Blackbaud Inc (BLKB) 2006 Q2 法說會逐字稿

Good afternoon, and welcome to today's Blackbaud Second Quarter 2006 Results Conference Call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Tim Williams, the Chief Financial Officer of Blackbaud.

Thank you very much. Good afternoon everyone. Thank you for joining us today to review our second quarter 2006 results. With me on the call today is Marc Chardon, President and Chief Executive Officer. Marc and I will have a few prepared remarks and then we will open up the call to questions a little 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 most recent annual report on Form 10-K and the risk factors contained therein, as well as our other periodic reports under the Securities Act of 1934 for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements.

Also, please note that a webcast of today's call will be available in the Investor Relations section of our website. With that, let me turn the call over to Marc. He will provide you with some color on the second quarter results and an update on our strategies to address market opportunities and then, I will come back a bit later to give you some further details regarding our financial results. Marc?

Thanks, Tim. And thank you all for joining us on the call today as we review our second quarter 2006 results. We are pleased with the company's performance in the second quarter, which was highlighted by better than expected revenue profitability. In the two years that Blackbaud has been public, there have been periods of significant variability year-over-year in the overall software industry. However, similar to the resilient long term growth profile of the non-profit market we serve, Blackbaud's results continued to be remarkable consistent during this same period.

The steady growth in the non-profit market combined with our clear market leadership position, superior execution, and the diversity of our business model is the foundation of our financial success. We have three industry-leading solutions and several newer, high-value offerings that are growing rapidly and helping to diversify our overall revenue.

During our 25-year history, Blackbaud developed an industry leadership position by serving the middle tier of our market. In the last 2 to 3 years, we successfully expanded our presence into the upper tier of the market through our key accounts and selling efforts. With the acquisition of Campagne Associates in early 2007, we extended our offering and account coverage to smaller, non-profit groups.

We're making significant progress in developing a strategic plan designed to expand our market opportunity, improve our ability to sell to new non-profit customers and deepen our relationship with our existing customer base. We're very excited about our long-term opportunities and the strength of our second quarter results combined with our near-term [inaudible - technical difficulty] gives us the confidence to raise the low-end of our revenue expectations for the year and we are increasing our profitability expectations as well. Tim will have more to say on this in a moment.

I would now like to briefly cover the results of the second quarter. Our growth continued at a solid pace, with total revenue of $48.8 million, an increase of 14% on a year-over-year basis. Revenue from all major segments were key contributors to this growth. License revenue grew by 11%, services by 11%, subscriptions 49% and maintenance revenue, 14%. Looking at our major product categories, our core solutions, Raiser's Edge, Financial Edge and Education Edge, continued to drive the majority of our business, accounting for roughly 75% of our sales in the second quarter. They served as a primary entry point for attracting new customers and in turn opened the door for us to sell additional products and services over time.

Our Raiser's Edge application continues to be the clear market share leader for the fundraising solutions. We have thousands more customers than our nearest competitor and in addition, while it's somewhat less visible, we're also a leading vendor for both non-profit accounting solutions and private school student information and administration systems with our Financial Edge and Education Edge offerings. In addition to being a primary entry point to new customers, these three core solutions are also the key driver in the majority of our larger sales. During the second quarter, one or more of these core solutions played a large role in each of our top ten software deals.

Raiser's Edge continues to represent over half of our business and it made a solid contribution in the quarter. Education Edge, which typically has had a seasonally strong second quarter, posted a record quarter in sales and software licensing revenue in Q2 of '06. These results were driven in part by a recently released enhancement that allows teachers, administrators, students and parents to interact over the Web. In addition, the number of software deals in Q2 over $25,000, in which Education Edge was a part, more than doubled from 5 to 12 on a year-over-year basis.

Our third core solution, Financial Edge, also contributed to post -- or also continued to post solid growth. We believe our decision to switch from an indirect to direct channel strategy for this solution at the beginning of the year will improve our ability to profitably serve the non-profit financial applications opportunity.

Our leadership position in the core areas of fundraising, accounting and private school student information applications has also helped to fuel the growth of our new solutions, which include Blackbaud NetCommunity and Net Solutions, our Internet applications, the Patron Edge, our ticketing solution; and our Analytic Solutions. Sales of this portfolio of new solutions approached 25% of our sales in the second quarter, which is an increase from the roughly 20% level we realized over the past several quarters.

The success of these new solutions is a testament to our industry-leading innovation in the non-profit sector and our ability to identify and commercialize new products and services that meet our customers' needs. Our Internet Solutions led by Blackbaud NetCommunity have continued to gain traction over the last several quarters. In the second quarter, NetCommunity showed the largest year-over-year sales growth of any of our solutions segments and more than doubled as a percentage of our total sales compared with the second quarter of last year. NetCommunity is, of course, tightly integrated with Raiser's Edge which enables us to deliver an unmatched value proposition to our existing customers and many new prospects.

Indeed, the small niche vendors in the Internet space have rushed to partner with services companies to build interfaces with the Raiser's Edge because they simply don't have anything remotely comparable. Raiser's Edge houses the information necessary to effectively run Internet-based fundraising campaigns that leverage all of the donor relationship history that has been captured from various off-line channels over the years by our customers.

This is critical to optimizing donor relationships for the vast majority of organizations that operate in a cross-channel fundraising environment. There is an obvious opportunity to sell NetCommunity within our Raiser's Edge customer base which is still less than 10% penetrated.

Patron Edge also made another strong contribution to the new solutions sales this quarter. And our donor prospect research offerings, which we refer to as our Analytic Solutions, posted one of its strongest quarterly growth rates in the past two years. Analytics remains the largest contributor to our group of new solutions.

In addition to our broad solutions portfolio, the quality of our sales organization and selling model is another key reason Blackbaud has been able to deliver results that have met or exceeded our expectations in each of the eight quarters we've been a public company. Several weeks ago, when we previewed our positive second quarter results, we also announced that we have reconsolidated the management of our key account sales team under our Vice President of Sales who had previously had responsibility for only our traditional mid-tier account sales and the international teams.

This move will enhance our ability to scale the company for the next several years. You may recall that we created a separate key account sales organization in 2004 and asked the Vice President of our Professional Services Organization to lead both the key account sales and Professional Services groups. We did this because we needed to build enterprise-class selling skills and positive strong collaboration with the services professionals to maximize key account sales opportunities. We benefited from our service teams' experience with the consultative sales approach necessary for selling into these larger accounts, given our initial key account staff came from our traditional mid-tier account background and not from an enterprise sales background.

Over the past 2 years, we've added significant talent and critical mass to our key account sales teams, both from account rep and sales management standpoint. In addition, we have successfully established the processes and key relationships necessary for effective teamwork, by partnering with and serving the largest of nonprofit organizations. While we were building this skill set, Blackbaud's overall sales force grew from about 100 to 140 or so quota-carrying sales reps. This growth increases the need for us to optimize overall account planning and management, training and professional development for the team, and the sales compensation arrangements. And all of these are much easier done when there is a single decision maker and a point of accountability for the sales organization.

Beyond that, we believe that reunifying sales under the leadership of one sales vice president will improve productivity across our entire organization, by streamlining the exchange of information, both within sales teams, and between sales and the other functional groups. The strength and consistency of our results over the past several years is partly the result of our ability to continually evolve our sales strategies and reporting structure to the selling model. And we believe this relatively straightforward change in our reporting structure will better position Blackbaud to continue our track record of success over the next two to three years.

Looking at our second quarter performance, our traditional and key account sales teams helped to contribute to the growth of over 30% year-over-year in the number of deals with an aggregate deal size of over $50,000 apiece. Also, the number of solution deals with a value greater than $100,000 in the quarter grew in the neighborhood of 30% on a year-over-year basis. As I indicated briefly earlier, in addition to our continued success in selling deals of larger sizes, we are also pleased with the early results we are having at the low end of the market, in converting Campagne customers to the Raiser's Edge product suite. Although this was a relatively small acquisition, we are very pleased with the overall level of customer acceptance we have seen thus far, and we are optimistic that we will achieve the expectations that we had for this investment.

Before turning the call back over to Tim, I would like to provide some high level commentary on the strategic plan we have been developing. It is important to note up front, however, that I believe Blackbaud is currently in an enviable market position, and that we are well positioned for continued solid growth over the next couple of years, based on execution against our current strategies, and the product and service initiatives already in place. As I have mentioned before, we have been actively working on new offerings that will further strengthen our industry-leading fundraising solutions. One of the most exciting of these is our next-generation product development architecture. Just one of the things this will do is allow us greater flexibility in meeting the needs of large federated organizations that want to offer our product to their smaller chapters in the distributed environment.

In the 70 largest national organizations, there are over 25,000 underserved local chapters that could benefit from just such an offering. And at this point, only about 1,000 of such chapters are being currently served by us. But beyond the projects already in development, we have focused on identifying those new opportunities that will best position the company for continued strong growth beyond the two to four-year timeframe.

We have done significant customer market research to identify these opportunities, determined their approximate size, evaluate the competitive framework, and our ability to achieve success. In our research and planning, we have stayed within the nonprofit sector. I see no reason to move beyond our core competence, and as we've said many times, this is clearly a very large market with lots of unmet opportunity and need. In addition we've focused on bigger opportunities, those segments representing at least $100 million each in potential revenue. Let me just touch on two of them.

The first area where you'll see us increase our level of investment and resources is the Internet space. As I said a moment ago, NetCommunity, our lead Internet solution, had the highest year-over-year sales growth of all of our solutions in the second quarter. We are differentiated from our competitors by the quality of our offering and the level of integration of NetCommunity with the Raiser's Edge. Although we're hard at work on further enhancements in NetCommunity, it is already competitive with its current features and functions with the pure Internet solution providers in the market.

We believe, however, changes to the architectural platform that will allow NetCommunity to run in environments where Raiser's Edge is not required will significantly expand our addressable market. We see this as a huge opportunity and estimate that sales of such solutions last year by other providers in this space was somewhere between 30 and $50 million which is I believe over time a small portion of the total opportunity.

The second area of the focus will be in an area of nonprofit operations that our current solutions typically do not support. Blackbaud has achieved its market prominence in the nonprofit sector primarily by targeting the development or fundraising organization. In a typical midsize nonprofit, a fundraising organization is focused on hundreds of large donations, $1000, $10,000 or more, but in some nonprofits significantly more effort is directed to activities designed to generate tens of thousands of smaller donation's, $5, $10, $50.

The group that typically drives these efforts, the effort for tens of thousands of smaller donations is a direct response marketing organization lead by the nonprofit's chief marketing officer. These executives and their organizations are responsible for leading as many or more critical initiatives in some organizations as the head of development in others in our more traditional customer base.

There's a large market need for a solution that makes this effort more efficient and productive. The new solution we envision is combined with further improvements in our Internet offerings should help Blackbaud dramatically increase its presence within the marketing organizations of non-profit organization's customers.

In summary, there are a lot of exciting activities going on with Blackbaud, and we are looking forward to updating you on our progress against these initiatives in the quarters to come. To reiterate, our second quarter results were strong, and our ability to consistently grow the business and meet our financial objectives is driven by the depth and breadth of our company from a product, sales and services perspective. And with that, let me turn it over to Tim so he can walk you through some more of the financial details on the second quarter.

Thanks, Marc. I want to first focus on providing you with more details on the second quarter operating results. Then I will comment on a few balance sheet and cash flow items, update you on our guidance for the third quarter and full year, and finally provide a quick review of the status of our capital management program.

First, let's start with the highlights from the income statement. Total revenue came in at 48.8 million which was up 14% on a year-over-year basis and exceeded our guidance of 47 to $48.5 million. As you just heard from Marc, the top line 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 24.9 million for the second quarter which was up roughly 11% on a year-over-year basis. Within new revenue, license fees came in at 9.2 million, an increase of 11% year-over-year and near the high end of our Q2 guidance.

License revenue did experience a typical, seasonal increase in the second quarter, up 28% sequentially from the first quarter. As a reminder, the June and December quarters are typically our strongest licensing quarters due to the timing of most non-profits' fiscal year ends being at the end of these two quarters.

On the services side, revenue came in at 15.7 million representing growth of 11% on a year-over-year basis and 14% sequentially from the first quarter. As will be implied in our third quarter overall guidance, we expect services' growth to be stronger in the third quarter with growth picking up from the level that we saw in the second quarter due to further increases in headcount that have already occurred throughout the second quarter and are continuing into the third. We are making these investments to support the continued growth in software in key account sales that we expect to see in the second half of the year.

The last major component to our recurring revenue, maintenance and subscriptions, came in at a combined $22.5 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-90% range, which is a testament to our customer satisfaction and the strength of our technology. Maintenance alone grew at over 14% while subscriptions grew 49% to approximately $2.5 million. Last quarter you will recall, we began showing subscription revenue as a separate line item in our income statement recognizing its increasing importance to our overall performance.

Turning now to gross profit, we generated 34.9 million in non-GAAP gross profit in the quarter representing a gross margin of 71.5%. We continue to expect our long-term annual gross margins to be in the 70 to 71% range, but we were very pleased to see the highest quarterly gross margin percentage that we have in the past two years. This was largely driven by the elimination of our Financial Edge partner channel, which took place at the beginning of the year, which has reduced royalty expense, which flows through cost of license fees on our income statement. The services' gross margin declined compared with Q2 last year, largely because a -- because of a change in the mix of the different services components.

Looking at operating expenses, sales and marketing came in at 21% of revenue. This was up approximately 0.5% when compared to the second quarter last year and is approximately in line with what we saw in the first quarter this year. Research and development grew year-over-year on an absolute dollar basis, however as a percentage of revenue, it was down at 11.7% compared with 12.3% a year ago, and down from 13.3% sequentially from the first quarter.

This was principally the result of lower human resource costs as a percent of revenue. One of the strategies we have been focusing on more recently is hiring college graduates to meet many of our needs. This is now starting to have some impact on our cost comparisons year-over-year in this particular line item.

G&A came in at 8.6% of revenue, which is down about a half of a percentage point versus the second quarter last year and down about a half a percentage point versus the first quarter. The principal reason for the year-over-year improvement was that our public company costs are roughly flat with those that we incurred in the second quarter last year. And in addition, we continued to have an overall focus on improving our operational effectiveness, which is reflected in this line item.

The over-performance in revenue combined with good costs and expense control helped to drive non-GAAP operating income of 14.6 million, representing a non-GAAP operating margin of 30% for the second quarter, handily beating our guidance range of non-GAAP operating income of 13.2 to 13.6 million and represent our highest quarterly non-GAAP operating margin in nearly two years.

The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP net income of 9 million and EPS of $0.20, that's non-GAAP EPS of $0.20 based on diluted shares outstanding of 44.9 million. That's non-GAAP -- the non-GAAP EPS was also ahead of our guidance range of 18 to 19%.

As we've noted before with you, we focused 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, one-time tax credits or unusual -- or other unusual one-time items, provides the best indicator of the health of our overall business and a level of efficiency in our infrastructure.

That said we appreciate that investors also need to analyze our results on a GAAP basis. So we've provided a full tabular reconciliation of our GAAP results and non-GAAP results as part of the earnings release. The principal reason for the differences between GAAP and non-GAAP earnings in the second quarter of 2006 is stock-based compensation charges, which are excluded from the determination of non-GAAP earnings.

You will remember that in the first quarter the company adopted FAS 123R, covering stock option accounting. And you should also remember that in the 2005 second quarter, the company also recorded a $2.9 million state tax credit that was not repeated in the 2006 second quarter. This principally accounts for the year-over-year reduction in GAAP net income.

In summary then, the GAAP net income was 7.7 million in the second quarter of 2006 compared with $8.5 million in the second quarter of 2005. So our second quarter GAAP fully diluted earnings per share were $0.17 compared with $0.18 in the prior year.

Let me now turn to cash flow and the balance sheet. We ended the quarter with just under $31 million in cash, $30.9 million. This was up from 16.5 million at the end of the first quarter and we were quite pleased with our performance here as we generated cash flow from operations of $16.4 million this quarter compared with 12 million in the second quarter last year, an increase of 37%. And for the first half of 2006, if you treat the tax benefit on the exercise of stock options consistently in both periods, as a financing cash flow as now required under FAS 123R, cash flow from operations would be up 22%, greater than the increase in non-GAAP operating income.

At the end of the quarter, we had a deferred tax asset balance of approximately 74.6 million, the largest component of which is the benefit stemming from the company's leveraged recap in 1999. To recall for you, this adds roughly $8 million annually to our cash flow. As we have indicated before, this tax benefit is expected to continue to contribute to our cash flow at this level through 2014 and is one of the principal reasons our cash flow is materially larger than our reported net income.

Accounts receivable at the end of the quarter were 34.7 million, up about 9.8 million from the first quarter, consistent with the kind of growth we saw in this line between Q1 and Q2 last year. Much of this is due to normal maintenance renewal billings at the end of the second quarter.

DSO was approximately 40 days, consistent with our recent history of DSOs in the high 30s to low 40s. Total deferred revenue came in at 69.8 million, an increase of 9.5 million, again, in line with the increase of accounts receivable and again largely arising from maintenance renewals at the end of the quarter.

Let me now turn to our guidance for the third quarter and revisions to our full-year estimates. For the third quarter of 2006, we now expect total revenue in the range of 48 to $49.5 million or a growth rate of around 12 to 15% with a midpoint of a little over 13%. License revenue of 7.8 million to 8.2 million or a growth rate of 7 to 13 % with a midpoint of approximately 10%. Non-GAAP operating income of 14.4 to 14.8 million or a margin of 30% at the midpoint of the range and non-GAAP EPS of $0.19 to $0.20. I will remind you that we typically see a seasonal decrease in our license revenue from Q2 to Q3.

For the full year, as Marc indicated earlier, we are also increasing our guidance on revenue, license revenue and non-GAAP operating income and non-GAAP EPS. We are now forecasting a total revenue range of 190 to 193.5 million or a growth rate of around 14 to 16% with a midpoint of 15%. We have increased our full-year license revenue to a range of 32.7 million to 33.6 million or a growth rate of 9 to 12% with a midpoint of 11. And we are projecting non-GAAP operating income of 53.2 to 53.9 million or a margin of around 28% at the midpoint of the range, which is at the high-end of our targeted range of 27 to 28%. And we're projecting EPS of $0.73 to $0.74 for the full year and that's a non-GAAP measure.

I'd like to now finish with a very quick update on our two-part capital management program that we originally announced at the end of 2004 and we will then move to the Q&A session. The backbone of our capital management program is the extremely strong and proven cash flow generating capabilities of the company, which I commented on particularly with -- in regard to the second quarter. The first element is our dividend program and today we announced the declaration of our third quarter dividend of $0.07 per share on September 15th, the stockholders of record on August 28th.

The second component is our share repurchase initiative which we continue to execute in the second quarter. During the quarter, we purchased 36,700 shares of our common stock for $727,000 and at the end of the quarter we still had a little over $20 million remaining under our existing $35 million share repurchase authorization. We remain committed to using our cash flow in these ways to enhance our stockholder value.

In summary then, let me just reiterate what Mark said earlier. We were very pleased with the company's performance for the first half of 2006. Our second quarter results were strong. We've increased our forecast for the full year and we believe that we are in the early stages of executing against some exciting long-term initiatives that expand our market opportunity from a long-term perspective. With that, let me it turn it back over to the operator to begin the Q&A session. Operator?

Thank you sir. [OPERATOR INSTRUCTIONS] And we'll take our first question from Adam Holt with JP Morgan.

Good afternoon and congratulations on the quarter. I guess my first two questions are a little bit more of a clarification on the margins going forward. It looked like and to your comments about the gross margin that -- a lot of the upside was at the gross margin because of the change in the distribution relationships around one product, going forward shouldn't that sustain a margin at a higher level? And then secondarily, we did take our margins up for the year. I just want to understand your thinking about the split there between gross margins and the operating margin?

Sure. Let me take a shot at that, Adam. Pretty consistently, I think what we've said here is that we're targeting gross margins in the 70 to 71% range and that's an annual margin. Typically, I think if you go back and look historically, we run a little bit stronger in the middle two quarters. But clearly, we felt good about the margin performance in the quarter, clearly, the situation with the channel did help us, but we feel pretty good about our margin overall as well. But we're not really changing our target. We're staying with the 70 to 71% target at the gross margin line and we continue to feel good about the 27 to 28% margin at the overall operating income, non-GAAP operating income line.

Again, we had a great performance this quarter, helped partly at the gross margin line, but also in a couple of the other lines below gross margin. But we're staying with the overall targets, going to continue to try to perform better than that. But we feel comfortable with those targets that we've set.

And then just a follow-up, in terms of the investment areas that you identified, presumably that is baked into the updated guidance on the margin and then I guess the associated question would be particularly on the Internet investments, does that change your thinking about how you'll deliver ASP offering going forward?

Well you're right that the first half of the follow-up that the new initiative expenses that I talked about today are baked into the margin model of thinking. As it relates to the ASP model, we have a hosted offering, as you know, and have data center expenses for hosted offerings built into our model. But we're still -- not -- we're still not seeing a huge demand for an ASP offering in the space we traditionally serve. We have not included in the announcement today an ASP model. As we look into the question of Internet offering serving non-Raiser's Edge customers, we will be considering that option as well and when we make a decision, one way or the other, we'll be very clear with you about that. And I would say that any such model would need to be looked at as an independent business model that we would explain to you in a transparent manner.

And just finally, on the balance sheet, you noted -- and the deferred revenue saw a greater seasonal uptick and was particularly strong. That's historically been largely maintenance, but now you're breaking up subs and starting to break growth there, I was hoping maybe you could drill down a little bit on the increase in deferred rev?

I think, Adam, that -- I'll double check this, but my belief is that the biggest part of that increase still continues to be maintenance revenue. Yes there is some piece that does relate to subscriptions but the biggest portion of that does relate to maintenance.

Terrific. Thank you.

You bet. Thank you.

We'll take our next question from Tom Roderick with Thomas Weisel Partners.

Hi guys, good afternoon. Wanted to talk a little bit about your plan to increase headcount, particularly in the sales front in the back half of the year. Maybe a little bit more detail would be really helpful to us as we look into the model and see the life and services lines on revenue, both maintaining a pretty healthy clip but perhaps moderating from where they've been. How important a mandate is reaccelerating the growth to your core business here?

Well, let me just comment on headcount and then maybe Mark can jump in on the tail end of your question. As far as sales headcount is concerned, I think as we've said before, normally the bulk of our additions to the sales force occur at the beginning of the year. That's a model we've traditionally followed and has worked pretty well for us. I think we told you as we came into the second quarter, our sales headcount was around 140 -- maybe just a tad below that -- it's a tad above that. And as we normally do, we look at making modest additions to the sales headcounts as we go through the year. But usually, the bulk of our additions come in the early part of the year and then we try to ramp those resources as we move through the year and continue to focus on making that most effective.

And that continues to be the strategy I think that we will be following for the rest of the year. We feel good about what we've been able to accomplish in sales so far this year and I think if you look at our guidance, though it's for the rest of the year and in the third quarter, imbedded in that our some pretty good, pretty health growth rates. Our midpoint of our guidance range for the full year now is around 15%. We came into the year at around 13.5, so we have increased our guidance as we've moved through the year. Feel good about the growth we're achieving. So that, I think that's pretty much where we are from a sales headcount standpoint.

On the services side, we continue to add headcount as we, normally throughout the year until we get sort of to the middle of the third quarter because as you know as we go into the fourth quarter there's not as strong a demand period for us. But we feel good about the headcount additions we've been able to achieve there and our ability to get those people billable.

Okay good. On the services margins, you mentioned that there was a little bit of mix in the components of your services this quarter that brought that number down just slightly from last year. Can you talk about what that mix is and what sort of services elements might come attached with higher margins for you?

Sure, as you know Tom in the services area, we have sort of three broad components. The biggest portion is of course our consulting and technical services business. And then we have, the biggest portion of our analytics or prospect research business comes through services that are sold as individual engagements and then we have training. If you look at the margins of those individual components, the highest margin piece is training, and the lowest margin part of our business is basically our prospect research business.

All still though doing very -- all have very good margins. And in this particular quarter, the contribution from our training business was not as heavy as it has been in prior quarters. It has the highest margin, and so it was that mix that sort of impacted us here. That said, we feel very good about where our overall margins are in the high 40s. We think they're very strong. If you look at comparables for other organizations in the software industry, these are very good margins. We feel real good about where we are.

Great. And last question for you. You talked a bit about the NetCommunity product being a continued source of strength. How about the Patron Edge product. Can you talk a little bit more about the traction you're seeing in the marketplace for place for an Edge? Thanks.

Yes. We're continuing to see good sales growth in that market. We don't have -- we haven't even gotten to a quarter of the customers who could potentially have it that were well below that. So it's what I would think of is it's sort of the middle of the growth curve, and it has a long -- maybe even at the first half of the middle of the S-curve. So we were quite satisfied with the result. They had a very good quarter of sales, and we've had a good quarter of delivery. Some big customers, some small customers, and we're looking forward to a continuing strong contribution from them.

The only thing I would add on that too, Tom is that we did have growth in Patron Edge this quarter over last year's second quarter. And that was against a very tough compare. If you were to go back and look at the second quarter of 2005, we had some very strong performance by Patron Edge in the prior quarter. I think in fact it was one of the strongest that we've had out of say the last 8 or so. So it was a very tough compare, and we were able to beat it. So we feel good about that.

Thank you, guys.

Thank you, Tom.

And we'll take our next question from Ashley Hemphill with William Blair.

Hi guys. I have a couple of questions for you. First, I was wondering if you could give us an update on the international business, how that was performing and what percentage of revenue that was in the quarter?

Yes. International represented something like 11% of the revenue in the past quarter. So relative to previous quarters, perhaps a tad less. We're still in early stages in the initiatives. A couple of the new product offerings that we've added especially for the UK market such as ScanStore is starting to get some traction. We've been doing some hiring and augmenting the teams in a couple of the geographies. And it's early days from that perspective. I think we have a good set of people there in place now, and I'm confident that it will re-accelerate in coming quarters. And I'm still looking forward to it being a significant and larger proportion of our business over the next couple of years as it is today. So sort of a quarter in line with some of history, increase in the human capital and I think very positive prospects.

Okay, great. And then I was wondering, can I actually get the number of deals done in the 50,000 and 100,000 plus area for the Q counts?

You know, Ashley, I do not know that we have actually given the specific number. I think all we have tended to do is just talk about the increase, and as Marc said, it was a little over 30%, so.

Okay, great. And then just a broad question, in terms of, what do you guys think of the long-term impact of Warren Buffett and Bill Gates charitable event? And sort of, do you think it is going to have any impact on the industry, insofar as it affects your business?

Well, I do not see an immediate impact or a direct impact on the business. In talking to executives in nonprofit organization, and consultants, there is a pretty strong belief that it makes giving more visible. But it has not -- it has not, in any way, seemed to have discouraged other people. In fact, it might encourage other major givers to step up to the plate. And recently, there have been continued efforts in the Congress to push various different provisions that would make various kinds of giving, planned giving and other, more likely to happen, or change -- pushing changes, of that nature. So I do not see an immediate or significant impact. What I think it will do is make foundations, and foundation giving, and the processes around foundation giving, more on top of mind for many charities.

And so, there are a couple key factors that that brings, having some experience with Bill's operating methodologies from having worked seven years at Microsoft, I know that his focus on accountability is going to be -- is reflected and will be reflected in how the Gates Foundation works. And accountability is already a trend that you see executive groups in the nonprofit organizations sort of moving towards. There is a need for accountability to get givers to be more comfortable that their -- the funds that they are giving are being used to good ends. And accountability has sort of two levels. It has a level of being able to track, and those organizations that use -- have high numbers of grants, or large numbers of restricted endowments, like, schools might have many different kinds of restricted funds.

They are very good Financial Edge customers, and so, a drive towards accountability cannot help but be a good thing from the Financial Edge part of our business. But accountability also has an outcome of measurement perspective, and organizations like the Gates Foundation, I think, are instrumental in helping the industry think through, how do you start measuring the end result, and not just the actions? I mean, in some sense, not how many kids went to an after school program is less important, than how many kids who have been in the after school program got good jobs, or stayed in school, or got their diploma?

And that focus on outcomes measurement also is important to any organization that is a supplier to the nonprofit industry. So, I think it is an excellent thing. I think that is -- I think it will have some impact, but I do not -- I see there being moderate, a moderate improvement in one of the markets we serve, in terms of the opportunity for us. But not a significant or dramatic material effect.

Okay, great. Thank you.

[OPERATOR INSTRUCTIONS] We will go next to Kash Rangan, with Merrill Lynch.

All right, thank you very much. Marc, just listening to you talk about the Gates and Buffett activities, it sounds like you might have a another Edge product along the way here. That was meant to be a joke.

We actually have a covenant that I think that still has some time of non-compete in the grant spaces I'm going to bet you know. But you never know what'll happen.

Okay, good. So maybe that's a now less facetious tie-in into some of the new product initiatives you just outlined. How should we think about the training time to get sales reps to monetize these efforts? Should we think about the productivity benefits that's happening potentially in the second half of this year? Or do you think it's more likely to bear fruit in early '07?

Well I think there are two parts to your question, and in a court of law those would be leading questions. Right? Because I never gave a date and what I will tell you is that you'll start to see products that line up with the direct response marketing and the foundation -- not the foundation, sorry. Previous question on my brain. The smaller chapters of federated organizations. I expect us to have offerings in the market in the first half of next calendar year. So you won't see an '06 impact in terms of revenue or sales there.

But let me say that I'm not sure that I see any change in sales productivity per se associated with this. I mean this'll be selling to new - oftentimes, we'll be selling to new people within entities we know, for example selling to a chief marketing officer in an organization where we've had a long-standing relationship with the development officer.

And as you may know in enterprise selling when you start selling to a new influencer in organizations that it requires a sales effort that's sensibly similar and intense to the kind of effort you would have to make to develop the relationship with the first person you had in that organization. So I don't see a significant change in the sales productivity model per se in the new offerings. I do think that these offerings are -- I may not have been clear but these offers are not designed to replace the Raiser's Edge and they're not a follow-on product to the Raiser's Edge. They are fully intended to either sell to new constituents and existing customers or to sell -- bring new customers into our target market. And doing those things requires a sales effort that's a material sales effort. So I guess I'd say that I would think of the sales model as being quite similar to the current one we have.

That's useful. Also, Tim I'm wondering if you could comment on maintenance margins. They have been relatively flat for the past couple of quarters but when I look at it relative to last year's maintenance margins, gross margins we seem -- is there any investment that's happening there that depresses the margins relative to last year's maintenance margins, gross margins, we seem -- is there any investment that's happening there that the rest of the margins relative to the 85-ish percent that we were at last year?

Well, I think it's fair to say that we have -- we are at the stage where it is a very, very high margin and sort of world-class if you look at maintenance margins. So yes, we've made investments as we've gone along, added headcount where we felt it was appropriate and needed as we've grown the size of the organization to meet the need.

The other thing that does go through there too -- go through that cost line cash -- is that remember that we with Patron Edge for example, we are re-selling another product, and we actually have to share part of that -- sorry, part of the maintenance fee, not at the same rate, but we still have to share part of the maintenance fee with the creator of the product, the product, the organization whose product we're reselling. And so that has had a little bit of an impact on our margins.

Got it. Also on the metrics that you've been sharing with us today any update on the 100K-plus deals? I think you did 27 of those last quarter if I'm not mistaken. Any update on that? And also average deal size, if you will.

Yes, the -- I think rather than deal with the specific number again I think we said they were -- the total number was up around 30% of the deals over 100K year-over-year, quarter-to-quarter not sequentially.

Oh, it's not over 50K because I thought I heard it was deals over 50...

It was both, Kash.

Okay.

Deals over 50K were up about 30% and deals over 100K were up about 30%.

Got it.

And as far as average deal size, average deal size was still in the -- I think last quarter we said it was around 35 so a little bit below that but pretty close.

Great, thank you very much.

You bet.

We'll go next to Phil Rueppel with Wachovia Securities.

Great, thanks very much and good afternoon. You mentioned the strength in new products versus core product, which gave a much higher percentage this quarter than we've seen the last couple of quarters. Was there anything different about this particular quarter? Either a very large deal or perhaps seasonality that would indicate that, that is not sustainable going forward? Or are we at perhaps a new level of product mix?

Well, there were not -- it's not the impact of a major deal. I think that what you're seeing is that there'll be a continual growth -- those products should grow faster than the core products every quarter. And so that means that on a regular basis at some periodicity given that we're apparently going to -- it was 15-ish percent for a while and then it was 20-ish percent for a while, and we're staying 25-ish percent for a while. It's going to -- it'll continue to grow I think as a percentage of our business over time.

And I'm certainly not going to predict today exactly when it'll break 30 but I can sure tell you that when you've got a set of products that are sort of 10, 15% of your customers' own, of the appropriate part of your customer-base owned and you think that that's something which 60, 70, 80% of the appropriate part of your customer bases ought to own, you ought to be able to sell that stuff faster than you're selling to totaling new customers.

Great. And then you mentioned, you highlighted some of the examples of the strategic plan you're implementing to accelerate growth. As you've looked at these has it changed your view of acquisitions to accelerate your entry? You talked a lot about some of the internal investment you're making. Are there ways that you think you could either for some of these that you mentioned or some of the examples that you didn't where acquisitions could play a key part.

No. We'll always -- as a market leader you tend and given the cash position that we have and can generate we would always consider a make versus buy decision for any major area that we'd consider investing in and going into the market. That being said we're pretty stringent in how we think these things through and we want to make sure that we're pretty stringent in how we think these things through, and we want to make sure that we're using the shareholders' assets wisely. And so I don't have anything to announce.

It's certainly true that in the two segments we're talking about it would be a very wise thing to consider make versus buy, but the most important thing in that is to be able to have a very sound make strategy. You need to know what you're comparing to buy against, and so my number one belief and challenge here is to make sure that we know how we'd invest well in those spaces so that we have our beyond 2 to 4 year growth profile well in hand, and we are masters of our destiny on that front. If I see something that will help us accelerate beyond that, you'll be amongst the first to know, along with everybody else in a fair disclosure.

Great. Thanks very much.

Thank you.

Thank you.

And ladies and gentlemen, at this time we have no further questions. I'd like to turn it back to Mr. Chardon for any closing remarks.

Well I'd just like to say thank you all for joining us on the call today, and for your questions. We'll look forward to - Tim will be on his phone fielding questions I'm sure in the not too distant future. And if you have questions, you know where to find us. Otherwise, I'll look forward to talking with you again next quarter. Bye-bye.

Thank you.

And ladies and gentlemen, this will conclude our teleconference for today. Once again, we do thank you for your participation, and you may disconnect at this time.