Portfolio Software Still A Hot Seller Despite Sinking Stock Market

It's not easy to navigate a business along a steady course when your customers have been rocked by severe turbulence.

But that's what Advent Software (NasdaqGS:ADVS - News)Chief Executive Stephanie DiMarco has done as the stormy economic climate has ravaged the financial services community.

Advent, a provider of software to investment managers, has enjoyed double-digit sales gains for nine quarters running. And it's turned out hefty profit growth in all but three of those quarters.

The company has been able to fare well during these tough times on Wall Street because its software products help customers increase operational efficiency, manage costs and reduce risks, says DiMarco, who founded the company in 1983.

Supports Each Step

Advent provides investment managers with the infrastructure software that supports each step of the investment process from portfolio management and accounting to processing and trade and order management. Advent has over 4,500 customers worldwide, including large investment banks and hedge funds as well as small mom-and-pop financial advisers. It licenses its software on a term basis, typically for three years.

And while these are challenging times for asset managers, Advent has been able to buck the trend.

DiMarco calls Advent's products "mission critical," not discretionary items.

"We're the last thing they unplug," she said. "And while parts of Advent's business are slow, given the current environment, other parts are compensating. We've been navigating this environment extremely well."

Solid demand for Advent's products comes as the Bernie Madoff scandal and the role of hedge funds in the current financial crisis are creating an increased need for regulation, says analyst Gil Luria of Wedbush Morgan Securities.

Hedge Fund Regulation

The Obama administration wants tighter regulation of hedge funds. It has proposed requiring larger hedge funds, as well as private equity and venture capital funds, to register with the Securities and Exchange Commission.

"Regulation will cause hedge funds to have the need to have very detailed accounting and reporting capabilities," said Luria, whose employer has an investment banking relationship with Advent. "The way to do this is to have robust portfolio accounting software."

And, since Advent is a leader in providing portfolio accounting software, it increases the need for its products, he says.

Meanwhile, the large hedge funds see regulation coming, which increases their willingness to start preparing for it, he adds.

But Advent has been enjoying steady growth the past couple of years.

"Their growth over the last few years has been based on the fact that both asset managers and hedge funds are trying to get their portfolio accounting to a higher functionality, and with more capability," said Luria. "And Advent is a winner within that segment."

DiMarco took an important step in growing Advent's offerings with October's acquisition of Tamale Software, a provider of research management software. Analysts and portfolio managers use Tamale's software to manage and access their research. Advent paid $28 million and 906,000 shares of its common stock for Tamale.

The buy expands and complements Advent's offerings.

Historically, a lot of Advent's systems have been used in the mid- and back offices of firms for applications such as portfolio accounting and trading, says DiMarco.

Tamale takes Advent into the front office, where the software is used by portfolio managers and analysts to automate their work flow.

"Advent can use Tamale as a Trojan horse to put more and more products on portfolio managers' desks," said Luria.

DiMarco sees Tamale as a platform for expansion.

"With Tamale, Advent is the only provider that offers clients a comprehensive work flow solution for total visibility across the firm's most important information -- from ideas to positions to performance," she said in a conference call.

Earnings Dilution

Luria says he expects the buy to be dilutive to earnings because it was negotiated before the financial crisis occurred.

"But long term, it creates a lot of strategic opportunities," he said.

Meanwhile, Advent turned out a strong fourth quarter. Earnings climbed 64% to 23 cents a share. Revenue rose 25% to $74.4 million.

"In this kind of market, when people are very concerned about risk and stability, there's a flight to quality that occurs," said DiMarco. "We benefit from that. We've been in business for 25 years, we're a public company, and people see we have strong profitability and cash flow. Our customers don't want to take a risk on their vendor."

But Advent faces challenges during these lean times on Wall Street. It may lose customers or have a tough time adding new ones, says Luria.

Still, followers expect it to continue its winning streak. Analysts polled by Thomson Reuters expect 2009 earnings to surge 56% to $1.06 a share, then 21% to $1.28 in 2010.