Blackbaud Inc (BLKB) 2004 Q2 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to Blackbaud's Second Quarter Earnings Results Conference Call. At this time, all lines are on a listen-only mode. It is now my pleasure to turn the floor over to Tim Williams, Chief Financial Officer. Sir, please go ahead.

Good afternoon everyone. Thank you for joining us, today, for our first earnings conference call. We'd like to thank investors for their time and interest in our recent IPO, and we were quite pleased that we were able to complete the transaction in what was clearly a challenging IPO market environment.

As many of you are aware, we completed the IPO and began trading on July 22nd. As such, we are still in our quiet period. As a result, we will limit this call to our prepared remarks, and the scope of our comments will be limited to the second-quarter results and, an overview of our business that is consistent with what we have already disclosed.

As we mention in our press release, we will host a separate conference call on August 17th, when we are out of the quiet period to provide guidance and host a Q&A session with investors and analysts. That being said, please note that our remarks today contain forward-looking statements.

These statements are based solely on present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements, please refer to our SEC filings including our registration statement on Form S-1 and the risk factors contained therein as well as our periodic reports under the Securities Act of 1934, as amended, for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements.

Also please note that a web cast of today's call will be available on our web site, in the "Investor Relations" section. With that, I'd like to turn the call over to our CEO, Bob Sywolski, so he can give some color on the market and our business model and, then I will come back, later, to provide some further details regarding our second-quarter results. Bob?

Thanks, Tim. By now, you should have all had a chance to look at our press release, indicating record results for the quarter in terms of total revenue, operating income, and profitability. For the second quarter, total revenue was 35.5 million, an increase of 19% year-over-year.

Pro forma operating income was 10.6 million, a 30% margin, and pro forma net income was 6.4 million, up 23% year-over-year. Obviously, we were quite pleased with this performance, especially, in light of what investors were telling us was the worst quarter in the software industry, over the past couple of years.

We believe our results highlight two major themes to the Blackbaud story. First, we operate in a very different end user market than most software companies. And second, although we do sell software, our business model is quite different than "a traditional software company." Let me provide a little more detail on these two important points, starting with the market opportunity.

Blackbaud is the leading global provider of software and related services, designed specifically for non-profit organizations. In the Maine, our target market customers of those non-profits that raise money to fund their cause and run their operations.

They are represented by the broad array of non-profits that include healthcare, human service organizations, K through 12 and higher education schools, zoos, aquariums and religious organizations. The common challenge that all of these non-profits face is the need to raise more money cost effectively while at the time improving the efficiency of their operations.

They are challenged to become more effective in how they target new donors and manage and mine relationships with current constituents. To be efficient and successful, non-profits must invest in technology just as full profit consumer service companies do.

Their challenge is to better understand their donors and consistents and deliver tailored focused marketing programs and provide improved service levels. Although a bit of a generalization, it is fair to say that non-profits are well behind the for profit sector in terms of operating efficiency.

Many of you, who may be involved with non-profits, would probably never accuse them of being early adopters of technology. In fact, a quite thoughtful article appeared recently in the Harvard Business Review, the main theme of which was that inefficient operations cause non-profits to lose access to approximately $100 billion each year, roughly 12% of the funds available in the sector.

These are dollars that could otherwise be directed supporting their cause. Blackbaud is focused on helping non-profits recapture these dollars by automating operations with state-of-the-art vertically focused solutions. There are two aspects of the non-profit market that make this a particularly interesting opportunity.

First, it is a surprisingly large market. In terms of size, there are approximately 1.4 million non-profits in the US and another 1.5 million outside the US, where we have approximately 12% of our business. Our sweet spot in the US is 360,000 of the largest organizations that fund raise and which can well benefit from our software, subscription and service offerings.

As we currently have some 12,500 clients, there seems to be plenty of headroom in this market. Secondly, the economics supporting this market are characterized by consistent growth with a surprising lack of volatility.

Revenue from non-profits comes from two not totally obvious sources: the first is contributions, which last year was a staggering $241 billion and the second, fees for services, which was $600 billion last year. As you know, schools charge for tuition performing arts organizations sell tickets and memberships and hospitals and others charge for their services.

While the casual observer might suspect that the contribution number would bounce around quite a bit, depending on consumer sentiment, in fact, the opposite is actually the case. It's surprising, but, since 1962, contributions have had a very steady CAGR of roughly 8% and a bad year for non-profits has typically meant that contributions are flattish as opposed to declining.

Bottom line. This is a surprisingly large $850 billion sector of the US economy that has been growing steadily for close to 50 years -- the sector that Blackbaud has served for more than 25 years with a focused strategy and a comprehensive blend of software and service solutions. There are in fact, four important characteristics to our positioning and, strategy to attack this market that I believe will help you understand how we operate and which combined in Q2 to produce our relatively solid results.

One, we have a very different far less volatile business model than the typical software company, one which truly reflects a solution sale. A typical sale for Blackbaud is often composed of 30 to 40% software and 60 to 70% services. Services such as installation, implementation, conversion and business process reengineering where we have very attractive gross margins.

Secondly, virtually half, 50% of our revenue is driven by our maintenance income, where we have a renewal rate of approximately 94%. Third, we are, in fact, are the leading player in this space which gives us considerable access and credibility and an advantage, which I will talk about in a moment.

And finally, our large customer base of more than 12,500 clients is an important aspect -- asset from two perspectives. It provides us a real advantage in being able to offer integrated solutions and, the opportunity to sell additional products and services back to this space.

Let me give you a little more detail around these four points. First, it's important to recognize that we are a high-volume, low average selling price business, providing comprehensive solutions, software and services. Services provided by Blackbaud, unlike services provided by many other software companies, is a highly profitable area, as we have fully loaded gross margins of approximately 50%.

Although we have a growing unit selling to the larger enterprise market, what I mean by high-volume is the fact that we typically close around 3500 transactions a quarter with an average deal size of 25,000 to $30,000. That figure includes software and services. You should also keep in mind that we do this with a direct sales model, while producing almost 30% operating margins.

This high transaction sales model produces quarterly results that are far less dependent on one or two colossal sales at the end of each period, and revenue that is more predictable than many software companies. Another reason for our limited overall revenue volatility is that 50% of our total revenue is represented by our maintenance income where for over a decade we have enjoyed a 94% renewal rate.

The third factor driving our success is related to our significant market share. While there is no third-party source such as Gartner or META that is comprehensive market share data on the non-profit technology sector, we estimate that we have three to five times more customers than our nearest competitor in the fund raising space. This is, of course, the category that drives the majority of our revenue.

It is much easier competing and closing business, when you are a recognized standard. And finally, our more than 12,500 customers represent a huge asset. Not only is this large customer base the engine behind our maintenance revenue, but it also provides an excellent source of revenue as we sell both new and, add-on offerings back to this base of customers. In fact, approximately half of our new revenue each quarter is derived from selling additional software and services to this base of customers.

The final area of our strategy that I'd like to highlight is our ability to introduce new products and, service offerings that can be fully integrated into our product line. Our customers are constantly striving to combine their individual silo-like data sources, and produce a single view of their constituence in donors.

With more than 12,500 clients already using our services, we believe Blackbaud stands alone in its ability to offer integrated offerings to this market. Today, we have the broadest solutions available for the non-profit sector, and we continue to introduce new products that benefit from common architecture, applications and databases.

We started with a core fund-raising management application, Raiser's Edge, which drives 70% plus of our revenue. Over the years we have successfully added an accounting product, business intelligence tools, an online fundraising system and analytical and data services. In the second quarter we introduced a new and, improved version of our Educational Edge product with the K through 12 market, and Patron Edge, a ticketing system for which we have exclusive resale rights in the US.

This system allows performing arts and, other organizations to have a single view of their patrons that is donors and ticket holders. As you might suspect, in general, non profits lack sophisticated IT departments. As a result, our customers often turn to us for our best of breed products, and because we have the broadest integrated set of solutions in this space.

Before I turn this over to Tim, who would like to share with you - I'd like to share with you two examples of sales we closed in the second quarter, which I think, you'll find particularly interesting. The first example, is Bon Secours Health Systems, Bon Secours illustrates two important themes in our positioning and strategy.

The first is, our ability to help federated or national organizations, as they look for ways to consolidate their fundraisings. Additionally, as several Bon Secours chapters were existing clients, it also highlights the importance of our customer base and, our ability to make major sales back to our base of clients.

Just to give you a little background, Bon Secours is a healthcare ministry, headquartered in Maryland. Like many of our large customers, Bon Secours is a national organization with a group of affiliated local organizations. Bon Secours is a combination of 29 hospitals, 9 nursing care facilities, 8 assisted living facilities and, over 28,000 caregivers. Supporting this distributed and, sizable group are 14 foundations that raise the money to support ongoing operations.

Bon Secours faced several challenges, if they were to improve operations across this distributed system (sic). First, some of the organizations had no fundraising tools or were utilizing a weak competitive solution. As a result, not only were many of these organizations sub optimized in terms of best practice, but also the national organization could not obtain a holistic view of their donor base, given the variety of non-integrated systems.

Blackbaud was well positioned to address these issues, as our Raiser's Edge product was already being used at 9 of the foundations, we were the logical choice when national decided they needed to standardize on a single solution. We were pervasive at a majority of the organizations, offering superior functionality and, we're the only vendor that also had a robust service training and integrated business intelligence tool.

This is an example of an enterprise sale to a national organization with distributed users, where some were already clients of Blackbaud. We believe that consolidating on our fundraising product, the Raiser's Edge, is only the first step in what will be an expanding relationship with this client. As we move forward, we are hopeful of building on this start by including additional products, such as, our decision support tools, our Internet portal and possibly our accounting product.

The second customer, I'd like to touch on briefly is Mission Of Mercy. This is an interesting engagement, as we not only sold multiple products and services but, we'll also be hosting these offerings as part of the solution. Mission of Mercy is an organization dedicated to helping meet the physical and, spiritual needs of children in poverty-stricken areas, by matching donors with over 75,000 children, in 27 countries throughout the world.

After running a homegrown system for the past 13 years, they decided it was time to invest in new technology to help support their growth plans. They selected both Blackbaud's fundraising system and, our business intelligence product, the Information Edge, to help aggregate, manage and analyze their donor data. They chose us, because we provide the most functionally rich products in the area of fundraising management and, business intelligence and, professional services and support, for them to carry on their mission.

These are just two very recent examples that demonstrate the breadth of our solution services and, domain expertise, and how compelling they are viewed by our nonprofit clients. In addition, with these examples, you may get a sense of how complicated the issues are that these nonprofits face, and the need for robust software, supplemented with services delivered by experienced and knowledgeable professors.

With that, I'd like to turn it back over to Tim Williams to provide more color on our second-quarter results. Tim?

Thanks Bob. As already indicated we are very pleased with our second-quarter performance. There are two important factors to consider when putting these results in perspective. The June quarter has historically been a strong seasonal quarter for Blackbaud, particularly with respect to licensing revenue.

This is because many non-profits at fiscal yearends that occur at the end of June. On top of this seasonal strength our performance during the quarter was better than expected. As Bob mentioned our total revenue for the quarter was $35.5 million, which was an increase of 19% on a year-over-year basis.

In support of what Bob said earlier, that we are focused on being a total solutions provider. You will note that during the second quarter total revenue was comprised of 20% from software licensing revenue, 31% from services and, 46% from maintenance and subscriptions revenue.

As we indicated on the road show, we manage and compensate our sales organization based on this total solution focus. And, we believe this approach is a significant competitive advantage in selling at all levels in our market. Looking at the numbers in a bit more depth, from the top, license revenues was 7.3 million, an increase of 29% on a year-over-year basis.

Beyond the impact of seasonality, which I mentioned a moment ago, there were a couple of other factors that drove these strong results. First our efforts to better penetrate so-called enterprise accounts continue to gain traction. These enterprise accounts are larger non-profits that have more complex needs and are also driven by the need to consolidate multiple data sources.

We closed more than twice as many such transactions in the second quarter this year compared with the second quarter of last year and, this was the single biggest contributor to the growth in our software licensing revenue year-over-year.

To provide further clarification when we say enterprise transactions, we are talking about licensing revenue of around 25,000 to $100,000 per deal. Also, contributing to software licensing revenue in this quarter was a benefit from new products. Specifically, our new Education Edge product and, the software that is sold as part of our WealthPoint prospect research offering.

When looking at the year-over-year percentage increase you should also keep in mind that licensing revenue is a relatively small component, in our overall total revenue and, the fact that we are talking about small numbers means that year-over-year growth rates can be skewed, by relatively small absolute amounts.

Turning to services, revenue came in at 11.1 million an increase of 29% year-over-year. Our services business is being driven by high utilization rates above average billing rates, resulting from our domain expertise and, a customer base that needs help implementing our solutions.

The rebound in year-over-year license revenue growth -- licensing revenue growth, which really started in the fourth quarter last year, has added further momentum to our services revenue growth and visibility. With respect to maintenance we continue to enjoy a renewal rate of around 94% and, revenue from maintenance came in at $16.2 million, for the second quarter an increase of 12% over the second quarter of last year.

As we mentioned during the road show, we implemented a CPI adjustment as part of our maintenance program at the end of last year. This included an across the board increase of 5% for all accounts that have been on our program for more than a year. This increase -- price increase is starting to have an affect on our maintenance revenue as is the growth, we are seeing in software licensing. The last thing I would point out on the revenue side is our North America international mix. This was again around 90%, 10%. This has been fairly consistent over the last year.

Turning to gross profits, we generated 25.4 million in pro forma gross profit, representing a margin of 71%. This is slightly higher than the 70% level we achieved in the second quarter of 2003, and we attribute the higher gross margin percentage to the relative strength of software licensing revenue versus last year's second quarter.

Looking now at operating expenses, sales and marketing came in at 7.3 million or 20.6% of total revenue. This was inline with first quarter this year but higher than the prior year’s 18.3% as a result of a couple of factors. First, the company has made a focused effort to increase the size and, skill set of our enterprise sales force to help us further penetrate larger non-profit organizations. As you've already heard this investment is starting to pay dividends.

In addition, sales and marketing was also impacted by higher commission rates related to our topline performance. There were really no surprises on the research and, development and general and administrative cost side. We continue to invest in our product lines with R&D coming in at $4.4 million or 12.5% of total revenue up slightly from last year's second quarter when R&D was 12% of revenue. G&A came in at 3.1 million or 8.6% of total revenue, compared with $2.5 million or 8.5 % of revenue in 2003.

On a pro forma debt basis then, excluding stock option compensation expense and one-time IPO costs, our operating income for the second quarter was $10.6 million, up 16.5% on a year-over-year basis and, representing a 29.8% operating margin. This was just slightly lower than last year's margin of 30.5% and, was principally a result of the previously mentioned sales and marketing expense increase.

As with revenue, we would remind investors that we typically have our highest quarterly operating margin during the second quarter, which is different than most software companies where the fourth fiscal quarter is generally the most profitable quarter of the year.

We used an effective tax rate for pro forma results in the quarter of 39% leading to pro forma net income of 16.4 million or an 18% margin and, pro forma EPS of 14 cents on 45.8 million fully diluted weighted average shares outstanding. This compares to pro forma EPS of 12 cents in the year ago period.

Today, and in the future, we will talk about pro forma results because we believe that excluding non-cash items such as stock option compensation expense or a onetime item such as IPO costs provides the best indicator of the health of our business, and the level of efficiency in our operating infrastructure. That said we appreciate that investors also need to analyze the results on a GAAP basis.

To reconcile pro forma profitability to GAAP, you would need to add the following pretax amounts to expenses, in the second quarter of 2004, $800,000 for stock option compensation expense and $700,000 for IPO costs, and in the second quarter of 2003, $6.7 million for stock option compensation expense.

After appropriate tax adjustments the reported GAAP net income is 5.3 million in the second quarter of 2004, compared with a net loss of $200,000 in 2003, and GAAP EPS is 12 cents, compared with a loss of 1 cent in the prior year. Please note that the press release contains a full tabular reconciliation of these GAAP and pro forma results.

Let me turn now to cash flow on the balance sheet. We ended the second quarter with $16.9 million in cash, up from 6.1 million at the March quarter end. For the second quarter we had cash flow from operations of $11.3 million, a 31% increase over the second quarter of 2003 amount of 8.6 million. The two primary drivers of cash flow were, of course, net income but also deferred revenue.

And additionally, we continue to do a good job with working capital, and this also had a positive impact on the quarter. To that point when you look at the balance sheet, you will see an increase of $8.3 million in accounts receivable during the June quarter. However, almost all of this increase was related to a comparable $7.4 million increase in deferred revenue.

The increase in accounts receivable and deferred revenue was similar to the increase we saw in the second quarter last year and is almost entirely due to the seasonally heavy level of annual maintenance renewal billings that occur in May and June each year. You will know we actually delivered a net improvement of about $1 million to cash flow year-over-year from the impact of accounts receivable, net of increases to deferred revenue.

Because of the significant quarterly fluctuations in deferred revenue, that is caused by the seasonality of maintenance billing, internally we compute DSOs in a manner that adjusts for this change in deferred revenue. Using this method our DSO was 39 days at the end of the second quarter, compared with 41 days at the end of last year's second quarter.

Finally, finishing the discussion on the balance sheet and cash flow, it is worth pointing out that we have completed the pay down of $115 million of debt we incurred in 1999 at the time of the company's recapitalization.

We ended the second quarter with no long-term debt. And finally, one last item on the balance sheet to refresh your memory, we also carry a deferred tax asset of approximately 83 million as of June 30. The realization of this benefit does not impact our income statement but does result in a quarterly reduction of tax liabilities, or benefit to cash to the tune of about $2 million for the quarter.

With that, let me turn it back to Bob for some final comments.

Thank you Tim. Just a couple of final comments. Obviously, we're delighted with our Q2 results but, let me add that, given our conservative approach to planning, at this time we have not changed our internal forecast for the remainder of the year.

We are still in the quite period following our IPO, which was completed on July 22nd and, so we cannot provide any further insight at this time, regarding our views about the rest of the year. We would also love to respond to questions but, we can't do that either. It is our intention however, to host a separate conference call on August 17th, in which we will provide revenue and, earnings guidance for the second half of 2004 and, we'll be happy to take your questions at that time.

Thank you so much for joining us today. We look forward to speaking to you again on August 17th. Operator, this concludes our prepared remarks.