization during the quarter. Other sources of cash during the first quarter of 2006 included decreases in accounts receivable and increases in deferred rent and deferred revenue. The decrease in accounts receivable primarily reflected improved collections during the

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quarter. Days’ sales outstanding decreased to 64 days for the first quarter of 2006 from 68 days in the fourth quarter of 2005. The increase in deferred rent resulted from the entry into a definitive lease agreement on January 6, 2006 for our future headquarters facilities located at 600 Townsend Street in San Francisco, California. The increase in deferred revenue primarily reflected our continued transition to the term license model. Uses of our operating cash included an increase in our prepaid and other assets and decreases in accounts payable, accrued liabilities and income taxes payable. The increase in prepaid and other assets primarily reflected a receivable established for the tenant improvement allowance associated with our 600 Townsend lease agreement, which was slightly reduced by cash payments by the lessor during the quarter. The decreases in accounts payable and accrued liabilities reflected cash payments of fiscal 2005 liabilities including year-end payables and bonuses, commissions, payroll taxes, settlement of claims of certain former members and employees of Advent Outsource Data Management, and legal costs associated with the discovery phase of the Kinexus earnout litigation. The decrease in income taxes payable during the first quarter of 2006 reflected cash payments related to state income taxes and reductions in other projected tax liabilities.

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors including fluctuations in our net revenues and operating results, amount of revenue deferred, collection of accounts receivable, and timing of payments.

Cash Flows from Investing Activities

Net cash provided by investing activities of $21.3 million for the first quarter of 2007 is primarily from the sale of short term investments of $24.9 million, partially offset by capital expenditures of $2.6 million and an installment payment totaling $1.0 million related to the acquisition of East Circle Solutions, Inc.

Net cash used in investing activities of $9.5 million for the first quarter of 2006 consisted primarily of net purchases of marketable securities of $4.5 million, capital expenditures of $3.0 million, increase in restricted cash of $1.2 million to secure a bank line of credit for our corporate headquarters facility, and capitalized software development costs of $0.8 million.

Cash Flows from Financing Activities

Net cash used in financing activities for the first quarter of 2007 of $22.3 million reflected the repurchase of 0.8 million shares of our common stock for $30.1 million, partially offset by proceeds received from the exercise of stock options of $7.8 million. Net cash used in financing activities for the first quarter of 2006 of $31.2 million reflected the repurchase of 1.2 million shares of our common stock for $33.7 million, partially offset by proceeds received from the exercise of stock options of $2.6 million.

Our liquidity and capital resources in any period could be affected by the exercise of outstanding stock options 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 other outstanding equity awards (RSUs and SARs) could also affect our per share results of operations. However, we cannot predict the timing or amount of proceeds from the exercise of stock options or SARs, or whether they will be exercised at all. Furthermore, we may continue our stock repurchase activity under the share repurchase programs approved by our Board. As of March 31, 2007, approximately 1.7 million shares were available to be repurchased under the share repurchase plan that was approved by the Board and publicly announced in February 2007.

At March 31, 2007, we had negative working capital of $18.0 million, compared to negative working capital of $0.3 million at December 31, 2006. Our negative working capital is primarily due to our common stock repurchases, totaling $148.6 million during fiscal 2006 and $30.1 million during the first quarter of 2007, and to a lesser extent deferred revenue growth.

We currently have no significant capital commitments other than commitments under our operating leases, which increased from $49.0 million at December 31, 2006 to $52.2 million at March 31, 2007 primarily as a result from expanding the rentable square footage at our corporate headquarters facility located at 600 Townsend Street in San Francisco, California during the first quarter of 2007.

The following table summarizes our contractual cash obligations as of March 31, 2007 (in thousands):

	Nine
	Months Ended
	December 31		Years Ended December 31
	2007		2008		2009		2010		2011		Thereafter		Total
Operating lease obligations, net of sub-lease income	$	4,750	$	7,518	$	5,752	$	5,261	$	4,755	$	24,169	$	52,205

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At March 31, 2007 and December 31, 2006, 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.

In February 2007, we and certain of our domestic subsidiaries entered into a senior secured credit facility agreement (the “Facility”) with Wells Fargo Foothill, Inc. (the “Lender”). Under the Facility, the Lender will provide the Company with a revolving line of credit up to an aggregate amount of $75 million, subject to a borrowing base formula, to provide backup liquidity for general corporate purposes, including stock repurchases, or investment opportunities for a period of three years.

We expect that for the next year, our operating expenses and common stock repurchases will continue to constitute a significant use of cash flow. In addition, we may use cash to fund acquisitions or invest in other businesses, when opportunities arise. Based upon our past performance and current expectations, we believe that our cash and cash equivalents, marketable securities, cash generated from operations and availability under our Facility will be sufficient to satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases and financing activities for the next year.

Off-Balance Sheet Arrangements and Contractual Obligations

Our off-balance sheet arrangements as of March 31, 2007 consist of obligations under operating leases. See Note 11, “Commitments and Contingencies” to the condensed consolidated financial statements and the “Liquidity and Capital Resources” section above for further discussion and a tabular presentation of our contractual obligations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Historically, much of our revenues and capital spending was transacted in U.S. dollars. However, since the acquisitions of Advent Denmark, Advent Norway, Advent Sweden, Advent Netherlands, and Advent Europe’s remaining distributors in the United Kingdom and Switzerland, whose service and certain license revenues and capital spending, are transacted in local country currencies, we have greater exposure to foreign currency fluctuations. Additionally as of March 31, 2007, $39.6 million of goodwill and $0.9 million of other intangibles from the acquisition of these entities is denominated in foreign currency. Therefore a hypothetical weakening (strengthening) of the U.S. dollar of 10% relative to certain European currencies could increase (decrease) our assets and equity by approximately $4 million. We do not believe that a hypothetical 10% change in foreign currency exchange rates would have a material adverse effect on our condensed consolidated results of operations or cash flows.

Historically, our interest rate risk related primarily to our investment portfolio, which consisted of $20.2 million in cash equivalents and $24.9 million in marketable securities as of December 31, 2006 and $35.3 million in cash equivalents and zero in marketable securities as of March 31, 2007. An immediate sharp increase in interest rates could have a material adverse effect on the fair value of our investment portfolio. Conversely, immediate sharp declines in interest rates could seriously harm interest earnings of our investment portfolio. We do not currently use derivative financial instruments in our investment portfolio, nor hedge for these interest rate exposures.

By policy, we limit our exposure to longer-term investments, and the majority of our investment portfolio at December 31, 2006 had interest rate maturities of less than one year. As a result of the relatively short duration of our portfolio, an immediate hypothetical parallel shift to the yield curve of plus 25 basis points (“BPS”), 50 BPS and 100 BPS would result in a reduction of 0.11% ($51,000), 0.23% ($103,000) and 0.46% ($205,000), respectively, in the market value of our investment portfolio as of December 31, 2006. During the first quarter of 2007, we liquidated our investment portfolio to fund our stock repurchase program resulting in a zero balance as of March 31, 2007.

Effective February 2007, we also have interest rate risk relating to debt under our line of credit facility which is indexed to LIBOR or a Wells Fargo prime rate. However, as of March 31, 2007, we essentially have no exposure for market risk for changes in interest rates associated with our Facility, as we have yet to make any draw-downs.

We have also invested in several privately-held companies. These non-marketable investments are classified as other assets on our consolidated balance sheets. Our investments in privately-held companies could be affected by an adverse movement in the financial markets for publicly-traded equity securities, although the impact cannot be directly quantified. These investments are inherently risky as the market for the technologies or products these privately-held companies have under development are typically in the early stages and may never materialize. It is our policy to review investments in

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privately held companies on a regular basis to evaluate the carrying amount and economic viability of these companies. This policy includes, but is not limited to, reviewing each of the companies cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. The evaluation process is based on information that we request from these privately held companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to timing and the accuracy of the data received from these companies.

Our investments in privately held companies are assessed for impairment when a review of the investee’s operations indicates that a decline in value of the investment is other than temporary. Such indicators include, but are not limited to, limited capital resources, limited prospects of receiving additional financing, and prospects for liquidity of the related securities. Impaired investments in privately held companies are written down to estimated fair value. We estimate fair value using a variety of valuation methodologies. Such methodologies include comparing the private company with publicly traded companies in similar lines of business, applying revenue multiples to estimated future operating results for the private company and estimating discounted cash flows for that company. We could lose our entire investment in these companies. At March 31, 2007, our net investments in privately-held companies totaled $8.5 million, which was principally comprised of our investment in LatentZero Limited (“LatentZero”). In April 2007, we sold our investment in LatentZero. See Note 16, “Subsequent Event”, to our condensed consolidated financial statements for further discussion.

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(f) 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 March 31, 2007 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 our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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(e) of the Exchange Act that occurred during the first quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, Advent’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on the Company’s financial position or results of operations. However, litigation is subject to inherent uncertainties and our view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.

On March 8, 2005, certain of the former shareholders of Kinexus and the shareholders’ representative filed suit against Advent in the Delaware Chancery Court. The complaint alleges that Advent breached the Agreement and Plan of Merger dated as of December 31, 2001 pursuant to which Advent acquired all of the outstanding shares of Kinexus due principally to the fact that no amount was paid by Advent on an earn-out of up to $115 million. The earn-out, which was payable in cash or stock at the election of Advent, was based upon Kinexus meeting certain revenue targets in both 2002 and 2003. The complaint seeks unspecified compensatory damages, an accounting and restitution for unjust enrichment. Advent advised the shareholders’ representative in January 2003 that the earn-out terms had not been met in 2002 and accordingly no earn-out was payable for 2002 and would not be payable for 2003. Advent disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend this action. Management believes that any potential loss associated

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with this litigation is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

On July 11, 2006, a former independent consultant filed suit against the Company in the Supreme Court of the State of New York. The complaint alleges that Advent failed to pay plaintiff commissions due for his services as a consultant to Advent. The plaintiff is seeking approximately $101,000 in commissions and $2.0 million in unspecified consequential damages, as well as interest and attorney’s fees. We dispute the plaintiffs’ claims and believe that we have meritorious defenses and intend to vigorously defend this action. Management believes that any potential loss associated with this litigation is neither probably nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

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 consolidated financial statements and related notes thereto.

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 purchase of our software products 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. For example in 2002 and 2003, existing and potential clients reduced or canceled expenditures and delayed decisions related to acquisition of software and related services. While we have seen improved economic conditions in recent years, customers are still cautious about capital and information technology expenditures. As a result, 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 over which we have little or no control, including customers’ budgeting constraints, internal selection procedures, 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 license sales. 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. 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 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.

We Depend Heavily on Our Axys®, Geneva and APX Products

We derive a significant portion of our net revenues from the licensing of Axys and Geneva products. In addition, many of our other applications, such as Moxy, Partner and various data services have been designed with either of these two products to provide an integrated solution. As a result, we believe that for the next several years a majority of our net revenues will depend upon continued market acceptance of Axys and Geneva, and upgrades to those products. In addition, APX, our newest portfolio accounting and reporting product, is of critical importance in providing an upgrade path for many of our Axys customers. Our long-term growth could be harmed if we are unable to establish APX as a leading product in the market. As a result, we may not be able to successfully upgrade existing Axys clients to APX, or to attract new customers to buy APX.

Uncertain Economic and Financial Market Conditions May Continue to Affect Our Revenues

We believe that the market for large investment management software systems may be affected by a number of factors, including reductions in capital expenditures by large customers and poor performance of major financial markets. The target clients for our products include a range of financial services organizations that manage investment portfolios. In addition in our MicroEdge business segment, we target corporations, public funds, universities and non-profit organizations, which also manage investment portfolios and have many of the same needs. The success of many of our clients is intrinsically linked to the health of the financial markets. We believe that demand for our solutions has been, and could continue to be, disproportionately affected by

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fluctuations, disruptions, instability or 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, a slowdown in the formation of new investment firms, especially hedge funds, or a decline in the growth of assets under management would cause a decline in demand for our solutions. 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, and we believe that future uncertainty about financial markets and the financial services sector could have a material adverse effect on our revenues.

We Face Competition

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 independent vendors such as Advent. Other competitors include 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. In 2005 and 2006, seven of our competitors were acquired with the possibility of forming even larger companies through additional acquisitions of companies and technologies. Any further 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 market that may develop innovative technologies or business models. 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 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 new 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 new products or product enhancements that address the future needs of our target markets and to respond to their changing standards and practices. For example, we are currently engaged in validation and beta cycles for major new releases of several key products, including APX, Geneva and Moxy. Additionally in 2007, we plan to introduce two new products to our suite: 1) a trading compliance solution; and, 2) an analytics solution.

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 commencement of commercial shipments of new products or enhancements may result in client dissatisfaction and delay or loss of product revenues. In addition, clients may delay purchases in anticipation of new products or product enhancements. Our ability to develop new products and product enhancements is also dependent upon the products of other software vendors, including certain system software vendors, such as Microsoft Corporation, Sun Microsystems, database vendors and development tool vendors. If the products of such vendors have design defects or flaws, are unexpectedly delayed in their introduction, or are unavailable on acceptable terms, our business could be seriously harmed.

Our Operating Results May Fluctuate Significantly

We are more than halfway through our transition to a predominantly term license model. Until we substantially complete our transition to a term license model, our net revenues will be affected by the continued reduction in perpetual license revenue and by the relatively slower revenue recognition associated with the term license model, which is typically over a three-year period. Under a perpetual model, customers purchase licenses to use our software indefinitely and generally we recognize all license revenue at the time of sale; maintenance is purchased under an annual renewable contract, and recognized ratably over the contract period. Under a term model, customers purchase a license to use our software and receive maintenance for a limited period of time and we recognize the revenue ratably over the length of the contract.

During the first quarter of 2007, term license revenues comprised approximately 19% of term license, maintenance and other recurring revenues as compared to approximately 8% in the first quarter of 2006. Term license contracts are comprised of both software licenses and maintenance services. Individual perpetual software licenses vary significantly in value, and the value and timing of these transactions can therefore cause our quarterly perpetual license revenues to fluctuate.

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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. If the implementation services are still in progress as of quarter-end, we will defer all of the contract revenues to a subsequent quarter. As a result of these and other factors, our quarterly net revenues may fluctuate significantly. 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. For example, during the first quarter of 2007, we deferred net revenues of $3.3 million and deferred directly related expenses of $0.9 million. The impact of these deferrals on our operating income was approximately $2.4 million.

In addition, we experience seasonality in our perpetual license revenue. The fourth quarter of the year typically has the highest perpetual license fee revenue, followed by lower perpetual license revenue in the first quarter of the following year. We believe that this seasonality results primarily from customer budgeting cycles and the annual nature of some AUA contracts, and expect this seasonality to continue in the future.

Because of the above factors, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance.

We Must Retain and Recruit Key Employees

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 the anticipated increase in product 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 the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Therefore, we need to identify, attract, motivate and retain such employees with the requisite education, backgrounds and industry experience.  However, experienced personnel in the information technology industry are in high demand and competition for their talents is intense, especially in the San Francisco Bay Area where the majority of our employees are located. For example, in February 2007, one of our executives resigned from the Company to become the Chief Executive Officer of an internet company.

We have relied on our ability to grant equity compensation as one mechanism for recruiting and retaining such highly skilled personnel. Recently enacted accounting regulations requiring the expensing of equity compensation impair our ability to provide these incentives without reporting significant compensation costs.

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, which may 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 International Operations

We market and sell our products in the United States and, to a lesser extent, internationally. To further expand our international operations, we would need to establish additional locations, acquire other businesses or enter into additional distribution relationships in other parts of the world. Any further expansion of our existing international operations and entry into new international markets could require significant management attention and financial resources. We cannot be certain that establishing businesses in other countries will produce the desired levels of revenues, such as in the case of Advent Hellas which produced less than satisfactory revenues and profitability before its sale in 2005. We currently have limited experience in developing localized versions of our products and marketing and distributing our products internationally. In addition, international operations are subject to other inherent risks, including:

·the impact of recessions in economies outside the United States;

·greater difficulty in accounts receivable collection and longer collection periods;

·unexpected changes in regulatory requirements;

·difficulties in successfully adapting our products to the language, regulatory and technology standards of other countries;

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·difficulties in and costs of staffing and managing foreign operations;

·reduced protection for intellectual property rights in some countries;

·potentially adverse tax consequences; and

·political and economic instability.

The revenues, expenses, assets and liabilities of our international subsidiaries are primarily denominated in local currencies. We have not historically undertaken foreign exchange hedging transactions to cover potential foreign currency exposure. Future fluctuations in currency exchange rates may adversely affect revenues and accounts receivable from international sales and the U.S. dollar value of our foreign subsidiaries’ revenues, expenses, assets and liabilities. Our international service revenues and certain license revenues from our European subsidiaries are generally denominated in local foreign currencies.

Difficulties in Integrating Our Acquisitions and Expanding Into New Business Areas Have Impacted and Could Continue to Adversely Impact Our Business and We Face Risks Associated with Potential Acquisitions, Investments, Divestitures and Expansion

From 2001 through the middle of 2003, our strategy focused on growth through the acquisition of additional complementary businesses. During those years, we made five major acquisitions including Kinexus Corporation, Techfi Corporation and Advent Outsource Data Management LLC, and also acquired all of the common stock of five of our European distributor’s subsidiaries. In addition, we purchased our European distributor’s remaining two subsidiaries in the United Kingdom and Switzerland in May 2004. More recently, in December 2006, we acquired East Circle Solutions, Inc., a developer of investment billing solutions to integrate their product into our software offerings.

The complex process of integrating our acquisitions has required and will continue to require significant resources, particularly in light of our relative inexperience in integrating acquisitions. Integrating these acquisitions in the past has been time-consuming, expensive and disruptive to our business. 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 successfully integrate the operations of these entities has harmed and could potentially harm our business, results of operations and cash flows in future periods. For example, in the first quarter of 2003, we closed our Australian subsidiary because it failed to perform at a satisfactory profit level and similarly in the fourth quarter of 2005, we disposed of our Advent Hellas subsidiary because of less than satisfactory profitability. 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. For example, demand for our Techfi product line was significantly lower than expected and thus we discontinued certain products within our Techfi product line in September 2004. As a result, we recorded a non-cash impairment charge of $3.4 million in the third quarter of 2004 to write-off the carrying value of certain Techfi-related intangible assets. Furthermore, we may face other unanticipated costs from our acquisitions, such as the disputes involving earn-out and incentive compensation amounts, similar to those we have experienced with our Kinexus and Advent Outsource acquisitions.

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 and services. Failure to achieve the anticipated benefits of any future 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. 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.

Impairment of Investments Could Harm Our Results of Operations

We have made and may make future investments in privately held companies, many of which are considered in the start-up or development stages. These investments, which we classify as other assets on our consolidated balance sheets, are inherently risky, as the market for the technologies or products these companies have under development is typically in the early stages and may never materialize. The value of the investment in these companies is influenced by many factors, including the operating effectiveness of these companies, the overall health of these companies’ industries, the strength of the private equity markets and general market conditions. Due to these and other factors, we have previously determined, and may in the future determine, that the value of these investments is impaired, which has caused and would cause us to write down the carrying value of these investments, such as the write-down of our investments of $2.0 million in fiscal 2003. Furthermore, we cannot be sure that future investment, license, fixed asset or other asset write-downs will not occur. If future write-downs do occur, they could harm our business and results of operations.

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Information We Provide to Investors Is Accurate Only as of the Date We Disseminate It

From time to time, we may publicly disseminate forward-looking information or guidance in compliance with Regulation FD. This information or guidance represents our outlook only as of the date we disseminate it, and we do not undertake to update such information or guidance.

Our Stock Price May Fluctuate Significantly

Like many companies in the technology and emerging growth sector, our stock price may be subject to wide fluctuations, particularly during times of high market volatility. If 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. In addition, our stock price is affected by trends in the financial services sector and by broader market trends unrelated to our performance. For instance, in the event of increased hostilities abroad or terrorist attacks on U.S. soil, there could be increased market volatility, which could negatively impact our stock price.

If Our Relationship with Financial Times/Interactive Data Is Terminated, Our Business May Be Harmed

Many of our clients use our proprietary interface to electronically retrieve pricing and other data from Financial Times/Interactive Data (“FTID”). FTID pays us a commission based on their revenues from providing this data to our clients. Our software products have been customized to be compatible with their system and this software would need to be redesigned if their services were unavailable for any reason. Termination of our agreement with FTID would require at least two years notice by either us or them, or 90 days in the case of material breach. Our revenue would be adversely impacted if our relationship with FTID was terminated or their services were unavailable to our clients for any reason.

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 and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We have registered trademarks for many of our products and services and will continue to evaluate the registration of additional trademarks as appropriate. We generally enter into confidentiality agreements with our employees and with our resellers and customers. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection and we do not have any patents. Despite these efforts, 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 substantially equivalent or superseding proprietary technology, or that equivalent products will not be marketed in competition with our products, 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 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. Litigation may be necessary to protect our proprietary technology which may be time-consuming and expensive. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. We cannot be sure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products or design around any patent that may be issued to us or other intellectual property rights of ours.

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. As a result, we may be subject to litigation and claims, including claims of infringement of patents, copyrights and other intellectual property rights of third parties that would be time-consuming and costly to resolve. 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 manner. Failure to resolve an infringement matter successfully or in a timely manner, would force us to incur significant costs, including 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.

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Catastrophic Events Could Adversely Affect Our Business

Our operations are exposed to potential disruption by fire, earthquake, power loss, telecommunications failure, and other events beyond our control. Additionally, we are vulnerable to interruption caused by terrorist incidents. For example, our facilities in New York were temporarily closed due to the September 11, 2001 terrorist attacks. Immediately after the terrorist attacks, our clients who were located in the World Trade Center area were concentrating on disaster recovery rather than licensing additional software components, while the grounding of transportation impeded our professional services employees’ ability to travel to client sites. Additionally, during the temporary closure of the U.S. stock markets, our clients did not use our market data services. Our corporate headquarters are located in the San Francisco Bay Area, which is a region with significant seismic activity. Earthquakes such as that experienced in 1989 could disrupt our business. Such disruptions could affect our ability to sell and deliver products and services and other critical functions of our business. Further, such disruptions could cause instability in the financial markets upon which we depend.

Further, terrorist acts, conflicts or wars may cause damage or disruption to our customers. The potential for future attacks, the national and international responses to attacks or perceived threats to national security and other actual or potential conflicts or wars, including the ongoing crisis in the Middle East, have created many economic and political uncertainties. Although it is impossible 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 Software Errors or Failures Found in New Products May Result in Loss of or Delay in Market Acceptance of Our Products that Could Seriously Harm Our Business

Our products may contain undetected software errors or scalability limitations at any point in their lives, but particularly when first introduced, such as our APX product, or as new versions are released. Despite testing by us and by current and potential customers, errors may not be found in new products until after commencement of commercial shipments, 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.

Changes in Securities Laws and Regulations May Increase Our Costs

The Sarbanes-Oxley Act (“the Act”) of 2002 required changes in some of our corporate governance and securities disclosure and/or compliance practices. As part of the Act’s requirements, the SEC has enacted new rules on a variety of subjects, and the Nasdaq Stock Market has enacted new corporate governance listing requirements. These developments have increased and may in the future increase our accounting and legal compliance costs and could also expose us to additional liability if we fail to comply with these new rules and reporting requirements. In fiscal 2006 and 2005, we incurred approximately $1.3 million and $1.8 million, respectively, in Sarbanes-Oxley related expenses consisting of external consulting costs and auditor fees, and the Company anticipates similarly spending a significant amount for its 2007 compliance activities. In addition, such developments may make retention and recruitment of qualified persons to serve on our board of directors, or as executive officers, more difficult. We continue to evaluate and monitor regulatory and legislative developments and cannot reliably estimate the timing or magnitude of all costs we may incur as a result of the Act or other related legislation or regulation.

Changes in, or Interpretations of, Accounting Principles Could Result in Unfavorable Accounting Charges

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by us, the SEC and various bodies formed to interpret and create accounting principles. 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. Our accounting principles that recently have been or may be affected include:

·Software revenue recognition

·Accounting for stock-based compensation

·Accounting for income taxes

·Accounting for business combinations and related goodwill

In particular, in the first quarter of 2006, we adopted SFAS 123R which requires the measurement of all stock-based compensation to employees, including grants of employee stock options, restricted stock units and stock appreciation rights, using a fair-value-based method and the recording of such expense in our condensed consolidated statements of operations. The adoption of SFAS 123R had a significant adverse effect on our results of operations. It will continue to significantly adversely affect our results of operations and may impact the way in which we conduct our business.

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If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share.

We currently use the Black-Scholes option pricing model to determine the fair value of stock-based compensation awards and employee stock purchase plan shares. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, restricted stock units and stock appreciation rights, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our condensed consolidated financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

Potential Changes in Securities Laws and Regulation Governing the Investment Industry’s Use of Soft Dollars May Reduce Our Revenues

As of December 31, 2006, approximately 400 of our clients utilize trading commissions (“soft dollar arrangements”) to pay for software products and services. During fiscal 2006 and 2005, the total value of Advent products and services paid with soft dollars was approximately 5% and 6% of our total billings. Such soft dollar arrangements could be impacted by changes in the regulations governing those arrangements.

During the fourth quarter of 2006, we completed the wind down of the “soft dollar” business of our SEC-registered broker/dealer subsidiary, Second Street Securities, as it no longer fits with our corporate strategy. Second Street Securities offered our customers the ability to pay for Advent products and other third party products and services through brokerage commissions and other fee-based arrangements. We will continue to allow clients to utilize soft dollar arrangements to pay for Advent software products and services through other independent broker/dealers.

In July 2006, the SEC published an Interpretive Release that provides guidance on money managers’ use of client commissions to pay for brokerage and research services under the “soft dollars” safe harbor, which is set forth in Section 28(e) of the Securities Exchange Act of 1934. The Interpretive Release clarifies that money managers may use client commissions to pay only for eligible brokerage and research services. Among other matters, the Interpretive Release states that eligible brokerage includes those products and services that relate to the execution of the trade from the point at which the money manager communicates with the broker-dealer for the purpose of transmitting an order for execution, through the point at which funds or securities are delivered or credited to the advised account.  In addition, for “mixed-use” items (such as trade order management systems) that are partly eligible and partly ineligible, the Interpretive Release states that money managers must make a reasonable allocation of client commissions in accordance with the eligible and ineligible uses of the items. Based on this new guidance, our customers may change their method of paying for certain Advent products or services from soft to hard dollars, and as a result seek to reduce their usage of these products or services in order to avoid increasing expenses, which could cause our revenues to decrease.

Covenants in Our Credit Facility Agreement Could Adversely Affect our Financial Condition

In February 2007, we entered into a senior secured facility agreement which provides us with a revolving line of credit up to an aggregate amount of $75 million. Our continued ability to borrow under our credit facility is subject to compliance with certain financial and non-financial covenants. The financial covenant is limited to a maximum ratio of senior debt to adjusted earnings before interest, taxes, depreciation, amortization (EBITDA) and non-cash stock compensation. 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.

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Security Risks May Harm Our Business

The secure transmission of confidential information over public networks is essential to commerce and communications, particularly in the market in which Advent operates. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. In addition, computer viruses or software programs that disable or impair computers could be introduced into our systems or those of our customers or other third parties, which could disrupt or make our systems inaccessible to customers. Our security measures may be inadequate to prevent security breaches, exposing us to a risk of loss, litigation and other possible liabilities, as well as possibly requiring us to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches.

If We Fail to Maintain an Effective System of Internal Control, We May Not be Able to Accurately Report Our Financial Results 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. For example, as of December 31, 2005, the Company did not maintain effective controls over the accounting for income taxes, including the determination of deferred income tax liabilities and the related income tax provision. This control deficiency resulted in adjustments to the fourth quarter of 2004 and 2005 financial statements and a restatement of the Company’s financial statements for each of the first three quarters of fiscal 2004 and 2005.

The Company also did not maintain effective controls over the accuracy, presentation and disclosure of the pro forma stock-based compensation expense in conformity with generally accepted accounting principles as of December 31, 2005. As a result of this control deficiency, the Company’s disclosure of stock-based compensation expense for fiscal 2003 and 2004 and first three quarters of 2004 and 2005 were revised.

During 2006, we implemented controls and procedures to improve our internal control over financial reporting and address the material weaknesses identified in fiscal 2004 and 2005. As a result, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006 and March 31, 2007.

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.

Our Ability to Conclude that a Control Deficiency is Not a Material Weakness or that an Accounting Error Does Not Require a Restatement is Limited, in Part, by Our Level of  Pre-Tax Income (Loss)

Under the Sarbanes-Oxley Act of 2002, our management is required to assess the impact of control deficiencies based upon both quantitative and qualitative factors, and depending upon that analysis we classify such identified deficiencies as either a control deficiency, significant deficiency or a material weakness.

Our current expectation is that our fiscal 2007 pre-tax income will range from breakeven to a modest amount, due primarily to the impact of expensing for stock-based compensation, the short-term negative impact on net revenues from our transition to a term license model, and the investment in the development and growth of our business. One element of our quantitative analysis of any control deficiency is its actual or potential financial impact, and any impact that is greater than 5% of our pre-tax income (loss) in any quarter may be more likely to result in that deficiency being determined to be a significant deficiency or a material weakness. Accordingly, our projection of fiscal 2007 pre-tax income at a breakeven level to a modest

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profit will make it statistically less likely for us and our independent registered public accounting firm to determine that a control deficiency is not a material weakness.

In addition, if management or our independent registered public accountants identify errors in our interim or annual financial statements during 2007, it is statistically more likely that such errors may meet the quantitative threshold established under Staff Accounting Bulletin No. 99, “Materiality”, that could, depending upon the complete qualitative and quantitative analysis, result in our having to restate previously issued financial statements.

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 to enhance shareholder value. 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.

On February 9, 2007, the Company’s Board authorized the repurchase of up to an additional 2.25 million shares of outstanding common stock. During the first quarter of 2007, Advent repurchased an aggregate 0.8 million shares of common stock under the repurchase programs authorized in July 2006 and February 2007 for a total cash outlay of $30.1 million and at an average price of $36.00 per share. The following table provides a month-to-month summary of the repurchase activity under the stock repurchase programs approved by the Board in July 2006 and February 2007 during the three months ended March 31, 2007:

				Maximum
				Number of Shares That
	Total Number			May Yet Be Purchased
	of Shares	Average Price		Under Our Share
	Purchased (1)	Paid Per Share		Repurchase Programs
	(shares in thousands)
January 2007	—	$	—	330
February 2007	361	$	36.80	2,219
March 2007	476	$	35.39	1,743
Total	837	$	36.00	1,743

(1)All shares were repurchased as part of publicly announced plans.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Item 5.  Other Information

None.

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Item 6.  Exhibits

31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32.1Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

32.2Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

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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: May 10, 2007	By:	/s/ Graham V. Smith
		Graham V. Smith Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

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