Blackbaud Inc (BLKB) 2005 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to today's Blackbaud fourth quarter 2005 and full year conference call. [OPERATOR INSTRUCTIONS] I would like to remind everyone this conference is being recorded and I'd now like to turn the conference over to Mr. Tim Williams, Chief Financial Officer of Blackbaud. Please goo ahead sir.

Thank you, good afternoon everyone, thank you for joining us today to review our fourth quarter 2005 results. With me on the call today is Marc Chardon, Chief Executive Officer. Marc 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 project 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 into 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 for 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, Marc Chardon so he can provide some color on the fourth 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 the financials. Marc?

Thank you Tim and thanks to all of you for being on the call today as you review our fourth quarter 2005 results. Now, my first priority as Blackbaud's new CEO was to make sure the Company's solid momentum did not skip a beat during the transition process to the new CEO. Now I believe our Q4 results show that we are successful in achieving this.

I'm very pleased to report that in my first quarter as CEO of Blackbaud, we continued the Company's track record of delivering results that meet or exceed our expectations from both the top line and the bottom line perspective. This was the seventh consecutive quarter since going public that the Company has been able to do just that. And I think it's something that we can be proud of.

Now each of the primary factors that attracted me to Blackbaud has been reaffirmed during my first two and a half months on the job. Mainly the significant market opportunity, the Company's leadership position in that market and finally the people at Blackbaud who share my deep passion for serving the customers in this unique market space.

First, from a market perspective, while many nonprofits are behind the technology adoption curve, compared to the for profit world, there's a growing and sustained interest in the technology and the application to the nonprofit mission. And this is a key contributor to Blackbaud's strong top line momentum, something that I believed strongly when I joined the Company and it's confirmed itself to me.

Second, customers continue to confirm that Blackbaud is the market leader from a solutions, domain expertise and customer satisfaction perspective, positioning us well to benefit as more nonprofits ramp up their IT investments. A key to being a market leader is having a sound business strategy in place to execute against and I'm very fortunate that my predecessor, Bob Sywolski, led the Blackbaud leadership team in creating a tremendous set of strategies to implement, such as building a broad suite of integrated products, a professional services organization and a key account selling effort to take our solutions up market. Bob also played a significant role in growing Blackbaud's leadership position and I'd like to recognize Bob for helping us have a really smooth CEO transition during the December quarter.

And finally, I joined Blackbaud because I have a personal passion for what nonprofit organizations accomplish in this world. And it's been great to see that the Blackbaud team truly shares this passion to make a difference in the world. This passion also leads to a high level of dedication and focused execution, which can be seen in the solid and consistent track record Blackbaud has established.

Building on our leadership position and track record, we plan to continue to use our strong cash flow and raise the benefit stockholders. This includes dividends which we're raising today and also continued stock buybacks from judicious acquisitions. I'm excited about our outlook for 2006 and beyond and I look forward to leading Blackbaud in its next stage of growth. So with that, let's take a look at our performance in the quarter.

Our growth continued at a very solid year-over-year rate with a total revenue of $42.9 million, which is growing at 19% over the previous year. This capped off a highly successful year in which we grew total revenue on an annual basis by 19%. The momentum of the market and Blackbaud in particular can be seen in the increase of our annual revenue growth rate which had moved up from 12% in 2003 and up from 18% in 2004.

Revenue from all major segments in the quarter, licenses, services, maintenance and subscriptions remain strong. License revenue growth was solid at 17% while our service business grew at 26%.

Services continue to play an integral role in our overall value proposition as our customers who rely on our 25 years of experience to help them improve their fundraising capabilities and operational efficiency. Our services are a particular competitive advantage at the high end of the market because at that end of the market, implementations that are more comprehensive and more complex require a higher level of service.

Our core solutions Razor's Edge, Financial Edge and Education Edge had another solid quarter with low to mid-teens growth compared to Q4 of last year. These core solutions continue to serve as the primary entry point for us to attract new accounts, opening the door to us for selling additional products and services. During the December quarter, slightly over half of our sales of these core solutions went to new customers, and that's great because it continues to support our view that there are still a large relatively impact opportunity in front of us for even our mature solutions.

In addition, the strategic nature of our core products makes them key drivers in the majority of our larger deals. As evidence, our core solutions were a key driver in nine of the ten top software deals we closed in the quarter. Razor's Edge continues of course to be the flagship solution for this and it represents a majority of our sales and about 75% with the core solution sales. However, Financial Edge and Education Edge both continue to post solid growth as well.

Blackbaud's long been recognized as the industry leader in these mission critical applications at the heart of most nonprofit organizations and will likely continue to be for a long time.

So, our customer base now numbers over 15,000 with our recent acquisition of Campaign Associates and that gives us - that acquisition gave us approximately 2,000 additional customers. Similar to Blackbaud, Campaign has significant domain expertise with 18 years of experience dedicated to the nonprofit sector. They also share an intense focus on customer satisfaction, which makes them an attractive partner from our perspective as an acquisition candidate here.

It's the cornerstone of their high maintenance renewal rates and cornerstone of our ability to cross-sell over time. Our plan for now is to continue to support Campaign's GiftMaker Pro fundraising application, but ultimately the value of the acquisition from a Campaign customer perspective is that they now have an attractive upgrade path to our industry leading application for fundraising, the Razor's Edge and most importantly to a much broader integrated suite of value added applications. We believe this acquisition is a big win for the customers of Campaign.

The expansion of our fundraising customer base is important because these are the systems that mange much of the constituent data that must be integrated with and leveraged by other high value-added applications. Our leadership position in the core areas of fundraising, financial and information applications helped to fuel the growth in what we internally call our new app solutions, such as internet applications, [inaudible] Edge and our analytic solutions.

This portfolio of new solutions increased to nearly one quarter of our total sales during the December quarter, reaching its highest level in the history of the company. For the full year, our new solutions portfolio increased to slightly over 20% of sales, which is an increase from 7% just two years ago and a strong indication of Blackbaud's ability to bring new solutions to the marketplace to meet our customers' needs.

Our internet offerings, led by Net Community, were the fastest growing segment within our [inaudible] solutions. As we've stated before, we believe the Internet needs to be integrated with a non-profit other communication channels to ensure the constituent relationships are fully optimized. Our internet offerings are tightly integrated with Razor's Edge, which means we're able to deliver a value proposition with our internet solutions that's virtually unmatched in the marketplace.

Another new solution we've discussed in several prior conference calls is the Patron Edge, and that's our ticketing solution. For the fourth quarter, and the full year 2005, Patron Edge was the third largest contributor to our license revenue. Also, Patron Edge was involved in three of our top ten software transactions this quarter, including a standalone Patron Edge deal. We continue to increase the resources and focus behind Patron Edge and we believe there's a large opportunity for this product still ahead.

Turning to the performance of our sales channels, our key accounts group continues to increase its contribution to our overall sales performance. This has been a major focus of our investments in sales and marketing for the past two years and it's a key driver of the acceleration in our overall growth for the past two years.

While our business model fundamentally remains high volume, low ASP, our key accounts team has been incremental in growing our average deal size to the $30,000 level in 2005 which is up from the $25,000 level that the company experienced before it went public in 2004.

On the topic of growing deal sizes, the number of deals that we closed of an aggregate software and services value, that is to say total solution value of greater than $50,000, grew just under 30% year-over-year. This is the category where you can see the biggest impact of the build out of our major accounts teams over the past couple of years.

Once again, the balance in our business model can be seen in the fact that 6 out of our 10 largest solution deals in the fourth quarter came from existing customers. An important feature of our key account selling efforts is to build bigger relationships with our large existing customers and we're being successful at doing just that. At the same time, for the second consecutive quarter, we also closed a single total solution sale that was greater than $1 million with a brand new customer and shows the balance of new customers as well as selling back to our key accounts and existing customers.

This growing interest in our solutions is not limited by geographic borders and we believe that there's a significant opportunity to grow our international business in the years ahead. In the December quarter, our international operations had their strongest performance of 2005. They contributed the largest single software licensing transaction in the quarter and produced approximately 13.5% of our sales. For the full year, international operations produced approximately 12% of sales, but I believe that over the long term there's no reason that this number couldn't increase to a quarter or maybe a third of our overall business.

In summary, I was very pleased with the company's performance in the fourth quarter, which was highlighted by strong momentum across all segments of the business. Each of the reasons I joined the company, the market, leadership position and [our] solid people have been confirmed and I'm excited about our outlook as we enter 2006 and even more so by the long term opportunity that I believe is ahead of us.

So with that, let me turn this over to Tim Williams for a moment so that he can walk you through the financial details before we take questions and answers.

Thanks Marc. As Marc said, we were very pleased with the performance that the company turned in this quarter which Marc already mentioned exceeded our expectations. I would like to cover three main topics before turning it over to Q&A.

First, review our fourth quarter results and the balance sheet in a bit more detail, provide some guidance for the first quarter of 2006 and the full year and then finally provide a quick update on our capital management program. First, let's start with the highlights of the profit and loss statement.

As Marc said, total revenue came in at $42.9 million, which was up 19% on a year-over-year basis. The 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 which, as you know from prior conference calls, represents our combination of software and services revenue with $20.5 million for the quarter which was up roughly 22% on a year-over-year basis.

Within new revenue, license fees came in at $7.9 million, up 17% year-over-year and 9% sequentially and above our guidance of $7.3 to $7.7 million. All of our solutions and sales teams made solid contributions in the quarter but if we had to single out one that's more important perhaps than another that might have led to the overage in the quarter in the full year, it would be our key account sales team.

On the services side, revenue came in at $12.5 million, which represented growth of 26% on a year-over-year basis and a typical seasonal decline of 14% sequentially. The last major component to our revenue, maintenance and subscriptions came in at $20.7 million, which represented 48% of our total revenue and growth of approximately 16% 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 almost 14% in the quarter and continuing to drive the overall recurring growth rate higher was our growth in subscriptions which increased 78% on a year-over-year basis and was approximately $1.9 million fourth quarter.

The growth in our subscriptions revenue has fueled acceleration in this overall line item compared to prior years and it is in this line item where you are seeing part of the growth from the internet solutions sales that Marc referenced earlier. Turning to gross profit, we generated $29.2 million in pro forma gross profit in the quarter representing a gross margin of 68% in line with our gross profit margin in Q4 last year, but down a bit from 71% in Q3 which is due to the normal seasonality and downturn in our services business that we see in the fourth quarter.

Looking at operating expenses, sales and marketing came in at 19% of revenue; this was up about a half a percentage point versus Q4 last year and down about one percentage point versus the third quarter. The increase over the prior year is due to invest in our key account selling team.

R&D grew both year-over-year and sequentially on an absolute dollar basis however at 12.5% of revenue; it was down very slightly as a percentage of revenue compared to a year ago and essentially in line sequentially with the third quarter. G&A came in at just over 9% of revenue, which was down about a half a percentage point versus Q4 last year and down about a full percentage point versus Q3. This improvement was due to a combination of factors that reflected our overall good cost control in the quarter but no one item was a significant contributor.

The over performance in revenue then combined with good cost and expense control helped to drive pro forma operating income of $11.8 million, representing a pro forma operating margin of 27% for the fourth quarter. This was better than our guidance of operating income in the $10.5 to $10.8 million range.

The effective tax rate for pro forma results in the quarter was again 39%, leading to pro forma net income of $7.3 million and EPS of $0.16 based on pro forma diluted shares outstanding of 44.5 million shares. 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 non-cash items such as stock-based compensation and amortization of intangibles arising from business combinations or one time items such as IPO costs provide the best indicator of the help 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, as we normally do, a full tabular reconciliation of our GAAP results and pro forma results as part of the earnings release. In summary then, the reported GAAP net income was $6.2 million in the fourth quarter of 2005 compared with a loss of $4.3 million in the fourth quarter of 2004. And GAAP fully diluted earnings per share was $0.14 compared with a loss of $0.10 in the prior year.

The principal reason for differences between GAAP and pro forma earnings in the fourth quarter this year is stock based compensation charges which are not included in the determination of pro forma earnings.

As of the end of the year there is no longer any significant number or value of corresponding options that would be required to be accounted for under variable accounting in 2006. We will, however, have further charges associated with our restricted stock program and charges associated with previously issued options that will be accounted for under the new FAS 123R pronouncement beginning in Q1. I will comment further on that in just a moment.

Let me now switch gears and turn to cash flow in the balance sheet. We ended the quarter with $22.7 million in cash, this was up from $20.7 million at the end of the third quarter. In the quarter, we generated cash flow from operations of $12.8 million, growth of 26% over the fourth quarter last year, and more than our growth in pro forma operating income. At the end of the quarter we had a deferred tax asset balance of approximately $79.1 million, the largest component of which is a benefit stemming from the company's leverage recap in 1999 that adds roughly $8 million for cash flow on an annual basis.

As we have indicated before this asset is expected to continue providing an annual tax benefit at this level through 2014, and is 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 increased by $3.2 million sequentially, consistent with our 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 $60.7 million, roughly flat with the end of the prior quarter, consistent with the movement, however, from Q3 to Q4 last year, and up overall approximately 16% from the December 31 balance last year.

As has already been noted we were thrilled to have completed the acquisition of Campaign Associates in late January. This was an all cash acquisition for $6 million with a two-year earn out that is capped at another $2 million. In the last full year of operations, Campaign generated roughly $3 million in revenue, around two-thirds of which was from maintenance. And they had a very small operating profit.

As we disclosed at the time of the deal, we do not expect the transaction to have a significant impact on our 2006 results. Obviously, the accounting for maintenance as part of the acquisition will reduce the amount we can actually recognize as revenue this year relative to last, just because of the way the accounting rules work. And we're effectively going to discontinue the sale of the old Campaign product and begin to market an attractive upgrade offering to Razor's Edge. We do expect the transaction, however, to be accretive to 2007 earnings.

Let me now turn to guidance for the full year 2006. We are now forecasting a total revenue range for all 2006 of $186 million to $192 million, including Campaign, or a growth rate of between 12% and 15.5% with a midpoint of almost 14%. License revenue, we expect to be $32.1 million to $33.3 million or a growth rate of 7% to 11% with a midpoint of approximately 9%. We expect pro forma operating income of $50.5 million to $52.5 million or a margin in the low to mid 27% range, and pro forma EPS of $0.70 to $0.72. Now these numbers for the full year 2006 exclude the impact from implementing FAS 123R. Our current estimate of the full year aggregate effects of FAS 123R and the charges associated with our restricted stock program is approximately $7.8 million pretax.

Moving now to the first quarter of 2006, we expect total revenue in the range of $41 million to $42.5 million or a growth rate of 10% to 14% with a midpoint of 12%; license revenue of $7.1 million to $7.3 million or a growth rate of 10% to 13% with a midpoint of 11%; pro forma operating income of $10.3 million to $10.6 million or a margin in the 25.5% range; and pro forma EPS of $0.14 to $0.15.

And then finally now, let me finish with a very quick update on our two-part capital management program that we announced at the end of calendar year 2004. The backbone of both these programs as you will recall is our extremely strong improvement cash flow generating capabilities of the company. Part one is our dividend program. Today we were pleased to announce an increase in our annual dividend to $0.28 per share up from the $0.20 per share dividend we paid last year. This reflects the dividend yield which is roughly in line with the dividend yield of the S&P 500 but from a company with revenue growth rate that is greater than the S&P 500.

Today we also declared our first-quarter dividend of $0.07 per share payable on March 15 to stockholders of record on February 28. The increase in the dividend is of course a reflection of our continuing confidence in the business and the growth in our earnings and cash flow.

The second component of our capital management program is our share buyback initiative which we are proud to say we have continued to execute against. During the fourth quarter we purchased $4.7 million worth of common stock, and at year end we had roughly $23 million remaining under our existing $35 million share buyback authorization. We remain committed to using our cash flow in this way to enhance stockholder value.

In summary, then, we are very pleased with the company's performance in 2005. Our fourth-quarter results were better than we expected, our competitive and product positions are strong and we enter 2006 with an optimistic outlook. With that we will turn it over for a Q&A session, and I'd like the operator to come back on and moderate that for us. Operator?

Thank you sir. [OPERATOR INSTRUCTIONS] We'll take our first question from Bob Simpson at WR Hambrecht.

Hi Marc, hi Tim, how are you this evening?

Doing great. Thanks Bob.

Doing great.

Hey listen, a couple quick questions. Can you maybe give us a little bit more color on the - just the dilutive nature of Campaign in '06? And then maybe just kind of follow up a little bit with the 123R adjustment. I just want to make sure that that is excluded from your guidance. Is that correct?

Let me answer the second part of the question first. Yes, the guidance that we gave was on pro forma operating income and did exclude the 123R adjustment. As far as the Campaign acquisition is concerned, we've given you our view on a pro forma basis of what we think will happen here and essentially what you're looking at is a bottom-line operating income level that would be neutral to maybe slightly accretive, but in essence with very insignificant impact in 2006. And as you've already heard when you look at the revenue they generated in all of 2005 it's relatively insignificant related to our overall revenue levels.

Okay great. And just one final question if I may. Could you guys - and Marc hopefully this is last time you have to talk about this - but can we talk a little bit about Hellman Freeman lockup and I think they own, I think it's roughly like, 16%, 17%. Traditionally they kind of come out after the end of the quarter, could you just give us some color, I know you obviously don't talk to them directly, but maybe just give us some color on what your take is and how they'll act at the end of this quarter.

In some sense I just can't comment on them, because we don't want to know what their plans are, because we have a stock buyback program that we need to proceed on independent of anybody else's plan. That having been said, you're right there are about just under 8 million shares so just under 20% of the outstanding stock. And I'm quite confident that they'll continue to either sell or distribute as they believe is the right thing to do. But I have no idea about when they'll be doing that.

Okay. Thanks gentlemen, have a good evening.

Thanks Bob.

Okay Bob.

We'll take our next question from Phil Rueppel at Wachovia Securities.

Thanks. Good afternoon or good evening guys. A couple things, one, just on Campaign again, are you assuming in your guidance kind of any -- you mentioned that you'll be discontinuing their product, but that does -- their 2,000 customers offer a nice potential upgrade. Are you assuming a certain level of attach of your Razor's Edge or some of your products to those customers, and how should we view that over the course of -- is it going to take a couple years, five years before you move them all over -- what's your plan along those lines?

Well we're certainly going to start offering, Phil, we're certainly going to start offering the upgrades right away. But our guidance does not assume any significant contribution at the revenue level. We certainly are anticipating some but it doesn't have a big impact on our overall growth there.

Great. And igiven the strong performance of some of your new products, could you update us on any plans you have, new product initiatives in '06 or how should we think about upgrades to existing products or new modules. What do you think we could view on the course of the next year or so?

I'd say that we are in a position with the new offering is relatively early in their growth curves, and so my first order of business is to put continued focus on selling the Internet, ticketing and analytics offerings have far from gotten to anywhere near the middle of the S curve in terms of penetration. Just to take ticketing offering for example we have probably less than 100 customers in that space out of the 1,300 accounts that are in the cultural segment where we have already presence of one of our other products. And so there is an enormous opportunity - and I -- that's the very first place from a new solutions perspective that you should see us continuing our investment. So in the short-term I don't see a significant increase in the offering portfolio. You'll continue to see in the core business that we'll continue to add either modules or value to the existing product set, so we can continue to track new customers. But that's sort of a continued incremental approach as opposed to something you'd qualify as a major departure in 2006.

I think later on in the year I fully expect that we'd have an opportunity to have a broader conversation about the strategy for 2007. And I think you might very well see a departure from that. But in 2006 we have plenty of opportunity in the existing new solutions.

Great, thanks. And one follow-up on Patron edge it sounds that you're also, that is attracting new customers as well outside of the 1,300 cultural institutions that are current customers.

There are many more than 1,300 customers that do not have one of our products at this point. And it turns out that, especially for those organizations which do reserve seat ticketing, very good reserve seat ticketing, application may be the first entry point. So very much like in our education sector where a student information may be an entry point and then RE might follow up on education end. So yes, we fully expect a significant number of PE sales to -- new to Blackbaud accounts. And that just give you a great opportunity in Year 2 to go on in and sell RE or FE as a follow-up. So thanks, Phil - yes, that's a good point.

Great. Thanks very much.

Thanks Phil.

We'll go next to Keith Gay at Thomas Weisel Partners.

Good afternoon. Marc I was wondering if you might give your assessment of Blackbaud's sales strategy now that you've had time to come in and look at the direct, the enterprise inside channel - and any changes you might contemplate in emphasis in mix or focus? I know you've talked about you're seeing success with your key account area. And then as a follow on to that, in particular international, given your background particularly over in Europe. Is there anything that you see in terms of actions that you might take in exploiting the 13% of revenues internationally. But certainly given your background I was just wondering if you're seeing anything that you may want specifically do over in Europe?

Well, thanks Keith - yes, that's a two-part question. The current sales approach of -- in the enterprise what we call the key accounts space, it's a marvelous opportunity for this organization and for those customers, because we're selling to a portion of and a size of account, traditionally Blackbaud five years ago didn't sell to. So you'll see a continued focus on the key account selling and that should continue to provide significant increases in revenue over the next few years. And so -- in part because it's in some ways a greenfield opportunity, Keith. The core portion of the business continues to grow which is to say that the midsize accounts in our core offerings plus no offers to those accounts. But they aren't growing obviously as fast as the enterprise has over the past year. I think that as I mentioned earlier, as we go into this question of what would our longer-term offering strategy be for the core, I think you're going to see us address some potential new models relative to what we might offer and also how we might sell it. It's just early after 2.5 months for me to tell you what that would be right now.

I do believe that there are a lot of potential customers that are sort of small to midsize customers, where the competition is really still 3 x 5 cards or Excel spreadsheets or access databases. That's something that I'm quite familiar with and right now our offering is -- doesn't necessarily bring as many of those people into market as some potential new offerings might do. So there's plenty of opportunity for the core right now but the growth rate would accelerate really with a right offering and that might imply some channel changes over time.

In the international space I think the very first-order business, it has just continue to increase the breadth and depth of the sales organizations in English-speaking countries. As you probably know the offering is not engineered today in a way that is easily localizable. And besides given that our real value proposition is the strongest when we have multiple applications in a given market segment, the difficulties creating a financial application in a foreign country and under foreign tax law are a lot higher, whereas the commonality as you might see in donor management are much stronger.

I believe over time if we were to address the segment aggressively it would imply a different kind of partnering strategy. And again I'm not announcing that today but that's how you would think about it. And I'd be much more inclined to be able to give you some details on how we'll think about this in the second half of the calendar year as we start talking about our plans for 2007 and further on, Keith.

Okay. And just a quick question on Q1 margin guidance at 25.5%, a little bit lower than Q1 last year. Is that primarily due to the investment in key accounts -- is that primarily it?

Well, I would say it's not primarily investment in key accounts, it's investment in resources generally. We will invest as we normally do in Q1 in sales resources and consulting resources and other resources that support and contribute to the overall growth of the company. But I would say that we're not talking about a terribly different margin. I think, on the high-end the guidance would imply sort of close to 25.5% may be on the low end, maybe a couple tenths of a percentage point less than that. And I believe we actually finished 2005 the 29.9%, so we're talking about tenths of a percentage point. So I don't think there's a tremendous amount different between our plans going into '06 and what we did as thought about going into '05, Keith.

And one additional point on that Keith is that I'm pretty confident that the efficiency of the enterprise sales investment is such that we're not in an over-investment mode in order to create that growth at this point in time. We're in a cruising investment mode and that means that as you bring in revenue the revenue's going to be neutral or accretive to the operating margin in the enterprise space as opposed to -- in terms of the actual cost of sales. The yields are going to go up in that space because of the re-sale opportunities for the existing territories as well as new field opportunities. So it's very clearly in my mind not based on the investment in the enterprise sales portion of the thing.

The other point I would make, Keith, too, is just to draw your attention to the full-year guidance again. We guided to a full your margin that is almost exactly on with what the full-year margin was this year as well.

And is that the way we should look at it - there is upside to revenue. Is that going to be invested as opposed to expecting that to result in significant margin upside?

I think as we have said fairly consistently over time, we feel that as a public company, we feel a 27% to 28% operating margin on a pro forma basis is a good target. We've certainly performed there in 2005, I won't say that we might not get tenths of a percentage points improvement in our margin. And we certainly will work like crazy to get more than that but we're certainly are not appear to guide to something higher than that at this point.

Okay. Thank you.

You bet. Thank you.

We'll go next to John Torrey at Montgomery & Co.

Good afternoon. How are you? Just a couple quick questions for you, the migration pricing around the release for the Campaign customers. Can you explain what that migration pricing might look like relative to normal deal pricing for other new customers you may be pursuing?

Well, I want to be very cautious about going too far here, and so I'm not going to really layout much in the way of detail. I think that would frankly would not be good here. I think suffice it to say that we are offering what we consider to be an attractive upgrade opportunity to those customers. That upgrade opportunity would get them on Razor's Edge, and it would include a conversion - involve conversion assistance as they move from [inaudible] their existing product to Razor's Edge, plus some training. And then of course they would move to our maintenance program over time - our main pricing over time. So, that's sort of what we have in mind and I'd prefer not to get into very specific details here.

Okay. I joined a little bit late and I think I heard, Marc, you say that over some period of time you can foresee a circumstance in which international is sort of a 25% contributor to your business. If I heard that correctly, could you explain the sort of factors that would help drive it there in the long term?

Well, yes, I said somewhere between 25% and one-third of the business, I think, at the time. It's pretty similar to what I sort of answered to Keith a minute ago, it's just to say that there quite a bit of untapped opportunity already in the English speaking countries of the world as well as English language fundraising in some of the other areas. So, for example, say, English speaking schools in Singapore or something like that.

And we, frankly, have to continue to invest in the sales and the very specific sort of application differentiation that you might need in a country-by-country basis. Just as one small example in the UK there is something called Gift Aid, which is basically the government gives revenue directly to non-profits based on donations in addition to sort of the tax deductibility side of things. And there's a whole for-profit things and records keeping situation that's required and we bought application to help us do that and to provide a service around. So there are a few things of that ilk, who's - that acquisition, by the way, was, I think, 250,000 pounds and will produce better revenue than that in this current 2006 year.

So, a couple small factors to really tune to the market and then learning how to even sell better are the two sort of short-term - are the two short-term business opportunities there. And then, I really honestly believe that we will need to think about how to re-engineer the next generations of the products, but that's a longer term question. It's not going to happen in 2006. And the product - you have - when you're designing a full release of the product, it's a lot easier to think through the work of internationalization. And that is something that I've spent a lot of time doing over the years, starting with way back when I was at software engineering at [DEK] in the 80s.

So the ability to just say we're going - we're actually a very good architectural organization. We do a good job of programming interfaces. And so, the day that we decide to build a localizable product, that will be something that will be done well. But it's not been done and so that's why I say there really are these couple phases. But - what are the small bits and pieces you have to put together? We need to continue to invest in building out the organizations that are in the local geographies, identify some more of the opportunities for English language applications in the multinational sort of - equivalent of multinational operations. And then, over a longer period of time, decide the partnership and application strategy that's necessary to get into the non-English language speaking parts of the world.

Okay. And then, one other quick question for you. Can you talk a little bit, as we head into this new year, about your philosophy around across-the-board type maintenance pricing increases? Obviously, a very strong performing element of your business that -- just curious how you're approaching that heading into '06 and sort of over all how you think about that, given the scale of the customer base.

Well, I think we've done a very good job of increasing the maintenance price over the past few years -- the actual maintenance price. And being - coming from the business that I came from, seeing a place where you have better than 24% of full list price as your maintenance, with the cost of living - or a cost - annual cost adjustment and a 95% renewal rate, there's one part of this CEO that says, "Hold on a second. That's the goose with the golden egg." And you want to be pretty careful about how you continue to push that adjustment out.

We do have an offering that's higher than the 24% rate. We will push for a higher percentage of sort of the enterprise level offering and that will happen, probably, modestly as you go into key accounts because there are certain things that key accounts want in terms of security that smaller organizations can do without. But I'm not sure it's going to have a material impact on the overall pricing level. My desire would be that, sort of a recurring revenue perspective, that we would see a stability in that base because that's [audio skip] base represents the place to do add-on selling to. And I'd love to see the increase in recurring revenue happen through some subscriptions or through analytic services and other offerings that we have produced. And we have some of those in place.

And so, as Tim said, the increase in our subscriptions from the Internet side of our business is another way of looking at how you build a recurring revenue stream that's stable. So I'm going to tell you that that's the way that I think about it. And if there's an opportunity to increase prices, it'll probably happen more through increasing the base software price and then keeping a relative - because, again, that 24% is pretty high compared to a lot of the industry comps and it will probably happen through increasing the actual pricing model as opposed to the percentage rate.

Got it. Okay. Congratulations on a great quarter.

Thanks, John.

Thanks, John.

We'll go next to John Neff at William Blair.

Hey, guys. Marc, also welcome to the machine.

John, it's a very human machine.

People kind of asking this in, I guess, different ways. I guess, if you could just give us a little sense of the ASP for Campaign and whether or not that poses a risk in terms of sticker shock as you're looking to migrate those customers.

Well, clearly, the annual maintenance level for Campaign has been somewhat smaller than the annual maintenance level. The transition is that people, over time, will see an increase in their maintenance prices and we do fully expect that some portion of them - a significant portion of them - will choose to join us because they won't be having to go over the initial shock of the license. They'll be converting in an environment where they've - they get to sort of slowly acclimate themselves over a period of time to our maintenance levels and also the value that it brings. And we do have some experience in doing this with previous acquisitions and we don't - our model, basically, I'll be a happy CEO if we do two-thirds of what we've done in previous acquisitions. And I'll be a satisfied CEO if we do roughly the same ranges - another third more, or another 50% more in terms of the transition.

So -- and I haven't planned on getting every single person to immediately or even over time end up on Razor's Edge, but I do believe that if we do even two-thirds as well as we've done in our previous outings on this topic, it will be a good thing for the shareholder. So the reason that you do it sort of a little more slowly over time is that people know that the product's the best product and once they've had a chance to use it at, perhaps, a sort of a more introductory rate, our experience in the past has said that they're willing, over time, to increase the amount that they'll pay to come back to the level of our existing customers. And they end up believing that it was a very good deal and that some portion of those people continue to go on and then become customers of our analytics services. The real benefit overall from a - for a customer at Blackbaud versus a customer a one-product shop is that we do get a higher overall value per customer and we deliver a higher overall value to the customer.

So two things have to happen. We have to do at least two-thirds as well as we've done in the past in terms of sort of converting people in this gradual way and convincing them during that process to stay with us. And if we do as well as we've done in the past, I'll be very happy. And then, the second thing is that some portion of those customers - and we've really been careful at sort of cataloging them and looking at sort of their size and the sectors that they're in and the propensity to need things that we have that are additional sales -- sort of the back-to-base sales, but then follow on, need to happen to some proportion of the customers who make the migration. But not a huge proportion. And again, that's also a very positive factor when that happens because the customer is just worth a lot more when they're looking at the overall Blackbaud product set than when they're looking at a one-product company's offering. Did that address your question?

Yes, no - very much so. Thank you. Another question here. In terms of the uptake of the web-based products, the Internet offerings, can you give us a sense of the demand there by customer size? Are you seeing the uptake - small, large or medium NPOs? And is it more existing or new customers that are attracted to this product?

It's - to start with the second half. It's almost all existing customers in one sense because, remember, the cornerstone or the tenet of our offering is that we believe that Internet is merely one of the many diverse channels of communication with the constituencies that we cover with our applications. So, we do have a few customers who use [that community] or other Internet applications without actually having a Razor's Edge database behind it. But the primary use is for people who already have the best in terms of sort of the planned server based database model and are very desirous of either giving access to one or more of their constituents to the information flow around the organization and/or to building the workflow around delivery of services and connecting it back to the Razor's Edge back end.

So, that having been said, you also asked about sort of size or type of customer. We have a pretty broad range and so far as I can tell - now, this isn't a statistical analysis but just sort of a CEO's view of it from a little bit more of a distance - I don't see any major trends that say it's vertical X, not vertical Y or it's big, not small. What is true is it's typically those people who have decided that they want both a very strong donor management application and to reach out to a constituent. And so we've seen that pretty much across the board.

Does the Internet product in any way - I mean, there's the potential there for web-based demos remotely, things of that nature, does that create the potential to develop another sales channel, say ,like a sort of, for lack of a better term, a telesales type of channel?

Well, we do telesales. I mean, that's our - we have tons of inside sales and even many of our outside sales in the core have done telesales through the use of remote Internet technology and demos, which aren't done through the Net community. In fact, they're done using a third-party application -- in this case, WebEx mostly. And so, I don't think that it necessarily produces a potential new sales channel. I mean, we've talked about the channel a lot and people sort of have this expectation because I came from Microsoft that that might mean X, Y or Z about my channel synergy. I also spent 14 years at DEK, which was a very direct company. And my firm belief is that you sell the way that the customer is most likely to buy. And in our market, there are very few resellers who are of the confidence necessary to implement and deliver what you'd think of as a real world-class donor management application.

And so, since that's the core of the offering, until such time as the large donor management professionals in the business start looking to somebody else than [Vipod] as the place to go for their very first purchase, you're going to see a significant amount of direct [sum]. Now, we can certainly do it, as you say, remotely, with telephones and Internet demos and so on, which we do today. And I know there are other things we can do to improve the model. But I think that the current offering lends itself to a specific sales model and I'm blessed to have become the CEO of a company that has mastered that model pretty darn well.

Again, that having been said, when we talk about what might the offering in 2007 or 2008 look like, sometime towards the end of this calendar year, I - there may be some opportunities for a sort of a more self-service channel for some of our offerings that we'd like to look into. I clearly would love to be able to figure out how to let anybody who wants to have our products at any time buy it in the first bite in a very easy way. It would certainly improve everybody's life if we could do that. And that's - so, that's an ambition over time, but it's certainly not an announcement.

Great. And final question, Tim. How would you describe your approach to the share buyback? Would you describe it as more opportunistic or more systematic in terms of your activity in the quarter?

I would say it's actually been pretty systematic, frankly. Not really opportunistic in this - in the fourth quarter.

Great. Thank you. Great quarter.

Thanks, John.

Thanks, John.

[OPERATOR INSTRUCTIONS] We'll take our next question from [Alan Cook] at Merrill Lynch.

Hi, Marc and Tim. Congratulations on the quarter.

Thanks, Alan. Appreciate it.

Can you just give us a little bit more background on the integration efforts with regard with regards to Campaign associates. For instance, reaching out to customers and also the number of cuts, the number of employees or salespeople that you're inheriting and how you're including them in the Blackbaud fold. Thank you.

Okay. The way in which we are approaching the integration is essentially we have retained a sizeable portion of the team that was at Campaign, which was not a very large staff to begin with. But in terms of salespeople, I believe we inherited roughly five salespeople. And those individuals are, in fact, helping us reach out to the existing 2,000-plus Campaign customers to begin the discussion of a potential upgrade path to Razor's Edge in the offering that we're talking about.

And I think that -- just back to the total number of employees, I think we inherited 25. Obviously, over time, we will look to have that organization be integrated into our organization here. That probably will come as no surprise. But at this early stage as we're reaching out to those customers and trying to help them understand what this acquisition is all about and what our offering is going to be, we're using those very able and important salespeople at Campaign to assist us on that.

Okay, great. Thank you very much.

You bet. Thank you, Al.

And it appears there are no further questions. Gentlemen, I'll turn the conference back to you for any additional or closing remarks.

I don't think we have anything to add at this point. We thank everybody for joining us once again and look forward to speaking with you all soon. Thank you.

Thanks a lot, everybody. Bye-bye now.

And again, this does conclude today's conference. We thank you for your participation. You may disconnect at this time.