Blackbaud Inc (BLKB) 2005 Q1 法說會逐字稿

Welcome to today's conference call for Blackbaud’s first quarter 2005 earnings. Today's call is being recorded. At this time all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions. I also would like to remind everyone that this conference is being recorded.

At this time I would like to turn things over to Tim Williams, Chief Financial Officer of Blackbaud. Please go ahead, sir.

Thank you. Good afternoon, everyone. We appreciate you joining us for today; our first quarter 2005 results conference call. With me on the call today is Bob Sywolski, our Chief Executive Officer. Bob and I have some prepared remarks and then we'll open up the call to a question and answer session later.

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 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 or uncertainties even 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 website in the investor relations section. With that, let me turn the call over to our CEO, Bob Sywolski so that he can provide some color on the Q1 results and an update on our strategies to address our market opportunities and then I'll be back a little bit later to provide you some further details regarding our financials. Bob?

Thanks, Tim. I hope by now everyone has had time to review our press release indicating that we delivered solid Q1 ’05 results that in fact, exceeded our expectations. We came into the year with good momentum and believe our results offer evidence that the nonprofit market we serve has somewhat different characteristics than the more traditional commercial software sector.

Tim will take you through the detailed numbers in a bit, but let me just say we're pleased with our execution during the quarter and remain quite positive about the outlook for the rest of the year.

In the first quarter, we again saw a strong performance across our 3 main revenue lines; that is, license fees, services, and recurring revenue. We saw particular strength in new products and our key account sales team, though we continue to be successful across a broad cross section of clients, from the smallest nonprofits to some of the largest in the world.

Our first quarter "new revenue" which we consider the combination of our software and service revenue came in at 17.9 million and grew at 22% year over year against a solid comparison quarter. Within "new revenue" the software had its second best year over year quarterly growth rate in the past 3 years growing at 27% for the quarter.

The momentum of our business is being driven by steady performance from our core solutions combined with rapid growth of our relatively new offerings.

During the first quarter, our core solutions which we consider to be Raiser's Edge, Financial Edge and Education Edge continue to represent more than 80% of our total sales which include both software and services and collectively grew at roughly 10% on a year over year basis.

Not only did these offerings generate the majority of our revenue, but they also serve as a primary entry point for us to penetrate new accounts, opening a door for us to sell additional products and services to our base of roughly 13,000 clients.

During the quarter, sales of software and services for Education Edge, our back office administrative solution for the K-12 private school market were up over 10% sequentially and even more against the prior year's quarter. Over the past year we have made significant improvements to this product family and we've planned another major release in the second quarter which will further improve our competitive position in this market.

Raiser's Edge and Financial Edge, the clear leaders in fundraising and accounting markets respectively also both had solid quarters. In addition to the steady growth of our core products we saw continued acceptance and rapid growth of our newer product initiatives. Our internet applications, our analytics offerings and Patron Edge, our ticketing product.

Quarter to quarter results will vary by product line, given that individually some are still relatively small and coming of early releases, but taken as a whole our new offerings continue to grow over 50% on a year over year basis and they increased from a little over 10% of sales in the year ago quarter to over 15% in this quarter’s sales.

Specifically, we are encouraged by the momentum we are starting to see in our internet solutions. Last quarter we mentioned that we were excited about our latest net community release and in the first quarter of this year our internet based solutions grew at over 90% year over year. We have a planned second quarter release that we believe will further close the gap between us and the pure plays, if you will, as it relates to web based solutions.

Our Blackbaud Analytics platform represents more than half of our new offering sales and is now the third largest product line contributor to our quarterly total sales. Patron Edge also made a nice contribution to the quarter.

As further evidence of our commitment and enthusiasm for the ticketing and patron management space, I'm pleased to announce that we have acquired the exclusive distribution rights to this ticketing product in the U.K. This gives us exclusive access to the Patron Edge technology across North America and the U.K. and with the integration provided to the Raiser's Edge we can now offer a powerful solution providing cultural organizations a single view of their patrons.

It's also worth pointing out that we were also fortunate enough to hire a very seasoned executive in the ticketing space to drive our efforts in the U.K.

Summarizing, we believe we are well positioned as the industry's clear leader with our core offerings while at the same time, integrating these offerings with our newer products and services providing Blackbaud with a differentiated and compelling offering that leverages the core assets of the company. That is our domain expertise and industry leading base of 13,000 nonprofit clients.

Turning to the performance of our sales team, I mentioned earlier that our large or key account focus has had a particularly good first quarter. These account teams have been specifically charged with penetrating the largest nonprofit organizations in the world. We are uniquely positioned to serve these accounts due to the breadth and depth of our products combined with our capabilities to deliver complete and often complex solutions through our professional services teams.

As we have stated before, sales to larger accounts have been a high growth segment for Blackbaud. A significant portion of our increase in average deal size can be attributed to this sales focus; our expanding product line and especially the close coordination during the selling process with our service professionals as these larger sales often have significant service solution components.

Over the past 12 months our average deal size which includes again both software and services has increased from roughly 25k to slightly under 30k. While this is still a relatively low number compared to traditional enterprise software vendors, it has had a very positive impact on our business, given the high volume nature of our overall distribution model. As we close I'll remind you roughly 1,000 transactions each month.

Our overall sales model remains high volume with modest ASP at its core. During the quarter the number of deals with combined software and service transaction value greater than 50k grew by over 31% year over year. What is interesting is that our average deal size has been creeping up in our core sales channels as well. It seems that our clients in the nonprofit space seem to be investing more dollars in state of the art technology and our sales teams are doing a good job selling our broad multi product value proposition.

Now I'd like to turn it over to Tim Williams, our CFO. But before I do, I want to take a moment and express my profound appreciation to both our staff and our clients whose continued support and commitment have allowed us to report this performance. Tim?

Thanks Bob. As you've already heard, we are really pleased with the company's overall execution in the quarter. I'd like to cover 3 main topics before I turn it over for Q&A.

First, review our first quarter results and balance sheet in a bit more detail, provide some guidance for the second quarter and provide a quick update on our capital management program.

Let's start with the highlights from the P&L. Total revenue came in at 37.3 million which was up 19% on a year over year basis and better than the high end of our guidance coming in to the quarter. Our revenue visibility continues to benefit from roughly half of our business coming from recurring sources, such as maintenance contracts and subscriptions. And we are enjoying attractive growth from new revenue streams, which as you've heard earlier we define as revenue coming from both software 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 17.9 million which was up roughly 22% on a year over year basis and within our new revenue, license fees came in at 6.5 million up 27% year over year. This was roughly $500,000.00 better than our expectation.

On the services side, revenue came in at 11.4 million which represented growth of 20% on a year over year basis and 16% sequentially.

The last major component to our revenue, maintenance and subscriptions, came in at 18.4 million which represented 49% of total revenue and growth of 17% on a year over year basis. 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. Maintenance alone grew at 13%.

Continuing to drive the overall growth rate higher was the growth in subscriptions which more than doubled year over year. It is in this revenue caption where you see part of the growth in our internet solution sales and certain of our data enrichment offerings which are sold through Blackbaud Analytics.

Turning now to gross profit, we generated 26.1 million in gross profit; pro forma gross profit in the quarter representing a gross margin of 70% in line with the prior year's quarter and the full year 2004.

Looking at operating expenses, sales and marketing came in at 21% of revenue. This was up about 1 percentage point on a year over year basis and a primary driver was head count additions in the sales area. R&D came in at 13.5% roughly in line with the prior year, while G&A came in at 9.9%. G&A was up eight-tenths of a percentage point on a year over year basis and that increase came from a combination of public company costs that we discussed on our last conference call coupled with slightly over $200,000.00 of expenses related to our shelf registration statement.

Pro forma operating income then came in at 9.6 million representing a pro forma margin of 26% and better than our guidance of 9 to 9.2 million. We used an effective tax rate for pro forma results in the quarter of 39% leading the pro forma net income of 6 million and pro forma EPS of $0.13 based on pro forma diluted shares outstanding of 46.6 million. EPS was a penny better than our guidance.

As we noted before we will focus our discussions on pro forma results because we believe that excluding non cash items such as stock option compensation, amortization of intangibles arising from business combinations, or one time items such as IPO 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 our 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 net income is 10.9 million for the first quarter of 2005 compared with net income of 4 million in the first quarter of 2004 and GAAP fully diluted earnings per share is $0.23 compared with $0.09 in the prior quarter.

The principle reason for the significant increase in profits on a GAAP basis in the current year's quarter is the large credit for stock option compensation. In the prior year quarter we took a charge for stock option comp. As we have indicated to you before, we continue to have about 3.5 million options subject to variable accounting and therefore the impact on GAAP quarterly earnings can be significant as the stock price moves from quarter end to quarter end.

Let me now turn to cash flow on the balance sheet. We ended the quarter with $43.3 million in cash up from 42.1 million at the end of 2004. For the first quarter, we generated cash flow from operations of 7.4 million representing 49% growth over the prior year, but as I will cover in a moment, we did utilize approximately $10.1 million in cash in our capital management program in the first quarter.

Accounts receivable actually decreased by approximately 1.3 million sequentially in spite of the increase in revenue and our DSO at the end of the quarter was 40 days, up 1 day from the last 2 quarters.

Total deferred revenue came in at 51.7 million an 18% increase on a year over year basis. Let me now turn to guidance for the second quarter and for 2005.

For the second quarter, we are now forecasting a total revenue range of 39.5 million to 40.5 million and EPS of $0.15. This is EPS on a pro forma basis. With respect to additional Q2 details, we are forecasting a license revenue range of 7.9 million to 8.1 million and operating income again on a pro forma basis of 11.1 to 11.4 million.

For the full year 2005, we are raising our total revenue guidance and the high end of our EPS expectations by a penny. Specifically, we are raising our total revenue guidance to a range of 154 million to 158.5 million with a mid point slightly north of 156 million. Our operating income target remains 42 to 43 million, so at this time we would have a bias toward the middle to higher end of that full year range and we are updating our EPS guidance to $0.56 to $0.58 for the full year, a slight tweak from the $0.56 to $0.57 range established last quarter primarily due to rounding up from the Q1 upside.

I should add that these projections do not include nor reflect any impact from the recently concluded deal that Bob referred to in which we acquired the U.K. distribution rights to the Patron Edge product. We expect right now that that impact will be roughly neutral to earnings both in Q2 and for the full year. Furthermore, our EPS guidance does not reflect any potential impact from further share repurchases over the rest of the year.

We would remind investors that from a licensed revenue perspective, we do expect the June and December quarters to be our 2 strongest quarters. Services typically ran from first quarter through third quarter and then declined in the fourth quarter, while maintenance is a steady grower throughout the year.

In general, this leads to first half total revenue coming in at roughly 48 to 49% of the total year, while the second half accounts for roughly 51 to 52%. We typically expect the second quarter and third quarter to be our highest operating margin quarters and the fourth quarter is typically a step down from the third quarter with respect to our operating margin.

I'd now like to finish with a very quick update of the two part capital management program that we announced at the beginning of this year. The backbone of both of these programs is the extremely strong and proven cash flow generating capabilities of the company.

Part one was the initiation of a $0.20 per share dividend that we paid to our investors at a rate of $0.05 per quarter on February 28. Today we announced our second quarter dividend of $0.05 payable on May 29 to our stock holders of record on May 15.

The second component of the cash management program is the share buy back program. As a reminder, our Board of Directors authorized the company to buy back up to $35 million worth of the company's stock. In the first quarter, we acquired roughly 650,000 shares of the company's stock and spent approximately 8 million executing against that plan.

In summary then, we are very pleased with our start to 2005. We are optimistic about our outlook for the remainder of the year. We had solid first quarter results that were better than our expectation and our competitive and product positions are strong and we're slightly raising our 2005 forecast.

Our confidence in the business is evidenced by our dividend and share buy back programs, both of which we believe will help to maximize share holder value.

With that, let me close now and turn it over to the operator to begin the Q&A session.

Operator?

Thank you very much.

(OPERATOR INSTRUCTIONS).

We will pause for just a moment. Our first question today comes from Keith Gay at Thomas Weisel Partners. Please go ahead.

Good afternoon and another nice job on the quarter. Can you give us an update also on the geographic revenue mix and what type of traction you are seeing in some of those international markets you're trying to penetrate?

Keith thanks -- good question. Overall in the quarter no significant change in the overall mix between North America and our international locations and we're satisfied with the way those businesses are performing, but there wasn't any significantly greater growth there than what we saw here.

I would just add that represents about 12 to 15% of our revenue outside the U.S.

Okay. The increase you're seeing in ASP; is that primarily mix related and are you doing any increase in pricing?

Well, I'll start out and Tim can hop on. It's primarily mix selling really larger engagements as opposed to price increases would be the basic answer.

Yes, I would just reference you back to the comment Bob made; when you look at the quarter, I think Bob mentioned we had, if you will, deals involving sales of software and services; when you look at the amount combined, those transactions involving sales of contracts over $50,000.00 I think he said were up about 30%; 31% I think exactly was the number used. So that is what's driving it, Keith.

Okay.

And a lot of that is the effort we have been expending on trying to penetrate these larger accounts.

Okay and can you give us an update on where you stand in terms of total sales head count? And if you can tell us also - break that down into inside versus outside sales if you would?

Well, I can do the first part for you. Total sales count increased from the end of Q4 last year to the end of Q1 this year by roughly 20 heads. And so, at the end of Q1 we were roughly at 120 quota carrying commission sales people. As far as the breakdown between inside and outside, I guess all I would say at this point is the mix is slightly more in the direction of outside because of the effort relative to where we were at the end of last year basically because of the ongoing effort we're putting into staffing up the large accounts sales team.

And what are you targeting for quota carriers by end of year?

At this point, I would say we're relatively happy with where our head count is at this time, however, clearly we are constantly monitoring the opportunities here and as we see opportunities evolve, we won't hesitate to add head count if we think that will help us take better advantage of the opportunities that are in front of us.

I would also say that frankly we will focus a lot of our attention around trying to make the reps we've added even more effective as well, Keith.

I might just add one thing here, Keith. As we've said before, this whole question of how many sales people we've added and then trying to do the math to get to see how that translates into revenue is probably a lot trickier than it seems. Without knowing the experience level of the people, the teams they will work on, the ramp up time, by just trying to do the extrapolation, it doesn't quite work that way. We've sliced and diced the sales teams almost continuously which I think is, in fact, the right way to look at it.

Okay. Thanks a lot.

Thanks Keith. Good to talk to you.

(OPERATOR INSTRUCTIONS).

We will go now to Adam Holt at J.P. Morgan.

Good afternoon and congratulations on the quarter.

Thanks Adam.

Thank you Adam.

Bob, just a follow up to the comment you made about just trying to analyze the effectiveness of the sales organization. If you look at the hires that you did make over the last 2 to 3 quarters, where would you estimate we are in terms of utilization and how up to speed the recent hires are in terms of your capacity today?

I don't know how to answer that question with precision Adam, I'm sorry to tell you. It's a constant process to try to improve both the way we're organized and the ability of our sales people to be effective. I would say that we're always working to improve it and continuing to raise our goals as we do so. I'm not sure I could have a quantitative answer and the time to get up to speed sort of varies. It depends on our back to base sales people, it can be as short as a couple of months; on our key account sales people, it could be as long as 6 to 9 months. So it varies depending on the sector.

Okay.

I don't know if that was helpful.

Well, I guess the other way - are all of the recent hires effectively productive at this point?

Well, the answer is unequivocally, no, because one of the concepts we use is sort of bench hiring. We feel that one of the killers of sales performance is to have uncovered territories and so we think it's incumbent on us to have this sort of continuous process of making sure the funnel of sales people is full. So by definition, everybody is not up to speed and yet we believe that that is sort of the right approach. There will be turnover and there will be sort of misfires and so I think it's incumbent on us to constantly have a way to fill that pipeline. And so therefore that means that these people are not productive. They are sort of in waiting.

If you look at the increase in the average deal sizes, and this again may be a difficult question to answer, but how much of the increase do you think was due to the broader product set versus customers buying larger transactions for the – on an apples-to-apples basis - Raiser's Edge and/or --?

That is a really good question, Adam. I think it's a combination of both, but I think the broader product set is really quite relevant. I think that we're more and more seeing the power of the breadth of our offering and the integrated nature of our offerings and therefore making combined sales which are larger. I think that's unequivocal.

The data - there is just no question, Adam that the data clearly supports that if you look at some of the larger deals, clearly they reflect more full utilization of our services offerings, but also more multi product transactions. There is no question about it.

Okay and just one last question. Maintenance and services growth has accelerated over the last, say, four quarters. Are you comfortable splitting out what the subs component is of that and what the relative profitability would be?

I'm not quite sure I understand your question. A breakdown between services and maintenance is actually presented on the statement.

Right. I'm saying that if you look at the maintenance and subscription line, it has accelerated the growth rate over the last four quarters.

I see.

Presumably because of the increased contribution of subscription revenue.

Yes. That's also true. As I mentioned in my comments, Adam, if you looked at maintenance alone, maintenance grew by about 13% and if you were to take the numbers for subscriptions, subscriptions almost doubled. So if you were to look at those in absolute dollar terms roughly for the quarter we did -- about 17.1 million of the number was, I believe maintenance and subscriptions was roughly about 1 million 4. These are roundings. So that compares with prior year amounts of 15.1 and around 700,000 in the prior year. So that's roughly the breakdown on the maintenance line.

Great. Thanks very much.

You have a question now from John Neff at William Blair.

Very good quarter.

Thanks.

Quick little housekeeping question here on deferred revenue and it just dropped slightly sequentially.

Yes, basically the reason for the drop, very simply stated has to do with the timing of maintenance billings. As I think we've communicated before, our maintenance billings do jump around quarter to quarter and typically Q1 is a weak billing period for maintenance. Remember, we bill maintenance on an annual basis so when we bill that that goes directly into deferred revenue and then of course, we're constantly recognizing over a 12 month period the amounts out of deferred revenue. So that is the big reason for the drop in deferred revenue.

Okay, great.

And just to remind you though, the deferred revenue did grow fairly dramatically versus last year, reflecting good performance across the organization. It grew about 18% over last year.

Okay. And I was just curious if there has been any movement in the ASPs for enterprise deals relative to the non enterprise deals? I recall that they were fairly comparable in terms of dollar value.

No, actually the enterprise deals or what we would call large account sales do carry -- typically have a higher ASP. They are more likely to be multi product and therefore the ASP is likely to be higher. But as Bob said earlier we are seeing some movement up in what we might call core or mid market type transactions as well. So we're seeing growth on both sides, but the ASP on the large account transactions or the large account team is higher.

And I was wondering -- you talked about a new Internet functionality or release coming in the second quarter. I was wondering if you could give us a little more color as to what that was going to entail.

First, I would say we're talking about NetCommunity here and we believe we have quite an attractive and competitive offering today, and recent wins against pure play providers indicate that the market sees it that way as well. However, we continue to enhance that product and in the next quarter we will be releasing enhanced functionality around advocacy and team fundraising, specifically.

In general, our goal with NetCommunity is to continue to build stronger and stronger relationships with constituents and we are committed to adding new ways to help nonprofits to achieve this goal. And our real differentiation comes from the fact that we have the only Internet solution that enables really an organization to see all the interactions with a constituent and that is looking at historic on line and off line giving, volunteer history, donation history, etc. so this allows nonprofits to really personalize messaging on both an on line and off line experience and sort of better connect with their supporters.

Great. And is your new official or commercial hosting offering central to this new upgrade?

It can be offered either way and is offered either way and has been sold either way. Either hosted or installed on the client site.

Great. And final housekeeping question. Tim, I think you said the number of shares repurchased - was that 657,000?

Yes, sir.

Okay. Thanks guys.

Thank you John.

Thank you.

Gentlemen, at this time there are no other questions holding in the roster so I will turn things back over to you to make any additional or closing remarks.

We thank everybody for their participation on the call and appreciate the ongoing support of the company.

Yes. Thanks so much and we're always available off line or on line.

Thanks again for dialing in everyone. That will conclude today's conference call. Have a good day.