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Advent Software, Inc. Message Board

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  • kunjamukkid kunjamukkid Dec 11, 2002 8:50 PM Flag

    Who is Spo Advisory?

    Based on the SPO investor profile in this thread, one would conclude this is a great value investment. Aren't there a lot of software firms with similar profiles?

    John Scully, Bill Patterson, Bill Oberndorf. Long only, very concentrated investors, managing investments both in public markets, and leveraged, controlled businesses on behalf of wealthy individuals (themselves, the Fisher family - of Gap fame, etc.). They helped create Plum Creek, have been major owners of luxury hotels (from the early 90s). The firm is one of the descendants of the original Bass family investment group that also spawned TPG, Oak Hill and others. When Buffett was asked once who is a good example among the modern generation of investors carrying on the Graham/Fisher/Buffett investment legacy, he mentioned Bill Oberndorf by name. Their average cost in ADVS is around $16

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    • There are that share some characteristics (good historic performer with high margins and cash generation when selling lots of software, great balance sheet, etc.). The key differences (aside from the very important questions about technology and management) relate to market - 1) is there a real demand for automating the business processes that are automated by the company's software {as opposed to just a business fad}), 2) how strong is the competitive position, and 3)how will that competitive position be affected by a period of high uncertainty of indeterminate duration. Siebel, for example, rates highly on 1 (companies need to automate the processes around having a unified view of their customer), reasonably highly on 2 (still dominant, though eroding, CRM market position), and relatively weakly on 3 (ORCL, MSFT, SAP, PSFT are all fairly strong, and can take advantage of this environment of no spending to close the gap on Siebel functionally). I think, and I assume SPO does, as well, that ADVS rates very highly on all three of those counts (1) investment management has continual automation demands, with changing requirements over time, 2) dominant market share in its niches, and 3) most of its competitors are smaller, relatively weak, suffering, rather than benefiting from this environment). Right or wrong, I believe that's the key to the value thesis on ADVS.

      If the foregoing is correct, the business, in a more normal capital market environment, will be able to sell software again at a level that will support the sales organization and continued R&D. Ex the license revenue line and those two categories of spending, the business should do over $50mm of very capital efficient EBIT next year (though there are some who disagree, arguing that the maintenance revenue line will see dramatic contraction). With $170mm of cash, you're paying only about $280mm for a business composed of two parts - a maintenance business, burdened by all the overhead, that will generate $50mm of EBIT (that's very cheap) and a license business that could be worth anything from a very large positive number (up until this year it had been growing at 30% every year), to a very large negative number (they've openly said they're not reducing R&D spending in response to the license misses, and if license revenue never returns, this part of hte business is a net liability). Given the businesses obvious sensitivity to the capital markets environment, different scenarios will lead to different outcomes for the stock (if you believe the DOW is headed for 3000, this stock won't do well, at least until after that's reached). However, I think maintenace revenue will be stable, and that part of hte business is probably worth over $400mm, and the license business will prove to be worth at least a couple hundred million. Add in the cash, and fair value, right now, is north of $25. I don't think it's a stretch to reach a number well north of $35 for current fair value. That said, as an owner of the stock, I am expecting the next 12 to 18 months to be very unpredictable, and very weak from a reported earnings standpoint.

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