Blackbaud Inc (BLKB) 2004 Q4 法說會逐字稿

Welcome to the Blackbaud 4th quarter 2004 earnings conference call. [OPERATOR INSTRUCTIONS] And now I would like to turn the conference over to the CFO of Blackbaud Mr. Tim Williams. Mr. Williams please go ahead sir.

Thank you very much. Good afternoon everyone and thank you for joining us today to review our 4th quarter 2004 results. With me on the call today is Bob Sywolski our chief executive officer. Bob and I have prepared remarks and then we will open up the call to question and answer session. 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 defer materially from those projected in the forward-looking statements. Please free to our SEC filings including our registration statement on form S1 and the risk factors contained therein, as well as our periodic reports under the securities act of 1934 for more information on these risks and uncertainties and on limitations that apply to our forward-looking statements. Also, please note that a web cast of today’s call will be available on our website in the investor relations section. For that let me turn the call over the our CEO, Bob Sywolski so he can provide some color on the fourth quarter results and our market opportunities and then I will come back later to provide some further details regarding our financials, Bob.

Thanks Tim. My dramatic reading if you will hear. So, I hope by now everyone has had time to review our press release indicating that we delivered better than expected top line results and solid profitability that was in line with our expectations. We are very pleased with the company’s overall execution during 2004, our first year as a public company, and we are excited about our business outlook for 2005. As Tim will discuss shortly our confidence in the business has enabled us to slightly raise our revenue and profit guidance for 2005 in addition to announcing both a quarterly cash dividend and a share buy-back program. Both actions focus on maximizing shareholder value.

Q4 was a very solid quarter for us with strong performance across all areas including our core solutions, new products, and service offerings. In addition, we enjoyed success selling to our broad cross section of clients, from the smallest nonprofits to some of the largest in the world. Before I dive into some of the very positive results, I would like to take a moment to express my appreciation to our employees throughout the world who help make this performance possible, sales, consulting, development, customer support, marketing, and all our finance and administrative functions, thanks for a great year.

On to the details, our 4th quarter new revenue, which we consider the combination of our software license fees and services revenue grew an impressive 18% year over year against a solid comparison quarter last year. During 4th quarter new revenue both software and services from our core products, Razors Edge, Financial Edge, and the Education Edge, represented more than 80% of our total sales and collectively grew at over 15% on a year over year basis. Not only do these offerings generate the majority of our new revenue but importantly they also serve as the primary entry point for us to penetrate new accounts opening the door for Blackbaud to sell additional products and services to our base of almost 13,000 customers.

Of course a subtle but important point here and one that allows us to dominate this space is that we are the only large vendor with seamless integration between our fund raising, accounting, and add on solutions. The fundamental applications if you will in nonprofit space. In addition to continued growth of our core products, we have witnessed blowout acceptance and success of our new offering such as the Patron Edge, our Internet applications, and an array of analytic offerings.

On last quarters conference call I indicated that we had obtained exclusive North American distribution rights to an exciting ticketing product that re-launched as Patron Edge. I remarked this analysis had generated a lot of interest within our customer base and to capitalize on this demand we formed a specialized vertical team focused on performing arts, culture organizations, zoos, aquariums and others who sell tickets and can benefit from an integrated ticketing fund raising solution that provides a single view of the patron.

Patron Edge was introduced in the 2nd quarter of 2004 yet it is our third largest product line contributor to license fees in the fourth quarter. This demonstrates both the success of Patron Edge and the power of our back to base business model. An other exciting develop during the 4th quarter was the pickup and demand for our Internet base solution called Net Community, an offering that enables nonprofit organizations to manage relationships with the constituents and process transactions by an online pull. What we have offered in online funding raising solution for almost four years and today have approximately 1,000 clients using this capability.

You may have seen our press release during the quarter announcing a major upgrade in significantly expanded functionality for Net Community. With this release we have improved ease of use and importantly enhanced integration with the Razors Edge our leading industry back end system that manages all constituent information and I might add is the most widely deployed constituent management system for nonprofits in the world.

This integration enables our clients to have a single online, off line view of their donors and constituents to help them deliver a truly personalized experience, which we believe in the end leads to improve relationships and increase donations. During the quarter Net Community was a material component in five of our top 20 sales and helped make Q4 the best quarter we have had with our Internet solutions. Although the internet remains a relatively small portion of the overall technology market for nonprofit organizations it is growing and we believe we are well positioned to dominate this space over the long-term as a result of the breath of our product sweep, integration with Razors Edge, and our substantial customer base.

Finally our Blackbaud analytic solutions and our business intelligence tool, The Information Edge, represents the largest component to our new offerings revenue and are collectively growing at a multiple of a growth rate being generated by our core products. Here again we believe that we can dominate this space, as we are the only vendor delivering comprehensive business intelligence and analytic solutions, seamlessly integrated with an equally robust financial management and reporting system.

In summary, we believe we are well positioned, as the industry leader with our core offerings, while at the same time integrating these with our new offerings. This provides Blackbaud with a differentiating and compelling solution that leverages the core assets of a company, our domain expertise and massive customer base. The strong momentum on our backs, we plan to continue pushing the envelope on the R&D side to further enhance our core and new offerings, as well as to introduce additional applications to sell back to our base.

Switching gears here and looking at our sales channels we continue to be very pleased with our traditional sales force that target the low and mid market segments of the nonprofit market, while at the same time we are realizing increasing returns from our investment in a sales team targeting the larger organizations. As a reminder, Blackbaud’s franchise is built on a high volume of transactions with an average selling price representing software and services in total of approximately $25,000 and we believe this will continue to be the case for the forceable future.

As we have said before this is the engine that any traditional enterprise software vendor would struggle to replicate. However, on the margin, we are seeing an increasing number of deals above 25k in software and 50k in software and services combine. In Q4 the number of software deals greater than 25k grew buy over 70% year over year, while the number deals for the combine software and services transaction value, greater than 50k, grew by 50%.

Understanding these comments I do want to continue to emphasis that we are not elephant hunters dependent on large deals. To help reinforce that point I will tell you that we have only two deals greater than 100k in software during the quarter and 10 for the full year. Additionally I would point out that it takes a lot to impact our overall deal size given that we close several thousand transactions in a quarter. However, larger customers seem to recognize the need to invest more in technology solutions to improve their operations and are turning to Blackbaud as a result of our domain expertise and the fact that we are the only vendor with an end-to-end fully integrated product sweep.

Switching gears a bit, I would point out that a very important component to our revenue, namely maintenance revenue, remained strong during the quarter. Maintenance represents just under 50% of our total revenue and is a major source of the company’s cash flow and total revenue predictability. We take pride in doing whatever it takes to help our customers successfully use our product, and this helps to fuel our renewal rates in the mid 90’s.

One other point regarding our recurring revenue: While we have downplayed the significance of revenue from our subscription-based offering, it is worth noting that this revenue stream is growing at a nice rate. All of 2004 subscription revenue totaled about $3.3 million and grew at 82% over 2003.

It is difficult to fully understand how powerful our combined offerings can be without looking at some specific customer examples. Though, before turning it back over to Tim, I would like to review just three of these from the fourth quarter that provide further support of several of the themes I just mentioned. Note, however, that these three examples are not necessarily the largest deals we completed in the quarter. I selected these organizations to give you some insight into the comprehensive way many of our clients are combining and using our products and services, not necessarily to impress you with their size.

So, the first organization is Clemson University. Clemson was searching for ways to increase and improve communications with alumni, while at the same time, through better integration, drive fundraising growth with their alumni. The organization purchased an integrated fundraising solution from Blackbaud that included the Razor’s Edge, the Information Edge, and Blackbaud’s net community to help build and manage deeper alumni relationships and extend personalized communications for the web. There were really four key reasons we were selected: First, unmatched breadth of our product sweep; second, solid internet functionality; third, seamless integration between our back-end and online front-end; and finally, our superior reputation for reliable customer support.

The second organization is the Detroit Symphony Orchestra, a Blackbaud customer that had already relied on the razor’s edge and financial edge to manage its integrated fundraising and financial management needs. This organization was looking for a state-of-the-art ticketing system that would both support its box office and integrate with fundraising. To achieve this, they selected the Patron Edge and the Patron Edge Online. In addition, the customer also licensed the Information Edge. With this unique data intelligence tool, Detroit Symphony Orchestra will be able to consolidate data from multiple systems used throughout the organization, thereby getting a complete view of each patron and more effectively targeting future activities.

The third and last organization is Cathedral of Hope. As non-profits face increasing pressure to demonstrate accountability and stewardship to donors and boards, and I might add possibly regulatory authorities, Blackbaud’s integrated fundraising and financial reporting systems enable organizations to implement more effective controls -- controls that ensure compliance with donor intent and demonstrate the effective stewardship of funds. In the case of Cathedral of Hope, the organization expanded its relationship with Blackbaud beyond the Razor’s Edge, purchasing a complete financial management system that included the Financial Edge and the Information Edge. By bringing these three applications together, Cathedral of Hope will create a seamless solution that will provide enhanced insight into their operation and improve compatibility and compliance to all interested parties.

Let me now turn it over the ever popular Tim who will comment further on our financials.

Thanks, Bob. Let me begin this afternoon by simply stating that we were very pleased with our December quarter results, which were better than we expected, and we feel that we are entering 2005 with good momentum.

I would like to cover three main topics before we turn it over for Q&A. First, review our solid fourth quarter operating results and our balance sheet; secondly, provide some detailed 2005 and first quarter guidance; and finally, outline a multifaceted capital management program that we believe will have a positive impact on increasing the value we can deliver to you, the Blackbaud stockholders.

Let’s start with the highlights of the P&L. Total revenue for the 4th quarter came in at 35.7 million, which was up 17% on a year-over-year basis and better than the high end of our expectations coming into the quarter. For the full year of 2004, total revenue grew 18% compared to the 12% growth we enjoyed in 2003. On the one hand, our revenue visibility continues to benefit from roughly half of our business coming from recurring sources such as maintenance contracts and subscriptions, while on the other hand, we are enjoying attractive growth from new revenue streams, which again, to remind you, we define as revenue coming from software license fees and services.

We believe our new revenue is the most relevant metric for analyzing the momentum of our business. For the quarter, our new revenue was 16.7 million, which was up 18% on a year-over-year basis, and for the full year of 2004, our new revenue was 68 million or growth of 23% on a year-over-year basis. We are quite proud of the growth Blackbaud has generated as we believe it places us in the upper echelon of what sizeable software companies were able to produce in 2004. Within our new revenue, license fees came in at 6.8 million, up 15% year-over-year against a solid comparison quarter and also up 10% sequentially and slightly better than our guidance of $6.5 million.

As Bob mentioned, we were pleased with the performance across the spectrum of our product lines. In addition to the distribution of yields closed by our traditional sales force and our increasingly productive sales team focused on the largest non-profit organizations. On a full-year basis in 2004, license fees grew 19% to $25.4 million. This was the largest year-over-year growth we have had since 1999, and in that year, we were helped by a major acquisition.

On the services side, revenue came in at 9.9 million, which represented growth of 21% on a year-over-year basis and a decline of 18% on a sequential basis. To remind investors, we had previously guided that our services business experiences a seasonal sequential decline in the December quarter driven by typically weak demand for our services around the holidays and the fact that many of our clients also focused their efforts externally on fundraising near year end. However, our performance did come in slightly better than we expected.

A last major component to our revenue, maintenance and subscriptions, came in at 17.6 million, which represented 49% of our total revenue, growth of 17% on a year-over-year basis, and 4% sequentially. For the year 2004, maintenance alone grew at 12% due in part to the CPI adjustment, which took effect in the 3rd quarter of 2003, but also due to the substantial growth in software licensing. We continue to enjoy maintenance renewal rates in the mid 90’s, which is a testament to our customer satisfaction and the strength of our technology. Also, adding to the growth here is subscriptions, which as Bob mentioned earlier, grew by 82% in 2004.

Turning now to gross profit, we generated 24.5 million in pro-forma gross profit in the quarter, representing a gross margin of 68%. Gross profit grew 14% on a year-over-year basis, and the margin declined by 2 percentage points compared with the prior year fourth quarter. This was due to both higher consulting staff utilization in the prior year fourth quarter and the result of additions to our staff in the 2004 fourth quarter in preparation for 2005 to meet the growing demand reflected in our growing backlog. For the full year 2004, our gross margin was 70%, virtually flat compared with the prior year.

Looking at operating expenses, there were really no surprises compared to our expectations or previously disclosed guidance. Sales and marketing came in at 19% of total revenue R&D at 13% and G&A at 9%. Pro-forma operating income came it at 9.9 million representing a growth of 16% on a year-over-year basis and a pro-forma margin of 28%, roughly flat with the prior years’ quarter and down from 30% in the 3rd quarter of 2004.

To remind you again, we typically expect a quarter-to-quarter decline in operating margin from the 3rd quarter to the 4th quarter due to the seasonal decline in our services revenue. That, as I indicated earlier, is driven by typically week client demand in the 4th quarter.

For the full year 2004, we generated pro-forma operating income of 49 million or a pro-forma margin of 29%, which again is virtually flat with the full year of 2003.

We used an effective tax rate for pro-forma results in the quarter of 39% leading to pro-forma net income of 6.2 million, a 17% margin and up 15% over last year.

Pro-forma EPS was .13 cents which was inline with our guidance. Diluted shares outstanding used and pro-forma EPS were 46.7 million shares.

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 and amortization of intangibles arising from business combinations or other one-time items such as public offering costs provides the best indicator of the health of our overall business and the level of efficiency in our operating infrastructure.

That said we appreciate that investors also need to analyze results on a GAAP basis so we have provided a full tabular reconciliation of these GAAP results and the pro-forma results as part of the earnings release.

In summary, the reported GAAP results for the 4th quarter were a net loss of 4.3 million compared with a net loss of 129 thousand in the 2003 4th quarter and GAAP fully diluted loss per share was .10 cents compared with zero in the prior quarter. The principal reason for GAAP losses in both the current and prior year quarters is a - very large charges for stock compensation. As we have indicated to you before we have about 3 1/2 million options subject to variable accounting and therefore the impact on GAAP quarterly earnings can be significant as the stock price moves.

Let me now turn briefly to cash flow in the balance sheet. We ended of the quarter was $42.1 million in cash up from $6.7 million at the beginning of the year. For the 4th quarter we generated cash flow from operations of 10.2 million and for the full year of 2004 we generated cash flow from operations of 43.5 million, representing 19% growth over the prior year. Our DSO at the end of the quarter was 39 days, roughly flat with the prior 2 quarters while deferred revenue increased roughly half a million dollars on a sequential basis.

I would now like to turn to guidance for 2005 then we'll wrap up with our capital management announcements.

To remind investors, at the end of the 3rd quarter, we provided 2005 guidance of 150 to 155 million in total revenue and 42 million in operating income. Taking the mid-point of the revenue range that would have led to roughly 10% revenue growth and a 27.5% operating margin. Today we are slightly increasing our guidance for 2005, bumping up our revenue range by 2.5 million to 152.5 to 157.5 which provides us with a revenue growth range of 10 to 13 1/2% and at the mid-point of the range would represent just under 12% revenue growth. From a licensed revenue perspective we are initiating a 2005 guidance range of 27.5 million to 28.5 million, which would represent 10% growth at the mid-point of the range.

Turning to operating expenses and operating margins, I would begin by operate—by reiterating the comments I made in last quarters conference call. That is, in 2005, we will not only absorb a full year of public company costs, such as DSO insurance, increased financial reporting and auditing expenses, compared to those costs for the –for only 5 months in 2004. But we will also have to incur additional costs in 2005 related to the coming compliance with Sarbanes-Oxley section 404. As many of you have seen with other companies it is quite difficult to predict precisely what SOX costs will be. But we believe the aggregate incremental public company costs including SOX 404 compliance costs, could be anywhere from $1.2 to $2 million in 2005, or about 3/4 to 1 1/4 EBIT margin points.

In addition, due to the significant success of our new product offerings as well as the reception to enhancements made to our existing products, we are expecting to increase our R&D spend slightly by about 1/2 of a percentage point of revenue in 2005.

The company should be in leverage in both the public company costs and the incremental R&D investment in 2006 and beyond. Therefore we are holding the line on the '05, the 2005, operating margin assumption that we shared with you at the end of last quarter. That means we are taking our initial $42 million operating income target and making that the new low end of our increased 2005 target range of 42 to 43 million of operating income.

The midpoint of this range combined with the midpoint of the revenue range leads to an operating income target of approximately 27 1/2% right in line with our target pro-forma EBIT margin range of 28—of 27% to 28% we have frequently discussed with you.

We then assume a pro-forma tax rate of 39% and 47 million shares in our fully diluted EPS calculation for 2005, which leads to an EPS range of .56 to .57 cents.

It is worth noting that the diluted share count for all of 2004 was 46 million shares and keep in mind that the 2005 EPS range I've just given does not include the potential impact of the share buy-back that we will discuss in a moment.

Depending upon how many shares we are able to buy back and when, our share buy back could add .01 to .03 cents to our full year, 2005 EPS. A conservative approach would be to say that 2005 earnings per share will be .57 to .58 cents taking into account the buy back and we would add that extra penny into the back half of the year.

Turning now to our guidance for the 1st quarter and the general flow of our business for 2005, we are currently expecting a total revenue range of 35.5 to 36.5 million, license revenue of 6 million and operating income range of 9 to 9.2 million and EPS of .12 cents based on 46.8 million fully diluted shares outstanding compared with 45.7 million shares in the 2004 1st quarter.

The public company cost impact in the 1st quarter is estimated to be about $300 to $500 thousand.

In terms of projecting our 2005 quarterly revenue and operating income, we would remind you that from a licensed revenue perspective, we expect the June and December quarters to be our 2 strongest. Services typically ramps in the 2nd quarter and the 3rd quarter and then declines in the 4th quarter while maintenance is a steady grower throughout the year.

In general this leads to first half total revenue coming in at 48% to 49% of the total year while the second half accounts for the remaining 51% to 52% of our annual revenue. We typically expect the 1st quarter to have the lowest operating margin, 2nd quarter and 3rd quarter would be our highest operating margin quarters and 4th quarter is usually a step down.

I hope this helps you build out a quarterly progression in your models for the full year of 2005.

I would now like to finish with a discussion of a new 2-part capital management program that we announced today.

We are very excited about this announcement, as we believe it is an excellent way to drive and maximize value and returns for your investors. The backbone of both of these programs is the extremely strong and proven cash flow of the company. The source of this is Blackbaud's operating model. The business requires minimal investment and capitol infrastructure or inventory and with a DSO of 40 days or less, continued growth does not require a proportional investment in working capitol.

Finally the company's cash flow will continue to benefit until 2014 from a deferred tax asset that produces approximately $7.7 million per year in tax savings. In 2004 we generated $40 million in free-cash flow up almost 23% versus the prior year and compared with 24.7 million of pro-forma net income.

We are committed in handling this free-cash flow wisely using the recent trading range of our stock price, the 2004 free cash flow results in a yield of approximately 6 1/2%. But as some of you have told us, while this is very impressive, it doesn't mean very much if we don't return the cash to you. So the first component of our capital management program is the initiation of a .20-cent per share annual cash dividend policy. We have declared and will pay our investors a 1st quarter dividend of .05 cents per share on February 28th to stockholders of record as of February 14th. At today's prices this would provide investors with an annual yield of approximately 1 1/2% and would return roughly $8.5 million to stockholders in 2005 in the way of dividends.

The second component to our capitol management program is a share buy back program that we announced today. Our Board of Directors has authorized the company to buy back up to $35 million dollars worth of the company's stock and this can be done in a number of different ways including repurchasing shares in conjunction with a public offering much like we originally contemplated in the IPO, or in the open market at prices and times that we deem appropriate in accordance with rule 10D18. We believe a share buy back program will serve as an effective way when implemented to further enhance stockholder value. We are authorized to begin repurchasing shares under this program as early as February 4th.

In summary then, let me just say we—we believe we had a very solid 4th quarter, results that were better than our expectations and we are slightly raising our 2005 forecast. Our confidence in the business can further be seen in our dividend and share buy back announcements that we believe will help to maximize stock holder value in 2005 and beyond.

Thank you very much for you interest in Blackbaud and now let me turn it back over to the operator to begin our Q&A session. Operator?

Thank you sir. [OPERATOR INSTRUCTIONS] And for our first question we go to Keith Gay with Thomas Weisel.

Can you talk a little, you mentioned of bumping up of the R&D percentage, can you talk a little bit about what you have in mind there? Are there any new product expectations or anything that you are working on in terms of new releases?

Well Bob can jump in here too, but—but Keith I think in general we would expect to spend the dollars both within our core products, continue to enhance those core products, particularly enhance ongoing integration efforts there, but—we would also plan on spending dollars for—on some of the newer offerings, continuing to enhance and strengthen and build on those offerings as I think you've already heard in the call here, that we've gotten very nice reception here in the market place, so we want to continue to build on that, continue to improve and strengthen those products and then of course we are going to devote a sizeable amount of the dollars to –our continuing search for new functionality, new kinds of products that are needed in this market. Can't get into any specific details there on what we might be thinking about but certainly we have in the past identified areas where investment may make sense and we'll continue to search for those and we just feel that our efforts, certainly its paid off this year and we want to continue to put dollars into that.

Can you just review your comments about Q1 relative to Q2, you were saying that Q1 tends to be a little bit weaker and then the June quarter picks up?

Yeah, we're not giving specific guidance today regarding Q2, but I think if you look historically at how the company has performed sequentially over the last couple of years, you will see that Q2 typically bumps up particularly in the licensing side, a number of – a very significant number of non-profits have June year ends and so that's a time when buying cycles do tend to pick up. So we would expect to see some up-tick in our – certainly in our license revenue and also in our services revenue as we move into the 2nd quarter. So that’s about as much as I can say about that.

On the competition front, you mentioned some customer—you started to see some larger deal interest. Does that result in you seeing more competition and any changes on the competitive front particularly in the online-hosted area?

Bob Sywolski: No, not really. Not much of a change in the competition there, nothing specific on the hosted area either. So, not much change really.

For our next question we go to Adam Holt with JP Morgan.

I also had a couple of questions about the –about the cost infrastructure. The hiring that you did in the quarter on the services side, it bumped up the cost of services, number one could you maybe give a little bit more detail about who you hired, what the head count adds were, etc..and secondly, does that at all impact you expectations for hiring in the services area as we look into 2005?

I don't want to get into specific numbers of heads that we hired but the types of individuals that we hired in the services area would be billable consultants. That is where the bulk of where the heads were hired and as I mentioned in my comments, those would be additions that we made in light of what were seeing in our—in the growth of our backlog and business that we can deliver in 2005. I think that the way to think about further adds to the head count is that –is that to some degree it will depend on how our sales can—how our sales efforts perform in the early part of the year. Certainly we have a back log we can deliver off of, but we also look to continue to fill that back log and were we to experience a sizeable growth in our sales efforts of those services engagements we would take appropriate actions to add further consulting heads to deliver the services to our customers.

So these were adds that you expected—that you planned on hiring in the 4th quarter you didn't see the out performance on the revenue side and get more aggressive about '05 hires in the 4th quarter.

I'm sorry I didn't quite…

Yeah, no the question was did we—is this beyond what we would normally expect to do and not really. Again as Tim mentioned the 4th quarter in the services business is one in which our clients are typically out there raising funds and not well positioned to accept our service engagements. And so, it provides a good opportunity for us to sort of spend more time focused on hiring up our consultant base, and that is in fact what we have done. Because you know, hiring is, you know, a choppy kind of effort. We are looking for a small number of really exceptional people and so we were able to hire some great people in the quarter, and delighted to do so, and we have got the back log to put those people to work going into 2005. And as Tim mentioned, to the extent that our sales would further accelerate in 2005 we would continue to do that hiring. And there is a, you have to hire ahead of the wave a little bit for training and orientation.

In terms of the, just one last question on your expectations for 2005 on the cost side, given that you know, most of the revenue growth you outlined is going to happen in the high margin, you know, services and license area or core revenue. Even with the incremental ads in R&D, as well as the public company costs, wouldn’t we expect to see more margin potential and/or leverage in some of the other Becks (ph) lines. Are you sort of setting a baseline expectation heading into ’05 with the expectation that, you know, the surprises will be to the up side.

There were two questions there, right?

I would say first of all, you know, we have all along said 27 to 28%. We have guided the sort of 27 to 28% margins, even with the public company costs, we are still in that range. And those public company costs of course are pretty significant. I think the 27 to 28% margin target is also, I would say without trying to sound defensive, world class performance, particularly when you sort of look at what our business model is. And, I do not think there is much room for marginal expansion here. So, that is our view on margins.

Okay, and then just the question on the maintenance, as you noted, the 12% growth this year was in part driven by a CPI adjustment. Would you expect to see a similar adjustment in ’05?

Well, just to remind everyone on the call, the CPI adjustment, recall when we implemented that in the third quarter of 2003, included an across the board, first year, across the board adjustment of 5% for any customer who had been with us for more than a year. While certainly we will continue to in, we will certainly have CPI adjustments for our customers going forward. Obviously, they are not going to yield the same kind of increase this year that they did in ’04. And the contribution from that CPI adjustment was approximately 3 ½ percentage points of our growth for the full year 2004. So, while we will certainly continue to look for ways to drive more growth and maintenance that the CPI adjustment impact will not, will certainly not be nearly as significant.

Operator instructions. We go next to Kash Rangan with Wachovia Securities.

A couple of questions here, one is with the 20 cents in dividends per share that you are going to be issuing, does that limit your flexibility to pursue acquisitions, tiny albeit, towards adding product at all. How do you look at that?

Cash, no I don’t think so. Just to refresh everybody’s memory here and a couple of the comments that I made on this, remember that we finished the year with over $42 million in cash on the balance sheet. Over the last three years, prior to 2004, we generated over $100 million in cash flow. Last year over $40 million in 2004 alone, and when you look at the full amount of the dividend that we would pay back, plus were we able to complete the full amount of the share buyback authorization, that when you look at how much cash we are generating in our business, we clearly have enough cash to take advantage, we think, of any opportunities that might be there.

In addition, let me add, just as a reminder, we also have a $30 million line of credit totally undrawn at this point which we could also go to as additional resources should we need it.

Second, (indiscernible) the markets, do not expect any significant acquisitions, maybe small product of acquisitions, because between the share buyback and the dividend it looks like you have got pretty good coverage of your free cash flows on a trailing twelve month basis, or a forward twelve month basis, right? At least you probably will be doing smaller products of acquisitions, if you choose that route, not anything big.

No, I don’t, I mean I don’t think we are limiting ourselves at all Kash. I think that would be a wrong conclusion to come to. I think this, as Tim points out, I think we continue to have all the flexibility we need or want, or could deploy, no withstanding our cash, notwithstanding the buyback and the dividend policy. So that’s not, that’s not an accurate statement at all.

So, if you can talk about the Patrons a little bit. You quantified that a little bit in the last quarter. How did that do as a percentage of your license revenues? Did it uptake, or stay flat, any color you can give us on that front would be useful.

Well, Kash, when you look at, when you look at our total software sales for the quarter, the Patron Edge contributed about 7%. I don’t remember the exact number that we had in the third quarter, but I believe that is a slight up tic from where we were in the second quarter, the third quarter, I’m sorry.

Got it. And in services margin, just to followup on a couple of the questions raised earlier, are you through an investment portion of that services headcount, that you should start to get back to more of a normal gross margin, which has been running the 50/51% for 2005, or do you think that the investment curve will continue into Q1 and we might get the yield from that investment the latter half of the year?

I wouldn’t look at it Kash, as sort of a one-time investment. It is sort of a rolling sort of adjustment, you know, to both our backlog and our sales. So it is not a, you know, one time. We continue to sort of add our services people as we continue to expand our business.

Got it. And how’s the incremental margin to that business looking like. In other words, what I mean is that the new consultants that you are bringing on, are they being utilized at the same rate, in the same utilization, given the same incremental margin on that incremental revenue dollar, or is there any change to that?

By and large, after our startup period the answer is yes. Yeah, I mean there’s obviously some period of training and on-boarding if you will, but, you know, every consulting organization has, but after that, in fact, there are exactly the same as the rest of our staff.

Great. That’s it for me. Thanks. Congrats.

The other thing I would just add on the whole issue of services margin, I think if you look at it for the full year, the margin, I think, overall in services was roughly pretty flat, and I would just say on an overall basis for ’05 we would not expect a whole lot of change in that.

[OPERATOR INSTRUCTIONS] And with a followup question we return to Adam Holt with JP Morgan.

I just had two followups. You highlighted Clemson in your customer examples this quarter and I think last quarter one of your larger deals was also with a large university. Is something shifting in the demand environment in that particular vertical within you target landscape you know that is driving acceleration and demand, or is it better execution on your side? Maybe you could talk a little bit about what is happening in the education vertical.

All right, you know I think it is fair to say that, you know, the education vertical, higher education vertical especially, you know are clearly out in front in terms of better implementation in technology in their fund raising areas. And certainly in their alumni relations, which they find therefore quite appealing two things, one, our internet offerings, but especially the integration of these products to help them sort of, you know, as I said in my comments, kind of better manage deeper relationship with the alumni. So I think it is by virtue of their structure and what they are trying to do, they are likely to sort of reach out. And of course, you know, they by and large are somewhat larger, more sophisticated organizations. And we have done a good job of selling it.

My last question was on Net Community and I think you mentioned that it was included in 5 of your 20 largest deals. Are you saying, you know the positioning of net community adds, you know, more of a driver of new folks where there might have been some pent up demand for wider internet capabilities, or is this something that you can go back and sell into, you know, a large percentage of your install base?

I think the second is for sure true. And I think again, the first comment that is also true, that in fact, you know over time people are sort of recognizing and embracing the internet more here, but again, it, the power of having these as an integrated solution, which I think drives demand more than anything else, both to new clients and to existing clients.

And also with a followup question we return to Kash Rangan with Wachovia Securities.

Hey Bob, just a quick question, also to followup on Adams question on (indiscernible) product, do you see over the next four to five years this being a, you know, pretty meaningful portion of the business, especially if that make shift towards the on-line dontation continues. And if that is the case, how do you position this product without cannibalizing your core (indiscernible) product. And I have a followup as well.

Well, I mean they are totally different. Are focused on a totally different set of solutions. But there is no cannibalization at all, in fact, there is, you know there is a reinforcement with these products. And so, the cannibalization is not an issue. Rather, we see that we will, we see for sure that demand is increasing for net communities as a result of the integration again.

I think Kash, I would just add just briefly to what Bob said. I think the power and the fact that it was part of other sales reflects the fact that what customers want is they want the seamless integration that Bob talked about. What they want is, they want that, the power of the back hand, but also have this, this capability when they need it. So…

Would then customers that make a commitment to one of these two models, the on-line heart of the on premise model, would they be able to migrate back and forth all their data so they have the flexibility to pursue either alternative down the line or…

That’s the key. Right, that’s the key. A single on-line, off-line view of the constituent. The same view that in the commercial sector people are striving for. One view of Kash Rangan. However he interacts with the organization. On-line or has long history of off-line interaction. I need to understand that sort of view of the customer. And that’s the power of this sort of single integrated view.

And that is, that in your view should be a key different (indiscernible) for your combined (indiscernible) regardless of the makeshift trend of on-line versus off-line.

Right. Whether it’s new, a new name, or back to an existing organization the power of that is quickly obvious.

And with that ladies and gentleman we have no further questions on our roster at this time. Therefore, Mr. Sywolski: I will turn the conference back over to you for any closing remarks.

Thanks, with no further questions I do want to thank everyone for taking time to be with us today and we are delighted to announce our quarter and full year and excited about 2005. So thanks for your continued support.

That ladies and gentlemen, this does conclude today’s Blackbaud 4th quarter 2004 earnings conference call. We do appreciate your participation and you may disconnect at this time.