Advent Software is losing its leading position in portfolio management systems in large part because of its strategy of milking an old, cash cow product just as a growing number of competitors pump out web-based solutions that more readily integrate with complementary applications, make conversions and upgrades easier and often cost less, according to a report by a small investment company owned by a former hedge fund analyst.

The report by JHeck Investments LLC of New York says Advent is keeping thousands of its old customers on desktop software, Axys, developed more than a decade ago rather than give them incentives to migrate over to its new product, Advent Portfolio Exchange or APX. The report is garnering serious attention from industry analysts,

Advent has continued to upgrade Axys over the years and some customers still acquire it. It is built on a flat file system. Advent’s main competitors, including Orion, Black Diamond, Schwab Performance technologies and Morningstar use a structured [often SQL] server – as does Advent’s new product Advent Portfolio Exchange or APX. Advent Software is moving ahead in the RIA tech market— even if most Axys users refuse to budge

Dying off

“Axys is dying off and APX is competing out there but not terribly well,” says report author Jonathan Heck. To read the report, click here

Advent Software’s CEO, Peter Hess — suggesting that the doom and gloom is misplaced — had this to say in response to the report’s allegation:

“As we announced in our third quarter earnings call and our most recent 10-Q, Advent’s business is very healthy – our key business metrics are up across the board. In the third quarter, we had record revenues, strong bookings and operating cash flow and improving renewal rates. Demand has been strong for our entire suite of software and services and we continue to add new customers around the globe.”

Peter Hess: Demand has been strong for our entire suite of software and services and we continue to add new customers around the globe.
Peter Hess: Demand has been strong
for our entire suite of software
and services and we continue to
add new customers around the globe.

Indeed, Heck himself notes that Advent’s decline might be slower than expected. Advent Software’s stock is his company’s largest short-selling position. JHeck has held this short position for over a year and writes that “it has moved against us measurably” because Advent’s shares have climbed tremendously during that time. The company’s shares climbed $12.58 or 31.22% from $40.31 on Dec. 7, 2009 to $52.40 on Dec. 3.

Short-selling

The continued front-and-center presence of Axys in a structured server world is what got Heck’s short-selling instincts twitching — and has him continuing to hold his short position.

“The Axys software might as well be an entirely separate business and it’s in run-off mode” he said in an interview.

By run-off mode, he means that the company continues to collect virtually all Axys license revenues from renewals – and that it’s losing a substantial number of these customers annually, he says. This would be fine if Advent’s more modern product, APX, were picking up the slack but it’s not, in Heck’s opinion.

Advent requires $4 of new revenue to generate profits produced by $1 of lost Axys maintenance revenue, according to the JHeck report.

“Since much of the costs to continue supporting a product are largely fixed, as the installed base on Axys withers, Advent’s margins should begin to suffer in concert. We believe that the Axys client base is currently eroding at a 10% to 15% annual pace, although it is likely to increase as the technology becomes more and more dated.”

Protocols

Advent can not address specific financial points made in the report because of investor relations protocols, according to its spokeswoman Jessica Miller.

Advent Axys and APX portfolio accounting software account for 40% of Advent’s revenues and 75% of those revenues are derived from Axys users and the other 25% from APX, according to the Heck report. The other revenues derive from: Moxy, 14%, Advent Custodial Data, 15%, Geneva, 22% and Tamale Research Management, with 5% and 4% from other sources, the report says.

“Advent remains as committed as ever to the investment management space, and the advisory space in particular,” Hess says. “We have a diverse portfolio of products for the market, and we continue to invest significantly to ensure that our solutions are attractive and accessible for firms of all sizes.”

The public company’s shares [ADVS] are owned largely by Mill Valley-based SPO Partners & Co, which hold 7,856,100 shares or 30.5% of the company, according to MSN Money. Advent had revenues of $208 million and profits of $15 million for the nine months ended Sept. 30, according to SEC documents. As of Friday, it had a market capitalization of $1.36 billion.

The report mentions both Morningstar Office and Orion Advisor Services LLC among the companies “raiding Advent’s customer base” – and this point resonates with executives at those companies.

Advent conversions

Eric Clarke, CEO of Orion, says that his Omaha, Neb.-based company is doing six Advent conversions this quarter alone.

Eric Clarke's company is converting six Advent customers this quarter alone.
Eric Clarke’s company is converting six
Advent customers this quarter alone.

“Advisors are looking to move to not only SQL-based solutions, but also web-based solutions. The web-based solutions provide advisors access and scale.”

In 2010, Morningstar added 400 net new firms [though not all of them utilize the portfolio management system], 25 of which have included full historical conversions from Advent, 55 from PortfolioCenter, and 17 from Principia CAMs, according to Michael Wilson, director of marketing for Morningstar Office.

But the Heck report singles out Black Diamond as a particular threat to Advent’s hegemony.

“The company did not exist five years ago and now wins a greater share of new client business than Advent,” Heck says.

Advent has added about 80 new clients and gotten an additional 80 RIAs to convert to APX from Axys over the past two years. Black Diamond has added 145 clients during the same time period, according to the report.

“This [report’s thinking] pretty much sums up why I joined Black Diamond” after a long executive career with Schwab Advisor Services, says David Welling, chief solutions officer of Jacksonville, Fla.-based Black Diamond Performance Reporting.

Conversion time

Black Diamond moves clients over to its new platform, BlueSky, for free, and says there is no conversion time, he adds

Advent’s conversions can take weeks or months and can be expensive to complete, according to consultants. Advent founder urges advisors to steer away from 'disruptive’ course of switching systems

Heck actually understates the success of Black Diamond, which now has 230 clients and $54 billion in assets, according to Welling, who adds that the company may hit 250 clients before year’s end.

One other factor working against Advent in winning new customers is how it prices its offering, Heck says. “Our conversations with industry insiders suggest Advent [APX] is priced 20% to 50% above similar offerings. In other words, their pricing is meant to milk as much as they can out of their current base, rather than compete in the market for new customers.”

The report adds: “Advent cannot and is not lowering prices for new clients to the same levels. Instead of competing aggressively for new clients, they are depending on their captive client base to absorb ever-higher fees.”

One reason Advent faces tougher competitive pricing pressures is that the custodians are increasingly getting into the act. They do group buys on behalf of RIAs and – in the case of Schwab – compete themselves. JHeck’s report goes so far as to say Schwab’s PortfolioCenter is a loss leader.

Schwab disagrees with that its Raleigh, N.C.-based subsidiary, Schwab Performance Technologies loses money.

Small but profitable

“Schwab Performance Technologies is a small but profitable business and serves approximately 3,500 advisory firms, about one-third of which do not custody assets with Schwab Advisor Services,” says Lindsay Tiles, spokeswoman for the firm.

Part of SPT’s strategy is to focus on its core competencies: portfolio data management and performance reporting for independent advisors. This strategy helps allow SPT to price services very competitively, she adds.

Indeed, companies are able to earn handsome profits selling portfolio management systems —unlike with other RIA-related software [namely CRM] where margins are thinner, according to Joel Bruckenstein, producer of T3 conferences and reports. This means that Advent can expect to see more fierce competition in years to come, he adds.

Heck’s investment company is a hedge fund-like RIA that uses a managed account structure. It is in the process of moving to Menlo Park because many of its most promising investors reside there, according to Heck, who is 30 years old.

Heck formerly worked as an analyst for Matrix Capital Management, which managed $2.5 billion of assets from Waltham, Mass., and Savannah-Baltimore Capital, which managed $1.5 billion while he was there. His Advent report is posted at Sumzero.com, a Facebook-like website for hedge fund managers. It’s rated 8th out of about 3,000 by its members, he adds.