Blackbaud Inc (BLKB) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by.

Welcome to the Blackbaud third quarter 2005 earnings conference call. Today's call is being recorded.

At this time all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for how to signal.

At this time, for opening remarks, I would like to turn the conference over Mr. Tim Williams, Chief Financial Officer of Blackbaud.

Please go ahead.

Thank you.

Good afternoon, everyone. Thank you for joining us today to review our third quarter 2005 results.

With me on the call today 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 bit 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 S3 and the risk factors contained therein, as well as our periodic reports to 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, I'd like to turn the call over to our CEO, Bob Sywolski, so he can provide some color on the third quarter results and an update on our strategies to address market opportunities. And then I'll come back a bit later to provide some further details regarding our financials.

Bob?

Thanks, Tim.

And thank you for joining us on the call today as we review our third quarter 2005 results.

The September quarter marked the sixth consecutive quarter since going public that we delivered results that met or exceeded our expectations from both the top and bottom line perspective. In addition, while it sometimes gets overlooked, the company continues to generate very strong cash flow, and we're using that cash flow to benefit our stockholders through both dividends and share buybacks.

Our high-level story and reasons for continued success remain much the same. Nonprofits are increasing their use of technology. We are the dominant market share leader, and our business momentum is strong across both our core solutions and newer offerings.

While other sectors in software have been volatile over the past year-and-a-half, the nonprofit sector (inaudible) momentum have been quite steady. As a result of our solid third quarter results and continued optimism, we are slightly raising our full year 2005 guidance.

Taking a step back to look at our numbers, our business continued to grow at a very attractive year-over-year rate. Our third quarter total revenue of $43.1 million grew 18% from the same period last year. And revenue from all major segments, license, services and maintenance, and subscriptions remain strong. Our third quarter new revenue, which recall we defined as a combination of our software and service revenue, grew 18% year-over-year. Our license revenue growth was solid at over 17% versus a strong comparison quarter, while our service business grew at 19%.

Service growth continues to be fueled by the growth in sales over the past 12 months and is a reflection of our unique ability to serve as a trusted partner to customers based on our extensive experience in the nonprofit sector. This is particularly true at the high-end of the market where our domain expertise and services capability are a distinct competitive advantage.

From an overall perspective, our business continues to be balanced with solid growth coming from our core solutions and with even higher growth from our newer solutions. In particular, off three core solutions Raiser's Edge, Financial Edge, and Education Edge posted over 15% year-over-year sales growth in the third quarter, the highest year-over-year quarterly growth from our core solutions group in 2005.

This supports the notion on the untapped opportunities that exist in our market. These core solutions continue to serve as the primary entry-point for us to penetrate new accounts, open the door for us to sell additional products and services to our base of over 13,000 clients.

During the third quarter core solutions led the way in roughly 70% of the new clients we won. In addition, the strategic nature of our core products makes them key drivers in the majority of our larger deals. As evidence of that, our core solutions were key driver in eight of the top ten software deals we closed in the quarter.

Raiser's Edge continues to be our flagship solution, and during the quarter it posted its highest sales growth this year. Fund raising solutions around Raiser's Edge represent the majority of our sales and were approximately 75% of the sales of our core solutions.

But we also continue to receive a solid contribution from Financial Edge, our nonprofit accounting solution, which was a contributor in four of our top ten software deals.

And finally, Education Edge also continues to post strong year-over-year growth.

To summarize, our core solutions are critical because they one, enable us to penetrate a largely untapped market; and two, are a key source of our competitive advantage versus all other vendors. Our name has become synonymous with the mission-critical back-end applications that run the heart of a nonprofit's operations.

The strength of our overall strategic position, combined with the growing suite of robust and high-value applications has fueled the rapid sales growth from new products, which, just as a reminder are our Internet applications, The Patron Edge and our analytic solutions.

Indeed, from a high-level perspective, the third quarter was the second quarter in a row that our portfolio of newer solutions represented at least 20% of our overall sales. And the growth rate of this portfolio was in excess of 40%.

One of the most exciting of our new solutions is NetCommunity and our Internet offerings. Since releasing two upgraded versions of this product over the past year, we have gained significant traction in the marketplace. For the second quarter in a row our Internet offerings grew well in excess of 100% year-over-year. Our success is being driven by the fact that our highly-competitive front-end offering is tightly integrated with Raiser's Edge, the industry standard for back-end fund raising solutions.

This combination provides a very compelling offering in the market. As such, we are the only company that can deliver highly personalized, real-time interactions with current constituents based on complete historical information while using the online capability to deliver highly personalized real-time interactions with prospected donors.

Another new solution having a very positive impact on our business is Patron Edge, our ticketing solution targeted at nonprofit organizations that sell tickets as part of their mission-critical operations, symphonies, operas, zoos, aquariums, and theater groups all would be candidates for this solution.

During the third quarter Patron Edge was involved in four of our top ten -- of our top 11 software deals, and two of those deals were stand-alone Patron Edge sales.

Our experience with Patron Edge is barely one year old, but results to date confirm that this is an attractive long-term opportunity. And we will continue to have a dedicated focus on this market sub sector to ensure we capitalize on the opportunity.

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 subscription revenue should not be overlooked. We continue to enjoy renewal rates in the mid 90s on the maintenance side. And the rapid growth of our offerings sold on a subscription basis has driven our total maintenance in subscription quarterly growth rate to a materially higher level than past years.

The high levels of profitability generated across our business, coupled with good working capital management and the continuing benefits of our deferred tax asset of $73.7 million continues to drive our significant cash flow. For the first nine months of 2005 we generated 39.1 million in cash from operations, a growth of 17% over the first nine months of 2004. This amount is substantially more, nearly twice the pro forma net income generated over the same period of time.

Turning to the performance of our sales channel, both our key accounts group and our traditional sales team had another strong quarter. 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 in the world as a result of our unmatched domain expertise, breadth and depth of our product suite, the end-to-end integration of these products, and our 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 approximately 30K this year. While this number seems relatively small, it is significant when one considers the very large number of transactions we do every quarter.

Software sales continued strong in the quarter and were well balanced with good contributions coming from both large and smaller engagements, as well as both core and newer offerings. However, as we have repeatedly emphasized in our discussions, Blackbaud should not be judged solely on software growth, as services continue to be an equally important component of our business, from both a strategic and revenue perspective.

To that end, the number of deals that we closed with an aggregate software and service value greater than 50K grew roughly 20% year-over-year. While these deals were about equally split between new and existing customers last quarter, this quarter the deals were more heavily weighted from new customers. In fact, four out of our top five total solution deals came from brand new clients in the quarter.

Lastly, I would note that we were very excited this quarter to have inked one of the largest total solution deals in the company's history with a very large integrated system of healthcare institutions. The project we have been engaged to perform involves the implementation of both Raiser's Edge and The Information Edge in at least 11 different sites with over 120 users.

Our continued traction at the upper end of our market is a reflection of our customers' growing confidence in our integrated and highly scalable products, consulting services, and support capabilities. In addition, it reflects the strength of our business model, as the total solution value of this deal is a sizable multiple of the software license value of a few hundred thousand dollars.

In summary, I'd like to leave you with four key points. First, the fundamentals of our sector remain strong. Second, we continue to make progress with a variety of new and attractive solutions, with solid growth coming from our core applications and rapid growth from the newer offerings. Third, we are benefiting from growth in our ASTs over the last nine months, while still maintaining our high-volume business model. And finally, we continue to generate very strong cash flow.

Finally, 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, for which I am profoundly grateful.

Before turning it over to Tim, I'd like to share with you an update on the future direction of Blackbaud's leadership team. As many of you are aware from our public filings, my contract with the company is set to expire in the first quarter of 2006. Those of you who have done the arithmetic will also note that I will be 68 years old at the turn of the year. I'm proud of my contributions at Blackbaud over the last six years, and especially proud of the team I have been able to assemble. However, I have decided it's time to begin planning for the next phase of my life.

As a result, and as a matter of good corporate governance, our board of directors -- me included -- has been engaged in succession planning to protect and grow stockholder value. We have launched a search for a new CEO and have been delighted with the caliber of talent that we have seen so far. As a result, there is a good chance we may be able to bring this matter to a conclusion in short order. But, as I am sure you are all aware, it's never over till it's over.

Rest assured, though, that I am committed to spend as much time as it takes to both find a highly-qualified CEO replacement and transition the reins regardless of my contract terms.

I'm confident that the company, with its strong franchise and deep management team is well positioned as new leadership comes on board to take Blackbaud to the next level.

Now let me turn it over to Tim to review the details of the quarter.

Tim?

Thanks, Bob.

We were, as Bob noted, extremely pleased with the performance that the company turned in this quarter, which, as Bob already mentioned, exceeded our expectations. I'd like to cover three main topics before turning it back over for Q&A. First, review our third quarter results and balance sheet in more detail, provide some guidance for the fourth quarter, and finally, provide a quick update on the capital management program.

First, let's start with the highlights of the profit and loss statement. Total revenue came in at 43.1 million, which was up 18% on a year-over-year basis. Top line was driven by continued strength in our new revenue sources, along with continued strong growth from our maintenance and subscriptions revenue.

New revenue, or the combination of software and services revenue was 21.8 million for the third quarter, which was up roughly 18% on a year-over-year basis. Within new revenue, license fees came in at 7.3 million, this was up 17% year-over-year and down 12% sequentially due to typical seasonality, but above our guidance of 6.8 to 7 million. The key driver of this overperformance compared to the high end of our guidance was the relatively large transaction Bob referenced earlier.

On the services side revenue came in at 14.5 million, which represented growth of 19% on a year-over-year basis, and 2% sequentially off a very strong second quarter.

The last major component to our revenue, maintenance and subscriptions, came in at 20 million, which represented 46% of our total revenue and growth of approximately 17% on a year-over-year basis. We continue to enjoy maintenance renewal rates in the mid 90s range, which is a testament to our customer satisfaction and the strength of our technology. Maintenance alone grew at 13%. But continuing to drive the overall recurring revenue growth rate higher was the growth in subscriptions, which increased 91% on a year-over-year basis and was approximately 1.8 million for the quarter.

The growth in our subscriptions revenue has fueled an acceleration in this overall line item compared to prior years. And it is at this line where you are seeing part of the growth from the Internet solutions sales that Bob referenced earlier.

Turning to gross profit, we generated 30.6 million in pro forma gross profit in the quarter, representing a gross margin of 71% in line with the second quarter and the year-ago quarter.

Gross margins in our services business improved sequentially by about one percentage point. This was largely due to further improved utilization of our professional services resources.

The gross margin from licensing declined approximately one percentage point sequentially because of the relative success we had selling the royalty-based Patron Edge solution in the quarter.

Looking at operating expenses, sales and marketing came in at 20% of revenue. This was up a little over one percentage point versus last year and down about a half a percent versus the second quarter. The increase over the prior year is due to the comparatively higher cost associated with our key account selling team, which represents a heavier component of the revenue mix versus last year.

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 a year ago and right in line with the second quarter.

G&A came in at 10.2% of revenue, which was up about three quarters of a percent on a year-over-year basis. This increase is entirely the result of incremental public company costs, most of which are related to Sarbanes-Oxley compliance.

The overperformance in revenue then helped to drive pro forma operating income of 12.3 million, representing a pro forma operating margin of 28.6% for the third quarter. This was better than our guidance of operating income in the 11.6 to $11.8 million range and was due to a combination of better-than-expected revenue and careful expense management.

The margin is about one percentage point less than the third quarter last year due to both the higher sales and marketing expense and incremental SOX Compliance costs I just mentioned.

The use and effective tax rate for pro forma results in the quarter of 39% leading to pro forma net income of 7.6 million and EPS of $0.17 based on diluted shares outstanding of 44.6 million. EPS was a penny better than our guidance.

As we have noted with you before, we focus our discussions on non-GAAP or pro forma results because we believe that excluding noncash items, such as stock-based compensation, amortization of intangibles arising from business combination, or one-time items such as IPO costs provide 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 was 7.7 million in the third quarter of 2005, compared with 7.6 million in the third quarter of 2004. And GAAP fully diluted earnings per share was $0.17, compared with $0.16 in the prior period.

The principal reason for differences between GAAP and pro forma earnings in the third quarter this year is stock-based compensation charges and a state tax credit benefit, neither of which is included in the determination of pro forma earnings amounts.

Last quarter you will recall that we recognized a state tax credit of approximately 2.9 million associated with certain qualifying jobs tax credits. This quarter we recognized an additional 1.3 million of further state tax credits associated with the location of our corporate headquarters and a recent change in South Carolina law that allows us to apply these credits to offset our South Carolina state income tax. This latter amount will be realized over the next ten years.

Although we exclude these credits from the determination of pro forma earnings, I would remind you that they positively impact our already strong cash flow.

Finally, regarding the stock compensation charges, I would also remind you that as of the end of the third quarter we continued to have about 1.2 million options subject to variable accounting. Obviously, the impact of GAAP -- the impact on GAAP quarterly earnings from these options will vary as the stock price moves.

Let me now turn to cash flow and the balance sheet. We ended the quarter with $20.7 million in cash. This was down from the 50.4 million at the end of the second quarter. But you will recall that at the beginning of the third quarter we used approximately 43.3 million in cash to complete our self tender. In the quarter we actually generated cash flow from operations of 19.8 million, representing 15% growth over the prior year, more than the growth in our pro forma operating income.

The end of the quarter was a deferred asset -- or deferred tax asset balance of approximately 76.5 million, the largest component of this asset stemming from the company's leveraged recap in 1999 adds roughly 8 million to our cash flow on an annual basis. And it is expected to do so until the year 2014. This continues to be one of the principal reasons our cash flow will continue to be materially larger than our reported net income.

Accounts receivable at the end of the quarter decreased by 5.2 million, sequentially consistent with normal seasonal trends. And our adjusted DSO at the end of the quarter was 41 days, consistent with our recent history of high 30s to low 40s.

Total deferred revenue came in at 60.9 million, an increase of 2.2 million from the end of the prior quarter.

Let me now turn to guidance for the fourth quarter. For the fourth quarter we are now forecasting a total revenue range of 40 to $41 million, with EPS of $0.15. Additionally, we are forecasting a license revenue range of 7.3 million to $7.7 million, and operating income of 10.5 million to $10.8 million. The midpoint of a license revenue guidance reflects 11% year-over-year growth, while the quarter-to-quarter comparison is skewed by the relatively large transaction that occurred during the third quarter, which we had actually forecasted for the December quarter.

Finally, we are also adjusting our full year guidance to 163 to 164.2 million in revenue with operating income of 44.8 to 45.1 million, and EPS of $0.61.

One final word on guidance. As you all know, the company has not yet adopted FAS 123. Furthermore, we have indicated to you that we have been evaluating with our board of directors several different types of stock compensation vehicles that we could use in the future as long-term incentives for our key employees.

Following a lengthy review, the board as approved the use of restricted shares as that vehicle. And we are currently in the process of awarding grants for approximately 435,000 restricted shares to key contributors across our organization. These shares will invest over the next four years.

We expect to be issuing similar grants annually in the future.

The accounting impact of this decision will be a charge to pretax earnings of approximately $1.7 million in 2006. There will also be a charge of approximately 200,000 in the fourth quarter. These amounts are not reflected in our fourth quarter guidance, as we will continue to focus on pro forma results that exclude stock compensation expense.

In addition, let me add that the impact of FAS 123 from previously-issued stock options is estimated to be $1.1 million in 2006. I should note here that the stock compensation expense amounts do not include the impact from awards that could be granted to a new CEO.

I'd now like to finish with a very quick update on our two-part capital management program that we announced at the end of 2004.

The backbone of both of these programs is the extremely strong and proven cash flow generating capabilities of the company. Part 1 was the initiation of a $0.20 per share annual dividend that we began to pay our investors at a rate of a nickel per quarter beginning on February 28th. Today we have announced our fourth quarter dividend of $0.05 per share on November 30 to stockholders of record on November 15th.

The second component of our capital management program was a share buyback initiative, which we are proud to say we have continued to execute on. During the third quarter we purchased $45.6 million worth of common stock, including 43.3 million in the self tender. We remain highly confident in the future cash flow capabilities of the company and are committed to continue using this cash in ways that enhance stockholder value.

In summary, then, we are pleased with the company's performance thus far in 2005. We are optimistic about our outlook for the remainder of the year. Our record third quarter results were better than our expectations. Our competitive and product positions are strong. And we are slightly raising our 2005 forecast.

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

Operator?

Thank you.

(Operator instructions)

We'll pause momentarily to assemble our roster.

We'll take our first question from John Torrey of Montgomery & Company.

Good afternoon. Great quarter, guys.

Thanks, John.

Thanks.

A couple of questions for you. Can you update us on your hiring plans heading into the fourth quarter?

At this stage we will add to our headcounts opportunistically as we have attracted candidates. As you would appreciate, we're always searching for quality people, particularly to work in our services and development area, and we would expect to build headcounts as we move to the end of the year in those areas, possibly in sales also, but they will be largely opportunistic as we move to the end of the quarter.

I would say, John, no real change in the trend line throughout the year. The fourth quarter will look like the rest of the year, really, in terms of hiring.

Okay. And then in your educational services component, can you give me some idea if you're seeing any meaningful shift between the vast majority of that business that comes from the classroom-based training over to some of the e-Learning catalog offerings that you have today?

No, not -- I wouldn't call it a major shift. I think that -- we do not see e-Learning as a replacement for classroom training, really, and mercifully needed of our clients. It's really a way of sort of strengthening what they learn in the classroom and a referral source as opposed to a replacement.

Okay. And then on the new product growth that you mentioned of greater than 40% during the quarter, I think you've been mentioning for quarter's greater than -- or well more than 50%, obviously a strong product for your core business here in Q3. Anything to read into the slightly lower growth rate on the new products relative to the kind of (inaudible) --

No, not really. The way we look at this, growth is still very strong and has been, in this area, has been a driver of the acceleration in our growth over prior years.

I think you have to remember from a purely mathematical perspective, some of our products, like Patron Edge and some of our Internet solutions actually are now being compared with results in prior years' quarters. This was not the case in the first two quarters. So I think that's the biggest impact.

I think it's also important to remember we manage a complete portfolio of products and are mostly focused on maximizing our overall performance, and in that context we were very happy with the performance of these products, or these solutions, as well as our core solutions. So nothing more to read into it than that, John.

Great. Understood.

And then the last thing, Bob, congratulations. Do you, at this point, have any specific plans with respect to whether or not you'll retain your board seat upon (inaudible) the successor?

Yeah. You know, I would say first of all, I'm not taking another j-o-b and will probably most likely not stay on the board of directors once a CEO replacement is in place.

I personally think it's unhealthy to have a former CEO looking over the new CEO's shoulder.

Well, fantastic. Congratulations.

Thank you.

Thanks, John.

We'll go to our next question from Adam Holt with JPMorgan.

Hi, guys.

Hi, Adam --

Hey, Adam.

-- how you doing, man?

I'm doing all right. Bob, I'll also echo those congratulations.

But I guess my first two questions are for Tim, both financial.

The first would be, it looked like you had a little bit more of an uptick in deferred revenue than certainly we saw in the third quarter last year. I was wondering if that was primarily just good maintenance renewals or whether or not there was something else at play there.

And then also, if you could talk about what, if any assumptions you made around ScanSoft in the guidance?

Let me answer the second question first.

No specific -- no specific thoughts were built into our assumptions around the Scan store (ph) acquisition built into our guidance. We're excited about that acquisition, but I think as we emphasize at the time we did the acquisition, it is relatively small and we're just now completing the early stages of transitioning the business under Blackbaud control. So we remain very excited about the opportunity, but there's nothing specifically built into our thoughts on guidance here.

As far as deferred revenue, my recollection is that there isn't anything particularly unusual going on there. I think it's largely a factor of just continued good renewal activity in our maintenance business, and nothing more than that, Adam.

Okay. Then if I could, a question on the Patron Edge product line. I think you've said that two of the larger deals you signed within Patron Edge were stand-alone deals. And I was wondering if you could talk about what your experience has been in converting stand-alone Patron Edge's customers into broader Blackbaud suite users.

Well, it's conceivable that those were already Raiser's Edge users. So that's the sort of cool part of Patron Edge that if, in fact, they are Raiser's Edge users, then it's a very compelling case to purchase Patron Edge, which is the ticketing component. And I guess the way to look at that is that is a real compelling offering to have that sense of integration.

Okay. And just one last question on sort of the end market. You mentioned, in your prepared comments, that the end market remains quite strong. Just one question on the unfortunate side effects of Katrina and some of the hurricanes that we've seen. There's been a large amount of giving to those particular relief organizations. Has that had any impact on sort of the broader nonprofit market to the extent that you've got insight from what your customers are seeing?

That's a terrific question, Adam.

Actually, we did a survey of nearly 700 organizations of all types, and for those nondisaster-related relief organizations, something in excess of 70% really do not expect to see diminished donations as a result of the tsunami or Katrina hurricane. So again, with $250 billion worth of giving, the 1.5 billion, it's tough to move the needle. So the answer is not significantly at this time.

So it's a good question.

Great. Thank you.

Thanks.

We go now to Philip Rueppel (ph) of Wachovia Securities.

Great. Thanks.

And kind of building on that last question, do you sense -- and maybe some anecdotal evidence from your recent philanthropy customer conference -- given the attention that some of these relief organizations are getting from the media and sort of their efficiency at getting funds where they need to be, do you sense that there is also potentially a positive impact on your core customer set folks really looking to use technology to be more efficient in terms of how they manage their business?

Well, I think in general there is no question that there is a sort of a continuous and exorable trend to try to improve operating efficiency. It was actually, in fact, the subject of my comments, my opening comments at the conference, and that is the use of technology and various other investments and infrastructure to improve the operating efficiency of nonprofits. And I think that that's fact. I think it continues to get traction. And I think it will continue to get traction over time.

Okay. And a brief one for you, Tim.

You mentioned that you booked a large -- one of your larger deals ever in health services arena. Did you take any revenue from that this quarter? And if not, how do you expect that to be -- to layer out over the course of the next few quarters?

Yeah, we did. We recognized the software component of that transaction, Phil. And that was the point I was making earlier that that was the key driver in the overperformance in our licensing revenue line relative to the guidance we gave.

All right.

And then the rest of this, the rest of the deal involves services, which -- very large services engagement, which we would expect to begin implementing here shortly, but would extend well into next year for sure.

Okay. Great. Thanks very much.

Thank you.

Thank you.

We go next to Keith Gay of Thomas Weisel Partners.

Hey, Bob, congratulations. I think everybody'd agree, you've done pretty well for such a young CEO.

Thank you, Keith. I'm glad you recognize my age barrier.

Regardless of timing, how much overlap do you foresee with the next CEO, and what challenges do you focus on during that time period when you do have that overlap?

Well, I think it's largely up to the next CEO. And I'm here to help for as long or as short as he or she would like me to do so. And I think it's quite impossible for me to predict what that is at this time. So that's the best answer I can give.

Okay. Is this going to be -- is there an internal versus external bias here or is it primarily an -- ?

We're considering all alternatives.

Okay. On the AST front there's, I think you said around the 30K level last quarter or 30K this quarter. Is that a gradual sequential creep, and do you kind of -- do you see that continuing to go north -- gradually north of the 30,000 level?

Well, I would say that given the focus that we've had on -- in our key accounting, focusing on the higher end of the market, I think we would expect to see some movement up. I wouldn't necessarily predict that it will be at the same rate that we've seen in the last year or so, but I would expect to see some movement up in our ASTs as we move out into next year.

Okay. And then finally on the subscription revenue, it's 1.8 million, 4% of revenue. Are you incentivizing a move in this direction? Do you have -- from 4% of revenue now, is there some kind of long-term target that you have in mind, or is it just based on what the customer wants to do?

I think it's absolutely the latter. It depends on what the customer wants to do. And we're not incentivizing our sales force any differently with respect to those kinds of offerings versus other offerings that are sold on a more typical -- I guess you could say typical basis, typical for us.

And I guess one more financial question. After the tender you had indicated you might -- you would cut back on the share buyback. But are you kind of indicating here that you will continue with that or you may actually go with that at a higher level than maybe you had anticipated initially with the announcement of the tender?

Well, I think what I was trying to indicate when I said we were going to cut back a bit was that that there were some practical limitations for us on how many additional shares we could buy in the third quarter. We actually did end up buying another 171,000 shares after we completed the tender. So we were fairly active in the market.

I think what I'm trying to indicate to you with my comments today is we continue to be interested in buying back shares and using our cash for that purpose subject to making sure that we consider all the other potential uses for cash that we have here.

Okay. Thanks.

Our next question today comes from Bob Stimson with WR Hambrecht.

Hi, actually, this is Jason Coe (ph) for Bob Stimson.

I just had a quick question on your Internet offerings. I think you mentioned that they grew about 100% for the quarter. Can you give us a little more color on that demand?

Yeah. I think that although the Internet continues to be a relatively small piece of all funds raised, something in -- slightly in excess of 1%, we are seeing our clients more and more interested in figuring out how to utilize the Internet, and particularly in the capability we offer, which is the integration between the offline relationship management of a donor or prospect with their online interactions; that is, being able to use historical information about their profile, their giving history, their relationships with the organization, et cetera, which needs to be integrated with their online connections and interactions. So largely because of sort of the unique integrated nature of our solutions, we see a broad set of uses for our Internet apps.

Great. Thanks.

Thank you.

Next we go to John Neff with William Blair.

Hi, all. Great quarter. And, again, Bob, congratulations, although I've got some sort of Dick Clark analogy I can't quite put to words. I can't believe . . .

Again, most of my questions have been asked, but I guess could you give us a little bit more of a sense of the profile of the candidates being searched to replace you? Are these -- you came from an intensive services kind of a background. Anything along that line?

Something with an S on the chest maybe or something like that to get started.

Really, the profile of the candidates are -- and we take this very seriously, really, people with superior intellect, strong leadership qualities, a background in software and services delivery -- and maybe a sense of humor might be nice -- and someone who really values and appreciates the franchise and the team that we have here, which is actually not hard to imagine. So we're looking for really exceptional -- an exceptional individual. And we've got a lot of great candidates that have posted for this.

Are you looking for somebody that has been a CEO or is currently a CEO? Or is that not a requirement?

It's not necessarily a requirement.

Okay. And I guess, lastly, Tim, any color you could give on the status of the ownership Hellman & Friedman, et cetera, in terms of what their ownership currently is and what, if any plans they may have announced to liquidate?

Thank you.

Sure. Thanks to you, John.

Yeah, I can only comment that the Hellman & Friedman ownership at this point is at roughly 17.2, 17.3 million shares, I believe. And as for what their next steps might be, I have nothing to offer up. I'm not privy to exactly what they might plan to do at this point. So that's all I can say on that one.

Thank you.

Thank you.

Thank you.

(Operator instructions)

We go next to Cash Frangen (ph) of Merrill Lynch.

Hi. Thank you very much.

Bob, I'd say you're the most athletic 68-year-young CEO that I've known.

Are you still using those goggles, Cash?

I am getting very good productivity out of those.

Good.

But I still can't do the 68 laps in 30 minutes or whatever that is you do.

Anyway, so on the business here, on the CEO front it looks like you would probably want to locate a candidate that is specific to the region. And it occurs to me that you do have a handful of qualified candidates internally. Why even open up the search to external sources? I'm just wondering what your thought process is on -- especially considering that you've got a unique culture, you'd want to preserve it, what about the thought processes of preserving that and going internal as opposed to external?

Yeah. Well, we certainly considered that, we just didn't want to leave any leaf unturned, really. And so we've -- we felt it was prudent to look at all possibilities. It's just that simple, Cash.

Got it. Okay. That makes sense.

When we look at the core products being up so nicely, almost to an acceleration versus where they've been last year, and obviously some of that is driven by the key accounts focus. At what point are we, with respect to productivity curve of the new people that you've got working on the key accounts? Are we just in the beginning, first, second, third inning, or have we sort of exhausted their productivity at this point?

Well, I don't think we're in the later innings, let me put it that way. I think we've got a lot of room to go here. There's a lot of runway. And we feel really good about it. We've got a great team. We've got great leadership. And remember, this team is part and parcel service delivery component. So it isn't -- it's a total solution we're selling and they're well-integrated and sort of blowing and growing and it's -- I think it's early times, if anything.

Cash, are you there?

Cash, would you please resignal to finish your question?

Can you hear me, guys, now?

Yeah.

Yeah, we can.

Okay.

Did you hear my answer, Cash?

Yes, I did. I did. Thank you.

Good.

Finally, thought processes on raising the dividend. It looks like you've got enough cash flow to possibly double your dividends or maybe even do better than that as opposed to a stock buyback, which I guess limits your public market flow and liquidity, whatnot. I was wondering what your thought process there is.

Thanks, that's it.

Good question. We haven't thrown out the possibility of raising the dividend. That's something we would -- we'll certainly take a look at early next year. We committed early in the year to do a $0.20 dividend, and we're paying the final piece of that here and pretty excited about that. So I would just say stay tuned. We do -- we are trying to use our cash as wisely as we can when it comes to share buybacks, to do it in a way that also doesn't get in the way of hurting our float. That is to say, if you recall when we did the self tender, we were able to buy a substantial portion of the shares of our private investor, but at the same time made it available to all the investors if they wanted to participate. So we felt that was a creative way to use our cash, buy back some shares, but not get in the way of also trying to figure out a way to increase the liquidity in the stock.

So we'll continue to look at creative ways that we might be able to do something like that. But certainly, considering a dividend increase will be something we'll take a look at.

Great. That'll be nice.

And again, congrats and (inaudible).

Thank you.

And our last question today will come from Steve Mahedy with Banc of America Securities.

Thank you.

Bob, certainly during this phase of your career you did a fine job driving revenues and profitabilities here, so good luck in the next phase.

Thank you.

My question would be relative to guidance and just kind of comparing the guidance to expectations for cash flow and deferred. Tim, is there anything that's going on in the fourth quarter, former one-timers? I know you kind of had mentioned the Sarb-Ox, that would just be aware of -- that would have an impact on historical trends for both cash flow and deferred in 4Q?

No, I don't think so. I think you should realize that, of course, cash flow is not quite as strong typically in the fourth quarter as it is in the two middle quarters. But I don't see anything of a one-time nature that would get in the way of our performance there that is -- that has not been factored into our guidance or it has been for that matter. There's really not any one-time items embedded there.

Thanks.

The next question would be just looking at various vertical markets, healthcare, where you've had a strong presence, it sounds like that's where the particularly large deal came. Are there any other vertical markets that seem to be just accelerating or stand out as out-performers in the quarter?

I wouldn't say there's anything in the quarter. I think we have told you before that we've been -- and if you reflect back on conference calls earlier this year, we've mentioned the higher ed space where we feel like we've gained some traction. So -- but nothing particularly significant we would point to this quarter. But that is a vertical which we think we're continuing to do quite well in.

Okay. Well, my last will be on geographies. Anything going on within Europe or the UK during the quarter that was of particular note?

Not really. I think if you look at the mix of both -- of U.S. versus the international business, the mix stayed relatively constant with what we've seen. The international revenues were roughly 15%. So no major change there.

Okay. Thanks.

Thank you.

And good luck once again, Bob.

Thank you.

And that will conclude today's question and answer session. At this time I'd like to turn the conference back over to Mr. Bob Sywolski for any additional closing remarks.

Thank you very much. We appreciate everybody taking time to be with us. And we look forward to next quarter.

Back to work.

Thanks.

Thanks, everyone.

That will conclude the Blackbaud third quarter 2005 earnings conference call. Your participation has been appreciated. You may disconnect at this time.