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Advent Software (NASDAQ:ADVS)

Q2 2013 Earnings Call

July 29, 2013 5:00 pm ET

Executives

James S. Cox - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

David Peter F. Hess - Chief Executive Officer, President and Director

Analysts

Gil B. Luria - Wedbush Securities Inc., Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Advent Software Earnings Conference Call. My name is Ayeesha, and I will be your coordinator for today's call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. James Cox, Chief Financial Officer. You may proceed.

James S. Cox

Thanks, Ayeesha. Good afternoon. Thanks for joining us today for Advent's Second Quarter 2013 Earnings Call. This is Jim Cox, Advent's Chief Financial Officer, and I'm joined by Peter Hess, Advent's Chief Executive Officer. Over the course of the call, I will share with you some color on the numbers, and then Pete will provide insight into how we are executing against our strategy. Before I pass it over to Pete for the highlights, let me cover the forward-looking statements language and a warning about our use of non-GAAP financial information.

During the course of this conference call, we will make forward-looking statements regarding future events and the future performance of the company. These statements are just predictions that involve risks and uncertainties. We discuss a number of these risks in detail in the company's SEC reports, including our 10-Ks and 10-Qs. Any forward-looking statements must be considered in the context of such risk and uncertainties, and actual events or results could differ materially. The company disclaims any intention or obligation to publicly update or revise any forward-looking statements whether as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

As a reminder, we include non-GAAP financial measures in our disclosures including, for example, non-GAAP operating profit, non-GAAP operating margin, adjusted EBITDA and non-GAAP earnings per share, to name a few. These non-GAAP financial results are not meant to be considered in isolation or as a substitute for results prepared on a GAAP basis. Please refer to the table in our earnings release which is furnished to the SEC on a Form 8-K and available on our website for a reconciliation of GAAP to non-GAAP financial measures.

Now let me turn it over to Pete for the highlights. Pete, take it away.

David Peter F. Hess

Thanks, Jim, and welcome, everybody. Thank you for joining us this afternoon. I'm pleased to report that Advent had another record second quarter. Revenues were $96 million, a 7% increase. We had our best renewals quarter since 2011, and we saw a 55% increase in non-GAAP profitability over the same period last year, yielding a non-GAAP earnings per share of $0.37.

Later in the call, I'll talk more about our accomplishments and highlights, but first, let me give it back to Jim so that he can explain the numbers.

James S. Cox

Thanks, Pete. As Pete just said, it was a fantastic quarter from an operating performance perspective. And coupled with the dividend recapitalization, we are very proud of the value we delivered to shareholders in the second quarter.

I'll cover 4 areas in my remarks today. First, I'll give some color on our key operating metrics. Second, I will walk through our income statement and explain some of the unusual items. Third, I will cover the impact of the recapitalization on our balance sheet and cash flows. And finally, I will explain the changes in our 2013 guidance.

Starting with operating metrics. Annual contract value, or ACV, for new contracts signed during the second quarter was $6.7 million, a decrease of 7% over the second quarter of last year. Last quarter, we said bookings can be lumpy, and this proved true in the second quarter. Year-to-date, ACV has increased 5% over the prior year despite the headwind caused by our sales force reorganization that we implemented in the first half of this year, and we feel good about our second half sales pipeline.

Renewals performance was particularly strong with our initially reported renewal rate for the first quarter coming in at 94%. We expect that renewal rate to increase into the high 90% range once all cash is collected. We are thrilled with this number, but we're not yet convinced that this is the new normal. We continue to expect renewals for the year to be in the mid 90s. With respect to our updated renewal rate, as we said last quarter, our fourth quarter renewal rate increased 3 points from the initially reported 91% to an updated 94%.

Turning to the income statement. We had record revenue of $96.1 million in the second quarter, an increase of 7% over the prior year. This increase was driven by 9% growth in recurring revenue from the layering in of new bookings over the past year and to a lesser extent, by increases in revenues from asset base pricing. Just over 10% of our revenues have some direct linkage to assets under administration or assets under management. So the strong equity markets create a very mild tailwind for us this year.

Nonrecurring revenue decreased 10% over the prior year principally due to implementation projects that are still in flight. For the quarter, recurring revenue constituted 92% of total revenues.

Turning to margins and expenses. Gross margin was 68.4% in the second quarter, an increase of 330 basis points over the prior year, driven by expansion in our recurring revenue gross margins from our improved efficiency in our global support organization and better margins in our professional services practice.

On a GAAP basis, operating expense is up over the second quarter of 2012, but the increase was driven by the stock-based compensation expense resulting from the modification of our equity awards in connection with our $9 dividend. If stock compensation expense for both periods is excluded, cost of revenues, sales and marketing expense and product development expenses actually decreased relative to the prior year.

Overall, Q2 non-GAAP operating income increased to $31 million or 32.3% non-GAAP operating margin. This is a 1,000 basis point increase over the prior year with 530 basis points coming from non-GAAP gross margins and 470 basis points coming from non-GAAP operating expenses.

Part of the increase in profitability related to the timing of software capitalization. Without software capitalization, our non-GAAP margin would've been lower by 210 basis points in the quarter. We've been saying that the second quarter would be the most profitable of this year, and we are proud of our non-GAAP margin performance.

Within operating expenses, we included a specific line item called recapitalization cost, which was $6 million in the second quarter and includes financial advisory fees, legal fees and various valuation fees incurred in connection with the debt modification, the special dividend and the equity award modification which occurred in the second quarter. These expenses have been excluded from our non-GAAP profitability.

The restructuring charge in the second quarter was $800,000 as we finalize our reorganization efforts in the quarter. Within the quarter, total company headcount grew slightly, and we expect to increase headcount at a modest pace going forward. Interest and other expense was $1.3 million, including about $700,000 of incremental interest expense related to the debt modification.

We had a GAAP diluted -- we had a GAAP loss. So GAAP diluted net loss per share was $0.08, and non-GAAP diluted earnings per share was $0.37 per share. Non-GAAP earnings per share increased 56% over the last year.

Now let's turn to the impact of the recapitalization on the balance sheet and its impact on cash flows and liquidity. As of June 30, we had $404 million in cash, cash equivalents and marketable securities and outstanding debt was $225 million. As a result of declaring the $9 per share dividend in June, we have a stockholders' deficit on the balance sheet as of June 30. We've included a statement of shareholders' deficit in our earnings release to enable investors to better understand the impact of the recapitalization.

After June 30, we borrowed an additional $125 million from our revolving credit facility, and today we have a total of $350 million in debt and $75 million of additional revolving capacity. We currently expect to pay down the revolving portion of the debt as quickly as practical, while maintaining a sufficient cash cushion for our operating activity. We do not expect to need more than $50 million in cash on hand while we pay down the revolving facility.

Operating cash flow for the second quarter was $21.9 million, an increase of 47% over the second quarter of 2012. The second quarter cash flows are more impressive when you consider that there was $6.7 million in cash recapitalization cost incurred in the quarter. For the second quarter, adjusted EBITDA was $27.6 million, an increase of 19% over the prior year.

Lastly, I will get -- discuss guidance for the third quarter and the rest of the year. In the third quarter, we expect revenue to be between $93 million and $95 million. As we noted last quarter and at the beginning of the year, our renewal of a major contract effective in June was, as expected, at a substantially reduced level and will negatively impact the revenue growth rate in the third and fourth quarters of this year. We have successfully completed the renewal at terms consistent at our expectations when we first provided full year guidance.

For the full year, we are raising the floor of our revenue guidance by $2 million, and our full year revenue guidance is now $375 million to $379 million. Additionally, we are raising our guidance for non-GAAP operating margin by 100 basis points to be in the range of 28.5% to 29% on the basis of our strong profitability in the first half of the year. I also want to reiterate what I said last quarter about the seasonality of non-GAAP profitability throughout the year.

Last quarter, we explained that we expect the second quarter to be the most profitable of 2013 because of the timing of software development capitalization. Conversely, our 30th anniversary client conference will be held in September in San Francisco on September 18 to 20, and we expect the conference to compress margins in the third quarter.

We are lowering our GAAP operating margin to reflect the increase in stock-based compensation expense and the recapitalization cost we incurred in the second quarter, as well as the slightly higher restructuring charges that we've incurred for the year. For the third and fourth quarter, we expect interest expense to be between $2.5 million and $2.7 million per quarter.

Although we have raised revenue and non-GAAP profitability guidance, we have not raised our operating cash flow guidance for the year. With the dividend recapitalization, we paid approximately $6.7 million in recapitalization cost in the second quarter. In the third quarter, we will pay approximately $5 million in cash for stock-based compensation charges related to the modification of equity awards in connection with that recapitalization. Both of these cash charges reduce operating cash flows while not reducing non-GAAP profitability.

Now before I hand the call over to Pete to give us color around our second quarter performance, I wanted to invite all investors to join us on Wednesday, September 18, in San Francisco for our Investor Day. You can find -- excuse me, you can find more details about the event posted to our website.

Now let me hand it back to you, Pete.

David Peter F. Hess

Okay. Well, thanks, Jim. As you've just heard, Advent had another strong quarter with record revenue and non-GAAP profitability, along with solid renewals and cash flows. We continue to fulfill our purpose: to help our clients, employees and investors thrive by executing on our strategy, which is to be the best at what our clients expect, capture the global opportunity and drive operational improvements throughout our business. On that note, our recently distributed onetime special dividend gave us a powerful way to return capital to our shareholders while enabling them to continue to participate in our future success.

Behind our growing revenue are great client stories, from new clients, firms who renewed with us and others who expanded their use of Advent Solutions. Our Geneva product continues to lead the alternatives market as we build new client relationships around the globe. Geneva's success as a leading solution for the alternatives market has once again been validated this quarter when it was named Best Fund Accounting and Reporting Software by HFMWeek, the industry's key fund publication in the U.K. This is the fifth year in a row that Geneva has been honored.

Advent Solutions are valuable across our business line -- our client's business, and a great example of this is that one of the world's largest banks expanded their Advent relationship by adding to their use of Geneva for fund accounting our Geneva World Investor module for shareholder services. That same client also expanded their usage of Tamale to further support their asset management business.

In the second quarter, we launched our latest versions of the award-winning APX, or Advent Portfolio Exchange, Moxy and their associated products. Proving the benefits of the new version, a new client named F-Squared chose the latest version of APX for the benefits of its simplified reporting process, more efficient upgrade experience and enhanced customization capability so that they can focus more of their time servicing their clients.

In addition, I'm pleased to say that Advent won the FSO Knowledge Exchange award for Excellence in Risk Management and Compliance for Advent Rules Manager, our pre- and post-trade compliance solution. With the growing demand for transparency and operational risk management in the industry, winning this award is a testament to our commitment to helping our clients keep pace with changing regulations.

Black Diamond continues to lead the way in the growing advisory market. It's been 2 years since the acquisition of Black Diamond, and it now has 440 clients and assets on the platform exceeding $180 billion, which is an 85% increase in its client base and nearly 2.5x the amount of assets that were on the platform when we acquired the company. It's exciting to see so many advisers choose Black Diamond for its combination of innovative reporting, ease-of-use and data accuracy. Black Diamond's advisory clients like that you can use it anywhere and anytime, whether you're mobile on a client meeting or you're doing your job back in the office.

We completed a significant number of Black Diamond implementations recently as well, helping new clients go live, including NFP and Duncan-Williams, both leading registered investment advisers. In addition, we're excited to announce that the integration between Black Diamond and Schwab Open Gate -- OpenView Gateway is now complete and available to our shared clients. This integration provides our mutual clients with the ability to view Schwab and Black Diamond information together in an integrated fashion and on an intraday basis to make better decisions as well as provide enhanced client service. This collaboration is a great example of our strategy to be adaptable and open to working with partners where it will benefit our clients, making their lives easier and increasing efficiency.

Now let's look at the EMEA region, where economic recovery has been slow. I'm especially pleased with our success so far in the EMEA region. Adding to last quarter's exciting new client acquisitions, in Q2, we built a new client relationship with, among others, DMA Direct, who will be working with Geneva to help grow their business.

One of the reasons for our stronger performance in the EMEA region is momentum in the Middle East and North African market, or the MENA market. For example, the asset management business at Banque Saudi Fransi, one of the leading banks in Saudi Arabia, is now live and using Geneva, Moxy and the Tradex product. And in the second quarter, Al Rajhi Capital, part of Al Rajhi Bank, which is the largest Islamic bank in the world, also signed on to gain the benefits of Advent Solutions for their business. They'll be using APX, Moxy and Tradex across multiple lines of business. Lastly, in Q2, we established a relationship with another asset management group, of yet another leading investment house in the MENA region who will be implementing APX to enhance the performance of their business.

There's also been an increase in demand globally for firms looking to institute best practices in research and knowledge management. Our Tamale product helps enhance front office productivity while safeguarding a firm's precious research information. Our relationships with U.K.-based asset managers Heptagon Capital Management and Tages Capital, who both signed up for Tamale, are good examples of this trend. On that note, I'm proud to say that this quarter, Tamale won the Systems in the City Award for Best Research Management Tool.

In the Asia-Pac region, we're seeing Advent's regional brand strengthen as we grow our client base. In the second quarter, we agreed to work with the award-winning Income Partners Asset Management to implement Geneva to help them grow their business.

Q2 has been a huge step forward for Advent. I don't mind repeating that we are executing on our purpose to help our clients, employees and shareholders thrive. Our strategy is to accomplish our purpose by being the best of what our clients expect, capturing the global opportunity and driving operational improvement into our business. To that end, we've been very busy working on next -- on game-changing, next-generation solutions that we will be previewing at Investor Day in our annual client conference we call AdventConnect in San Francisco in September 18. I hope you can join us.

The Advent team has been through a lot of change in the first half of the year. While we're still adapting to strategy and organization change, the energy and excitement amongst the Advent team is obvious. I'm proud of the progress we've made so far this year, and I look forward to Advent doing great things in the quarters and years ahead.

And with that, I'd like to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Gil Luria with Wedbush Securities.

Gil B. Luria - Wedbush Securities Inc., Research Division

So even with the guidance for the second half of the year, the margin -- your operating margin versus last year is going to be a very large step-up. At this point, with the margins where they are going to be for the year, you're close to some of your long-term targets, is this a level you're now comfortable with going forward and consolidate here, start going expenses again at the rate of revenue? Or do you think that you could get beyond the levels that you're going to be at this year?

James S. Cox

Gil, this is Jim. So I think we have -- both Pete and I have been really pleasantly surprised how as we have streamlined the organization, we've really been able to move faster. And I think that really, the margin expansion that you're seeing and even the improvement and the increase in the guidance that you see is really a product of our ability to move faster in this new organization. And I think it's really fulfilling to see that we can drive this margin expansion that we're driving while continuing to invest in all of our products and some of the next-generation elements that Pete was referring to. So obviously, we feel really good about where we are. We think that there's a lot of room going forward. And I think as we evaluate what our long-term model looks like, and I believe we plan to share that with everyone at Investor Day in September, we think that there is -- obviously, we've been pleasantly surprised at how effective the margin expansion has been. And so I think, we want to rethink about what is possible there.

Gil B. Luria - Wedbush Securities Inc., Research Division

Got it. And then so Jim, as a follow-up on the cash side, just to be clear, the guidance on the page already accounts for the $6.7 million for the recap and the $5 million for the stock-based comp. So it's after those outlays?

James S. Cox

Yes, yes. So the idea is we did not raise cash flow guidance, and so we're able to keep cash flow guidance consistent even with that -- with both of those elements being a headwind.

Gil B. Luria - Wedbush Securities Inc., Research Division

Are those onetime elements?

James S. Cox

They are. So the $6.7 million occurred in Q2. The $5 million occurred in July.

Gil B. Luria - Wedbush Securities Inc., Research Division

Got it. So they're not going to recur next year unless you do another one of these recaps.

James S. Cox

Yes, true, true.

Operator

Your next question comes from the line of Sterling Auty with JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

So it seems like the bottom line performance in the quarter was even better than what I would've derived out of the ACV and the renewals results that you talked about. Was there anything, as you finished off the legacy CREF contract, was there anything that got released that would've helped the bottom line or any other type of onetime item in the quarter?

James S. Cox

No. We identified for you the one onetime item, which actually isn't a onetime item. It's pretty consistent year-over-year, but the timing of it between quarters can have impacts on quarters, and that's the software capitalization. But there were no other onetime items that improved the margin profitability in the quarter.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. On the renewal side, Pete, can you give us a little bit more insight in terms of the 94% initial. Sounds like a very good improvement over what we have been seeing. Maybe some additional detail in terms of how much of that improvement is pricing versus selling in additional products versus expansion in the number of users, et cetera?

David Peter F. Hess

So it's -- I would say that it's a combination of things. There's no one thing, but we have been benefiting lately from really high renewal rates in the Black Diamond product and the Geneva product, where we have asset linkages. The market's been going up, right? And so in some -- in a lot of our revenue, that manifests itself in renewals. So that's been -- you could call that pricing, but it's not price changes that we're implementing. It's just as their business grows, our revenue share increases as well. So that's probably the biggest thing. Another component is that our Advent back office, or Advent OnDemand, as you guys have heard us referred to it, where we do the data management, we've had pretty substantial attrition in that line of business the past couple of years. We had a partnership with Fidelity, where they were subsidizing their clients' use of that service, and then Fidelity stopped that practice a little over a year ago. And as a consequence, we've been attritting quite a few of those clients and that had been holding our renewal rates down a bit. And we've kind of worked our way through that now, and so that product line is performing better on a renewals percentage basis. So there's some good things that are happening that way. We don't -- too early to say how long those will persist and what the new norm will be, but it certainly came through well for us in the first quarter.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

And is the attrition in that product in particular and maybe the type of client that you're seeing the attrition through, is that actually helping margins?

James S. Cox

Well, I think the longer we have a customer, right, the more profitable they are. So obviously, keeping customers longer is obviously really helpful. I think we've also been surprised at just our ability kind of shifting to this global organization, how we have been able to move faster and some of the additional efficiencies that are there, which is really rewarding. I'd say the final piece on the renewal, Sterling, is that there were no -- when I think back to the first quarter, there were no large kind of full customer attritions in the quarter. That's the other thing that helps with that overall number. There's the pricing side, and then there's kind of are there customers that go out of business, and we just can't help it. There were none of those in that quarter.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Got you. And then my last question, in terms of the ACV, it's down year-over-year. How should we think about -- what are you seeing in terms of trends in the pipeline? Any signs that we could see some stabilization and improvement in that in the back half of the year?

David Peter F. Hess

I think there's one key reason why we're not further ahead than we are with bookings. And again, we're up year-over-year through the first half, so I feel good about that. But we reorganized our sales force starting in January. And as a consequence of that, people are in new territories, people are having to learn new products and we have lost certain people. And there have been open territories that we didn't have -- that were filled territories last year. So on a year-over-year comp basis, I actually feel really good about our performance so far this year. And now that we're through the reorg, we still have ramp-up and learning and it'll take us all year, I think, before the sales force is really performing in the way that the reorg intended them to be. But we're going to have a more stable situation in the second half of the year as far as the team's concerned than we did in the first. And the pipeline looks good, and the market's been pretty good. So I feel like -- we feel pretty good going into the second half of the year. The caveat that I'll give to people is that oftentimes, the biggest deals we do, they get decided the year prior in people's budgeting cycles. So the demand environment that we're seeing this year is still pretty reminiscent of what the budgeting tenor was in the fourth quarter of last year, which wasn't great. So not to say that the good market hasn't loosened things up a bit, it has. But we're still sort of suffering, I think, to some extent in the overall demand environment just by virtue of budgeting that was done last year.

Operator

Your next question comes from the line of Chris Donat with Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Just one -- to start off for me, one quick question on the revenue for the quarter, just coming in $96 million, slightly above the range. Was that a function of some business being pulled forward? Or did you have a piece of business that surprised you?

James S. Cox

So Chris, this is Jim. So I think it's a combination of a couple elements, which could be expressed in the first quarter renewal rate. So to answer your question roughly, we didn't pull in business from the future. In fact, when you look at the term service deferral, we deferred kind of overall in revenue about $300,000 versus $1.6 million released in Q2 of 2012. But obviously, the timing of completion of projects, it varies and it's based on our customers. So that's part of the reason why it's difficult to pinpoint the revenue. But I'd say overall, the renewals environment was obviously helpful in the quarter. And then the second piece is marginally, and as I said in my script, AUA fees were up slightly in the quarter, obviously, as the market grows. Those are based on assets under administration, and that was a slight tailwind as well.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Got it. And can you remind me where you're getting those, the AUA fees? Is that tied to Black Diamond, or is that across a number of products?

James S. Cox

There is -- so Black Diamond does have asset-based pricing. But it -- but I wouldn't -- when we talk about AUA fees, it's for our fund administration clients. Our largest clients are fund administrators. They frequently have a minimum amount that they pay. And then to the extent that the assets under -- on the platform are greater than that amount, they pay those incremental fees. They report and pay those fees.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And just one last one on Black Diamond. With the growth you're having there and the success with the renewals, can you remind me what sort of terms Black Diamond customers come on for? Are they -- that they're renewing already these multi-year terms? Are they sort of annual terms?

James S. Cox

Yes. So Black Diamond is a run rate business. So as we think about the renewal rate that Pete was referring to and that we look out with, it's for the same, same customers, what did you pay us last year, what you pay us this year and what's that uptick.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And you're -- but you're, I guess, virtually doubling?

James S. Cox

Sorry, their contract terms are probably are generally 2-year contract terms. And then we don't really have a specific concept of a renewal event where they sign up for a contract. These contracts, because they have that pricing mechanism where you grow as the -- where we grow as the client grows, there's no formal renewal event for them.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then because of the way you calculate the renewal rate on revenues, if they're growing, that should have a positive impact on the renewal rate, assuming asset appreciation?

James S. Cox

Yes, the contracts exactly -- the contracts auto renew, and we're just -- they pay us whatever they owe us based on their size. And so we just measure what that is year-over-year, and that's what we report as the renewal rate for that product.

Operator

[Operator Instructions] Your next question comes from the line of Peter Heckmann with Avondale Partners.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

A follow-up question on fund administration. We've seen the consolidation in that space continue. How would you size or how do you talk about potentially some of the headwinds from consolidation in fund administration? When 2 customers are merging, what impact can that have on your pricing? And as well, I think in some of these cases, the acquirer was using a proprietary system. Is there a way to kind of size maybe a couple hundred basis points in terms of revenue headwind that you might be seeing from fund administration consolidation? Or is that way too high?

David Peter F. Hess

It's hard to call it a headwind because it can be -- - state Street bought Goldman. Goldman was paying us. We're going to -- Goldman is switching on to...

James S. Cox

Or State Street switching on their...

David Peter F. Hess

Yes, they're switching the Goldman clients on to the State Street system. But you can also look at Citi where they were using another product, and when they acquired RK Consulting, they switched everything onto our system. So on the whole, we are winning more than we're losing. So I guess the whole trend on the whole has actually probably proven a positive for us in terms of getting basis points on Geneva or getting assets on Geneva in the administration space. But there are circumstances where one Geneva client buys another Geneva client, and they don't -- and they may have had 2 separate contract structures that get negotiated into one at a slightly lower basis point level. So that happens too. But like I said, on the whole, with the different permutations of M&A activity, we come out ahead. So I don't think of it as a headwind. A big part of our strategy is how to work with our administrator clients to add more value as they start doing middle office services and start to provide more timely information to their clients. We're selling them tools to make that possible. And so that's a revenue opportunity for us going forward, and there's good focus on that. So I think we're embracing the outsourcers. There's going to be consolidation and so far, it's actually helped us rather than hurt us.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

All right. Good. That's good to hear. Can you give us an update as well then on professional services and how you've been able to address some of the problems you've had there on the margin line in terms of repricing, potentially avoiding problem contracts? Where do you think you are there? We've seen maybe the beginning of some improvement, but it seems like there is a lot more to come there.

David Peter F. Hess

Right. So there's improvement -- there are trailing and leading indicators, right? So the financials are the trailing, and we're still seeing the effect of deal terms and practices that we had implemented in the years prior in the financials today, which is why our professional services practice is not already profitable. But what we're doing with deal structure and terms for deals that we've been signing so far this year, I think that run rate and the run rate of that business that we're signing is actually going to be profit positive. And it'll take a while before the old stuff works its way out of the system to see the new stuff come in. And that's -- a lot of it is different governance over deal structure, and it has affected our sales process. We're doing more work precontract to make sure that we're prescribing the right amount of services. And also, just the approach that Anthony Sperling, who runs our services organization, and his team are taking to making sure that utilization is up, et cetera, lots of different things that we're doing. But I feel very confident that we're on track for the improvements that we want to see, which ultimately means this is a profitable practice for us, not a negative.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. That's...

James S. Cox

I'd just also add, as we merge this into a single global practice instead of the multiple practices that we had in the past, I think we found that we have been able to take out excess capacity and really increase utilization in the team, and everyone on the team is focused on those utilization goals.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. Okay. That's helpful. And then just lastly, is there a way to quantify what type of impact we might see on the renewal rate in the third quarter from that onetime repricing?

James S. Cox

That's -- thanks, Pete, for asking that question. That's a great question, but we're not going to include the impact of that renewal in our renewal rates. Our renewal rates a really related to our term license contracts, our perpetual maintenance contracts, our Black Diamond contracts. And so because this was a one-off contract, we aren't including it in that calculation.

Operator

[Operator Instructions] You have a follow-up question coming from the line of Sterling Auty with JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Just wondered, now that you got the recap done, just maybe comments that you can give us in terms of how you feel about the capital structure, the way it stands and what you feel kind of the ideal cap structure would be for the company at this point?

James S. Cox

Sterling, this is Jim. So we came to the level -- so we have $350 million of debt, which is between 3x and 4x EBITDA, and we came to the level of the dividend and the amount of the dividend based on what Pete and I thought we could be very comfortable with, with respect to that. I think what we'll do is we'll take our time to pay that down over time and obviously, then we'll look more long term at other ways to deploy that capital.

David Peter F. Hess

Yes, I think what I would add to what Jim said, Sterling, is that we're in a very organic phase right now. We're working on a lot of new products. We're building it on a cloud platform. We're going to be talking about all these at our client conference coming up next month. But we're not in a big acquisition phase. And so the way Jim and I looked at it was we were stockpiling a bunch of cash we weren't planning on using, and we knew that we could borrow inexpensively. And so it really made sense to do it. On a go-forward basis, I mean, we've obviously had a great experience with this dividend, the way that the market seems to have reacted to it. And so we're wide open to thinking about similar activities in the future. But if there becomes a really strategic acquisition opportunity that we feel like it's going to be more valuable than what we can exercise in a recap, then we might not be as inclined to return capital to the investors. So we'll have to wait and see, I think, is the point, but we're definitely positively impressed with how this has gone and we'll look for ways to keep something like this going if we can.

Operator

There are no further questions in the queue at this time. I would now like to turn the call over to Peter Hess, Chief Financial Officer (sic) [Chief Executive Officer], for closing remarks.

David Peter F. Hess

So thank you, guys, everybody. It's been a super exciting Q2 and first half to the year, and we are so excited about that we're doing. And if you guys come to the Analyst Day, I hope you do, in San Francisco on the 18, because you're going to get a look at a lot of the new product and new exciting things that we're doing that are going to drive the future growth that you won't want to miss. So with that, thank you very much, and hope to see you in September.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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