Blackbaud Inc (BLKB) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Blackbaud second quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS)

I would now 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 second quarter 2007 results and hear further about the acquisition of eTapestry, which we also announced this afternoon.

With me on the call today is Marc Chardon, President Chief Executive Officer. Marc and I will make a few prepared remarks and then we'll open the call for 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 could 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 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 I'd like to turn the call over to Marc, and then I'll come back a little later to give some further details regarding our financials.

Marc?

Thank you Tim, and my thanks to all of you on the phone for joining us on the call today.

We were quite pleased with our performance in the second quarter, which was highlighted by strong revenue growth that was above our expectations and profitability that was at the high end of our expectations. The second quarter was balanced across our core and new solutions, and it was encouraging to see an increase in our pipeline and continued improvement in [closed REITs] and overall execution by our Enterprise sales group, combined with solid performance from our traditional mid market sales teams.

While these were the primary drivers of our solid short-term performance, we're also very pleased with the progress that we've made against our long-term growth objectives. The Target Companies continue to meet our high expectations. And we closed a very important deal with a large international organization to be the secondary adopter of our recently released Enterprise CRM offering. And we're enthused with the additional prospects we see for that product.

We've moved forward with the implementations of our direct marketing solution. And today we announced the acquisition of eTapestry, a leading if not that leading provider of on-demand fundraising solutions.

As is the case with the acquisition with the Target Companies, we believe we will be able to accelerate the time frame to become a market leader in this high-growth early stage market opportunity with a proven company that is highly complementary to Blackbaud's capabilities and our market focus.

We're optimistic about our outlook for the remainder of 2007 based on solid market demand and high levels of execution across our organization. This is reflected in our increased guidance for the year. We're even more optimistic about the long-term potential based on the high levels of interest we're seeing in our new growth initiatives and our first major entry into the on-demand market.

Now let me turn to the details of our second quarter performance. Total revenue of $64 million grew 32% on a year-over-year basis, exceeding the high end of our guidance by approximately $1 million. The majority of the revenue upside came from license revenue, which grew 19% year-over-year to $11 million.

Subscription revenue came in at $5.5 million, which is an increase of 125% on a year-over-year basis. We also generated solid growth from both services and maintenance during the first quarter, with maintenance growing --

Second quarter, actually

Sorry about that. I spaced out there.

We also generated solid growth of services and maintenance during the second quarter, with maintenance growing 16% year-over-year and representing the largest component of our total revenues; service revenue growing 42%, representing the second largest component of our total rev.

Now, I'll give you some more insight on what's driving the majority of our near-term growth and financial performance and then I'll go on to discuss the progress we're making relative to our long-term growth initiatives.

Beginning with the near term, during the second quarter we saw solid contributions from both our core and new solutions. The combination of Raiser's Edge, Financial Edge and Education Edge, our core solutions, represented approximately 65% of our total sales during the quarter.

Their percentage increase was double-digits compared to the previous year; backed by that strong market leadership position in each of these core solutions and they continue to open the door for us to sell additional products and services over time.

The Raiser's Edge remains the industry's leading fundraising solution and the primary driver of the sales of our core solutions. As is typically the case, RE was a primary component in nine of our top ten software deals in the quarter. Coupled with the very strong first quarter, RE finished the first half of the year with very solid total sales growth of over 20%, which is the best performance in several years.

That notwithstanding, with the increased diversity and success of our total solutions portfolio, Raiser's Edge is now less than 50% of Blackbaud's total sales.

Within our core solutions it was also encouraging to see strong performance from Financial Edge, with a growth rate in software and total sales that was second only to our rapidly growing NetCommunity offering.

In the education space, our traditional Education Edge product made a solid contribution to total core solution sales as well.

And a new offering that we've not discussed previously -- made a nice contribution in both of the past two quarters as well -- that is to say our Student Information System for small colleges. It's still early days and we're proceeding with care, as we do with all of our initial releases of brand new solutions.

That said, after only two quarters of availability, we're surpassing our expectations.

The small college Student Information System solution is one of several higher-growth offerings included in what we classify as our new solutions. These collectively represented just under 35% of our total sales in the quarter, a record level. And they produced year-over-year growth of well over 50%. Even without the large Enterprise CRM deal that I mentioned earlier, sales growth for our new solutions would still have been over 40% in the quarter.

Among our new solutions, the Internet offerings led by NetCommunity achieved the highest year-over-year growth rate in the quarter. Year-to-date it's grown over 100% compared with the first six months of 2006. The rapid growth of NetCommunity is being driven by the increased use of the Internet by nonprofit organizations to drive communications with their constituencies and also to our significantly improved ease of use and functionality, as well as the integration with Raiser's Edge. During the second quarter NetCommunity was a component in four of our ten largest software deals.

Finally, sales of our various prospect research offerings, captured under the name Blackbaud Analytics, showed solid growth for the fourth consecutive quarter and represented the second largest component of our sales of new solutions in the quarter.

Patron Edge was also quite strong and represents the one new solution that's often sold on a stand alone or lead sale basis. In these sales the value of the PE software alone is frequently well in excess of $25,000. In fact, the average total deal size for Patron Edge was approximately twice that for the overall company during the second quarter.

Our overall average deal size increased slightly from the high $30,000 range to the low $40,000 in the quarter. When Blackbaud went public only three years ago, the company's average deal size was in the $20,000 to $25,000 range, which shows our significant progress in bringing new solutions to market and our success in serving larger nonprofit organizations and in building out the necessary sales and services capabilities to do so successfully.

It was not just one or two deals that drove the average increase in our deal size, by the way, we closed more than 130 deals in which the total solution value was north of $50,000. And, as with Q1, this represents an increase of more than 40% compared with the prior year period.

One of the key factors impacting the increase of our average deal size over the past couple years has been the successful build out of our Enterprise sales capability. Last quarter, I mentioned we were starting to see the benefits of the reorganization and other process enhancements we've made during 2006. And I'm please to share with you that the Enterprise sales group just had its best quarter since I joined the company 20 months ago. There is still further improvement to be made, but we have a solid and growing pipeline of opportunities that provides with confidence looking ahead.

In addition to the material improvement in our day-to-day execution in Enterprise sales, it's very encouraging to see the continuing strength and productivity of our traditional mid-market sales group. We have spent considerable time and energy over the past year improving our execution in this area of our business, and we're now seeing the pay back in the form of more consistent performance in growth.

I have a high degree of confidence in the executive leadership of both our Enterprise and mid-market sales teams. These leaders have several decades of combined experience in sales, including sales leadership positions at companies such as JD Edward, Dunn and Bradstreet Software, and Nielsen/Net Ratings.

Their capabilities and the strength of the teams that they lead are the drivers of the strong growth and improved execution we're seeing in both parts of our business.

I'm confident that we can continue to build upon the high level sales execution we delivered in the second quarter.

I would now like to discuss the progress we're making in the execution of our long-term growth strategy. To begin, we remain very pleased with the momentum of our business at the Target Companies, which has not skipped a beat since the acquisition in January of this year.

On the Target Software side, we closed a sizeable subscription-based deal with one of the more recognizable health and human services nonprofit organizations to support their high volume [great] marketing progress. This was a multi-year, multi-million dollar deal.

Now, as a reminder, Target Software's business model is based on a smaller number of high-end, very large database deals where sales cycles are usually longer and deal sizes are larger, contracts are multi-year in nature, renewable, and hence they are recognized ratable.

In addition to this transaction, we saw two existing Target Software customers transition from perpetual licenses to Target subscription-based service group services. This is not altogether uncommon, as approximately 20% of Target Software's perpetual license customers have done the same thing over the past several years.

This shows the value of the service-bureau solution offered by Target Software and the market clearly respects our high level of domain expertise. And many of the nonprofits are attracted to the service-bureau model as well, particularly for their high volume direct marketing programs.

In Target's Analytics business we have started to see some nice synergies between our two companies, including some successful efforts in international markets. We've already closed business with Target's Analytics offerings in Australia, and we are seeing good interest in the United Kingdom market as well.

Both of these are areas where target had no presence prior to joining Blackbaud. In these particular deals we sold Target's benchmarking services, which enabled nonprofits to compare their execution of direct marketing programs with the industry averages in order to assess the effectiveness of their current efforts and provide a basis for continuously improving their fundraising processes.

This area is quite strategic for Blackbaud because it demonstrates our domain expertise and thought leadership, and that's a clear advantage when seeking to serve the large nonprofits.

Another highlight of the quarter was the user group meeting for Team Approach for Target Software. They enjoyed record attendance. And the buzz regarding Target's combination with Blackbaud and the integrated product capabilities that we are planning and delivering was very positive.

The meeting also gave us an opportunity to hear directly from customers concerning their priorities, and as a result, while we had originally planned on first delivering a comparable level of integration between NetCommunity and Target Software to that which we announced between Target and other smaller niche Internet software providers, customer feedback at the Target Software user forum indicated that this was not a high priority from their perspective.

So as a direct result, we currently plan on releasing the new stand alone decoupled version of NetCommunity in the first quarter of 2008, as we had originally planned. That release, which will also have functionality enhancements, will be a diversion that's integrated with Target Team Approach solution.

Customers also expressed a very strong preference that we focus our efforts on the next major release of Blackbaud Enterprise CRM, which we plan on delivering around the second quarter of 2008. In addition to further improving the functionality available on the platform, we plan to incorporate the major [giving] functionality that Target had previously planned -- that's previous to the acquisition -- and committed to customers for the next release of Team Approach.

This is the second major milestone that I described on our last call, when we reviewed the combined Blackbaud and Target product road map. This milestone remains in tact and on schedule.

On the topic of Enterprise CRM, one of the major highlights in the second quarter was the signing of a very important deal with Heifer International. Heifer International is based in Little Rock, Arkansas, and their mission is to work with communities to end hunger and poverty and to care for the earth. They do this by providing livestock and agricultural training in countries around the world.

Heifer is the second early adopter of our recently released Enterprise CRM offering. And they've been a small Blackbaud Analytics customer in the past. And we've been actively engaged with them for several years, working to determine their critical needs in a fundraising solution and how we could work more strategically together. In the end, the answer was Blackbaud Enterprise CRM.

This is an ideal solution, given the large geographically distributed nature of their operations and their need for an effective solution that all their chapters and affiliates can use in an easily accessible and cost-effective manner. This is one of the five largest deals in the history of Blackbaud, and it's worth pointing out that none of the revenue related to this deal was recognized during the second quarter. It's something that we will recognize over time starting in this, the current quarter of Q3.

From an overall perspective, we're very pleased with the level of interest Blackbaud Enterprise CRM has raised. We have a rich pipeline of opportunities, and both customers and prospects continue to express real interest. Our goal now is to start one or, at most, two of these major implementations on a quarterly basis, at least through the end of this year, as we work on owning our project delivery processes in this new and highly strategic area.

Customer interest is well in excess of this, and it is more important to manage which customers we contract with at this point than it is to prospect for more interested customers.

We're on track to meet our goals for Blackbaud Enterprise CRM and direct marketing during 2007 which, to reiterate, is to win a handful of customers for both, be successful in the implementation of both solutions, and learn systematized best practices positioning the company to take these solutions to market more broadly in 2008 and beyond.

I would remind investors that these solutions are not, and were not ever material to our 2007 forecast. But the continuing positive customer response increases my confidence that we're on the right track for the long term and are tapping into a big market opportunity.

I'd like to finish by discussing our other announcement from today, that's to say our acquisition of eTapestry. eTapestry was founded in 1999, and they developed one of the first, as I said if not the first, true software as a service offering built especially for the nonprofits.

Their flagship offering is the highest such fundraising solution that's provided in an on-demand environment. And it's easy to use, easy to deploy and maintain, and it's sold on a subscription basis.

They have more than 3,000 customers for their on-demand services, with databases that range from several hundred donors per organization to more than 300,000.

There are several key reasons to support this acquisition. First, it provides Blackbaud with a solution built from the ground up delivered on an on-demand model. From a long-term perspective, we believe that software as a service will grow in importance, actually continue to grow in importance. With eTapestry Blackbaud gains a proven solution, a large customer base and a company with a solid track record of growth.

Second, it expands our adjustable market opportunity. Now, eTapestry's on-demand offering is ideally suited for smaller organizations interested in an easy-to-deploy and relatively low-cost offering, as well as mid-sized nonprofits interested in stand alone fundraising solutions that's deployed on an on-demand model. Now, these are both areas that aren't currently addressed by Blackbaud's flagship fundraising solution, The Raiser's Edge.

Third, the acquisition adds significant domain expertise to Blackbaud. On a combined basis, the three founders of eTapestry have spent more than 50 years helping nonprofits implement and use fundraising software, and they are true pioneers in bringing on-demand solutions to our marketplace.

And finally, it adds another high growth subscription based revenue stream from an on-demand service offering. The combination of eTapestry, Target Software and Blackbaud's existing subscription revenue sources represent the highest growth revenue (inaudible) in our business and they add our revenue [predictability] and to our [visibility].

In summary, we're very positive about the direction of our business. Our second quarter growth and profitability was strong. Our diverse sales channels are executing at a high level and demand remains strong both across our new and our core offerings.

Integration of the Target Companies has gone better than any acquisition I've participated in my 25-year career in the technology industry. And finally, we're seeing a high level of interest amongst customers and prospects in our new growth initiatives and we have just expanded our market opportunity by adding a high-growth recurring revenue stream with our acquisition of eTapestry.

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

Tim?

Thanks, Marc.

I first want to focus my comments on providing you with some more details regarding our second quarter operating results, then I'd like to discuss the financial details of the eTapestry acquisition, update our guidance for the next quarter and for the full year 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. As Marc mentioned, total revenue came in at $64 million, which was up 32% on a year-over-year basis and above the high-end of our $61 million to $63 million guidance range.

Within total revenue, Blackbaud's traditional operations generated $58.3 million, an increase of 20% on a year-over-year basis, while the Target Companies contributed $5.8 million in total GAAP revenue. Target's revenues, on a pro forma basis, without the deferred revenue write down under acquisition accounting grew in the mid-20% range on an apples-to-apples basis.

With two quarters now under our belt -- a full quarter of Target results for investors to judge their revenue run rate and our previous guidance of Target's expected contribution for the full year -- this will be the last quarter that we will explicitly break out their contribution.

Turning to license revenue, for the combined the company license fees came in at $11 million, an increase of 19% year-over-year, and $700,000 above the high end of our guidance for the quarter.

It should be noted, however, that included in the license revenue was an unusual sale of some additional seats by Target Software to one of their largest traditional software customers. This transaction was not expected until early 2008. Without that component, software licensing that is essentially stand alone Blackbaud would have increased 17% for the quarter and 14% for the year to date.

Subscription revenue came in at $5.5 million, an increase of 125% on a year-over-year basis, and 16% on a sequential basis. A factor in the strong sequential growth is the fact that we included a full quarter of Target's revenue in the second quarter, while it was only a stub period in the first quarter.

And the majority of Target Software product revenue, as we've alluded to before, goes through the subscription revenue line, with only a small portion going through license revenue.

Without the benefit of the Target acquisition, subscriptions still would have grown by approximately 50%.

On a year-to-date basis, Blackbaud's overall subscription revenue is slightly more than half of the license revenue line, and with the acquisition of eTapestry, the two should converge even closer, with subscription remaining the highest growth portion of our revenues.

On the services side, revenue came in at $22.2 million during the second quarter, representing strong growth of 42% on a year-over-year basis. Maintenance revenue was again the largest component of our revenue, coming in at $23.2 million, an increase of 16% on a year-over-year basis.

We continue to enjoy maintenance renewal rates in the mid-90s range, which is a testament to our customer satisfaction and the strength of our technology.

To give investors some further insight into how Target's inclusion impacted our various revenue line items, of their $5.8 million approximately 49% was in services, 43% was in subscription and maintenance -- with subscription being the majority of that amount -- and the remaining 8% was split between other and license revenue.

Turning now to gross profit, we generated $42.4 million in non-GAAP gross profit in the quarter, representing a gross margin of 66%. This was an increase of 1 percentage point from the first quarter, but is down from 71% in the prior year's second quarter.

As we described last quarter, a sizeable portion, approximately 2 full percentage points in Q2, of the year-over-year decline in the gross margin relates to the inclusion of Target's results, as they had a lower gross margin compared with Blackbaud stand alone. As we've said before, this will simply take time to increase as their on-demand service offering scales.

We did, however, see an approximate 400 basis point improvement in our services gross margins compared to the first quarter, but we still have a good bit of work to do to get our increased services staff trained and on to billable projects.

Also during the second quarter, one of our largest projects started later than we had anticipated, which had a slight impact also on our services revenue and margin for the quarter. We currently expect to see services margin improvements in the second half of the year in the range of two to three percentage points.

Looking at operating expenses, there really weren't any surprises for the quarter. Our total non-GAAP operating expenses were $26.2 million, or 41% of revenue. This is a decline of approximately 100 basis points compared to the prior year's quarter, and it is a decline of approximately 400 basis points from the first quarter of 2007.

Non-GAAP operating income, then, was $16.2 million, ahead of our guidance of $15.3 million to $16 million, and representing a non-GAAP operating margin of approximately 25%, which is an improvement of approximately 400 basis points from the first quarter and in line with the margin percentage we guided to for this quarter.

The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP net income of $9.7 million and non-GAAP fully diluted earnings per share of $0.22, based on diluted shares outstanding of 44.7 million. Non-GAAP EPS was at the high end of our guidance range of $0.20 to $0.22.

I'm going to say a little bit more about this in a moment when I get to cash flow, but just a reminder here. We fully tax our non-GAAP EPS amount, even though the company is not paying taxes at any approaching the statutory rate because of our deferred tax asset and other tax benefits associated with this year's business acquisitions.

The point here that I want to stress is that EPS, even on a non-GAAP basis, does not, in our view, show the real ongoing cash earning power of our business.

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

That said, we appreciate that investors also need to analyze our results on a GAAP basis, so we have provided a full tabular reconciliation of these GAAP results and non-GAAP results as part of our earnings release.

In summary, the reported GAAP net income was $8.2 million in the second quarter of 2007 compared with $7.6 million in the second quarter of 2006. And our GAAP fully diluted earnings per share were $0.19 compared with $0.17 in the prior year.

Let me now turn to cash flow on the balance sheet. We ended the quarter with $17.7 million in cash, up from $16 million at the end of Q1. The increase was driven largely by cash from operations, offset by $3.7 million in spending under our capital management program and $5 million in debt repayment.

We continued to generate strong cash flow from operations in the quarter of $11.8 million, but this was down from $16.4 million in cash from operations generated in Q2 last year. However, all of the decrease was due to tax payments.

As I've noted before, in 2005 and 2006, Blackbaud paid little or no federal or state income taxes, principally as a result of the tax benefits arising from stock option exercises by the company's former CEO, and also the annual benefit arising from the company's deferred tax asset.

Beginning in 2007, however, the company is paying income taxes, albeit at a rate substantially below statutory rates because of the ongoing benefit of the deferred tax asset. In addition, during the second quarter the company was required to pay $2.9 million to the state of Massachusetts in connection with the Target Companies acquisition.

If you exclude only the one-time tax payment associated with the Target acquisition, then year-to-date growth and cash from operations would have been approximately 14% with cash from operations generated in the first half of 2006. And this growth rate is higher than the year-over-year growth rate in non-GAAP operating income.

At the end of the quarter the company's deferred tax asset that I just alluded to had a balance of approximately 63.7 million. As a reminder, this asset adds roughly $8 million to our cash flow on an annual basis. And as we have indicated before, this asset is expected to continue adding to our cash flow at this level through 2014.

Also, in 2008 we'll begin to see the full effect of a similar tax benefit generated from the Target acquisition, which will generate annual cash flow in the amount of approximately a million and a half.

Accounts receivable at the end of the quarter were $46 million, an increase from 33.8 at the end of the prior quarter. $4.5 million of the balance at the end of Q2 was related to the Target Companies. DSO was approximately 41 days, in line with our target range of DSOs in the high 30s to low 40s. And total deferred revenue came in at $89 million, up 23% on a year-over-year basis.

Before turning to guidance, let me quickly provide some details on the eTapestry acquisition, as well as a summary of their financial profile. We've agreed to pay approximately $24.8 million -- and I should say the transaction, and you've undoubtedly read, has closed -- $24.8 million plus an additional amount of up to $1.5 million under a two-year earn out arrangement.

$12.5 million of the purchase price was financed through our new five-year, $75 million credit facility that we closed last week. In addition to providing us greater flexibility by virtue of its sheer size, the facility also generally has more favorable returns and less restricted covenants than our previous facility.

On an unaudited basis, eTapestry generated approximately $7 million in revenue during 2006 with a subscription revenue/services revenue mix of 65%/35%. eTapestry's gross margins have been in the low to mid 70% range and they were generating a very small operating profit.

We expect the transaction to be slightly dilutive to our second half 2007 non-GAAP earnings per share and neutral to slightly accretive in 2008. Not included in these estimates of dilution or accretion, however, is the benefit we expect to receive from eTapestry's 5.3 million tax net operating loss, which we expect to utilize over the next three to five years.

Let me now turn to guidance for the third quarter and full year 2007. For the third quarter of 2007, we expect total revenue in the range of $65.4 million to $67.2 million. Let me repeat that -- $65.4 million to $67.2 million, or a growth rate of around 31% to 35%, with a midpoint of 33%.

License revenue of $8.4 million to $8.9 million, or a growth rate of 7 to 14%, with a midpoint of 10.5 %, non-GAAP operating income of $16.3 million to $17.3 million, or a margin of just over 25% at the midpoint of the range and non-GAAP fully diluted EPS of $0.22 to $0.23. Within our guidance we've included an assumption that revenue from eTapestry will be approximately $1 million.

In addition, during the third quarter our estimate assumes eTapestry will be approximately a penny dilutive to our non-GAAP EPS results.

For the full year, we're now forecasting total revenue of $251 million to $254.3 million, or a growth rate of around 31% to 32.5%, with a midpoint of a little over 31.5%. License revenue of $36.4 million to $37.4 million, or a growth rate of 12% to 15%, with a midpoint of 13.5%. And we're projecting non-GAAP operating income of 60.1 to 61.9, or a margin at the midpoint of the range of just over 24%, and non-GAAP fully diluted EPS of %0.81 to $0.83.

Within our full year guidance, we're assuming revenue from eTapestry of $3 million to $3.4 million and a non-GAAP operating loss of $600,000 to $900,000.

So for the second half of the year our estimate assumes eTapestry will be dilutive by approximately $0.02 to our non-GAAP EPS results, with approximately a penny coming from operations and the same from the combination of increased interest expense or lost interest income.

Reflected in the estimate of the impact from eTapestry is an anticipated write down of deferred revenue spending from purchased accounting adjustments that will reduce second half revenues by $600,000 to $800,000. And as such, you can see that the acquisition would have been neutral as opposed to slightly dilutive to our second half non-GAAP operating income were it not for the deferred revenue write down.

Let me now finish with a very quick update on our two-part capital management program. The first element is our dividend program. Today we declared our third quarter dividend of $0.085 per share, payable on September 14 to stockholders of record on August 28.

The second component of our capital management program is our share repurchase initiative. During the quarter we did not repurchase any shares, largely because of a desire to conserve cash for the impending acquisition. However, earlier in the quarter the Board of Directors increased our share repurchase authorization by $35 million with no specific time frame limitation. Our total share repurchase authorization now stands at $41.2 million.

We remain committed to using our cash flow in these ways to enhance our stockholder value.

So in summary, the second quarter was very strong. The integration of the Target Companies is proceeding well. We're optimistic about our outlook for the remainder of 2007 which is evidenced by us raising our revenue guidance. And we're excited by the prospect of our new growth initiatives and the opportunity that we've added with the eTapestry acquisition.

With that, let me turn it over to the Operator, and we'll begin the Q&A session.

Operator?

Thank you. (OPERATOR INSTRUCTIONS)

Our first question comes from Philip Rueppel with Wachovia Securities.

Thanks and congratulations on the quarter.

A couple things -- one on eTapestry, could you talk about some of the milestones that we can look forward to, or the road map for products and potential integration with your higher-end database, potentially and/or what kind of cross-selling opportunities that gives you?

From a road map perspective, we don't have plans in the short term to do an integration between, or an evolution between, the eTapestry fundraising product and The Raiser's Edge or the Enterprise CRM. They're quite different products, they serve quite different markets.

And our road map was not on a collision path with the eTapestry product. So it's quite a different situation than the one that we had when we made the Target acquisition where the two products, Team Approach and ECRM, were basically going directly toward each other and would very quickly have had very similar functionality. Here our road map didn't cover these offerings in the near future. So it'll stay independent for quite some time, certainly for this year and next year.

That having been said, there are opportunities with the early release -- the early next year release of the NetCommunity stand alone product where we'll see an opportunity for the NetCommunity product and the eTapestry offering to work together and collaborate. We also have the ability with eTapestry to integrate with financial accounting in The Financial Edge for certain of our customers. And our Analytics offerings are of interest in any of the eTapestry customers as well. So those are the synergies that we see.

The market segments that we cover are really, in the large part, however, quite different and in the short term will be covered by the two different companies independently.

Okay, great.

And then second of all, you mentioned the large ECRM deal and nothing was recognized this quarter but it would be recognized over time. Is there anything different about that product in terms of revenue recognition? Will it be a standard, kind of, perpetual with maintenance type of product? And was that just the fact that these are early sales that have multiple delivery points et cetera?

The answer is that it was a perpetual license for this particular transaction, and your comments are right on point -- more or less has to do with the nature of the deal and the fact that this was an early adopter.

Okay, great.

And then my final question was just you had mentioned you saw some of the existing Target customers that had perpetual license move to subscription licenses. Is there still a meaningful number of those customers? And is that an opportunity you see going forward? Or is that just something that happens on an ad hoc basis?

Well, there are about half of the Target customers are still -- so there are about 80 Target Software customers, and about half of them have perpetual licenses still. And we see from time to time -- as I said, about 20% of the people who have ever bought perpetual licenses converted, so it's not a huge trend, but it's a regular occurrence. And I think that you'll see some more of that happen. But it's not something that I think will happen with the whole community. I think that there's still quite a segment of the population that does want to own the software and will continue to do so.

Great. That's it for me, thanks very much.

Thank you.

Thanks, Phil.

And next we'll move to Adam Holt with JP Morgan.

Good afternoon, this Nitin Doke for Adam Holt.

Hi.

Hi. I just had a couple of questions, I was wondering if you could share your thoughts on how the eTapestry acquisition fits with the Infinity platform, and your thinking behind the timing of the acquisition.

Well, the timing of the acquisition is we've done, it's acquired. So it was acquired actually on the 1 of August. The Infinity platform is a very different software architecture, both a Windows .NET based service architecture and the eTapestry platform has Open Source components and is UNIX-based in most of the platform. So it's a very different technology platform.

And as such they're different and independent and, as I mentioned earlier, will stay independent for quite some significant time. I fully expect the eTapestry offering to continue forward, to continue to evolve and grow independently of the Infinity platform.

Infinity currently is targeted underneath the Enterprise CRM product and the Direct Marketing product at larger customers. And so you'll see deals like the Heifer deal or the other large university or hospital systems, or large multinational or chapter-based service organizations. And that's really quite a different segment so I think they'll stay independent for quite some time.

I apologize if I wasn't very clear. When I meant by the timing of the acquisition, I meant with respect to you just completed the Target acquisition, you're still integrating it within your business, so I was hoping to get your thoughts around making another acquisition within that time frame.

Oh -- in terms of management bandwidth and so on. The Target acquisition is going really well, and so we're in line or ahead of the plans that we have. Management team has identified essentially what we have to do, and we know exactly what the milestones are. And so I'm completely confident that that's well under way and doesn't present anything sort of unknown.

And also, by virtue of the fact that eTapestry is an on-demand offering that targets a segment that we don't currently offer -- having them remain relatively independent represents a relatively low integration challenge. I mean, yes, we have to have financial systems to integrate and, yes, we need to build the right level of the cross-selling and so on, and we have to work through some branding questions -- not branding for the brand itself, but just the overall Blackbaud, the impact of that on the Blackbaud brand. But those are very minor integration challenges.

So I see very little stress on management attention, and we're very confident that this is something that can be accomplished easily.

Great. Is there any overlap between the Blackbaud customer base and the eTapestry customer base?

There's certainly an overlap. About -- under 5% of our sales in any given quarter are sold at the low end of the market. And of the 5% that we sell, a very small percentage are competitive situations.

You know we have -- this quarter that just passed for example, there were seven deals that we lost to eTapestry, so there is some overlap in prospects and customers. We don't see each other in the prospecting mode very much. I mean, yes we've gone traditionally to some of the similar shows like the Association of Fundraising Professionals or something, but primarily the kinds of people we talk to and the size and what they're looking for is different.

And often times we find that companies decide whether they want software as a service even before they get into market. You don't necessarily see them -- you know one team will see them and the other team would not have actually seen the same prospect.

And I would only add to what Marc said, and say that with respect specifically to customers who are actually using products, there probably are very, very few eTap customers who are using one of the other Blackbaud products like Financial Edge or NetCommunity or one of those products.

And a handful of Analytics customers are eTap customers.

And the other thing that we do have, however, is that you'll see several of the federated nonprofit organizations will have larger chapters will have Raiser's Edge and some of the smaller chapters will have eTapestry. So there are say Red Cross chapters with eTapestry just as there are many, many Red Cross chapters with The Raiser's Edge. And in fact at headquarters there's a Team Approach, just to put all three of the products in their respective place.

Great.

And one final question from me is, have you made any changes to your planning [exemptions] as a result of the sales transition for the back half of the year?

No. Do you mean in terms of what we're thinking about headcount and organization structure?

Right -- and coverage ratios and other sales metrics.

No. Given the fact that there is ones that overlap here, our plans for the rest of the year include continuing with the structure of our salesforce here with stand alone Blackbaud, and we would expect the folks at eTapestry to continue to move forward with their plans for the rest of the year. So we don't anticipate any changes in salesforce strategies at this point.

Great. Thanks for your help.

Thank you.

Thank you.

And next we'll move to John Torrey with Montgomery & Company.

Hey, John.

Hey, guys, thank you for taking the questions. You know a few questions for you on eTapestry. I see in the press release you gave a range in terms of the scale of donor records that eTapestry was addressing across its 3,000 customers. But can you give us any more information on sort of the absolute total number of records it was addressing to get an idea of the scope of some of the relationships at the eTapestry customer base?

I don't really even know the number of total donors that is managed by the whole thing. You know there are a very significant number of customers that fall in, sort of, the 1,000 to 5,000 donor range, and so below 500 donors is essentially try and, sort of, start growing up. And then you start getting into pricing by month when you get above 500 users.

And as I said, 1,000 to 5,000 records, that's somewhat smaller than a typical Raiser's Edge implementation on average, but it's not that much smaller than the low end of The Raiser's Edge. I mean, they overlap significantly. It's more a difference in how they want to buy and how they want - and, sort of, the level of integrations that they might want with other things.

As of today still eTapestry is quite stand alone and Raiser's Edge does, in many of our segments, like I said, the K-12 segment integrates with the Education Edge or [ticketing] integrates with ticketing. So it's more of a differentiation about how stand alone is simple and quick to implement and periodic to pay versus do you want some extra functionality that's not there yet and/or do you want integration without parts of the offering.

Okay. In terms of the customer base, again the 3,000 customers, roughly how many of those customers were added, say, in 2006? Can you give us any flavor on that?

John, I would say that the best way to describe that, and I don't know that this would be exactly right, but revenues for the last year grew above 30%. So in terms of customers, I don't know that that would be exactly right, but I would expect that that's probably not far off the mark.

Okay. And just to be clear -- I mean, I'm sorry because I'm just not particularly familiar with this company -- but are there more applications than sort of a core fundraising applications here at eTapestry that are important to understand?

Well, it's primarily a fundraising application. And it does integrate into other functionalities that you can sort of buy. Like when you buy The Raiser's Edge you can also by some sort of a la carte modules that go on top -- do you want to do mailing. Well, eTapestry's the same. You have a central fundraising database and then, if you want to do high-volume mailing or so on, you can buy an added service that's mailing, or you can buy the service of having a web page for donations and some web administration.

On the other hand, there is not anything that looks like Ticketing or NetCommunity or Accounting in that sense. So it really is fundraising and some modules and features and applications around fundraising -- like how do you do a donation page -- but it's not advocacy for example and so on.

And if you're going to do something like very advanced event management or membership tracking in the eTapestry offering, you do it by using some user-defined fields, but you don't buy a separate module, for example, that's really specialized in it.

So if you think of the difference between when you get involved in something like Hotmail or some other on-demand application, you get something that's relatively simple, relatively easy to get started with, which is one of the great attractions of the eTapestry offering. And at the same time, you get a little bit more of a one-size-fits-all because that's one of the ways that you keep the costs at the entry level and the simplicity and the ease-of-use level.

And typically you'll see, when you implement a Raiser's Edge implementation, quite a bit of -- there's consulting and customization and parameters that get set and configuration that happens in The Raiser's Edge, because people are looking for a little less one-size-fits-all.

Okay. One more, quick, question just so I can understand this as best as possible. I mean, this is roughly a $25 million dollar deal for a company with a, pretty, modest revenue profile today. What does this say -- or how can we think about what this says of your perceptions on this area of the market in terms of sort of a small to medium organization size, this particular delivery model for fundraising applications, et cetera it their strategic importance and perhaps their importance to those marketplaces today?

I would say, John, again, this was a business that, from a revenue standpoint, was growing pretty quickly. Modest, yes, I agree. They did about $7 million. Their run rate for this year suggests a growth rate of in excess of 30%.

And I think, as Marc has pointed out, and the thing I would emphasize here is that, if you look at what's happened is we rarely find ourselves competing with these guys. I would say that in terms of the overall impact in terms of our revenue, if you were to actually look at our sales, probably less than 5% of our sales volume would we have ever encountered them as a competitor.

So what it does for us is it really helps open up a part of the market that we haven't been able to get to with our offerings. And so this gives us an opportunity to add another piece of growth in our market where they tend to be customers that are smaller, but there's still a good growth opportunity there with a very attractive offering. And hopefully that helps a little bit describe what the attractiveness to us is here.

There's clearly a move in the overall software world to on-demand offering. And there's very clearly -- I think I've mentioned before that often times Raiser's Edge is not the first or the second fundraising application someone buys. I mean, you start with Excel or Access or something like that, maybe ACT. And then you might go to somebody like DonorPerfect or GiftMaker Pro in the past -- the campaign acquisition we made. This is a head-on focus on some of the first pieces of software that get bought, which is often times before a person's in the market for The Raiser's Edge too.

And that's an important strategic statement. I mean, people who like DonorPerfect are going to DonorPerfect Online. People who like Salesforce.com are going planning to have a place in the nonprofit world. And this on-demand perspective is definitely important; and also having a simple easy to use, easy to get into first step for people who are probably would not be at that time necessarily ready for a Raiser's Edge acquisition. To me that's a very important thing that I think I have mentioned a couple times in the past.

All right got it, thanks very much.

Thank you.

Thanks, John.

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And we'll moved next to John Neff with William Blair.

Hey guys, thank you, and very good quarter.

Hey, John.

Two quick questions, both kind of related. First kind of a big picture one, again, related to the acquisition is 18 months campaign target eTapestry, and this was an industry that for years had very little to no M&A activity among the more established companies, and now you've acquired three in 18 months.

So my question is, what's changed? Why are there now motivated sellers? Is it in any way an indictment on the ability to grow customer count organically? Thank you.

Thanks. I can't comment on why some of these things didn't happen in the past. I mean, in one sense Blackbaud was the one leader before I arrived. And so I'm not sure, with the exception perhaps of the SunGard companies that did some acquisitions of places like Advance BSR and so on. So there was a little acquisition activity that occurred.

But I just think that it wasn't the right time for whatever reason. I don't know that I can be more explicit than that. What I can say is that this is a set of people, the Target Companies weren't necessarily expecting to sell or wanting to sell, but I believe that the founder and I -- Chuck Longfield and I built a relationship that made us have a common vision for how together we'd serve the market better than we would separately.

And Jay Love, who was one of the founders at eTapestry, and I believe had a similar type of connection. And in fact Jay has also worked with Chuck Longfield, the founder the Target, in the past.

So it's a relatively small world -- and I will go back to Blackbaud's initial growth opportunity in 1997, because they did acquire a company called Mastersoft, which basically took the two leaders and combined them into one. That was a relatively significant acquisition. And the leader of that company at the time was Jay Love.

So it's a relatively small industry of committed people who've been around for quite some time. And I think now we've come to see that together we can serve the industry better than we would have independently. And I think that scale opportunity and that ability to cover a market with an integrated data model that goes from the Internet to the very large direct marketing, I've talked about that many times in that past. I think that that vision is starting to gain currency. And people actually believe it can be done.

John, the other thing I'd add -- just my two cents here in addition to everything Marc said -- I think you have to kind of take Campaign out of the mix here. Because Campaign basically was very similar to lots of acquisitions that Blackbaud had done in the past and is in the nature of a competitor roll up, if you will, where for whatever the reason the founders there thought now is the time to exit.

They were at the verge where they were going to have to make substantial investments in their product. And we felt there as great synergy and opportunity to take their base of customers and convert them to our products. And that was certainly a successful acquisition and was very similar to other stuff we'd done in our past.

The two more recent ones I would describe as somewhat more strategic in nature, certainly Target is without question. And I think eTap falls in that category as well.

And next we have Bob Stimson with WR Hambrecht.

Yes, hi Marc, hi Tim.

Hey Tim, if everyone gave guidance as detailed as you did, my life would be a lot easier in the world of sovereign. Maybe you might want to give a lesson to Oracle.

But anyway, a couple quick things. I want to hone in on the balance sheet real quick because I think one of the key things that Tim alluded to was kind of some of the revenues now going on the balance sheet. And when I look at the numbers year-over-year from the deferred revenue from 12 months ago, you guys were up about 26% year-over-year. So is that kind of a leading indicator of what you think growth could be top line for next year? How should we look at that number? And then I just have a quick follow up.

Well, you know me, Bob, it's way too early to get out the guidance numbers for 2008. But what I would say is still predominantly that deferred revenue is still driven heavily by maintenance.

But also, without question, you're now starting to see the impact of a higher proportion of our revenue coming through in the subscription line.

I would just reiterate what we said about subscriptions in the prepared remarks. You know, although we've had good growth in our license revenue the last couple of quarters, one of the important things is increasingly more and more of our software revenue is going to come through the subscription line, because that's what the Target model is and it's certainly is what the eTap model is.

And so part of that's what you're seeing on the balance sheet, but you're also seeing it very vividly in the subscription growth and it was over 125% in the quarter.

Got it. Now as a follow up -- and now I'm trying to reconcile cash flow. And when I look at your cash flow this quarter, which seems to me it's seasonal where you had a pretty big uptick in the AR which looks very similar to last year. But if you were kind of to hone down and give us a sense of what you think the cash flow guidance would come in at, or the free cash flow number for '07. Are you willing to take a stab at that for us just to give us kind of a range there?

No, but I'll tell you how I think you should approach thinking about it. I mean, I don't want to hone in on a number because I think, frankly -- it requires a little bit of work here. And so in thinking about cash flow, the way I think you have to approach cash flow is basically start with where you are with non-GAAP net income. And then wherever your estimates are coming out there for non-GAAP net income, I'd add back about $5 million for D&A, I'd add back $8 million for the deferred tax asset and then you've got to think a little bit about working capital.

Now, working capital last year generated about $7 million for us. I don't think it's going to be that much this year, but that's sort of the -- you know I certainly think we're going to generate some cash from working capital. And that's how I'd go about trying to approach that.

As I said -- just let me add one other thing -- I think when you look at cash flow from the cash flow statement, if you merely look at the comparison of this year and it's down slightly for the six months from last year, again, as I noted in my comments, we are a tax payer this year. We paid the $2.9 million for the one-time tax payment related to Target and we also made -- I think its $3.7 million of income tax payments, federal and state. And so without that cash flow would be up dramatically.

Okay. So and pro forma, what you'll do is take your cash flow, you'll basically pay off your short-term debt. And if you kind of had to look at where you think you'd come out at the acquisition time frame, you're not really going to be in a very big net debt position coming out of this year.

Well, it all depends on what I decide to do with my capital management program in the second half of the year.

Okay.

Absent doing something there, yes, that would be about right.

Okay, great. Thank you very much

And we'll move next to Brent Thill with Citi.

Thanks, good afternoon.

Hey, Brent.

Tim, as you look at the operating model, last year you obviously had peak margins. Kind of maybe lead us through how you're thinking about -- post these acquisitions, the margin structure of the company, and how quickly you think you can get back to that type of run rate.

Sure, absolutely, very good question. Look, I think that as you think about the business -- you know we've never specifically given a time frame on where we're going to get back to the margins that are sort of in our target range, which again I would remind everybody is that we really have targeted only an operating income margin, not specifically gross margin or any other -- or any other level. But we basically said, look, we want to get to a 27% to 28% margin. So we haven't given a specific time frame with that.

We clearly have the ability to generate margins in that range, but I think I'd remind investors that we're still in the early stages of numerous growth drivers. And we're making excellent progress on those. We've spoken today about some early adopters for some of those initiatives, and we've got an encouraging pipeline. Target is meeting and exceeding our plans, and we've just added the eTapestry acquisition.

So we're putting in place, I think -- we think, really solid plans and we've done solid implementation to generate that growth for years to come.

So as we think about margins and you think about the 27% to 28%, our view is it's probably not next year. You know we've guided to somewhere in the 25% range, we're not going to get back to 27% to 28% in 2008.

But Marc and I, and I think the management team here would be disappointed if we didn't make progress along the way.

The key thing for us is that, as we're looking at this and, as I said, we're driving with these initiatives to generate growth for the long term. We think it just would be foolish to try to squeeze another point or two of margin, while we're making these investments for the long term just to squeeze another point or two out of the operating model.

And, frankly, beyond that, you know all we're doing with the acquisitions that we've done and the use of our cash, 25% is a very attractive margin for everything that we're trying to accomplish here. But just to summarize, I think we don't think 27% to 28% is probably doable next year, but we'd be disappointed if we don't make some progress along that line.

And next we have Ross MacMillan with Jefferies.

Yes hi, just two questions. You mentioned Salesforce.com earlier, Marc. Could you just give me your perspective on how they're faring in the nonprofit sector? And maybe if you've had a number of conversations with Jay, I'm just curious to get what he's told you about them in market.

And then secondly, Tim, if you could just remind us of the deferred write down both on eTapestry and on Target, that would be great?

You know Salesforce is more noise than reality in the market for nonprofits right now -- I mean, truly in terms of real fundraising. And yes they have a number of smaller organizations that have made use of their free software through the Salesforce Foundation, but in terms of us seeing them and actually losing to them, it essentially never happens.

And that doesn't mean that sometime there won't be someone who builds an AppExchange application or two or three or five or seven on top of Salesforce, on top of their AppExchange, and that that someday will give us a concern. They're a worthy competitor, a great company, and they certainly get people's attention about this.

The application itself, without something built on top of it, is Salesforce automation. It doesn't have the depth of information necessary to build and cultivate relationships with major donors over time, and especially not to keep track of things like all the different family relationships between alumni and students and children and whatever for an educational institution or a grateful patient program for a hospital.

So I think they are very important to the world in terms of thinking about software as a service and how that brings that visible, but I don't think of them as a competitor at this point.

Ross, the answer to your second question, the deferred revenue write down, the estimate that we came up with, our early estimate for eTap was that it could be anywhere from $600,000 to $800,000 okay, which would flow through really in these two quarters. There would be, in our judgment, very little left that would flow into 2008, so it would be concentrated in these first two quarters.

When we did the Target acquisition, we estimated that that deferred write down could be as high as, say, $1 million. I think when the work was all said and done, we came in a good bit lower than that -- sort of something in the neighborhood of $500,000 to $800,000 -- I don't remember exactly what the number was. But we were able to come up with estimates that were supportable that would get us to a lower write off.

That would suggest that potentially maybe there's some opportunity in eTap as well, but I would prefer to be a bit conservative on that at this stage since it's still early days.

Next we have Kirk Materne with Banc of America.

Yes, thanks very much. Marc. With the eTapestry acquisition occurring today, can you just remind us in terms of your view on offering Raiser's Edge in a software service paradigm, and sort of how the current development program you guys are working on for the next release goes along with that?

Well, yes, I can, thank you. The Raiser's Edge, we've not given a date for the arrival of the Infinity platform base version of Raiser's Edge. I have said that it's very unlikely to occur in the next year to 18 months.

So in any case, having an on-demand version or a software as a service architecture version of The Raiser's Edge is quite some time out.

I do think that we will be evaluating the road map together as the two organizations learn. Right now the resources that are working on the impending platform are really focusing on the Enterprise CRM platform and the Direct Marketing, and taking the learnings from both the early adopter program customers as well the needs of the Team Approach customers into consideration.

So we're doing our best to ramp up our skills to do development in more streams -- not our skills but our actual number of engineering accounts. But right now the Infinity people are pretty much out straight on that side.

So there has been no stated plan other than that when Raiser's Edge comes it will be in a version that is hostable and then, therefore, could be delivered, and would have (inaudible) of these many applications, a smart client and so could then be accessed by URL.

It is quite a different model. It's still a somewhat rich client, because every time you look at it can download software onto your browser, whereas eTapestry is a pure like -- you point a browser at an application (inaudible) zero zero footprint application and it does represent needs for a different part of the market.

But that's how I think about it. There is not a plan now and I don't think we'll have anything to announce in the next two or three quarters. But I do believe that when we announce The Raiser's Edge plan that the road map will be made clear at that time.

Next we'll move to Tom Roderick with Thomas Weisel Partners.

Hi guys, good afternoon and thank you.

Hey, Tom.

I was hoping you could just maybe add a little bit of detail in terms of the new deal flow on the Direct Marketing side of the business, with particular regard to -- these seem to be some larger deals that got you to higher end of national nonprofit organizations. Is that providing you some additional exposure for other products? And how has the core business been since the acquisition there?

I'm not sure I understand the core business since the application. Could you expand on that a little bit? Maybe they cut you off.

So first Direct Marketing -- the Direct Marketing customers that have been sold represent sort of a cross section of the mid to large size organizations. So you know a large environmental organization, a hospital system, both of those with Raiser's Edge and BBNC customers, the first and the second Enterprise CRM customers. And so they represent sort of the cross-section of what you think of as an Enterprise sale for both the Raiser's Edge -- and most of the ECRM deals I would expect to have a Direct Marketing component.

They don't sell separately Direct Marketing itself, the [CRM] product does not sell independently of the database. There needs to be a database underneath it. And so we're seeing that being sold back to existing Raiser's Edge customers or, where as I said, with most of our ECRM we've not sold it in conjunction with the Target Team Approach application at this point.

I think you'll see customers waiting probably until we get down toward milestone three before you see the Team Approach customers considering using the Direct Marketing. There's sort of a user's interface to the Team Approach back end if and when that would occur.

So to sum up, I don't think there's an impact or a connection between the Target business. There's not really any sales to the core marketing segment because those are customers that are too small for the almost six-digit -- high five, low six-digit cost for a Direct Marketing implementation today. Most of the smaller customers with The Raiser's Edge don't have $100,000 problem that Direct Marketing is going to resolve for them. So it's Enterprise sales across both RE and ECRM.

And there are no further questions in our queue at this time. I'll turn the conference back over to you, Mr. Williams, for any final or additional remarks.

Well, all I want to say is thank you everyone for participating in the call today and we appreciate your continued support. And look forward to chatting with you at the end of the next quarter. Thank you very much.

Thank you very much, good day now.

That does conclude our conference call, we do thank you for your participation. Have a pleasant day.