Blackbaud Inc (BLKB) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Blackbaud Fourth Quarter 2006 Earnings Conference Call. Today's call is being recorded.

[OPERATOR INSTRUCTIONS]

And now, I'd like to turn the conference over to Mr. Tim Williams, Chief Financial Officer of Blackbaud. Please go ahead, sir.

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

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 our 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 periodic reports under the Securities Act of 1934 for 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 fourth quarter results and an update on our strategies to address market opportunities. And then, I'll be back a bit later to give some further details regarding our financials. Marc?

Thanks, Tim. I'd also like to thank all of you on the phone today for joining us as we review our fourth quarter 2006 results. As we discussed on our January 22nd call, from an overall perspective the fourth quarter was a solid finish to a successful year in which Blackbaud exceeded its key revenue and profitability targets. Revenue growth for the quarter and the year was 15% while strong profitability in the fourth quarter led to a full-year of operating margin at a record 29% level.

While we believe there continues to be a large market opportunity across the breadth of our industry-leading product suite, total sales of our core solutions, The Raiser's Edge, Financial Edge and Education Edge grew by over 10% in 2006 while market acceptance and strong demand drove sales growth of over 40% for our suite of new solutions.

As we look ahead, we are also very excited about our recently announced acquisitions of Target Software and Target Analysis, which make Blackbaud an undisputed market leader in direct response marketing in the non-profit world. This opens up another significant market opportunity, and dramatically improves our ability to serve the needs of Chief Marketing Officers of large non-profits, which is a top strategic priority for the company. The combination of these factors makes us optimistic about our outlook for 2007.

Taking a look at the details of our fourth quarter performance, total revenue was $49.6 million, an increase of 15% on a year-over-year basis. Revenue from all major segments contributed to this growth. License revenue grew by 4%, services, 18%, subscriptions, 46%, and maintenance revenue, 15%.

Looking at our major product categories, our core solutions drove just under three-quarters of our total sales in the quarter, with a combined year-over-year growth of just under 10% during the quarter. These core solutions help open the door for us to sell additional products and services over time, and they are key drivers in the majority of our larger deals. During the fourth quarter, our core solutions were an important factor in nine of the top ten software deals.

Drilling down into our core solutions, our flagship solution, The Raiser's Edge, continues to be a major differentiator for us in the marketplace, and it represented approximately half of our total sales in the quarter. As we mentioned on prior calls, we discontinued selling the Financial Edge through an indirect channel at the beginning of 2006 and transitioned to a 100% direct sales model.

From an overall perspective, we were pleased with the results of this transition as we were able to grow the sales of the Financial Edge in the neighborhood of 20% for both the quarter and the year. The one item of note related to this however, which we've previously discussed is the services revenue mix tied to Financial Edge has increased significantly, because Blackbaud now provides the services we need [for these], whereas our indirect channel partners previously provided most of the services.

The last of our core solutions, Education Edge, continued to deliver very strong results. For both the quarter and the year, Education Edge had the highest growth of our core solutions. It is our leadership position in the core areas of fundraising, non-profit accounting and private school information system applications that provides fertile ground for us to sell our new solutions, which includes our Internet applications, The Patron Edge and our Analytics offerings.

Sales of our portfolio of new solutions represented over 25% of our sales in the fourth quarter for the first time in the company's history. The success of these new solutions is evidence of our ability to identify and commercialize new products and services that meet our customers' needs. The two areas that I'd highlight this quarter were our Internet and Analytics solutions. Starting with our Internet solutions, NetCommunity again showed the highest sales growth rate of all Blackbaud solutions, and it was a component in five of the ten largest software deals.

Furthermore, on a full-year basis, our Internet sales more than doubled. NetCommunity's tight integration with our industry-leading Raiser's Edge continues to be a major differentiator relative to potential competition. The opportunity for NetCommunity within our broad base of over 16,000 customers continues to be under-penetrated, and the addressable market opportunities should expand dramatically when we deliver our freestanding Internet offering, de-coupled from RE. This should be available in late 2007.

Because The Raiser's Edge has been predominantly focused on high-touch fundraising operations, the ability to deliver our Internet offering outside of The Raiser's Edge environment and installed base will enable us to better serve larger, non-profit organizations with high-volume fundraising. Interestingly, many of these same organizations are the ones that Target serves with its solutions, which are specifically focused on optimizing their offline, high-volume fundraising activities.

We expect that we'll have an extremely compelling offering when we deliver both offline and online solutions to meet the needs of Chief Marketing Officers at these larger organizations. And we will have this combined offering within the year. Finally, we were very pleased to see another very strong performance from our Blackbaud Analytic solutions during the fourth quarter. They once again generated the second-highest growth in our overall solution portfolio.

Performance was strong throughout all of 2006 for our Analytics solutions with full-year growth of just under 40%. The addition of Target Analysis should further bolster our overall Analytics offerings, as there is virtually no overlap between the solutions, and there is an attractive opportunity for cross-selling both solutions to our respective customer bases.

Turning to the distribution of our deals, our traditional and key account sales teams help contribute to grow over 35% the number of total solution deals greater than $50,000. As a reminder, remember that we include the contract value of both software and services in the average deal size, but not maintenance. The number of total solution deals over $100,000 that were closed in the quarter grew by over 50% on a year-over-year basis.

An additional contributor in the growth in our larger deal count is the success of our sales organization in selling multiple solutions. During the fourth quarter, five of our six top deals each included at least three products, consisting of both a mixed core and new offerings. It was not just our enterprise sales organization that drove the growth of our transactions, however. Blackbaud's traditional sales organization focus on the mid-market, non-profit organizations also helped to drive this growth. And we were pleased to see the productivity of this component of our sales organization improving over the course of the year.

While we're very pleased with the company's growth and larger transactions in the quarter, we did point out in our January 16th conference call that there were several larger software transactions that did not close in the timeframe originally forecasted. It's important to keep in perspective that our business model is still high-volume in nature, as evidenced by our average deal size from the low to mid-$30,000 range. Deals larger than this level are clearly becoming more common in our business, and we believe this is very healthy for the long-term growth of the company.

Furthermore, the combination of Target Software's service offering with Blackbaud's subscription revenue, should immediately increase the quarterly run rate of our combined subscription revenue to just over half the run rate of our perpetual license-based software revenue, and subscriptions is the fastest component of our revenue. Subscriptions -- yes, I'm sorry. I got myself a little confused there. So, it's just over half the run rate of our perpetual license-based software revenue. Then I'll remind you, subscriptions are the fastest-growing component of our revenue.

So, before turning it over to Tim, I'd like to review the reasons why we're excited about the Target Software and Target Analysis acquisitions that we just announced a couple of weeks ago. Direct response marketing is one of the largest strategic market opportunities that we identified, and we believe that will help Blackbaud to at least sustain low to mid-teens growth beyond the two to three-year time horizon.

Blackbaud's achieved its market prominence in the non-profit sector, primarily by serving fundraising organizations focused on tens, or hundreds, or even thousands of large donations of $1,000 or $10,000 or even larger. But, in many non-profits, significantly more effort is directed to activities designed to generate tens, or hundreds of thousands, or millions of smaller donations such as $5 or $10 or $50. There are major differences between the systems needed to support these very different types of fundraising, in particular, in terms of scale and functionality.

Blackbaud's solution, The Raiser's Edge, records and organizes extensive, detailed information on major donors, and that helps the organization cultivate a more significant relationship with those givers. Target Software's team approach is designed to analyze huge databases of givers and their responses to mass appeals.

Another major difference is how the processes around these different types of fundraising are managed and how that affects our sales efforts to these organizations. The data that is needed, how it's analyzed and who is targeted are very different between the major giving programs and the high-volume, direct-response marketing programs. And the person driving the partner selection and purchasing process is typically different as well.

Blackbaud has unmatched experience in building relationships with the heads of development that typically drive major giving, but the Chief Marketing Officer normally drives decisions related to high-volume, direct-response marketing. And it is here that Target has built some very significant, very deep relationships.

[Buy Fund] was already progressing down the path of entering the direct-response marketing segment, as I've mentioned before. Similarly, Target was in the early stages of improving the high-touch fundraising capabilities in their product suite. As we began our discussions with Target, it became extremely clear to us that the combination of the two companies was ideal and very timely.

There are five key reasons why we believe the acquisition of Target is a good investment for Blackbaud and its stockholders. First, we estimate that Target company's solutions open up a market opportunity in the $500 million to $1 billion range that our existing solutions did not previously address.

Second, we've become an undisputed market leader in direct-response marketing with the best technology, the largest customer base and unparalleled expertise. As I mentioned two weeks ago, we are fortunate to be getting two very seasoned transactions from this transaction, Chuck Longfield, the Target founder, who will become our Chief Scientist or has become our Chief Scientist, and Lee Gartley, who will continue to run Target's day-to-day business. These leaders, along with their talented teams, have huge credibility with non-profits that are focused on direct-response marketing.

Third, our ability to serve the very high-end of the market improves as Target has relationships with some of the largest non-profit organizations in the world, and they have the sales and service domain expertise that will be valuable to Blackbaud. The fourth reason is, this acquisition presents substantial cross-selling opportunities, as I mentioned earlier today. And finally, it improves our ability to serve and build strategic relationships with Chief Marketing Officers.

Having the best-of-breed, direct-response marketing application, which is the mission-critical application for many of these Chief Marketing Officers, should also help us to improve the success of our Internet applications business, which is also a very key strategic priority for us.

In summary, the fourth quarter finished a successful year in 2006, and we're optimistic about our outlook for 2007. The market opportunity for our core and new solutions remains under-penetrated. Our competitive position has never been stronger, and we have significantly expanded our market opportunity and strategic appeal to no-profit organizations with the acquisitions of Target Software and Target Analysis in the direct-marketing space.

With that, let me turn it over to Tim so he can provide some more details on the financials. Tim?

Thanks, Marc. I will first focus on providing you with more details on our fourth quarter operating results, then comment on a few balance sheet and cash flow items, update our guidance and finally, provide a quick review on the status of our capital management program. First, let's start with some highlights from the income statement.

Total revenue, as you heard earlier, came in at $49.6 million, which was up 15% on a year-over-year basis, and near the midpoint of our original guidance for the quarter. Top line growth continues to be driven by success from our new revenue sources, along with the continued strong growth from our maintenance revenue. New revenue, which we define as the combination of software, services and subscription revenue, was $26.2 million for the fourth quarter, up 16% on a year-over-year basis.

Within new revenue, license fees came in at $8.2 million, an increase of 4%. And as Marc mentioned, our license revenue came in slightly below our original guidance, due to the fact that a few larger transactions in our pipeline had sales processes that extended beyond the end of the quarter. Because license revenue is the smallest component of our revenue, relatively small amounts can make a material percentage difference in our growth rate. And within a -- and with a narrow guidance range of only several hundred thousand dollars, it does not take a lot for results to be above or below guidance.

On the services side, revenue came in at $14.8 million, representing strong growth of 18% on a year-over-year basis, and representing the second consecutive quarter our year-over-year growth in services increased. As expected, service revenue declined 13% on a sequential basis, due to the typical seasonality around holidays. However, this sequential decline was less than it has been in the past several years.

The last major component to our revenue, maintenance and subscriptions, came in at a combined $24.4 million, which represented 49% of our total revenue and growth of approximately 18% on a year-over-year basis. We continued to enjoy maintenance renewal rates in the mid-90% range, which we believe is a testament to our customer satisfaction and the strength of our technology. Maintenance alone grew 15% year-over-year in Q4, while subscriptions grew 46% to approximately $3.1 million.

You might recall that in the first quarter of '06, we began showing subscriptions revenue as a separate line item in our income statement, recognizing its increasing importance to our overall performance. Turning to gross profit, we generated $34.5 million in non-GAAP gross profit in the quarter, representing a gross margin of 70%. We continue to expect our annual, long-term gross margin to be in the neighborhood of 70%.

Looking now at our operating expenses, and here, my comments will exclude the effects of stock-based compensation expense, which you will see reflected parenthetically in the statements attached to the press release. Sales and marketing came in at $11.2 million or 22.5% of revenue. This was an increase from 19% of revenue in the prior-year period and 20% in the third quarter. The increase is largely due to early hiring in anticipation of specific needs in 2007, and to some investments we are starting to make in connection with our strategic initiatives, which we discussed on last quarter's conference call.

Research and development came in at $5.3 million or 11% of revenue. R&D declined on an absolute and percentage of revenue basis compared both the prior year and prior quarter, due solely to decreased spending on our offshore development activities. As we noted in last quarter's conference call, we will be investing in bringing new solutions to market in 2007, and we would expect research and development to increase on an absolute dollar basis and slightly as a percent of revenue in upcoming quarters.

G&A came in at $4 million or 8% of revenue. This was down as a percentage of revenue compared to the prior year, largely due to the leverage we have achieved with our public company costs, and the non-recurring amounts we had last year associated with the recruitment of a successor CEO, which as you will recall is when Marc joined the company.

Q4 G&A was also down slightly on an absolute and percentage of revenue basis compared to the previous quarter. And if we look at the quarterly progression of G&A over the course of 2006, we were able to keep our costs roughly flat for the last nine months of the year, helping to bring G&A to its lowest level as a percentage of revenue since Blackbaud went public in mid 2004.

Non-GAAP operating income was $14.1 million, representing a strong, non-GAAP operating margin of 28% for the fourth quarter. The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP net income of $9 million, and non-GAAP diluted EPS of $0.20, based on diluted shares outstanding of $45.3 million. Non-GAAP earnings per share was at the high end of our original guidance of $0.19 to $0.20.

As we've noted before, we focus our discussions in these calls on non-GAAP results, because we believe that excluding certain non-cash items such as stock-based compensation charges, amortization of intangibles arising from business combinations and other unusual one-time items provides the best indicator of the health of our overall business and the level of efficiency in our operating infrastructure.

That said, we appreciate that investors also need to analyze our results on a GAAP basis, so we've provided a full tabular reconciliation of these GAAP results and non-GAAP results as part of the earnings release. In summary then, the GAAP net income was $8.6 million in the fourth quarter of 2006 compared with $6.2 million in the fourth quarter of 2005, and our GAAP diluted earnings per share was $0.19 for the quarter, compared with $0.14 in the prior year.

Now, I'd like to provide just a very quick summary view of our overall full-year 2006 results. Total revenue was $192 million, an increase of 15% compared with 2005. License revenue increased 8% to $32.5 million. Subscriptions increased 50% to $10.7 million. Services revenue increased 16% to $61.2 million, and maintenance revenue increased 14% to $81.3 million. All of these figures, of course, are compared with the full-year 2005.

Non-GAAP income from operations for all of 2006 was $55.8 million, an increase of 21% compared to 2005. Non-GAAP net income was $34.8 million, and non-GAAP diluted earnings per share were $0.77 for the full year ended December 31, 2006, both of these representing an increase of 22% compared to the comparable numbers for 2005.

Looking at the full-year profitability on a GAAP basis, net income was $30.5 million or $0.68 per share, compared with $33.3 million or $0.72 in 2005. The primary difference again between GAAP and non-GAAP results is non-cash, stock-based compensation charges and non-cash amortization of intangibles associated with previous acquisitions.

Let me now turn to cash flow on the balance sheet. We ended the quarter with $67.8 million in cash, up from $54.3 million at the end of the third quarter, driven principally by strong cash from operations of $17.6 million in the quarter. For the full year, cash from operations was a very strong $63 million. And if you treat the tax benefit of -- on exercise of stock options, consistently in both periods as a financing cash flow as now required by FAS 123R, cash from operations grew 46% on a year-over-year basis.

To put the strength of our cash flow in further perspective, while our non-GAAP earnings per share for the year was $0.77, our cash from operations was 80% greater than this at $1.40. Regarding cash, it is also worth noting here that we used about $30 million of that year-end balance along with an additional $30 million from our credit line to do the Target acquisition.

At the end of the quarter, we had a deferred tax asset balance of approximately $66.4 million, the largest component of which is the benefit stemming from the company's leverage recap in 1999, which we have noted previously, adds roughly $8 million to our cash flow on an annual basis. Also as we've indicated before, this asset is expected to continue adding to our cash flow at this level through 2014. Also, as I noted on our call regarding the Target acquisition on January 16th, we expect to add a further $23.5 million to this deferred tax asset balance, as a result of the tax structuring of that transaction, which will further reduce cash taxes in future years.

Accounts receivable at the end of the quarter were $29.5 million, down slightly from $29.8 million at the end of the prior quarter. DSO was roughly 40 days, in line with our target range of DSO in the high 30s to low 40s. And total deferred revenue came in at $73.9 million, up 22% on a year-over-year basis.

Let me now turn to guidance for the first quarter and full-year 2007. For the first quarter of 2007, we expect total revenue in the range of $52.4 million to $54.1 million or a growth rate of around 20% to 24% with a midpoint of 22%. This guidance includes a contribution from the Target companies for approximately two and a half months of $3.9 million to $4.1 million.

We expect license revenue of $7.5 million to $8 million or a growth rate of 4% to 11% with a midpoint of about 7%. We expect no contribution to license revenue from Target, as their transactions continue to be sold as a subscription-based ASP or, if you will, SAS model and will be reflected in our subscription to revenue line.

We expect non-GAAP operating income of $10.6 million to $11.2 million or a margin of 21% at the midpoint of the range, with the acquisition of Target impacting our first quarter operating margin by a little over three percentage points. And we expect non-GAAP diluted earnings per share of $0.14 to $0.16 in Q1 including $0.02 to $0.03 of dilution from Target.

For the full year, again in including projected results from Target, we are forecasting total revenue of $237 million to $245 million, or a growth rate of approximately 24% to 28% with a midpoint of about 26%. This includes an anticipated revenue from a contribution from Target in the low to mid 20s. We expect license revenue of $34 million to $37 million or a growth rate of 5% to 14% with a midpoint of 9%. Again, this has no meaningful contribution from Target.

As might be implied from these numbers, we expect services revenue to grow faster than license revenue, and we expect subscription revenue to be the fastest growing of our revenue components, as it was in 2006. We are projecting non-GAAP operating income of $58.5 million to $61.5 million, or a margin at the midpoint of the range of 25% with the -- with Target impacting our full-year operating margin by approximately two and a half percentage points.

And finally, we project non-GAAP diluted EPS of $0.79 to $0.82, with dilution from Target still estimated as it was as we gave you on the January 16th call at $0.03 to $0.06 for the full year. It is worth reiterating that we believe the acquisition will be neutral to our earnings per share by the time we exit 2007, and it should be slightly accretive to our bottom line performance in 2008.

In addition, while we will not be able to take credit for it through our income statement, the deferred revenue write-off is responsible for approximately $0.01 to $0.02 of the dilution that I just discussed. And there's an annual tax benefit that is worth approximately $0.03 per share related to the structure of the transaction that, as I mentioned earlier, only runs through our balance sheet and cash flow statement.

Let me now finish with a quick update on our two-part capital management program. The first element is our dividend program. And today, we announced that the Board of Directors has authorized an increase in the annual dividend from $0.28 per share to $0.34 per share. And today, we declared our first quarter dividend of $0.085 per share, payable on March 15th to stockholders of record on February 28th.

The second component of our capital management program is our share-repurchase initiative. And although we did not buy any shares in the fourth quarter, since the beginning of 2007, we have purchased approximately 162,000 shares of our common stock for $3.6 million, or an average price of approximately $22.51 per share. And at the end of the quarter, we still had $16.7 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, our overall performance was solid in the fourth quarter, and on a full-year basis, we're very pleased with the company's performance. All key revenue and profitability targets were exceeded. In addition, as I highlighted a moment ago, our cash flow continues to be very strong, which enables Blackbaud to invest money in acquisitions, and still return capital to stockholders, all of which we believe helps to maximize stockholder value from a long-term perspective.

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

Thank you, Mr. Williams.

[OPERATOR INSTRUCTIONS]

And we'll take Adam Holt with JPMorgan.

Good afternoon.

Hey.

Hey, Adam.

My first question has to do with the deals that fell out of the quarter. I was wondering if you could sort of update us on -- now that you've had a few days to go through the final analysis, whether or not there are any common denominators in those transactions? Update onto whether or not any have closed already in the first quarter. And, have you made any changes in the guidance of license revenue of $7.5 million to $8 million for the first quarter with respect to close rates for larger transactions?

As far as whether the deals have closed Adam, I'll just mention briefly that we're not prepared to give mid-quarter guidance. We haven't in the past given sort of mid-quarter guidance on whether deals have closed or not and are not doing that today as well. As for what we're factoring into our thinking in the quarter, we've put forward a forecast for the quarter that we feel quite good about. The midpoint, as I mentioned earlier, is 7% growth, and the high end of the range is -- would be double digit.

March quarter, as you know, is typically a quarter in which we see a seasonal decline in our license revenue. And our forecast, of course, has been billed with that as you would expect with that seasonality in mind. The only thing I would emphasize here again too is that we are clearly focused on optimizing total solutions revenue, not just license revenue. And that includes services and subscriptions. And of course, subscriptions was our fastest-growing revenue segment last year. We think the Target Software business is going to add to that trend, and it's a key component of our total solutions revenue.

Yes Adam, in terms of just the transactions or the -- sort of the number or percentage of them in the -- and the impact that it might have had on the software number, I don't see materially more or less sizeable transactions this quarter than I would in other quarters. So, it doesn't seem to be -- it does not seem to be different to me standing here today.

And if I could maybe shift gears to a question on -- actually, two questions on the expense side, the guidance is for $0.03 to $0.06 dilution from the Target transaction for the year. And you're sort of guiding to $0.02 to $0.03 for the first quarter. Could you maybe walk us through the variables around the high end of that guidance versus the lower end of that guidance?

And then, as we're thinking about the R&D, organically related to launching some of the new products, obviously R&D has declined for four straight quarters. How should we be thinking about that heading into the first and second quarter of this year? Is that incremental headcount that you're adding? Or, is it more of a shift away from the offshore?

Well, let me take your last question first. And then, I'll try to comment on the Target dilution. Insofar as R&D is concerned, yes, it does reflect additions to headcount. And we've already made some of those additions to headcount. That's factored into our thinking about margins for 2007. And so, that is incremental investment we're going to be making as we continue our efforts to bring new solutions to market and would be factored into our thinking about margins.

Insofar as the dilution, I think as you could tell from my comments about how much we see in the dilution from Target in Q1 and then relative to the full year, one of the key variables in this is the size of the deferred revenue write-off. We have not absolutely finalized that number. We think that the range of size of that write-off could be in the million-dollar range. And as you would expect, the biggest part of that is going to be in the first half of the year, and a portion of that certainly in the first quarter. So, that is baked into our thinking.

Insofar as the difference between whether we end up at the lower end of the dilution or the higher end of the dilution obviously depends very significantly on how quickly we can move forward in working together, selling together, partnering with those folks on transactions, and how the overall integration of the two businesses proceeds.

Adam, one of the things that I'd just amplify in terms of just the road map for integration or for developing a common road map across the two companies for the software plan, we don't sitting here today, what the outcome will be relative to the direct-response marketing software. We do know that what people do with direct-response, if you're saying a hospital that's part of a university system, which is something more like what Bullseye would have been, or sorry Blackbaud direct marketing would have been for or is for is quite different in scope, scale than what The American Red Cross or Cancer or somebody does.

And so, that work is just starting. And there's a -- there is a fair range in terms of the amount of engineering that you could expect would be required depending on what the road map looks like in the end. And what I can say is that we will engineer the products that covers the market in the best way we can, and that that may mean that we'll spend a little bit more if it's required.

Okay, thank you.

Thanks, Adam.

We'll take our next question from Alan Cooke with Merrill Lynch.

Hi, thank you, very much. Marc and Tim, if I take the midpoint of your guidance for Q1 and strip out the expected revenues from Target, it almost seems like there is a slight decline quarter-over-quarter, which you haven't really seen before from Q1 to -- from Q4 to Q1. And I was wondering if you could give us some insights on that?

I think all I can say to you is that if you strip out the contribution from Target, you get a mid -- you get a growth rate at the midpoint of the range that's certainly very consistent with what our overall targeted growth rates are in the low to mid teens. I think that midpoint ends up being somewhere in the 13% range, so still very good growth. And I would also suggest to you that if you look at the full year 2007 and where we're forecasting, again, stripping out the impact of Target would again put you at the full year at very attractive low to mid teens growth rates that we've -- that are our -- that are with -- right within what we've said our target is.

Okay, thank you. And then with respect to integration of Target, can you give us an update on integration, particularly with respect to product? It seems like there may have been an overlap between their products and your direct-response marketing product that you're launching this quarter. Can you give us some more insights on that, now that you've had a -- I guess, a couple of weeks to -- with the integration? And also on the sales side as well with your sales force.

Sure. From a product perspective, the first thing to say is that neither of us had launched anything that was sort of directly in the space of the other. So, the first product that might have that potential for confusion will be when direct marketing comes out later on. And today, if you take a look at the places where our enterprise sales force is strong, we sell to large hospitals and hospital systems. We sell to the higher education space, and we -- and typically in the segments where Target is strong like the large national organizations, we have typically had more of a chapter-by-chapter approach as opposed to a headquarters-down approach.

And so, the direct-response marketing product today, we will launch the Blackbaud product, because it does tie to The Raiser's Edge database. And it also is designed or adapted for those organizations that may rely sort of more on high touch and less on direct marketing, such as, as I had mentioned before, the universities or higher -- or the healthcare spaces.

What you -- what we don't know is, is there a -- in the next version of Team Approach that we would have -- that we're looking at, we don't know how exactly how the next version of Team Approach and Bullseye relate. And two weeks is just simply not long enough. I've just started to visit with customers and to take input from them on what it is that they're looking for.

And I've talked to quite a few of them, and they're all excited with the idea of the -- sort of the ease of use and the high-touch fundraising capabilities that we represent. And as you can imagine, there's been some divergence in terms of their belief of what exactly the right product development strategy would be to get there.

So, I'm quite confident however that Chuck Longfield and Lou Attanasi, who's the VP of Product -- and Product Strategy here at Blackbaud, that the two of them will come to a good road map in the next month or so. So --.

Okay. Okay, I understand it's pretty early in the process. And then finally, what are your plans with respect to your $30 million credit facility? Do you intend to pay it off as soon as possible? Or, are you going to maintain it for longer than that?

We're going to kind of approach this as -- with the greatest degree of flexibility, balancing what other cash needs are. But all other things being equal, we would probably intend to pay it off relatively quickly. But, we'll also look very carefully at what other cash opportunities are in front of us.

Okay, great. Well, thanks a lot Tim. Thanks, Marc.

You bet.

Thank you.

Thank you, Alan.

We'll take our next question from Brent Thill with Citigroup.

Thanks, good afternoon.

Hey, Brent.

Hey, Brent.

Tim, can you just help reconcile the license number? I think you mentioned the emphasis towards the subscription model. In all year, the license number fell. And it's -- obviously, the guidance is still implying, I think, single digit license growth at the midpoint. Maybe you can just spend a little time in terms of what you're seeing in terms of that shift versus '05 -- '04 and '05 where you saw high teen license growth. What's happening to the model that's causing this?

There are two main factors that caused that. The first factor is that, when you sell a $20,000 or $30,000 ASV deal, the percentage of the software can be anywhere from 35% or higher. And when you sell some of the larger, sort of $200,000, $500,000 enterprise deals, the percentage of software can drop down towards the 25s and even below. And so, if you have one -- if you have, say, $500,000 in one deal that's a 25% software, you've got $125,000.

If you have $500,000 in ten $50,000 deals, that was going to be, say, 35% software, then you've sort of lost $40,000 or $50,000 of software in that translation. And so, your growth rate is inevitably smaller in software just by virtue of mix shift to larger sales deals. The second is that, certain of the products that we sell today are lower software percentage versus services.

So for example, when you sell an initial web -- so a NetCommunity deal, there's quite a bit of service that goes into figuring out what the site ought to look like, how we integrate with their data models, what the content management model looks like. And so, the ratio of service to software in new solutions is lower than in the core solutions. So, the fact that new solutions are growing faster than core solutions also has an impact on that. Those are the two primary factors.

I would only say in adding to that, Brent, since -- ever since we went public, we've tried to make the point that we're focused on total solutions -- on the total solution. And our growth in terms of total solutions, in terms of sales of all of our solutions has grown very nicely. And so, we're not focused only on the licensing fees. We're focused on the total solution sale. And I think what you see in our numbers that we produced for 2006 that even with the slower growth relative to '05 in license revenue, we still maintain -- we still did very nicely in terms of overall growth with very, very nice margins. So --.

So long term, there's no reason to believe that as we go through this mix shift that the core operating margin could return to what you saw last year, once Target's fully subsumed inside the company?

Yes. I think what -- well certainly now with respect -- we have said since really the third quarter call that we don't expect that the margin's going to stay at 29%. We've said, given the investment we have to make in 2007, that ex Target, excluding Target we would be in our target range of 27% to 28%. And I think if you look at the guidance I gave, we said I think that the midpoint of the range was around a 25% margin with a two and a half point dilution from the Target acquisition. So, it puts us right back in the center of that 27% to 28% margin. So from that perspective, yes, we think we can do that.

All right, thanks.

The other quick point I'd make is that the midpoint of the annual range for software is something like 9%, and the high end is something like 14%. So, that would be -- both of those are numbers that are an acceleration on this number, Brent.

We'll take our next question from John Torrey with Montgomery & Company.

Thank you. Good afternoon, guys.

Hello, John.

A couple of questions for you, just by way of housekeeping, if you will, a couple of things very quickly, the $23 million deferred tax asset you talked about Tim, with respect to the Target acquisition --

Yes, sir?

Over what period do you expect that to roll out?

That will be -- will roll out sort of like the other deferred tax asset will roll out. It's going to have about a 15-year life. Or, it will have a 15-year life, not about -- 15 years. And so, it will be worth roughly $1.5 million per year in cash tax savings.

Okay. And then, on the guidance you've given for '07, I'm looking at the operating income. I'm looking at the tax rate staying the same. And I'm looking at the EPS number you've given. It seems to imply that you're going to be floating this debt for some extended period of time. Can you give us -- in other words, interest income -- or, interest income will be much lower or lower than what we would have otherwise modeled for the year. Can you --?

Yes. Well, it has to be John, because fundamentally, I'm either using -- I either don't have the cash invested at low rates for interest income, or I pay some interest expense. As we've modeled the dilution that is -- that's part of it. Other -- had I not made that investment, I would have done something else with the cash, or I wouldn't have been paying interest expense. So, it is modeled in for the year.

Okay. And then, you talked in the call about having met early, some of the hiring targets for specific needs in the sales organization. Can you elaborate on that, and then also identify for us or describe for us what some of the remaining hiring targets are for 2007 that you still have yet to fill?

Right. Well, what I would tell you is that if -- looking at the quota-carrying headcount in the sales force, we went into '06 at right around 140. It was a hair under 140 quota-carrying heads. That was excluding Target. Excluding Target again, we're probably starting out the year at 152 plus or minus.

And we probably have a number of sales folks -- another handful or so of folks that are what we call sitting on the bench. That is, they're not carrying a quota yet. They're sort of in -- a training mode, if you will, ready to step into a sales role. So, that's one area where we've made investment. And we've added those heads this year earlier in the cycle than we have in the past. So, that's number one.

On the services side, I don't have the exact number, but I believe we've added somewhere in the neighborhood of 25 to 30 heads in the professional services area, most of which will be billable. But, they're not very -- they're not typically heavily billable in Q1. Then, we have added some additional heads, as I already alluded to earlier in our product development area.

I don't have the exact headcount there, but it's a handful or so that we've added there. I believe it's seven or eight. I don't have the exact number, but we'll be adding some more heads there also. And we'll be adding more heads to our billable headcount for services as we move through this quarter and into Q2, as we prepare for our big third quarter and heavier second quarter billings for our services business. That's about as much detail as I can give you at this point. Hopefully, that's helpful.

It is, thank you. And then, just one last question. We're a couple of weeks beyond at this at this point, but can you give us your updated thoughts on the Convio/GetActive merger, if you will, in terms of how that impacts or doesn't impact your thinking around NetCommunity and the opportunity you have in the Internet fundraising space? Thanks.

Clearly, it's not my place to comment on the wisdom or whatever -- or not of another organization's merger. What I will say is that, very clearly, both of those organizations are worthy competitors. And they both continue to focus on a segment that we find very attractive, and I think that probably it's going to make the year a little more interesting. But, that's what American business is about.

And we'll take our next question from Robert Stimson with WR Hambrecht.

Hi, Bob.

Hi Marc, hi Tim. How are you tonight?

Hey, Bob.

Hey, just -- Tim, not to belabor the point, I want to kind of pick up with what Brent Thill was asking. When you guys come out of '07, what margin rate will you be tracking out going into '08? Because this year you're coming at it in 29% on '06. And I've got you probably at 27%, 28% on '08. Now, I'm away ahead of myself. I'm just saying, are you going to get back to that peak margin of 29%? Or does the Target acquisition kind of change that mix going forward?

Well, I think you're --.

I'm away ahead of myself, so I'm just curious.

Yes. I think my comments earlier about -- let's set Target aside for the moment.

Yes.

Without Target, our guidance implies a non-GAAP operating margin in '07 at the midpoint of the range of right at around 27.5%.

Okay.

So, right in our -- consistent with our goal of 27% to 28% non-GAAP operating margins. If and when we can get back to 29%, I don't know. Our long-range target has always been 27% to 28%.

Okay.

So, that's that part. Now, in terms of Target, we end -- they end up diluting our margin by two and a half points in '07. I'm reluctant to get into specifying a target for '08 at this point. The only thing I would say is we do expect them to make -- to provide accretion in our overall performance as we exit or as we move into '08. So, the margin with Target should improve, obviously, as we go from 2007 to 2008. So, that 25% margin at the midpoint with Target should get somewhat better as we move into 2008.

Okay. And if you had to reconcile -- just bear with me, if you had to reconcile without Target to 29.1%, to say the midpoint of 27.5%, again non-GAAP without Target --.

Yes.

What do you think the differential is? What went up in the expense structure to have the margins go back down? Is it just mix on license software, or other investments that you guys are making in the business?

I think the principal place where you're going to see change in our overall margin of where -- the look of our margin is going to be in a couple of places. Number one, in R&D, we've said very consistently that we're going to have to make some more investments in R&D. I think that's very clear.

The second thing that I think, and I've said this before at the end of Q3 is, I think we're looking at higher rates or costs percentages in sales and marketing. And I think the difference here is as you know, typically in the past, we haven't spent a lot on marketing dollars. And I think they can really -- if you're looking at with some of the initiatives we have underway, we're actually going to have to spend a little bit on marketing this year.

As for gross margin, I don't -- I still think we're going to be in the 70% neighborhood. It could be half a point one way or the other here. But, those are the two big ones, would be R&D and sales and marketing.

Okay. And then just a housekeeping item for me, what's the average share count you should -- we should be assuming for '07?

I think basically, we've been using 40 -- 44.5, I believe.

Okay.

45, 44.5 to 45, somewhere in that range.

Okay. And then, the net/net on the add-back from your NOLs, about $8 million on the core business and add back about $1.5 million for Target. So, you've got about a $9.5 million add-back --.

Yes. Well, you won't get the full $1.5 million in '0 --.

7?

Five -- or I mean '07, excuse me, because we actually have to pay a little tax as part of this deal.

Okay.

I just -- for conservatism, I'd just use the $8 million for now.

Okay. And then, that comes back on '08?

Yes. In '08, you get the full $1.5 million.

Great, thanks a lot.

Okay. Thank you, Bob.

We'll take our next question from Philip Rueppel with Wachovia Securities.

Great. Thanks, and good afternoon.

Hey, Phil.

A couple of questions, first, you mentioned a couple of times about the mix shift to larger deals on the software license side. Does that mean that a typical quarter today is now more back-end loaded, meaning that more deals closed in the last month or last week? And if so, as you forecast '07 or future periods, are your -- have your assumptions for close rates or probabilities, given your pipeline, changed at all?

The loading isn't necessarily going that much more towards the end of the quarter. We actually did -- you can imagine, we looked into this when we -- with the last quarter. And it turns out that sort of the same amount that was in the end of a quarter or even in the end of any given month, because much of our organization is transactional. And there's month-end incentives for much of the sales force.

There's a certain percentage that happens in the last week of every month, and there's a certain percentage that happens in the last two weeks of the quarter. And those numbers haven't changed all that much.

So, that was that. Sorry, I missed the second half --.

Well, the second half was just -- given the greater volatilities, your assumptions or how you forecast, given the pipeline, is it more conservative today than it was, say, six months ago?

Yes. I can say that I was tempted to get a little more conservative after finding the triple-witching hour last quarter. But no, I can honestly say that we're trying to do exactly the same thing we've done before. And I don't believe that you can create guidance based on stalling for every single thing that can go wrong and then trying to make sure it's in your range. Inevitably, you're going to end up outside of your range once in a while. I hate it when it happens, and I especially hate it when it happens in the downside. But, we really didn't change that very much.

It would have been tempting to have spread the range out as well, and we didn't do that either. So no, I feel pretty comfortable that we're going on. And the other thing is that over time, this is going to be less of a percentage issue for the overall revenue projection for the company, because the percentage of our business that is subscription, including software subscriptions and including hosting of our software applications, is going to keep increasing relative to the rest. And so over time, I think this becomes a less of an issue progressively.

Okay. And one final question just on sort of the initial read on the target acquisition. You talked about customer feedback on product functionality and overlap. How about on cross-sell opportunities, has there been any initial interest from customers of either company on the other products from the -- could be cross-sold?

Yes, certainly there's interest. I'd be -- I can't claim that we've actually sold anything incremental yet. But, I'll give you a couple sort of examples. Target has a very -- has a significant international organization that has some high-touch fundraising -- does some high-touch fundraising. And they seem -- and we've been talking with analysts -- a consultant that works with them. And they're very interested, because the people that do the high touch would really like something that looks like The Raiser's Edge.

And so, as Chuck and Lou look through the road map, when we can offer them an integration -- connection between the Team Approach at headquarters and The Raiser's Edge for the major gift people, there'll be a deal there that wasn't there before for us, and it might not have really been a deal for Target as well.

I've clearly seen -- in the other direction, I've clearly seen some organizations who have -- are committed to in this particular case, choosing enterprise fundraising so, the Blackbaud product that was code-named Galileo, but very, very interested in understanding the benchmarking and cooperative database offering that Target Analytics has, because -- and it's a much larger database size than we've done.

And it also -- that gives them the benchmarking capability against a different peer group. So, it's an international organization that does family human services. They really have people who have made a decision that our product set is the right set, but there are analytics there that will be sold. And so, in the probably -- in the dozen or so customer contacts that I've had at the very large level, I would say that maybe a quarter of them had what I would call an immediate need or opportunity that we could fulfill in a relatively small number of months or maybe a couple of quarters.

And we've had universal positive feedback in terms of this is just a very smart thing for you to have done in the large customers, I mean. The small customers, it doesn't impact. But, the large customers basically say, "Now, I -- my decision making is easier. And I believe that I'm going to get better value on it. As my database integrates over time, the high volume and the high touch databases connect and then integrate over time."

Great. Thanks, very much.

Thanks, Phil.

Thank you, Phil.

We'll take our next question from Kirk Materne with Banc of America Securities.

Yes, thanks very much.

Kirk.

I guess Marc or Tim, can you guys comment, I believe previously you had discusses 2007 as a time you'd sort of give an update on what your plans were in the international market. Does the acquisition of Target change that one way or the other in terms of being able to -- do you have to focus on that near term before giving some broader thoughts on the international market? Just any comments on that would be great.

No. I'm still going to hold to my timeline that I'll give you a story about that between now and the end of 2007. There's no reason to change that. We're well down that path. We've, as I've mentioned I think before, put an international product management person on the project. We've done a lot of research, and we've gotten some hypotheses, relative to the market opportunities and sizing.

One of the things that -- actually two things that the Target acquisition will actually -- will help us accelerate the decision-making process. First is, Target's done some work for a couple of their very significant customers, this is the software side, on how do you do multi-currency and multiple currency for the same transaction in a very rigorous way?

So, someone in France donates a euro to a charity office in the UK, which accounts in pounds with a headquarter in the US, which accounts in US dollars, you've got to keep track of those exchange rates on a daily basis and so on, plus all the bank transfer stuff. But, Target's actually further down the road than we are in terms of that particular sort of -- some high transactional ability.

So, from a technical perspective and from a market requirement [inaudible] perspective, we've probably accelerated a little bit in our ability to implement. So time arising for the decisions, the same, maybe some help in terms of implementation. By the way, there are some big charities in the UK who are -- who would -- Target hasn't really told there in terms of volume. From the synergy question that was raised earlier by Phil, there's some opportunity in the UK for us to use the Blackbaud office to help Target accelerate their sales there.

Super, that's all I had. Thanks, very much.

Thanks, Kirk.

Thank you, Kirk.

And ladies and gentlemen, we have time for one further question. It comes from John Neff of William Blair.

Hey, guys.

Hey, John.

Hey, John.

A question for you, how much Financial Edge-related services revenue incremental now that you're -- was incremental to 2006, based on getting rid of the value-added resellers?

Tim is going for his book, so I don't know that number off the top of my head.

Well, it was substantial John, because as we said -- . And I can't say exactly on the revenue side, I can only say in terms of the sales of Financial Edge, what -- how big was the services component here. As we said, the growth in Financial Edge year-over-year for the solution Financial Edge was in the 20% range. And I would tell you that the vast majority of that all came from services. The actual software component really didn't have any kind of an increase. It was all from services. So, we feel great about that. It was still very good, but we didn't have much growth in the -- we didn't have any growth on the software side.

Okay, great. They said one more question, but I'll throw one more in and then I'll let you go. But, is it a question -- again kind of dove-tailing on the last one, international revenue, what was that as a percentage of total revenue in the quarter? You had made a leadership change in that division a quarter or so ago. I just wanted to know how that's going and any other color you could provide? Thank you.

The contribution in the fourth quarter from international was roughly about 14% of revenue. It has quarter-to-quarter and actually for the full year, sort of fluctuated between 13.5% to 14%. I think for the full year, we finished just a hair over 13.5%.

Great.

And on the leadership change, I'll let Marc comment.

I've -- you're probably talking about the leadership change in terms of the [up] and the BB, Blackbaud Europe, where Martin Jervis came on towards the end of the summer. And I -- we're very pleased. He's certainly helped us. We've moved down to London, which is helping us as well, from Glasgow in terms of the sales office part of our business. And I'm seeing a higher level of customer satisfaction and some -- and a building pipeline. And I think that's all good.

Great, thank you.

Thank you, John.

Bye, John.

And Mr. Chardon, I'll turn the call back over to you for closing remarks.

I'd just like to close by thanking everybody for taking the time to come listen to our call. And I'll look forward to talking to you individually on the road in the next couple of weeks for those of you who are there. And otherwise, we'll see you next quarter. Thank you.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.