Blackbaud Inc (BLKB) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Blackbaud second quarter 2005 earnings conference call. 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. Instructions will be provided at that time for you to queue for questions. I would like to remind everyone that this conference is being recorded and I would now like to turn the conference over to Mr. Tim Williams, Chief Financial Officer of Blackbaud. Mr. Williams, please go ahead, sir.

Thank you very much. Good afternoon, everyone. Thank you for joining us today to review our second-quarter 2005 results. With me on the call is Bob Sywolski, Chief Executive Officer. Bob and I have some prepared remarks and then we will open up the call to a question-and-answer session a little 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 S-1, 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 the limitations that apply to our forward-looking statements. Also, please note that a webcast of today's call will be available on our website in the investor relations section.

With that, let me turn the call back over to our CEO, Bob Sywolski, so he can provide some color on the second-quarter results and an update on our strategies to address market opportunities, and then I will come back a little laser to provide some further details regarding our finances. Bob?

Great. Thanks, Tim, and thank you all for joining us on the call today as a review of our second-quarter 2005 results. The June quarter was an important one for Blackbaud and for our investors along a couple of fronts. First and foremost, for the fifth consecutive quarter since going public, we have delivered results that met or exceeded expectations from both a growth and profitability perspective.

Secondly, we were able to use the strong cash flow generation of the Company to complete a self-tender transaction that should be accretive to our future earnings per share and has reduced the ownership concentration of our largest shareholder in a way that was beneficial to all our stakeholders and stockholders. In what continues to be a challenging market environment for some software vendors, Blackbaud's growth and cash flow results continue to stand out, and we are slightly raising our full-year guidance to reflect this continued optimism.

To drill down on the growth of our business, our second quarter total year-over-year revenue growth of 20% was the highest quarterly growth rate in five years. Revenue from all major sources -- license, service and maintenance, and subscriptions were strong. Our second-quarter new revenue, which we define as the combination of our software and service revenue, grew 22% year-over-year for the second consecutive quarter.

Our license revenue growth was solid, with midteens growth against a very strong comparison quarter, while our services business grew at 27%. Service growth continues to be fueled by the growth in our sales over the past 12 months and is a reflection of our unique ability to serve as a trusted partner to our customers based on our 25 years' experience in the nonprofit sector.

From an overall perspective, our business continues to be well-balanced, with solid growth coming from our core solutions and more rapid growth coming from our newer solutions. In particular, our three core solutions, Raiser's Edge, Financial Edge, and Education Edge, posted mid-teens year-over-year sales growth in the second quarter. These core solutions continue to serve as the primary entry point for us to penetrate new accounts, opening the door for us to sell additional products and services to our roughly 13,000 clients.

In addition, the strategic nature of our core products make them key drivers in the majority of our larger deals. As evidence of that, I can tell you that Raiser's Edge, our industry-leading fundraising application, was the key driver in 8 of the top 10 software deals we closed in the quarter. Raiser's Edge had a particularly strong quarter in Q2 and remains over 70% of the total revenue generated within our core solutions portfolio.

Last quarter, we highlighted the strength of our Education Edge solution family, and during the second quarter it grew by more than 50% sequentially against a strong comparison quarter. During June, we introduced further significant enhancement to the Education Edge and were quite pleased with the initial reception we have seen from our clients. Finally, Financial Edge also continues to post solid results.

To summarize, our core solutions are critical because they A, enable us to penetrate a largely untapped market, as evidenced by our 13,000 clients versus our target customer base of over 360,000; and B, continue as a key source of our competitive advantage versus other vendors, as we have become the recognized leader in the mission-critical, back-end applications that run the heart of a nonprofit's operation.

This strategic position, combined with a growing suite of value-added applications, has fueled a rapid growth of our new products, which we consider to be our Internet applications, Patron Edge, and our analytic solutions. The performance of individual solutions can bounce around quarter-to-quarter because of their relative newness and the fact that we are selling a broad suite of applications. But in the main, we continue to be very pleased with the overall performance of our new products. Indeed, from a high-level perspective, second quarter was the first time our portfolio of newer solutions grew to over 20% of our total overall sales, and the growth rate of this portfolio remains well in excess of the 50% level we commented on last quarter.

For several quarters, we have commented on the early interest we have seen in Patron Edge, our ticketing solution targeted at nonprofit organizations that sell tickets as part of their revenue generating activities. During the second quarter, sales of The Patron Edge more than doubled from the first quarter and were the third largest contributor to our license revenue. And Patron Edge has been a material contributor to the growth in our average deal size over the past year. In fact, PE was involved in roughly one-quarter of our software deals that were over 25K in the June quarter.

Furthermore, you will recall that in our Q1 earnings call, we reported that we had acquired the company that owned the exclusive UK distribution rights for The Patron Edge product, and I am pleased to report that we actually closed 5 UK sales of Patron Edge in the second quarter. We are still obviously in the early stages with Patron Edge, but our experience to date strongly confirms the view that we are addressing an attractive, long-term opportunity with this solution.

The other area that we are particularly excited about is our Internet offerings. During the second quarter, we released a major new version of NetCommunity that substantially closed the gap between our Internet capabilities and that of the vendors focused exclusively on this single channel. This is the second major release of NetCommunity in the past six months and early feedback has really been tremendous.

The additional features and functions and ease-of-use in our latest release, combined with the unique opportunity our products give customers to tightly integrate their Internet activities with more traditional methods of fundraising, has allowed us to more than double our Internet business on a sequential basis and it grew by well over 150% on a year-over-year basis. In fact, NetCommunity was involved in three of our four largest software deals during the quarter, which is clearly an indication that Blackbaud is in fact the leader in the Internet-based solutions space. And our tight integration with Raiser's Edge is a further key competitive differentiation.

With our unique product advantages, strong financial position and long history of serving the nonprofit sector, we believe we are well-positioned to dominate the Internet space over the long-term, just as we have with our core Raiser's Edge product offering.

While the steady growth of our core solutions and rapid growth of our newer solutions have had a strong influence on our total revenue growth, our maintenance and subscriptions revenue should not be overlooked. We continue to enjoy renewals in the mid-90% on the maintenance side. Our subscriptions business has now crossed the $1 million quarterly run rate level and its rapid growth helped to drive our total maintenance and subscription quarterly growth rate to its highest level in several years.

Turning to the performance of our sales channel, our key accounts group had another very strong quarter and our traditional sales team made a solid contribution as well. Given that key accounts are the fastest-growing portion of our business, it is worth reiterating that Blackbaud is uniquely positioned to serve the largest nonprofit organizations of the world as a result of our unmatched domain expertise, breadth and depth of our product suite, and end-to-end integration of these products and capability to implement these often complex solutions through our professional services teams.

The growth in our key accounts channel has also played a key role in growing our average deal size from approximately 25K when we went public to the $30,000 range today. While this may seem relatively small, it is significant when one considers the very large number of transactions we are doing each quarter, approximately 3 or 4000. The increasing number of large deals is evidence of the nonprofit market investing more strategically in technology and reinforces our product strategy.

The June quarter is the fiscal year end for a large number of nonprofits -- in fact, about half of them -- which further helped to fuel our increasing deal size during the quarter. On the software side, we closed 10 deals that were greater than 100,000 during the quarter compared with three such deals in the year-ago period. Our key account sales team closed 8 of the 10 top deals. However, the breadth of our sales success can be seen by the fact that our core sales team closed the majority of the software transactions that were over 25K in the quarter.

I repeatedly stressed in our discussions with you that service is an equally component of our business from both a strategic and revenue perspective. To that end, the number of deals that we completed with a total software service value greater than 100K grew by about 40% on a year-over-year basis. Those deals were equally split between new and existing customers, once again supporting the view that opportunities exist in both of these sectors.

Before I turn it over to Tim, I would like to announce an evolution in our sales leadership. Our direct sales channel is and has been continuously evolving and changing over the last five years. In fact, we think this flexibility is one of the hallmarks of our strength. Recently, the direct sales team had been managed by three individuals.

In the latter half of the second quarter, Chris Todd began a transition to assume sole responsibility for two of these groups, as Ed Roshitsh moved on to pursue opportunities outside the Company. We thank Ed for his contributions over the last 4.5 years and wish him well. Chris has been with Blackbaud for five years and the solid second quarter results his team delivered is an indication that the transition is going smoothly. Tony Powell continues to run our key account sales force, which I have already noted turned in a terrific second quarter performance.

In summary, I would like to leave you with four points. First, the fundamentals of our sector remain quite strong, evidenced by our highest quarterly revenue growth in five years. Second, we have a very strong product story, with solid growth in core applications and rapid growth across a portfolio of newer solutions. Third, we are clearly benefiting from a growing ASP while maintaining our high-volume business model. Finally, on top of being a solid growth story, we continue to use our strong cash flow in multiple ways to drive shareholder value.

In closing, as always, none of this would be possible without the support and confidence of our clients, and the commitment, creativity, and dedication of our terrific staff. My profound gratitude and appreciation to both. Now I would like to turn it over to Tim Williams, our CFO.

Thanks, Bob. We are extremely pleased with the Company's performance in the quarter, which, as Bob already mentioned, exceeded expectations. I would like to cover three main topics before turning it over for question-and-answer.

First, I would like to review our second-quarter results and balance sheet in a bit more detail; secondly, provide guidance for the third quarter; and then finally, provide a quick update on our capital management program, including a few words regarding the recently completed self-tender.

Let's start with some highlights from the P&L. Total revenue came in at $42.8 million for the quarter, which was up 20.4% on a year-over-year basis. The top line was driven by continued strength in our new revenue sources, along with accelerating growth from our maintenance and subscriptions revenue.

New revenue, or the combination of our software and services revenue, was 22.4 million for the second quarter, which is up roughly 22% on a year-over-year basis. Within new revenue, license fees came in at 8.3 million, up 14% year-over-year and over 28% sequentially.

On the services side, revenue came in at 14.1 million, which represented growth of 27% on a year-over-year basis and 23% sequentially. Of note, this represented the highest quarter-to-quarter sequential growth in our services revenue in three years.

The last major component of our revenue, maintenance and subscriptions, came in at 19.1 million, which represented 45% of our total revenue, and growth of over 18% on a year-over-year basis. We continue to enjoy maintenance renewal rates in the mid-90s, which is a testament to our customer satisfaction and the strength of our technology. Maintenance alone grew at 14%. Continuing to drive the overall growth rate higher was the growth in subscriptions, which almost doubled on a year-over-year basis and it was greater than $1.5 million for the first time within a quarter. The growth in our subscriptions revenue has fueled an acceleration in this overall line item in the past six quarters, and it is on this line where you are seeing part of the growth from our Internet solutions sales and data enrichment offerings that are sold by our Blackbaud analytics business unit.

Turning to gross profit, we generated 30.4 million in pro forma gross profit in the quarter, representing a gross margin of 71%, up about 1 percentage point from the first quarter and exactly in line with a year ago. Gross margins in our services business improved sequentially by about 6.5 percentage points from the first quarter and were about 1 percentage point better than the second quarter last year. This was largely due to improved utilization of our professional services resources. The gross margin from licensing improved sequentially, but was about 2 percentage points lower than the second quarter last year because of the success we had selling the royalty-based Patron Edge solution.

Moving now to operating expenses, sales and marketing came in at 20.5% of revenue. This was up less than half a percentage point versus last year, and right in line with the first quarter. R&D grew both year-over-year and sequentially on an absolute dollar basis. However, at 12.3% of revenue, it was down slightly as a percentage of revenue compared to both periods.

G&A came in at 9.4% of revenue, which was up about 0.6 of a percentage point on a year-over-year basis. This increase is the result of incremental public company costs, a sizable portion of which is related to Sarbanes-Oxley compliance. The overperformance in revenue helped to drive pro forma operating income of $12.3 million, representing a pro forma operating margin of 29% for the second quarter. This margin is about 1 percentage point less than the second quarter last year, due solely to the incremental public company costs I just mentioned.

We used an effective tax rate for pro forma results in the quarter again of 39%, leading to net income of 7.8 million and EPS of $0.16, based on a diluted share outstanding count of 47.3 million shares. EPS was a penny better than our guidance.

As we have noted before, we focus our discussion on pro forma results because we believe that excluding non-cash items, such as stock option compensation charges, amortization of intangibles arising from business combinations, and onetime 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 the GAAP results and the pro forma results as part of the earnings release.

In summary, our GAAP reported net income was 8.5 million in the second quarter of 2005, compared with 5.3 million in the second quarter of 2004. And GAAP fully diluted share earnings per share was $0.18 compared with $0.12 in the prior quarter. The principal reason for differences between GAAP and pro forma earnings in the second quarter this year is stock option compensation costs and a state tax credit benefit, neither of which are reflected in our pro forma earnings amounts.

Let me say first a quick word about the state tax credit. Our GAAP tax provision includes a $2.9 million benefit this quarter, which principally arises from jobs tax credit carryforwards that we estimate will be realized over the next 15 years as a direct reduction of our South Carolina state income tax. Prior to the second quarter, it was not clear how much of this credit might be generated in future periods. This item has also been added into and is now included in our deferred tax asset at June 30, 2005.

Regarding stock option charges, I would only point out that through the end of the second quarter, we continued to have about 2.7 million shares under an option agreement that is subject to variable accounting, and therefore, the impact on quarterly earnings can be significant as our stock price moves.

Let me now turn to cash flow and the balance sheet. We ended the quarter with $50.4 million in cash, up from the 43 million at the end of the first quarter. Through the first half, we generated cash flow from operations of 19.3 million, representing 18% growth over the prior year. We ended the quarter with a deferred tax asset balance of approximately 82 million. And to remind you, our deferred tax asset adds roughly $8 million to our cash flow on an annual basis and it is expected to do so until the year 2014. This is one of the reasons you should expect our cash flow to be materially larger than our reported net income. It was more than 75% larger than our net income for the full year 2004.

Accounts receivable at the end of the quarter increased by $9.2 million sequentially, consistent with the growth we experienced in revenue and the typical seasonal growth we see in maintenance billings at the end of the quarter. Our DSO at the end of the quarter was 40 days, roughly flat with the last two quarters. Total deferred revenue stood at 59 million, an increase of 7 million, or 14%, from the end of the prior quarter.

I would now like to turn to guidance for the third quarter and the full year. For the third quarter, we are forecasting a total revenue range of 41 to 42 million with EPS of $0.16. Additionally, we are forecasting a license revenue range of 6.8 to $7 million and operating income of 11.6 to $11.8 million.

For the full year, we are raising our total revenue and our EPS expectations. Specifically, we are raising our total revenue guidance to a range of 160.5 to $162.5 million, a midpoint of 161.5, and right now we are comfortable with the current street consensus estimate for fourth quarter licensing revenue, which would get you to something around $29 million in licensing revenue for the full year. We will obviously have more to say about our fourth quarter licensing estimate next quarter.

Our operating income target has been increased to 43.3 million to $44.3 million from the previous range of 42 to 43 million. And we are updating our EPS guidance range to 58 to $0.60 for the full year, up from the 56 to $0.58 range we established last quarter. These numbers do include the impact from the recently completed self-tender.

Regarding seasonality, I would simply remind you what we have said before. That is that from a license revenue perspective, we expect the June and December quarters to be our two strongest quarters; services typically increase from the first quarter through the third quarter and then decline in the fourth quarter, while maintenance tends to be a steady grower throughout the year. We typically expect the second quarter and third quarter to be our highest operating margin quarters, and the fourth quarter operating margin is typically is a step down from the third quarter.

Let me now finish with an update on the two-part capital management program that we announced at the end of our December quarter. The backbone of both of these programs is, of course, the extremely strong and proven cash flow generating capabilities of the Company.

Part one was the initiation of a $0.20 per share annual dividend that we began to pay our investors at the rate of a nickel per quarter beginning last February. Today, we announced our third-quarter dividend of $0.05 per share, payable on August 30 to stockholders of record on August 15.

The second component of our capital management program was a share buyback initiative, including the recently completed self-tender offer. On July 13, Blackbaud purchased 2.97 million shares at $14.50 a share, a total cash outlay of approximately $43 million. Today, we announced a reinstitution of the Company's share buyback program, and the Board of Directors has authorized the Company to repurchase up to $35 million of common stock. These shares may be purchased from time to time in the open market, in privately negotiated transactions or otherwise, depending on market conditions and other factors, all in accordance with the requirements of applicable law.

As I said a moment ago, the foundation for this program is the Company's continuing strong cash flow performance, which over the past 12 months has generated 46.6 million in operating cash flow. We remain highly confident in the future cash flow generating capabilities of the Company and are committed to using this cash in ways that enhance stockholder value.

In summary, we are very pleased with the Company's performance in the first half of 2005. We are optimistic about our outlook for the rest of the year. Our second-quarter results were better than our expectations, and our competitive and product positions are very strong and we are slightly increasing our 2005 forecast.

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

Thank you. Our question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Adam Holt with JP Morgan.

Good afternoon, guys, and congrats on the quarter. My first question relates to the Patron Edge product; obviously you've had some success there. I was wondering if you could try and quantify for us how big you think the opportunity for Patron Edge is within your installed base and how you are going about bringing it back to potential customers within your installed base?

I will sort of take a shot at that, Adam. I think it is probably 10 to 15% of our installed base and generally would be opportunity for Patron Edge. In terms of how we are going about doing it, we have a separate sales force that we call the cultural sales force, that is focused exclusively on calling on those particular opportunities, selling the broader range of products. Because again, the real key and power here is not only that it is a sort of world class ticketing product, but it is the notional (ph) value of the integration between a patron who buys a ticket and is a major donor. So answer -- 10 to 15% of our total customer base and a separate sales force.

The other thing I might add, Adam, is it's important to know that is not just our installed base, too. There are a sizeable number of cultural organizations and other types of organizations that buy tickets. Our own internal research tells us there might be as many as another 20,000 of those organizations out there, some of whom would obviously be a potential buyer of not only Patron Edge, but Raiser's Edge as well.

Terrific. Just a question, if I could, on the services revenue and margin in the quarter. To what extent was the improved utilization and margin profile in the quarter driven by the seasonal strength in June versus being sustainable into the back half of the year?

I would say that, as we have said before, Adam, when you look at the seasonality of our services business, particularly our consulting business, we have higher levels of utilization certainly in the second quarter and generally in the third quarter. For a variety of reasons, that happens to be when we can most easily schedule many of these engagements. And certainly, when you get into the fourth quarter, you start to deal with holidays; you deal also with many nonprofits are running their fund-raising campaigns at that time of the year. So utilization of the resources is clearly much more difficult in the fourth quarter.

So we experienced greater utilization, as I mentioned earlier, and we would hope to see, expect to see some continuation of that in the third quarter. But again, we would expect some drop-off in the margin in the fourth quarter.

Great. Just one last question on Education Edge. Obviously, this was one of the better performances that we have seen, up 50% sequentially, also in part obviously due to the seasonality of your business. But would you expect to see a meaningful shift in terms of Education Edge as a percentage of aggregate revenue as you look at your installed base, from the opportunities around that product?

Tough question to answer, Adam. There is obviously some seasonality in the sale of this product. I think it will continue to grow, and as a result of that, I think it will continue to be growing sector of the overall revenue. Product's been well-received, separate sales force focused on this that has been terrific performers, and so we feel generally good about that sector and that opportunity.

Great, thank you.

(OPERATOR INSTRUCTIONS) Steve Mahedy with Banc of America Securities.

Hey guys, it's Elliott Wilson (ph) actually in for Steve today. My question is just sort from a product perspective, can you talk about what we should expect to see coming down the pike over the next 12 months here?

You mean in terms of new products? Is that what you --?

Yes, in terms of new products. I know you talked about the second release of NetCommunity that just arrived.

This is Bob. Let me just say this, that I'd prefer not to comment specifically on products, if you will, but I would answer in sort of this way. What are the sort of major opportunities we see in the client base in terms of their needs? And so, I would say that first of all, in general, helping the nonprofit personalize communications, and by that I mean things like enabling teachers and school employees to send targeted e-mails to groups of constituents, deeper integration with Blackbaud NetAdvocacy, which is our advocacy product.

The second would be -- I would call it improved overall analytic support -- more and more as nonprofits become more sophisticated, the urge to sort of do deeper dives into the data and do more effective analytics. Third probably would be deeper integration and interoperability between our solutions and maybe some third-party organizations. High among the group also would be enabling organizations to measure and highlight accountability, so that might be reimbursability of brands and tracking workflow in terms of grants.

And finally, we need to include the Internet. Better use of the Internet for business operations and as a new channel to communicate with constituents. And that would be reflected in things like online ticketing, etc. So that is where we sort of see the important areas of opportunity going forward. Does that help at all?

Yes. Thanks, guys.

(indiscernible) with Thomas Weisel Partners.

I was just wondering if you could speak to the something (ph) accounts receivables and deferred. Is it mainly just due to seasonality in the business?

Yes, it is. It is largely due to the seasonality involved in our maintenance billings. We have a very significant number of our customers that renew their annual maintenance at the end of June, so that drives up both receivables and our deferred revenue.

Okay. You said DSOs was 40, which was flat?

Roughly flat with the last two quarters, that is correct.

What is your target? Can you remind us what's the target for that?

We have sort of typically done on a quarterly basis 38 to 40 days. We feel really good about that DSO. I think if you look at other software and services firms, you would be more likely to see numbers with 6 in front of them (indiscernible) a 4 or a 3. So we (indiscernible) we are able to do there.

All right. That's great. Thanks a lot.

(OPERATOR INSTRUCTIONS) John Neff with William Blair.

Hey, guys. Congratulations on a good quarter. Kind of a big picture question then kind of a specific question. The revenue growth acceleration that you're seeing, how much of that would you say is being prompted by internal efforts in terms of new products? To what extent are you seeing external demand accelerating due to factors, whether it be the deliberations in the Senate Finance Committee or any other sort of regulatory pressures?

It is not so much -- this is Bob -- the Senate Finance Committee, but sort of the general question is, are we doing a better job or is the market beating a path to our door. I think it is probably a little bit of both, which is the way it is best to happen. So I think continued growth in our core products, accelerated growth in our new products, in the face of a perfectly okay market environment. I wouldn't say it buoyant or bubbly or anything like that, but it is okay.

Great. Along that line, I was wondering -- you commented on the management change at the sales force. Can you give us the head count at the sales force between Q1 and Q2?

Yes, it's very little changed, John. The way we like to talk about this is the quota-carrying sales people, I think we said at the end of last quarter it was 120. At the end of this quarter it stood at 122. We added one head net in the enterprise sales team or the key account sales team. And we added one in Europe in connection with the transaction that we did to buy the exclusive rights to market Patron Edge in the UK, so we added a person there.

I would just add to that and caution that counting sales butts and seats is probably not the best way to draw conclusions about future outcomes, because of the increasingly complex nature of our sales and the contributions being made by service personnel that may not wear a T-shirt that is explicitly sales emblazoned. Nevertheless, this is really a very team approach, and so that is probably -- for us, it's a number, but I am not sure it is a great forecasting tool.

Thank you.

Robert Stimson with WR Hambrecht.

Hi. This is actually Jason Cale (ph) for Bob Stimson. I had a quick question for you on your guidance. Can you give us an idea of how much of the increase in your guidance is a reflection of the self-tender?

I would say that it is roughly a penny.

For the quarter or the year?

For the year.

Okay. Great, thanks.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions at this time.

Okay. We would just like to thank everybody for joining us on the call, and we look forward to chatting with you next quarter.

That does conclude today's teleconference. We would like to thank everyone for their participation and wish everyone a great day. Now at this time, you may disconnect.