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Advent Software (NASDAQ:ADVS)

Q3 2013 Earnings Call

October 28, 2013 5:00 pm ET

Executives

Justin Ritchie

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

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

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 Third Quarter 2013 Advent Software Earnings Conference Call. My name is Jason, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Justin Ritchie, Senior Director of Investor Relations. Please proceed, sir.

Justin Ritchie

Thanks, Jason. Good afternoon. Joining Jim Cox, Advent's Chief Financial Officer, and me today by phone from London is Pete Hess, Advent's Chief Executive Officer.

Before I turn the call over to the Pete and Jim, I want to remind you of the regulations regarding forward-looking statements. Accordingly, we would like to note that during the course of this conference call, we will make forward-looking statements regarding our market, future events, products, strategies and the performance of the company. We wish to caution you that such statements are just predictions that involve risks and uncertainties, and actual events or results could differ materially. We discuss a number of these risks in detail in our company's SEC reports, including our quarterly reports on Form 10-Q and our annual report on Form 10-K. Any forward-looking statements must be considered in the context of such risks and uncertainties. The company disclaims any intention or obligation to publicly update or revise forward-looking statements, whether as a result of 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. These non-GAAP financial results are not meant to be considered in isolation or as a substitute for results prepared on a GAAP basis. For a reconciliation of GAAP to non-GAAP financial measures, please refer to the tabs entitled Reconciliation of Selected Continuing Operations' GAAP Measures to Non-GAAP Measures and Reconciliation of Projected Continuing Operations' GAAP Operating Income Percentage to Non-GAAP Operating Income Percentage in our earnings release, which is filed with the SEC on a Form 8-K and available on our website.

I will now turn the call over to Pete.

David Peter F. Hess

Well, thank you, Justin. And welcome, everybody. Thank you for joining us this afternoon. We've had a very busy quarter and we're pleased with the results. The Advent team delivered a record third quarter with revenues totaling $96.8 million, up 7% from Q3 2012. We saw a significant increase in profitability, recording a non-GAAP operating margin of 30%, and we hosted our largest client conference in our 30-year history in September, where we unveiled a number of new enhancements and product solutions, including Geneva 10.0, Tamale 7.0 and Advent Direct. And we introduced our new brand logo to reflect our reinvigorated approach to product strategy and service, which we've been discussing for the past few quarters. I'm excited to share much more about all of this, but first, Jim will review the Q3 financial results in detail. Take it away, Jim.

James S. Cox

Thanks, Pete. As Pete said, we're really very pleased to report a record revenue quarter. I'll provide color around the revenue outperformance; and as usual, I'll discuss our key operating metrics, walk through our income statement and our fantastic profitability; and discuss our balance sheet and cash flows; and finally, review the changes to our 2013 guidance.

Let me start with our operating metrics. Annual contract value or ACV for new contracts signed during the third quarter were $7.1 million, that's flat year-over-year. Year-to-date, ACV is $22.4 million, an increase of 3% over the prior year period. Black Diamond showed strength in the quarter, where we added 37 new clients.

We are very pleased with our updated renewal rate for Q1, which increased to 97% this quarter, as we continue to collect cash related to those renewals. Renewals performance for the second quarter was also very strong with our initially reported renewal rate coming in at 92%. That is 5 points better than what we reported last year. And as usual, we expect the Q2 renewal rate will increase into the mid-90s range once all cash is collected. These improved renewal rates were strong across all of our products, but I want to share a little detail about the great Black Diamond results.

Renewals of Black Diamond for 2013 are the best in their history, pre- or post-acquisition. Clients with Black Diamond continue to grow their number of accounts and their assets on the platform, and client retention has improved with enhancements to the client experience due to investments in the platform, leveraging Advent's data services and bolstering of the onboarding -- the client onboarding process. This great combination resulted in Black Diamond renewals exceeding 100% thus far this year.

Turning to the income statement, we had record revenue of $96.8 million in the third quarter. This compared to $90.2 million in the third quarter of 2012, which is a 7% increase. This increase reflects the continued growth from our core products from incremental bookings, strong renewals, as well as a mild tailwind from our revenues tied to assets under administration. These growth drivers more than offset the headwind from the TIAA-CREF renewal this quarter.

In addition, a large number of implementation projects finished in the quarter, resulting in an approximately $500,000 contribution to revenue from the release from what we call the term service deferral. Last year, we deferred $1.4 million in revenue in the third quarter.

Third quarter results for both years include approximately $1 million in nonrecurring revenues from our user conference. Nonrecurring revenue decreased 5% over the prior year due to lower perpetual license revenues, reflecting our evolving business model, as well as lower utilization in Professional Services. For the quarter, recurring revenues constituted 91% of total revenues.

Switching to margins and expenses. Gross margin was 67.1% in the third quarter, an increase of 350 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 from the margin benefit from the term service deferral.

Gross law [ph] on nonrecurring revenues was $2.8 million in the third quarter, an improvement of $1.1 million over the prior year. This is driven by a reorganization in 2012 and the resulting cost savings in 2013. As Pete mentioned, our client conference was a huge success, our largest in our 30-year history. Pete will provide more detail about some of the key product introductions, but we're very pleased to have debuted Advent Direct, our new cloud platform that will complement and extend the value of our existing products with a broad range of new solutions.

Total expenses from the conference were $2.3 million, and are included in the cost of nonrecurring revenues.

On a GAAP basis, operating expense is up over the third quarter of 2012 due to additional stock compensation expense from the equity award modification relating to the $9 dividend declared in June, and from approximately $600,000 of costs incurred in connection with the secondary offering completed in August.

Overall, Q3 non-GAAP operating income was $29 million or 30% non-GAAP operating margin. This is a 690-basis-point increase over the prior year and a reflection of our ongoing focus on improving profitability. Interest and other expense was $3 million in the quarter, reflecting increased interest expense associated with our larger debt balance. GAAP diluted EPS was $0.18 and non-GAAP diluted EPS was $0.31 per share, up 22% over the prior year.

Now let's turn to our balance sheet. As of September 30, we had $41.4 million in cash and cash equivalents, and outstanding debt was $350 million. We used cash on hand and borrowed approximately $375 million in debt to pay the $470 million to our shareholders for the special dividend declared in June and paid in July.

During the third quarter, we then paid down $25 million in debt, leaving us with $220 million in the term loan and $130 million drawn on our $200 million revolving credit facility.

Going forward, we expect to pay down $5 million in term loan every quarter, and we will utilize our remaining excess free cash flows to pay down the line of credit as quickly as practical.

During the third quarter, we also completed a secondary offering, where our SPO advisory sold approximately 8.4 million shares of Advent stock. As part of the offering, we repurchased $41 million worth of stock or 1.6 million shares.

Operating cash flow for the third quarter was $22.8 million, a decrease of 10% versus the prior year. Third quarter operating cash flows were reduced by $5.4 million, paid to option holders in connection with the equity modification that occurred in June but was paid in July. There was no such payment in the third quarter of 2012.

Lastly, I'll discuss guidance for the fourth quarter and the rest of the year. In the fourth quarter, we expect revenues to be $95 million to $97 million. For the full year, that means we're raising our revenue guidance to $380 million to $382 million. Additionally, we're raising our guidance for non-GAAP operating margin for the third time this year. This time, we're raising guidance by another 100 basis points to be in the range of 90 -- I'm sorry, excuse me, 29.5% to 30%, as we continue to increase the margin benefit resulting from the reorganization we commenced at the end of last year. At the midpoint of this guidance range, this is an impressive 600-basis-point improvement in non-GAAP operating margin over the prior year.

And we're also reducing our GAAP tax rate guidance by 5 points to a range of 25% to 30% this year. Certain of our stock-based compensation and other transaction-related charges throughout the year have had the effect of lowering our GAAP provisional tax rate. We made no change to our non-GAAP tax rate. That remains 35%.

Our guidance around full year operating cash flow remains unchanged and will be in the range of $93 million to $97 million, but our CapEx expectations throughout the year have decreased, and we're lowering our CapEx guidance by $2 million to be in the range of $8 million to $10 million.

Overall, I'm just really pleased with our third quarter with good revenues, renewals and just fantastic profitability. We're already really busy in the fourth quarter and we're looking to deliver a strong finish to what will be a great year.

Now I'll hand the call back over to Pete across the pond to give us additional color on the third quarter, discuss key trends, which are influencing our product strategy, and then Pete and I will be happy to answer your questions. Cheers. Pete? Pete? Pete, can you hear us?

All right. I'll read from Pete's direct remarks. So as you -- so you've just heard, Advent had another solid quarter on all fronts. This is Jim still. We continue to successfully fulfill our long-stated 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. We were delighted with the enthusiasm for -- from over 1,000 attendees at the AdventConnect 2013 in San Francisco last month. This was Advent's 30th birthday, and our message to our clients and partners was clear. Advent is reinventing itself to lead the industry through the change of the next 30 years.

Today, we're in the midst of a change brought about by a transformative wave of technology in our industry: cloud computing, social and mobile technology. It's a challenging time, but it's also a very exciting time. As you've probably seen, we now have a new logo that we believe is more reflective of our reimagined future and the leadership role we play in the industry. Advent's new logo represents the stability and dependability of our company in the middle of an ever-changing environment. As we explained earlier this year, we've evolved our strategy, organizational structure and culture to better serve our customers, while retaining the domain expertise and close relationships developed over our 30-year history, so we are unmatched by anyone in this industry.

David Peter F. Hess

Hey, Jim?

James S. Cox

At Advent -- Pete, are you there?

David Peter F. Hess

I'm here. Oh, God.

James S. Cox

Fantastic. Thank you.

David Peter F. Hess

Apologize, everybody. My -- it's conference call challenges from London. So let me pick up where Jim left off. So at AdventConnect, we introduced several key enhancements to the core -- to our core products. We debuted Geneva 10.0, which includes capabilities to enable our Geneva clients to run their businesses with greater scale and less operational risk. We also launched Tamale 7.0, which includes enhanced customization and compliance capabilities. And on the Black Diamond front, we further enhanced our advisory market-leading solution with a host of exciting new capabilities, including tax-aware portfolio rebalancing; powerful data mining capabilities; and deeper, more seamless integrations with third-party CRM platforms.

We also previewed Advent Direct, a new cloud platform that complements and extends the value of all of our traditional products, including Axys, with a broad range of new solutions. With the launch of Advent Direct next year, we will help our clients succeed by leveraging the benefits of cutting-edge technology and combining them with the quality and reliability that they expect from Advent. One of the first solutions delivered through Advent Direct will be a new online client experience called Advent Direct Community. Advent completely reimagined the client experience to ensure that the new community will take advantage of social technology to help users find the content and people most relevant to their needs.

You will hear more about our new cloud platform over the next year as we determine the most effective commercialization strategy. Currently, we're working with development partners and we are now in beta. We expect to start actively selling Advent Direct in late 2014 and see more meaningful bookings and revenue contribution in the years that follow.

At the same time, we'll continue to invest in the core products that have made us a critical partner to our customers. They will just benefit from the easy integration of our new cloud platforms and leverage the best of both approaches.

With the Advent Direct option available to Axys clients, we may see an impact on Axys client migrations. Nevertheless, we firmly believe that a strategy that includes both client migrations from Axys to Black Diamond, APX and Geneva, coupled with the option for Axys clients to buy Advent Direct, will optimize the value that we're able to deliver to the marketplace and the value that we create for our shareholders.

The objective of our new cloud suite is to enable our clients to differentiate and thrive, so that we can expand both our market share and our wallet share with our clients. Obviously, the highest margin business always resides with your current clients, which help support the margin expansion story that Jim has discussed. Along with focusing on cross sales to clients, we're also seeking to add new clients at a faster pace. With Advent Direct, investment managers can become Advent clients, whether they choose to switch their accounting system or not. Yes, we believe mature iterations of Advent Direct will allow us to break our growth dependency on accounting system replacement. As a consequence, we see our total addressable market growing well beyond the $1 billion, where we have historically played.

Another big reason we are so excited about our go-forward solution strategy is that we are also solving the same problems that we know how to solve for a client in a marketplace who is familiar with us and trusts us. We believe being the best at what our clients expect will drive phenomenal enterprise value, because we're both adding value to our existing clients, adding new clients at an accelerated pace and we're delivering solutions at a much -- that are much easier for our clients to use and for us to support. And that helps us grow and scale our business more profitably.

Additionally, we're seeking -- we're seeing the market trends of globalization, regulation, transparency, operational risk management and line of business expansion drive sales cycles. In Q3, we added firms from around the world, including Evercore Wealth Management, Whitebox, BTIG, Weeden Prime Services, CACEIS, Cain, Watters & Associates and Sparebanken Vest, to name just a few, as they invested in Advent to help them address these and other drivers of change in their business.

To summarize, the third quarter was a special one for Advent, as we celebrated our 30-year anniversary while unveiling our vision and solution strategy for the future. This is a critical time for the industry we serve, with major shifts continually evolving the way investment managers do business, making this a great time to bring new solutions to market that will help our clients thrive. We're very excited about both the short- and long-term opportunities in front of Advent Software and we look forward to sharing our progress with you. With that, Jim and I will be happy to answer your questions.

Question-and-Answer Session

Operator

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

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

In terms of the demand that you see over the next few quarters, how do you see that shaping up? With the capital markets having done well, do you see your customers feeling a little more secure as they budget for next year? And what can you do to prevent customers from waiting for Advent Direct and continuing to get bookings over the next few quarters until those new products come out?

David Peter F. Hess

So Gil, good question. I'll take the first part first, which is what does the environment look like from a demand perspective and spending. And I said before that what we've been able to execute on in 2013 largely depends on what gets budgeted -- what got budgeted in the fourth quarter of 2012, and the same thing will be true for 2014. I think we're in a better market position, a healthier market environment, with a bit more of a positive outlook going into 2014 than the market was coming into 2013. So I think that bodes well for us. And I think in terms of Advent Direct and the input -- impact on bookings, I only think it's going to help us. We've got more to sell next year than we had this year, and the direction of Advent Direct is really compelling for our clients. So I think it really helps us with renewals. I think it helps us with adding new clients, and there will be corner cases, where an Axys client was going to migrate to APX or Black Diamond and they may decide to stay on Axys. But I don't see that as being the norm. There are still many really compelling reasons for people to migrate platforms, and will have the benefit if they choose not to, that they will have the ability to purchase Advent Direct next year as well. So I think we're in a really good position overall.

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

Got it. And then Jim, your CapEx level at this rate is relatively low to what you've spent in the past, in spite of the fact that you guys are continuing to grow, investing a lot in the new platform. Should we expect a big step-up, as you ramp up more data centers for more hosted solutions?

James S. Cox

So Gil, I would not expect a ramp-up in that. The solution technology that we're going with right now shows some of that flowing through OpEx as opposed us doing CapEx, as we're using a third-party to provide those data centers and sites.

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

Got it. And then finally, Jim again, you bought back shares during the secondary, and you're still paying down the debt and you said you'd continue to do that going forward. Would you buy back shares opportunistically even as you're paying down the debt or was that more driven by the secondary?

James S. Cox

So I -- and Pete, feel free to chime in as well. But Gil, the way I feel is that our theory around how we want to deploy our excess cash remains consistent, right? We have historically bought back shares. We've now done a dividend and we like returning capital to shareholders. And obviously, we have the cash flow characteristics that are going to allow us to pay down the debt reasonably quickly, particularly the revolver piece. And so I think we see some benefits in paying that down below the 3x level and moving past that. But obviously, opportunistically, we're always interested in buying back shares.

David Peter F. Hess

Yes, I've got nothing to add to that.

Operator

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

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

All right, listen. Help me connect a couple of dots here. So you got really good leverage out of sales and marketing, but how would you characterize the ACV level that you got and maybe some cost savings that you may have gotten out of variable or sales commissions that may have helped that line?

James S. Cox

So Sterling, this is Jim. Maybe I'll take that one. I think you're right to think of it that way. And I think when we looked at our fourth quarter guidance, we did contemplate not just sales commissions, but variable compensation, broadly, being more expensive in the fourth quarter relative to the third quarter. I think also, our marketing team was really focused on delivering the client conference. So there's probably marketing spend that didn't happen in that sales and marketing line in the third quarter that we'd expect to happen in the fourth quarter.

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

Okay. But normally, if ACV would've been like I would've thought -- and I know your deferred revenue works a little bit differently in terms of some of the clients that are live, but I think the deferred revenue was actually a good contributor to cash flow, for example. So maybe walk through -- and we talked about the term deferrals, but what else happened here in deferred revenue in the quarter?

James S. Cox

Well, I think that our strong renewal rate is also increasing our deferred revenue. So I think you're -- so when you think about deferred revenue, it's going up year-over-year as we build the base of our clients and as we're selling more to more clients, and that continues to grow as our revenue grows. Within the year, between the quarters, we're obviously billing the most in the fourth quarter. And so you see the largest growth of deferred revenue in that fourth quarter, and you see deferred revenue go down slightly throughout the year as we're billing as -- sorry, as we're recognizing more revenue than we're billing within those quarters. So I think everything you're seeing there is really right on par with what we want to expect. And I think you're right to say, "Hey, net, it was more positive this year than last year, that impact." And we obviously feel good about the ability to grow deferred revenue in the fourth quarter.

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

Got you. Got you. And you talked about the Black Diamond renewal rates being over 100% on a dollar basis. How should we think about the rest of the renewals?

James S. Cox

So when I -- Black Diamond, obviously, is fantastic. And I think we're really proud of it because the improvement that we've seen there is strong in a competitive marketplace, but I think I probably shortchanged all of our other products, Sterling. Because across our entire product set, to get a number like that -- and by the way, we're still collecting cash on that number. So it'll continue to grow as we continue to collect cash. All of our products really performed very well. I'd have to say the other kind of key thing that I think about is that international was a little bit weak last year. And obviously, international was back to it's more, what I'll call, normal renewal environment. And then I guess, this is kind of the third kind of ancillary benefit of Black Diamond, and it doesn't even show up in the Black Diamond numbers. The Axys renewals are -- continue to hold up better than they were kind of pre-acquisition days. And I think part of that has to do with the good story that we can tell to all of our Axys clients right now, including the ability to go to Black Diamond and the various other options that we have on the table with Advent Direct, et cetera.

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

Okay. One last one. One question that I get from investors that I'd like you guys to comment on is, okay, for the renewals that are still below 100%, what's keeping those dollar values from being at 100% or greater? Is it customers that are no longer there versus 3 years ago, like we did a little while back? Is it just headcount is still lower so they're taking -- they're renewing, but they're renewing at a smaller level? What is it that keeps you from seeing the renewal run rate coming in greater than what the previous contract was?

James S. Cox

So I think -- Sterling, this is Jim, why don't I start off. And then Pete, you can layer on if you have stuff. So I think that it's a combination of all of those elements that you talked about. There's still a reasonable amount of churn in this business. On the positive side, that's new bookings for us as new firms are formed. But there's a lot of reformulation, and there's that element. There's also an element that we've talked about a number of times, which is the outsourcing element. And so if a client decides to outsource, they would show up as a negative renewal number, but probably their outsourcer is using our software and so we're picking it up in the basis points in another way, but that does have an impact on the renewal rate. And then lastly, some firms are shrinking and changing the size of their footprint. So those would be the 3 main drivers.

David Peter F. Hess

Yes, and if you get product specific, there are a few products that we're not really managing to 100% renewal rate, but -- the best example I can think of that is actually Advent OnDemand and our hosted platform. We -- it was our approach to the advisory market before we bought Black Diamond. And so we recognized that it wasn't adequately competitive for that market, hence we bought Black Diamond, and we've been migrating clients off of that onto Black Diamond, and then some of them have gone to alternative vendors that were low-cost, like MorningStar, and occasionally, we lose clients to Orion. So there's a real good reason for that one, and that one's down in the 80s. So -- but otherwise, as Jim said, I think we feel pretty good about -- we're making investments in our core products and the renewal rates are either steadily holding their ground or getting better, with most of them, frankly, getting better right now. So that's the good news.

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 wanted to follow up on one of Sterling's questions with your sales force. When you did the restructuring earlier this year, have you moved to the point you want to be as far as sort of the product knowledge and territories people are at? And that sort of gets back to ACV being flat year-on-year is, basically, do you think there could be some upside to ACV with the sales force that's getting a little more comfortable on what they're targeting now?

David Peter F. Hess

Yes, I think we have the seats filled that we needed to fill and people are ramping up quickly. It takes a good 6 months for a new sales person to really find their feet. And so in some cases, we won't be in that place until the end of the year. And people are still ramping up on new products, and that really only comes through repetitions. I mean, we have training programs, but they need sales cycles and repetitions to really get great at that. So those things do take a while. But that said, I feel really good about the people we have in the seats and I feel good about the progress that we're making. And so I think we only get stronger from here, which is the good news. And if we're fortunate enough, I mean the government always seems to find a way to kind of throw some industry threatening event out in front of us, February 7 with the next potential sort of fiscal cliff discussions and things. I don't know what that's going to do to the market and demand and all that, but I think we have a resilient industry that we sell to and I think people are getting pretty used to these kinds of threatening events. And most of our clients, I think, are going to be looking at next year more positively than they looked at this past year, I think, from a budgeting standpoint. So that should be a little bit of a tailwind as well for next year.

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

Okay. And then I wanted to follow up on your comment in your prepared remarks that we might see some impact on Axys migrations. Is that something you're getting -- you're hearing from clients or are you just being cautious with us?

David Peter F. Hess

Both. It's -- I don't know how to measure it. That's the challenge. We know the deals we're talking to and it's unclear, but -- exactly how that's going to impact us. It will impact us to some degree. Bookings are hard to predict to begin with, and so we've introduced another variable that I wanted you guys to be aware of. It is a new learning, it's a new topic to be discussed, so it has the tendency to slow sales cycles down. But when I mentioned earlier, there's still many great reasons to go from Axys to Black Diamond, right? One is run it yourself. The other one is fully outsource it. And Black Diamond is way ahead of anything else we're offering for advisors. So similarly, with APX for asset managers, Geneva for hedge funds, there are plenty of good reasons why people will switch, but Advent Direct will probably slow them down a little bit. Whether -- what the impact of that is going to be on the fourth quarter bookings number, I honestly don't know. But I don't -- I would have drawn an even brighter spotlight on us if I thought it was a really major thing. I think it's going to affect us, but I don't think it's going to affect us that much.

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

Okay. So it sounds like it's sort of on the margin here and on the radar screen, but...

David Peter F. Hess

Think of it as corner cases, not mainstream.

Operator

And the next question comes from the line of Peter Heckmann with Avondale Partners.

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

Wanted to follow up, and I apologize, I missed a little bit of the beginning of the call, my fault, but could you talk and give us a little bit of a better update on international versus U.S. demand, and how that contributed to ACV? And as well, if you could talk a little bit about some of the separate subsegments that you're seeing, particular strength or maybe a little bit of pullback in terms of near-term demand?

David Peter F. Hess

Sure. This is Pete, I'll take that. I would -- the healthiest market we're selling into right now is the U.S., and I think Europe is still a little bit in decline. I would say it's not in decline, though, I think it's just -- I always like to say that 2009 was the rough year for the United States, and I think 2012 was really the toughest year for Europe. This year, demand has been better than it was last year in Europe, despite a continued, what I would characterize as a little bit suppressed environment. My hope is that we increment our way out of that over the next few years, but I don't think it's going to be an on/off switch. I think that demand is going to trail where it was before for the next couple of years. I don't think -- honestly, I don't think that much about these macro-level trends. I mean, they certainly impact us, but I can't control them. What I control is how competitive the solutions are that we're bringing to market. And the design that we take is what would be so compelling that people would switch -- that they would switch to it or that they will create budget for it, and that's the bar that we're trying to clear. And so I think we've got enough of -- enough exciting new product coming out and a great new story to tell that I think we're going to maybe outperform the market, so to speak, in terms of our performance relative to what syntax[ph] spending may be. That's our objective, and that's what we focus on.

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

Okay. Okay. And then can you talk about how -- you had mentioned, perhaps, that some of these newer Advent OnDemand products and how they may contribute to ACV? And can you talk about how we should think about ACV as a driver for the whole business versus other solutions that aren't accounted in ACV?

David Peter F. Hess

Yes. Well, we're still working through commercialization models for Advent Direct. And what I can tell you is that what I care about is incremental recurring revenue run rates. And that can come in the form of better renewals and it can come in the form of AUA fees and it can come in the form of ACV. And we're deliberately entering the commercialization topic with Advent Direct unbiased in the form of -- in whichever form it takes. We -- I think, ACV, it's still the best proxy we have for growth, but it is flawed in its execution, where there are opportunities for us to generate more incremental revenue run rate by commercializing it in renewals and/or even in revenue share agreements. One of the reasons Black Diamond's renewal rate is so high is because that's a -- that construct is a basis-point revenue share construct. And so sometimes you have to trade some ACV in order to get that in exchange, but you're better off in the long run. So we are looking at Advent Direct commercialization with a clean lens and focusing on, ultimately, the incremental revenue run rate. Now as we learn more and make decisions on how we're going to charge for that, we'll obviously let you guys know. We're not there yet, and probably still a good quarter away from being there.

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

That's helpful, that's helpful. And one more question, as regards the margins on the nonrecurring revenue, can you give us an update on some of the initiatives within the Professional Services, pricing and utilization in terms of if we should continue to expect to see that line item moving towards a breakeven level in 2014?

James S. Cox

Yes, sure. Sure.

David Peter F. Hess

You want that one? Do you want to do that one?

James S. Cox

Sure, sure.

David Peter F. Hess

Go ahead.

James S. Cox

So Pete, I would say that our Professional Services practice continues to make the improvements, as we planned. There's ebbs and flows naturally to it, and so we're always looking to get better immediately, but we are making progress. And just to get to your actual question, I don't think -- nothing that we've seen thus far in the process would have us move away from being breakeven in 2014 for the Professional Services practice itself.

Operator

[Operator Instructions]

James S. Cox

Well, so -- all right, it sounds like we have no more questions. Pete, do you want to [indiscernible]?

Operator

Yes, no more questions in the queue.

David Peter F. Hess

No more questions. Well, thank you, everybody. And we look forward -- thank you also for coming to San Francisco, if you guys were there. Really appreciate you spending that time at that Investor Day, got a good look at what we're doing. It's very exciting. I think the next year, in particular for us, is going to be extremely exciting with the new products that are going to be launched, and we look forward to keeping you guys abreast and keep you up-to-date on our progress. Thanks for the call.

James S. Cox

Thanks, everybody.

David Peter F. Hess

Yes. Bye-bye.

Operator

And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

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