Blackbaud Inc (BLKB) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Blackbaud first quarter 2006 conference call.

[OPERATOR INSTRUCTIONS]

At this time I turn the conference over to the Chief Financial Officer of Blackbaud, Mr. Tim Williams. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Thank you for joining us today to review our first quarter 2006 results. With me on the call is Marc Chardon, President and Chief Executive Officer. Marc and I will make a few prepared remarks, and then we will open up the call to questions later on.

Please note that our remarks today contain forward-looking statements. These statements are based solely on present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our registration statement on Form S-3, 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 of today's call will be available in the Investor Relations section of our website.

With that, I'd like to turn the call over to Marc. He will provide you with some color on the first quarter results and an update on our strategies to address market opportunities, and I will come back a bit later to give further details regarding our financials. Marc?

Thanks, Tim. Good afternoon, and thank you all for joining us today on the call as we review our first quarter of 2006 results. We're pleased with the company's performance in the first quarter, which is highlighted by better than expected revenue and operating profitability. The continued strength of our results was driven by solid demand for state-of-the-art technology and applications within the nonprofit sector by our industry-leading product breadth and depth, and by our unmatched domain expertise.

Results were strong across our core products, services and our new solutions, and the contribution from our key accounts sales efforts continued to increase and drive our overall growth. Due to the momentum you see in our business and the ongoing strength in the market we serve, we are modestly raising both our top and bottom line guidance for 2006. Tim will discuss this in more detail a bit later.

Now, let's turn to the results for the quarter. Our growth continued at a solid pace with total revenues of $43.7 million, which is an increase of 17% on a year-over-year basis. Revenue from all major segments was strong. License revenue grew by 12%, services by 20%, subscriptions 58%, and maintenance revenue by 12%. Our services continue to be a key competitive advantage, particularly at the high-end of the market for implementations that are more comprehensive and complex.

The key accounts sales force again, delivered very strong effort in selling larger deals with services being a very significant component. Our domain expertise, proven history of delivering results and focus on execution enable us to generate good margins in our service business, and we expect it to continue to represent an important source of growth.

Now, let's turn to performance by the major solution categories. Our core solutions, Raiser's Edge, Financial Edge and Education Edge, had very strong quarter, delivering their highest level of year-over-year growth in the past six quarters. These core solutions continue to serve as the primary entry point for attracting new accounts, which opens the door for us to sell additional products and services. We are the clear market leader in this class of solutions, and their strategic nature makes them key drivers in the majority of our larger deals. Indeed, during the first quarter, our core solutions played a large role in nine of the top ten software deals.

Raiser's Edge continues to be our flagship solution, and it represents the majority of our overall sales again. However, in the March quarter, Financial Edge made a very significant contribution as well. Although our key accounts team has been selling FE for sometime, this was the first quarter in which we've seen their efforts for this solution produce such a big impact on our results. During the quarter FE was a key factor in five of our top six software deals. Our third core solution, Education Edge, also continued to post solid growth.

Our leadership position in the core areas of fund raising, accounting and private school student information applications has also helped to fuel growth in new solutions, which include our Internet applications, The Patron Edge, and our analytic solutions. Sales of our portfolio of new solutions grew by more than 50% this quarter, and they continue to represent above 20% of our total sales. The success of these new solutions is a testament to our industry-leading innovation in the nonprofit sector and our ability to commercialize new products and services that meet our customers' needs.

The key driver in our new solutions success in the quarter was the Patron Edge, which is our ticketing solution. For the first quarter of 2006, Patron Edge was the fastest grower in the new solutions category, and was the third largest contributor of our license revenue overall. We're very pleased with the market acceptance of PE, and we continue to increase the resources and focus behind it. We believe there is a large untapped opportunity for this product.

To-date, we have only sold PE to about 100 customers in the US, both new and existing, and we have another 1,000 US customers in the cultural and art sectors who are potential prospects for PE. Beyond that we estimate that there are at least another 8,000 cultural and arts organizations not currently Blackbaud customers that could be prospects not only for PE, but for RE and FE as well.

Our Internet offerings, led by NetCommunity, also continue to perform well. Sales of these solutions more than tripled this quarter versus the same quarter of last year, albeit of a very small base. Our Internet offerings are tightly integrated with Raiser's Edge, allowing us to deliver an attractive value composition.

Turning to the performance of our sales channels, as I mentioned upfront, our key accounts group continues to increase its contribution. In Q1 sales by this team represented about 30% of our total sales, which is significant when we consider that a little over two years ago we only -- we created that dedicated sales team to specifically target the high-end of the nonprofit market.

While our business model fundamentally remains high volume and lower average sales price, our key accounts team has been instrumental in growing our average deal size to almost $35,000 in Q1. I should note here that this average deal size, which excludes -- sorry -- I should note here that this average deal size exclude the sales of the RE conversions to the campaign customer base, which are so far a good bit smaller than our average RE transaction.

The $35,000 average deal size is up from the $25,000 level, the Company was realizing at the time it went public in mid-2204. During the first quarter the number of deals withi an aggregate of software and services, or total solution value greater than $55,000 grew by over 50% year-over-year, and we did 27 transactions with a value grater than $100,000 in this quarter versus 20 in Q1 of last year. All these metrics are a clear indication of the success we are seeing from the build out of key account sales team.

The growing interest in our solutions is not limited by geography. As I mentioned last quarter, I consider it a strategic priority to scale our business and improves the level of execution in international markets. In the March quarter, our international operations accounted for approximately 14% of our sales, up from 9% in Q1 of last year and around 12% for all of 2005. Not surprisingly the overall rate of the year-over-year sales growth was impressive at more than 50%, but off relatively small numbers.

In summary, we are encouraged by the solid start to 2006, my second quarter as the company's CEO and the first full quarter in which I oversaw Blackbaud's operations. Everything I felt when I came here has been confirmed, and I am increasingly excited by what I see as our prospects in this market. The foundation of our business is strong. Our core solutions posted their largest rate of growth in six quarters. Our new solutions once again grew very rapidly, and finally our enterprise selling effort continues to grow in contribution and momentum.

We are now in the process of developing a comprehensive strategic plan. The outcome, of which I expect to be able to share with later in the year. It's too early to get specific about opportunities that we have identified, but I am energized by what I have seen from our management team in this effort and I feel there is much we can do to build on the solid foundation that Blackbaud has established over the last 25 years.

In closing I would like to extend a special thank you to Sandra Hernández, who recently retired from our board of directors. Sandra's insight into the non-profit sector and her dedication to Blackbaud will be truly missed. At the same time, I am extremely pleased to welcome two software company veterans to our board, John McConnell and George Ellis both bring a wealth of experience that will greatly help us to execute Blackbaud's growth strategy moving forward.

And with that let me turn it over to Tim Williams, so he can walk you through more of the financial details from Q1.

Thanks Marc. As you just heard, I am going to now provide you with a few more details on the first quarter operating results, then give you some comments on a few balance sheet and cash flow items, update our guidance for the second quarter and full year 2006 and finally provide a quick status and review of our capital management program.

First let me start with some highlights from the income statement. Total revenue came in at 43.7 million, which was up 17% on a year-over-year basis and exceeded our guidance of 41 million to 42.5 million. The topline continues to be driven by success from our new revenue sources along with continued strong growth from maintenance and subscriptions revenue.

New revenue or the combination of software and services revenue was 20.9 million for the first quarter, which was up roughly 17% on a year-over-year basis. Within new revenue license fees came in at 7.2 million, an increase of 12% year-over-year, and inline with our Q1 guidance.

License revenue did experience a typical seasonal decline in the first quarter down about 9% sequentially from the fourth quarter. To remind you, the June and December quarters are typically our strongest software licensing quarters due to the timing of the fiscal year ends of most non-profit organizations. While all of our solutions and sales teams made contributions in the quarter, our key accounts sales team, as you just heard from Marc, again exceeded our expectations.

On the services side, revenue came in at 13.7 million representing a growth of 20% on a year-over-year basis and 9% sequentially. The last major component to our revenue, maintenance and subscriptions came in at a combined $21.5 million, which represented 49% 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 over 12%, while subscriptions grew 58% to approximately $2.3 million.

You will note that we are now showing subscriptions revenue as a separate line item in our income statement recognizing its increasing importance to our overall performance. But we remind you that it is in this line item where you are seeing some of the growth from the internet solution sales that Marc referenced earlier.

Let me now turn to gross profit. We generated 30.3 million in non-GAAP or pro forma gross profit in the quarter, representing a gross margin of 69%, down a fraction of a percent from the prior year but an increase from 68% in the fourth quarter due to improved utilization of our services professionals. At the services line, our non-GAAP gross profit margin declined about 2 percentage points on a year-over-year basis due primarily to a change in mix within our services revenue, which can vary on a quarter-to-quarter basis.

Looking at operating expenses, sales and marketing came in at 21% of revenue. This is in line with the first quarter last year and up about 1.5 versus the fourth quarter. R&D grew both year-over-year and sequentially on an absolute dollar basis. However, as a percentage of revenue, it was virtually flat at 13% compared with the year ago and up about 0.75 of a percentage point sequentially compared with the fourth quarter.

G&A came in at just over 9% of revenue, which was down about a percentage point versus the first quarter last year and up slightly versus the fourth quarter. The principle reason for the year-over-year improvement was that the 2005 quarter included one-time costs associated with the Shell filing. In addition, we continue to have an overall focus of improving our operational effectiveness, which is also reflected here.

The over performance in revenue combined with good cost and expense control helped to drive our non-GAAP pro forma operating income to $11.3 million, representing a non-GAAP operating margin of 26% for the first quarter, leading our guidance range for non-GAAP operating income of 11 -- of 10.3 -- excuse me, $10.3 million to $10.6 million.

The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP net income of 7 million and EPS of $0.16 based on diluted shares outstanding of $44.8 million. EPS was ahead of our $0.14 to $0.15 guidance.

As we have noted before, we focus our discussions on non-GAAP results because we believe that excluding certain non-cash items such as stock-based compensation, amortization of intangibles arising from business combinations and other unusual one-time items 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 with -- you with a full tabular reconciliation of these GAAP results and non-GAAP results as part of the earnings release. The principle reason for differences between GAAP and non-GAAP earnings in the first quarter of 2006 is stock-based compensation items, which are not included in the determination of non-GAAP earnings.

You'll remember that in the first quarter this year, the company adopted FAS 123R covering stock-option accounting. This resulted in a charge to GAAP operating earnings of $1.5 million in the quarter. There is an additional cost of approximately 500,000 included in our stock-based comp charges associated with restricted stock awards granted by the company in the fourth quarter of last year.

We utilized the modified prospected method of implementing FAS 123R, which does not result in restatement of prior periods. So Q1 of 2005 does not have comparable charges associated with the implementation of FAS 123R. However, to complicate matters you will further recall that in prior years we did have stock options covering several million shares that were treated as variable awards, and therefore were required to be mark-to-market at each quarter end.

In the first quarter of last year, this actually resulted in a gain of approximately $7.6 million being reported as a result of a decline in the company's stock price. The overall impact then from stock-based compensation items was a decrease in the first quarter 2006 operating income of $9.6 million as compared with the first quarter of 2005 operating income. In summary, then, the GAAP reported net income was 5.7 million in the quarter of 2006, compared with 10.9 million in the first quarter of 2005. Our GAAP fully diluted earnings per share was $0.13 compared with $0.23 in the prior year.

Let me now turn to cash flow in the balance sheet. We ended the quarter with $16.5 million in cash. This was down from the $22.7 million at the end of the fourth quarter, principally as a result of the $6.1 million used in the campaign acquisition and $9.3 million used in conjunction with our dividend and stock buyback capital management programs. In the quarter, we generated a cash flow from operations of $3.3 million.

At the end of the quarter, we had a deferred tax asset balance of approximately 77.7 million, the largest component of which is the benefit stemming from the Company's leverage recap in 1999 that adds roughly $8 million to our cash flow on an annual basis.

As we have indicated before, this asset is expected to continue at this level through 2014 and is one of the principle reasons our cash flow was materially larger than our reported net income on an annual or longer-term basis.

Accounts receivable at the end of the quarter were 24.9 million down about 600,000 from year-end. DSO was approximately 38 days consistent with our recent history of DSOs in the high 30s to low 40s. Total deferred revenue came in at 60.4 million, and includes roughly $1.2 million associated with Campaign at the quarter end. The balance is down slightly from year-end and approximately in line with the seasonality we saw in the first quarter of last year. We would not normally expect to see an increase in deferred revenue between the fourth quarter and the first quarter as the beginning of the year is not a heavy maintenance renewal period, which to remind you, is the largest driver of our deferred revenue.

Let me now turn to our guidance for the second quarter and revisions to our full year estimates. For the second quarter of 2006, we expect total revenue in the range of 47 million to 48.5 million or a growth rate of around 10% to 13% with a midpoint of 11.5%, license revenue of 8.9 million to 9.3 million or a growth rate of 7% to 12% with a midpoint of about 10%, non-GAAP operating income of 13.2 to 13.6 or a margin of 28% as the mid-point of the range and non-GAAP EPS of $0.18 to $0.19.

For the full year as Marc indicated earlier, we are modestly increasing our guidance on revenue, non-GAAP operating income and non-GAAP EPS. We are now forecasting a total revenue range for the year of $187.5 million to $193.5 million or a growth rate of around 13% to 16% with a midpoint of about 14.5%. We have less license revenue, at the previous guidance range of 32.1 million to 33.3 million or a growth rate of 7% to 11% with a midpoint of 9%. And we are projecting non-GAAP operating income of 51 million to 53.2 million or a margin in the low to mid 27% range, with EPS of $0.70 to $0.73.

Finally, let me finish with a very quick up-date on our two-part capital management program we originally announced at the end of 2004. The backbone of our capital management programs is the extremely strong and proven cash flow generating capabilities of the company. The first element is our dividend program. And today we declared our second-quarter dividend of $0.07 per share payable on June 15 to stockholders of record on May 28.

The second component of our capital management program is our share repurchase initiative, which we continued to execute in the first quarter. During the quarter, we purchased 364,600 shares of common stock for 6.3 million and at the end of the quarter we had 21.8 million remaining under our existing $35 million authorization. We remain committed to using our cash flow in this way to enhance stockholder value.

In summary, then, reiterating what Marc had said earlier we're very pleased with the Company's performance for the first three months of 2006. Our first-quarter results were solid, our competitive and product positions are strong and we are optimistic about our outlook for the remainder of 2006.

With that let me turn it back to the operator and we can begin the question and answer session. Operator?

[OPERATOR INSTRUCTIONS]

The first question comes from Adam Holt with JP Morgan.

Tim, the first question relates to your comments about the strength in Financial Edge. I was wondering if you could give us a little bit more detail on why you think, in particular, that accelerated in the quarter. And I apologize if I missed it, but what was the aggregate growth for core solutions?

Tim will take a quick look -- on the aggregate growth number, I don't -- we don't break them out obviously product-by-product, though Adam -- and good afternoon. The biggest growth of FE -- source of FE growth was within the key accounts sales group. And it is -- but there was also a change in that. This was the first quarter that sales in FE were almost exclusively direct.

You may recall we discontinued the channel sales effort at the end of last year. And so, a significant part of the growth in FE was in services for -- in the core part of the market, because in the past our channel partners would have been delivering the services and we delivered -- will be delivering services on the FE sales in that part. But as I said as well, I think that we've been focusing on change in the account coverage model in the enterprise space to cover the whole account and not sell product-by-product, and I think it's paying off.

But we're selling a higher percentage of those large contracts as enterprise sales where the products are going together. So you'd have FE and RE sold as enterprise solution rather than independently, and the customers seem to be responding to that, Adam.

And the answer to the first part of your question, Adam, is the growth in core solutions was a little over 20%. Right around 20%, just a tad over.

Okay. And just as a follow-up there, there's a change in the channel, does that have any -- or did that have any impact on the fact that you saw what looks like a nice year-on-year improvement in the license growth margin?

Yes. There is an [after] commissions relative to the channel that were part of the cost of goods or costs in that. So yes, absolutely, that does change the margin and that's a one -- probably the major determinant for that change.

And just quickly, finally, if I could, two questions on some of the going-forward opportunities. You talked about the need to ramp some headcount, particularly, in Europe on the international front, I was wondering if you could update us there? And then just more kind of strategically, as you think about the myriad new opportunities that you're facing, do you still anticipate being able to penetrate those albeit number of different choices with your margins staying in the 27% to 29% target range?

Well, I'll take those in order. The focus in Europe that I've mentioned in the past was more about ensuring that we reinforce the leadership more in and put more of a focus rather than purely ramping up headcount.

We did have some open positions on the sales side that I think we may not have -- in the past, we may not have filled as quickly as I would have liked. But we've pretty much covered that. We're now at a level of headcount in the sales side in Europe that I think is appropriate to the market opportunity we have today.

So I would not claim -- say, that we're understaffed. I don't -- I think that I will defer answering sort of what would the growth rate be next year or once we’ve finished going through the strategy development process until we talk about the full strategy conversation later in the year. Tim you might want to – (multiple speakers).

And this from the standpoint of margins, Adam, I think clearly, we're not backing away from the 27% to 28% target operating margin that we pay as our target non-GAAP operating margin; that continues to hold, obviously as we look at these opportunities and get more in depth. We may evaluate that, but at this point, we still feel that that's a good target to Q4 and one in which we should be able to attack the opportunities and perform.

Terrific. And congratulation on another good quarter.

Thanks.

Next question comes from Phil Rueppel with Wachovia Securities.

Hi, great. Thanks very much and good afternoon, guys.

Hi, Phil.

First of fall, campaign, the customer base there. Now you have had a little bit of time trying to sale them or upgrade them to Raiser's Edge. Could you give us a little bit of an update on, how that's going either quantitatively or qualitatively?

Well, I can cover the quantitative, and then Marc can jump in, and speak to the qualitative. It's still early days obviously, but in campaign in fact did not have a huge impact in the quarter. It had about a $0.5 million to our revenue and from a profitability standpoint it didn't really have an impact one way or the other.

We continue to believe that the acquisition will be accretive in 2007, when we have the advantage of more of their maintenance revenue, some of which with those as you know, during the first year, is the result of the purchase accounting. But we feel good about things, and maybe Marc can talk a little bit about that as well.

From a qualitative perspective, from the timing, first thing is the timing. We had to build a conversion utility as you may recall, before we would do any significant conversion of customers from those customers, who would choose to migrate from GiftMaker Pro to RANN. I would, it is point that -- it is worth pointing out.

There will be, we're still supporting the GiftMaker Pro base, and will for quite some time. So people obviously have the choice to stand on GiftMaker Pro now. But the conversion utility was completed slightly ahead of schedule last month. And we've run it through the first set of customers and have had a very successful conversion with essentially no problems at all.

So we're seeing the technology required to make the transfer, the migration occur has been put in place and is doing, and has being very successful. We've had very positive response in general from the campaign customers. And there is quite a bit of demand, both for the conversion, and also just -- we are actually, as I think, Tim said this, somewhat ahead of what we thought the plan would be revenue wise for Campaign.

And that's in part, because the customers are in general positive and actually quite please with -- at the way that we've managed the transition. The Campaign team and the Blackbaud team have done a really excellent job of working together to contact the customers and to maintain their confidence.

Great. And regarding that conversion utility, have some former GiftMaker Pro customers actually gone live, and are now on Raiser's Edge or you're still in the process of that?

Yes. There are five of them that have gone through that. We were doing it in a very measured way. And we took a diverse set of six customers, five of them are done, and one is in the process of being finished. That was right on - again, it's right on plan, actually probably about a week ahead of plan. But that scarcely counts as ahead of time. It's on plan. And --

Great. Thank you. One another question, and I'll get back in the queue. On the strength of the core product driven by your -- it sounded like your key accounts focus -- has that really been a -- has it been a combination of getting new customers as well as going back to some existing customers and spreading their usage and/or licensing of their products throughout the organization or is it really just new customer wins?

In the core products, you're saying, Phil?

Yes.

Yes. The core products actually there has been -- we continue to add units. It's, sort of, the same couple hundred units --

All right.

-- license that we have in the past. And so it's about the same mix of new to back-to-base that we've had in the past. There is no real significant change here.

Okay. That was the key of the question. All right. Thanks very much and congrats.

Thank you.

Thanks, Phil.

The next question comes from John Torrey with Montgomery.

Good afternoon, and congratulations on the quarter.

Hey, John. Thanks.

Thanks, John.

A couple of questions for you. The international performance during Q1 -- did that actually turn out a little bit better than expected? And if so, can you identify some of the sources of upside during the quarter?

I would say that it was ahead of expectations. It was just marginally ahead of expectations. And again, I think you have to keep in mind that it was off a weak prior year. Nevertheless, we feel very positive about it. And I think what's the source of it is continued ramping up of a relatively new team in the UK and Australia and Canada and all those locations. And beyond that, it's kind of hard to pinpoint any one thing.

Okay. Tim, earlier you talked about a mix change in services during Q1 that you see from time to time. Can you explain a little bit more about what you mean in terms of the services resources that were stronger this quarter?

Yes. I think that as we’ve talked before, there are three different components that make up our services revenue. It's not just consulting. It includes consulting, training, Blackbaud's analytic engagements. And each of these has slightly different gross margins.

And the mix between those components can tend to vary quarter to quarter. I think the bottom line is, overall, we continue to target gross margins for this group, excluding the effects of stock-based comp, in the mid-to-high 40% range. And we continue to look for overall gross profit margins of around 70%.

But in this quarter, the mix was just slightly off versus what we saw in the prior year. And in fact, if you looked at it, probably our strongest gross profit margin, actually, comes from training. The contribution from training was a little less in this quarter and greater on the service on the consulting side.

Okay. And then, in terms of the revenue guidance that you updated for 2006, obviously excluding license, can you talk about where some of the increased optimism in the other revenue lines is resident?

Well, I think that we continue to feel really good about what's happening with the key accounts team, and our effort to penetrate the upper end. That of course is a carryover implication, not just on software, obviously, but very importantly on services.

And so the traction that we're seeing there is giving us some added confidence and added strength that we see on the services side of our business. And we've got -- not surprisingly, we have the first quarter behind us. And we did do a bit better than what we guided to in Q1, and so we factored that into our thinking as well.

So I guess, just to be clear, it's more services than maintenance or subscriptions?

Well, we feel good about those two. But I would say that it's as much on services probably as anything.

Okay. Thanks very much.

You bet.

The next question is from Tom Roderick with Thomas Weisel Partners.

Hey, guys. Thank you.

Hey, Tom.

Hey, Tom.

I had a quick question for you. Among the Tier 1 non-profits to which you guys sell into, has there been any sort of shift in the way they're making their purchasing decisions meaning from sort of a chapter/regional type purchase to a national purchase?

I think that there is a slight tendency in that direction. But in most of these organizations, there is a very long history of decision-making processes. And so we call those federated organizations.

And the balance of power between the federated chapters and the central organization is, I think -- a) somewhat of a pendulum overtime; and I think, however, on a centralization trend in some of the organizations that we're selling to.

That being said, it's just not a binary switch; it happens slowly and you have to work with both the chapters who have been our customers traditionally as well as the central organization. Is there something specific that you want to know about that, Tom?

Nothing in specific, just more of a general macro level question.

I think that there will, inevitably, be some level of centralization in terms of these offerings, as the ability to offer services and support to smaller chapters through the central part of the organization grows and technology makes that more possible. So it is a trend that we will support. And we are seeing a modest increase in interest in that. But so far, it hasn't actually changed into sales.

I just wanted to get a couple updates on some metrics. Did you guys give renewal rates?

What we said was -- we try not to take that exactly. What we said is that they stayed in the mid-90s and very consistent with what we've seen over the last multitude of quarters.

And you usually give a range for customer growth. I believe it was 100 to 200 last quarter. Did you --

Well, I think, what we've said is that I think Marc referenced this already that typical -- consistent with what we've seen in the last several quarters, our customer or our customer-main growth, the new customer growth was in a couple -- was roughly a couple hundred.

Great. Thank you, guys. Good quarter.

Yes. Thank you, Tom.

Thanks, Tom.

[OPERATOR INSTRUCTIONS]

The next question comes from John Neff with William Blair.

Hi. Good afternoon.

Hey, John.

Hi, John.

I appreciate the breakout of the subscription revenues and margins. There was a nice increase in the gross margin year-over-year, in the two quarters that we have in subscriptions. And I was just wondering, is that due to economies of scale, more revenue on a more fixed cost model, and can we expect further gross margin expansion as revenue in that line item increases?

You're on it. Aye, it's due to that and sort of the law of small numbers and the ability to get some scale. I would say, yes, there probably is more opportunity there, but it would be hard for us to peg that at this point. And I don't think you are going to continue to see the size of performance increase that you saw this year quarter-over-quarter. But there should be some additional scale benefit we get here.

Okay. Can you talk a little bit -- what's the key account sales team headcount at this stage? Has it grown much? Are you getting some increased pressure due to increased headcount, or is it productivity?

And also can you talk about the structure of the sales force in Europe, is it -- is there a key account component to that as well?

So, , we don't breakout the size of the organization. As a whole, we have gone from 120 quota-carrying sales heads to 130 -- at the end of last calendar year to 139 at the end of the quarter. We like to hire early in the year and get people trained up. As Tim may have mentioned earlier, there is sort of a seasonality in June and a seasonality in December, which you want to be, be in good position for.

The enterprise organization is growing roughly consistently with the sort of overall growth rate. We are clearly seeing increased [PLs] in enterprise space as I mentioned once or twice before. I don't think that that's something from a yield per headcount in the enterprise space that I expect to have continue in future years. I think that we are getting close to the right yield model in the enterprise space in this third year, well, third full year of the enterprise or key account sales team.

As for the European sales model, it's a small organization in terms of sales and so they are organized on a territory and product basis as opposed to separating core versus enterprise accounts. That having been said, we have been very effective in the UK in selling to very large organizations, like [asthma] UK or [healthy agent] and we so -- they are large, large organizations with large marketing data bases and that actually in some ways use our technology to the very best effect and even in some cases more than the average sort of customer in the United States. Those large customers are larger than in terms of the data bases.

And so I think that the focus of having an integrated accounts team that is a small team of people, who have been working together for a little while and will be working together as one team, is the right model for that particular market because of the concentration of accounts in London and also because of the ability of a small team to organize and coordinate for any given particular sales opportunity. So I don't see that changing in the current year. I have -- there might make sense at some point in time to have an enterprise focus in the UK, which is the largest of our non-US markets. But for the moment, I don't think that's necessary.

Great. And are you still using the value-added reseller channel for any of the products? You mentioned that has been dropped for Financial Edge.

No, we are not. We only did Financial Edge to [BST], the business partners and that stopped. We announced the end of that in December and there was a cross over quarter this past Q1 where they could finish selling certain customers that they had put on a list at the beginning of the quarter and we are now at the end of that period.

Thanks and another good quarter.

Thanks a lot, John. Bye.

At this time, there are no further questions. I will turn the conference back over to you.

Thank you for everybody for joining us. We appreciate your continued support and interest in Blackbaud and look forward to chatting with you over the next several weeks. And thank you, again.

Thank you all. Good bye now.

Thank you. That does conclude today's conference call. Thank you for your participation.