Blackbaud Inc (BLKB) 2007 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Blackbaud Third Quarter 2007 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.

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 third quarter 2007 results. With me on the call is Marc Chardon, President and Chief Executive Officer. Marc and I will make a few prepared remarks and then we will open 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 can cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent annual report on Form 10K 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 would like to turn the call over to Marc and I will come back a little bit 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 pleased with the Company's overall performance in the third quarter, which was highlighted by revenue and profitability that were above the high-end of our expectations. Market demand remains solid and we believe our overall market opportunity remains largely under penetrated as evidenced by the majority of our larger transactions going to new brand new customers.

The momentum of our business associated with the Target Companies and eTapestry continues to be very strong. With each contributing to our better than expected revenue performance in the quarter. Equally as important, from a long-term perspective, we continue to be encouraged by the growing level of interest that we are seeing relative to our Enterprise CRM and direct marketing solutions.

Now, let me turn to the details of our third quarter performance. Total revenue of $67.8 million, grew 36% on a year-over-year basis and exceeded the high-end of our guidance. License revenue came in at a little over $8.5 million, which is up 9% year-over-year and just short of the mid-point of $8.4 million to $8.9 million guidance range that we provided for the quarter. As we've discussed in the past, our guidance range is fairly narrow in the license line.

And with the increase in our deal sizes over the last couple of years, the impact of just one or two deals will make the difference between the low end and the high end on license revenue in any given quarter, though it typically has little to no impact on our overall revenue with profitability.

It's equally important to keep in mind the significant growth in our subscription revenue, which grew 154% in the quarter to $7.1 million. This was the fastest growing source of revenue for Blackbaud entering 2007 and this trend has accelerated with the acquisitions of eTapestry and the Target Companies. It's not unreasonable to predict that our subscription revenue run rate may exceed the license revenue at some point in the second half of 2008.

We also generated solid growth from both services and maintenance during the third quarter. With maintenance growing 16% year-over-year and service revenue growing 55%. Tim will provide for the color in a moment, but I'd also note that cash from operations in the quarter was strong at just over $30 million, that's an increase of 18% over Q3 of last year. That's more also than the year-over-year increase to non-GAAP operating income.

Now, in many ways, 2007 has been one of the most important years in the history of Blackbaud. During the year, we have introduced our next generation fund raising solution, Life by ECRM, that's addressing the multi-channel fundraising needs of the largest non-profits, many of whom have significant distributed operations.

Through organic development and the acquisition of Target software, we have introduced the best-in-class direct marketing solution that addresses the needs of non-profits to rely heavily on high-volume direct marketing. These offerings complement Blackbaud's historical strength in high-touch fundraising where The Raiser's Edge is the recognized market leader.

Then, last quarter with the acquisition of eTapestry. We added a software as a service offering to meet the high-touch fundraising needs of smaller organizations that are searching for an easy to deploy lower cost solution.

This expansion of our product offering and addressable market opportunity during 2007 is just as important strategically for Blackbaud as the change, more than 20 year ago, we made when we moved beyond our initial offering, which was a student billing system for private schools, to become a sweep vendor with fundraising, financial and education system solutions.

Now before I joined Blackbaud, the Company had identified over 360,000 U.S.-based non-profit organizations that utilized fundraising efforts as a key component of their overall revenue generation. However, as late as 2006, we rarely sold our solutions to the smallest 210,000 organizations. And, even with our industry-leading product breadth, we were only capable of effectively reaching approximately one-half of the largest 150,000 non-profits.

The new solutions that are ideally suited for the smallest to largest non-profits with high volume and high-touch fundraising strategies across both online and offline channels, we've essentially tripled our investment market opportunity over this past year.

Equally as important, we have many ways to serve each of these customers given our significant breadth of product sweep. And for example, in addition to the core offerings in the area of fundraising, financial and educational systems and our new offerings released this year, Blackbaud also delivers solutions in the areas of analytics, donor, data enrichment services, ticketing, online fundraising, and online constituent community building.

The method by which Blackbaud has historically calculated product mix would have new solutions at just under 30% of sales this quarter. However, this figure does not take into consideration the incremental boost we have received from the Target Companies and eTapestry, so this metric is understated given the evolution of our business.

We are still at the earliest stages of developing each of our growth opportunities, which is what drives our underlying confidence in being able to continue to deliver low to mid teens revenue growth long term.

During the third quarter, NetCommunity continued to be the highest growth area within our new solutions. And, on a year-to-date basis, it's growth is right around 100%. The rapid growth of that community is being driven by increased use of the internet by non-profit organizations to drive communications with their constituents. And, also by our significantly improved ease of use functionality as well as the deep integration with The Raiser's Edge.

We also had a very strong quarter with respect to our patronage ticketing solution. There were roughly a dozen software deals in the third quarter in which ticketing was valued at over $25,000 on a stand-alone basis. And, it continues to have a positive impact on the Company's overall average deal size.

Now, let's take a look at our newest growth initiatives beginning with eTapestry. This is the first quarter we've included eTapestry in our consolidated results and we were very pleased with their continued business momentum. This manifested itself in better than expected revenue and profitability contribution compared to our original plan. As I mentioned earlier, eTapestry provided Blackbaud with a fundraising solution built from the ground up to be delivered by a software as a service model.

From a long-term perspective, we believe that software as a service will continue to grow in importance and eTapestry on-demand offering as ideally suited for smaller organizations interested in an easy to deploy and relatively low-cost offering as well as for mid-sized non-profits interested in standalone fundraising solution deployed in an on-demand model. As a reminder, these are areas that were not previously addressed by Blackbaud's flagship fundraising solution, which is The Raiser's Edge.

What is particularly pleasing to see out of the gate is our out of the gate coordination with eTapestry -- between eTapestry and Blackbaud. In a relative short period of time, the two organizations began communicating as if they've been working together for years. As one example, we have already had a couple dozen leads pass from our Raiser's Edge sales force to eTapestry.

These are opportunities that Blackbaud's sales organization would previously have passed on, because our offerings wouldn't have been a good fit for that particular customer. Also, we've given the eTapestry sales force the opportunity to pursue those Campaign customers, who have not yet converted to The Raiser's Edge. You may recall that we made the acquisition of Campaign a year ago in January, so, January 2006.

And, in the other direction, we've had over half dozen leads that have gone from eTapestry to our Raiser's Edge sales force, where a higher-end or broader, integrated solution, including fundraising, was desired by the customer. This is an example of how our broader product offering has already expanded our addressable market opportunity.

I am equally pleased with the continued success we enjoyed with the integration of the Target Company as Target has met or exceeded our financial expectations in each of the three quarters, since we've announced their acquisition, including this, the third quarter. From a longer term perspective, we've previously discussed the planned convergence of our product roadmaps as we incorporate Target's team approach enhancements in our ECRM releases next year.

It's also worth pointing out that Target's professionals, who have substantial experience in helping large organizations increase the effectiveness of their direct marketing campaigns, have been instrumental as we've developed future release plans for our direct marketing solutions.

We have been carefully developing a select set of early adopter customers for these new solutions with the objective of fine tuning the price model, the sales and implementation processes required to be successful in a more scaled environment.

In the relatively short period of time, since we introduced our new ECRM solution, we've seen significant market interest from very large organizations, particularly within the higher education sector. These universities want a solution that allows them to work across individual colleges and departments in managing relationships and key donors.

Among the ECRM early adopter deals closed to date and the potential deals in our pipeline, over one-half of these customers and prospects also acquired or are interested in acquiring our direct marketing solution. Our early efforts have been going very well thus far. And, we now feel comfortable increasing our go-to-market activities as we exit 2007 and head into 2008.

To be clear, these solutions are targeted at larger non-profit organizations. This business will be characterized by a smaller number of relatively larger deals, similar to Target's business before we acquired it. Additionally, we believe that some, if not many, of the underlying software licensing arrangements will involve multi-year payment terms or be under a SAS subscription-based model.

You may recall that Target's model was that they would close only a handful to a dozen new software-related deals per year and that virtually all their transactions over the past couple of years were done on that software as a service subscription-based basis. This is different than the majority of Blackbaud's business today, which generates thousands of transactions per year and up to a couple hundred to customers each quarter.

The interest levels are quite high for our ECRM and direct marketing oriented solutions and we remain as excited about our opportunity in these areas today as compared to a year ago, when we announced our intention to serve these markets.

The other area, which the Target Companies have influenced positively, is the analytics services business. As Target Analytics generated solid year-over-year growth, we've noted before that the analytics offering of Target complement the offerings we have in Blackbaud Analytics and we're starting to see some encouraging synergy among the business units.

On a combined basis, our analytics business was a $5.8 million revenue producer in the third quarter, which reflected a growth on a pro forma basis of 21% year-over-year.

As important as our new growth initiatives are, the majority of our larger deals and new customers came through our suite of core solutions, which include our flagship Raiser's Edge offering, Financial Edge and Education Edge. The Raiser's Edge continues to be a core driver to our larger deals and new customer growth on a quarter-to-quarter basis as evidenced by the fact that The Raiser's Edge was the primary factor in approximately 75% of our software deals that were greater than $25,000 in the third quarter.

Financial Edge was the highest growth core solution for the second quarter in a row. As we move beyond quarterly comparisons that were influenced by the switch from a channel-based sales model to a direct sales approach in the first half of last year. FE was a factor in approximately a third of largest software transactions in the quarter. Finally, we continue to be pleased with the performance of Education Edge, which continues to deliver solid growth.

The combination of our core solutions represented approximately 70% of our sales for the quarter. Though again, this does not include business associated with the Target Companies or eTapestry.

If we look at our average deal size across our new and core solutions, it was just over $40,000 in the quarter, which is fairly consistent with recent quarters, but up significantly from previous years. We continue to see strong growth in a number of larger transactions. The number of software deals over $25,000 and the number of deals with a total contract value over $50,000, both grew over 50% compared with the same quarter last year.

Looking at the makeup of these deals is also quite encouraging from a long-term perspective. If we look at our top 50 transactions in the quarter, half of them came from brand new customers, while the rest came from the sales to existing customers. This mix shows the significant opportunity present in our installed basis of over 19,000 customers above and beyond the large under penetrated market opportunities that I mentioned earlier.

In summary, our overall third quarter results were solid and we're very pleased with our continued momentum in the Target Companies and eTapestry, each of which contributed to our better than expected revenue and profitability performance. There is a high level of interest amongst customers and prospects in our new growth initiatives and we're optimistic about our long-term outlook based on our significantly expanded addressable market opportunity. With that, let me turn it over to Tim, so he can provide you some detail on the financials. Tim.

Thanks, Marc. I will provide details on our third quarter operating results, then update our guidance and finish with a very quick review of our capital management program.

First, let me start with some highlights from the income statement. Total revenue came in at $67.8 million, which was up 36% on a year-over-year basis and above the high-end of our $65.4 million to $67.2 million revenue guidance range.

This was the first quarter that our results were impacted by the acquisition of eTapestry. We had guided to $1 million revenue contribution for the quarter. Actual results came in several hundred thousand dollars greater than this due to stronger than expected business momentum combined with a smaller than expected deferred revenue write-off from acquisition accounting.

Turning to license revenue for the combined company, license fees came in $8.5 million, an increase of 9% year-over-year and within our guidance range for the quarter. Subscription revenue came in at $7.1 million, an increase of 154% on a year-over-year basis. The vast majority of Target's software's product revenue and all of eTapestry's product revenue goes through our subscription revenue line.

To put the impact of this in perspective, our subscription revenue was at level that was 83% of licensed revenue in the third quarter of this year, compared to 36% in the third quarter of 2006. And subscription revenue continues to represent the fastest growing portion of our business. And even without the contribution from Target and eTapestry, subscription revenue would have increased year-over-year by 42%.

On the services side, revenue came in at $26.3 million, an increase of 55%, and maintenance revenue came in at $24 million, an increase of 16% on a year-over-year basis. Obviously both of these lines include results from Target and eTapestry compared with no contribution from these entities in 2006. On a pure organic basis then, growth in services and maintenance would have been 25% and 12%, respectively. We continue to enjoy maintenance renewal rates in the mid-90s, which is a testament to our customer satisfaction and the strength of our technology.

Turning to gross profit -- we generated $44.9 million in non-GAAP gross profit in the quarter, representing a gross margin of 66%. This was in line with the second quarter, but down from 72% in the prior year's quarter.

A portion of the year-over-year difference is due to the inclusion of Target's results and eTapestry's results, which we have previously discussed as having lower gross margins compared with standalone Blackbaud. We expect the margins associated with Target's revenue to increase over time. The other factor in the year-over-year gross margin comparison is that our service revenue increased by four points as a percent of revenue year-over-year and services has the lowest gross margin of our revenue sources.

Our overall margin on services did improve close to six percentage points compared to the second quarter as we gained leverage on our aggressive hiring ramp in the first half of the year. However, it will take another quarter or two to get our utilization up to our -- up to the desired levels.

Looking at operating expense, there really weren't any surprises during the quarter. Our total non-GAAP operating expenses were $27.2 million or 40% of revenue. This is in line with prior year's quarters and it is a decrease of roughly a percentage point from last quarter.

Non-GAAP operating income was $17.7 million, ahead of our guidance of $16.3 million to $17.3 million, and representing a non-GAAP operating margin of 26%. This was an improvement from the 25.3% operating margin last quarter, but down from 31.5% in the year ago quarter with the entire difference coming at the previously discussed gross margin line.

The effective tax rate for non-GAAP results in the quarter was again 39% leading to non-GAAP net income of $10.5 million in non-GAAP diluted earnings per share of $0.23 based on diluted shares outstanding of 44.8 million. Non-GAAP EPS was at the high-end of our guidance range of $0.22 to $0.23.

Let me remind you, at this point, that we fully tax our non-GAAP EPS amounts even though the Company's cash tax rate is much lower, because of both our deferred tax asset and other tax benefits associated with this year's business acquisitions. The point here is that EPS, even on a non-GAAP basis, does not reflect the ongoing cash earning power of our business.

As we had noted before, we focus our discussions in these calls on our non-GAAP results, because we believe that excluding certain non-cash item, as such as stock-based compensation, amortization, a rise 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 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 our non-GAAP results as part of our earnings release.

In summary then, the GAAP, not net income, was $8.8 million in the third quarter of 2007, compared to $8.4 million in the third quarter of 2006, and, our GAAP diluted earnings per share were $0.20 compared with $0.19 in the prior year.

Let me now turn to cash flow in the balance sheet. We ended the quarter with $16.2 million in cash, down from $17.7 million at the end of Q2. We continue to generate strong cash flow from operations in the quarter of $30.5 million, which was up 18% on a year-over-year basis. Year-to-date cash from operations is $49.4 million. And, if you ignore the one-time tax payment associated with the Target acquisition, our year-to-date cash from operations would have increased 15% on a year-over-year basis. And all of this is after considering the fact that we are taxpayer in 2007, and received tax refunds in 2006.

We have used approximately $38.4 million of our year-to-date cash from operations to reduce debt that arose in connection with our 2007 mergers and acquisitions activity. And, at the end of the quarter, we had $11.5 million in debt outstanding. Since then, we have reduced debt by another $8 million to a remaining balance outstanding today of $3.5 million. Any way you slice it, cash performance for the Company continues to be outstanding.

At the end of the quarter, the Company's deferred tax asset that I just mentioned had a balance of approximately $57.6 million. As a reminder, this asset adds roughly $8 million to our cash flow on an annual basis and will continue to do so through 2014. Also in 2008, a similar tax benefit generated from the Target acquisition will benefit annual cash flow in the amount of $1.5 million.

Accounts receivable at the end of the quarter were $41.6 million, a decrease from $46 million at the end of the prior quarter, leading to an overall DSO in the mid-40s. This is up slightly from our historical average, but is solely due to the inclusion now of Target and eTapestry in those results.

Total deferred revenue came in at $96.7 million, or up $7.7 million, or almost 9% sequentially from the end of Q2, and up over 32% compared with the third quarter last year. This is consistent with the bookings growth we are seeing in our subscription-based offerings, as well as the inclusion of both Target and eTapestry in those amounts.

Let me now turn to our guidance for the fourth quarter and full year 2007. For the fourth quarter of 2007, we now expect total revenue in the range of $66.5 million to $68.5 million, license revenue of $8.8 million to $9.6 million, non-GAAP operating income of $15.4 million to $16.3 million, and non-GAAP diluted EPS of $0.21 to $0.22.

Two comments regarding our quarterly guidance. First, our services head count was higher than expected at the end of the third quarter. This positions us well as we already at staffing levels that we believe can meet demand through the first quarter. However, it does slightly impact operating income due to the fact that we always have -- we always experience a seasonal sequential decline in services revenue in the fourth quarter.

Second, a couple of our larger deals that we are pursuing may be structured in a way in which the software revenue will be spread over time. As such, it is our expectation that some of these deals will have less of an upfront impact to our license revenue compared with the majority of our license transactions. We believe, however, that this is a positive for us as it will further improve our long-term revenue visibility.

Based on our fourth quarter expectations, our updated full year forecast is as follows. Total revenue of $253.5 million to $255.5 million, license revenue of $36.4 million to $37.2 million, non-GAAP operating income of $60.9 million to $61.8 million, and non-GAAP diluted earnings per share of $0.82 to $0.83.

Let me now finish with a very quick update on our two-part capital management program. First, today, we did declare our third quarter dividend of $0.085 per share, which will be payable on December 14th to stockholders of record on November 28th.

Second, during the quarter, we repurchased approximately 13,000 shares as part of our buyback program. As you can tell from my comments regarding cash, we used much of our cash from operations this quarter on debt reduction. As a reminder, based on the increase in our share repurchase authorization in the second quarter, we currently have a total remaining share repurchase authorization of just under 41 million after our third quarter repurchases. We remain committed to using our cash flow in these ways to enhance stockholder value.

In summary then, the third quarter was a strong one and we are encouraged by the performance of the Target Companies and eTapestry, both of which contributed to our better than expected revenue and profitability. It will take an extra quarter to gain leverage on the significant ramp in our professional services organization, but we are confident that will happen based on the high level of interest we are seeing across our end-to-end product sweep.

Market demand, as Marc said, is solid. We have significantly expanded our market opportunity and we continue to make progress against our key growth initiatives. With that, let me turn it over to the operator to begin the question and answer session. Operator.

(OPERATOR INSTRUCTIONS). We'll take our first question from Adam Holt with JPMorgan.

Hi, guys.

Hey, Adam.

Hey, Adam.

My first two questions are around some of the larger deals that you all are beginning to get into, and I guess I have two questions. The first is, Marc, in your comments you talked a little bit about some volatility on a quarter-to-quarter basis with the larger deals. Could you remind us how you -- what is actually baked into the guidance in terms of the larger deal activity?

And then secondly, as you get into more of these deals that are say your percentage of completion or spread over a longer time, how should we be thinking about close rate assumptions and the sort of things that going into the underpinnings of the financial guidance for the multi-quarter deals?

Well, we're not going to -- we won't give a specific indication of how many deals of a given size are in a quarter, but if you take a look at the deals right now and they -- the big ones vary from $100,000 to maybe $500,000 of software and so, in any given quarter you can have two to three deals that might look like that as we get towards a run rate. And as I said, we're accelerating at this point.

So, you can have two or three such deals in a quarter and that's where you're going to see -- that would be where the volatility, what volatility there is in the (inaudible). Now I remind you that's still a small percentage of $8 million to $9 million of revenue -- software revenue and that the software revenue is getting overtaken by the subscription revenue. So you sort of need to look at the two of them at the same time.

As to how you think about them. The percentage completion is not so much a percentage completion deal as that people are buying software and spreading the software purchase over time. So, that's what we would call a smart license.

And so, a person might just buy say that $250,000 in software in one purchase or they may choose to buy it in 12 equal payments over a three-year period. I actually don't -- from a perspective of business, it's the same business. It does have an impact on the revenue of software on the quarter, which is another reason why I think subscription software revenue are less important than the overall revenue number that we actually produce out at the moment -- time the predictability factor.

And if I could just follow-up with a --. I'm sorry.

Yes, go ahead.

Oh, I was just going to say, if I could just follow up with a question on the operating margin. It looks like at the mid-point of the guidance, you're looking for about a 23% operating margin in the fourth quarter.

Tim you talked about the ability as you get through some of the dilution from acquisitions and it sounds like now, leverage from some of the sales -- I'm sorry -- services hires getting back to that kind of mid-20s operating margin next year and the year after. Is that still the target? Or does the mix of services now change the way we would should be thinking about the medium term operating margin?

Well. I think as we've said consistently, Adam, our goal is still to be at a 27% to 28% margin. But, we've not really given any guidance about when we will get there. I think as I've said in the past, we look for improvement in '08. We think that a lot of what we've done with services -- the aggressive hiring we've done this year that we ought to see some improvement from that as we move into '08.

And certainly, we think that there should be some margin improvement as we look at the impact that both Target and eTap as they continue to scale and grow, the impact that that will have on our margin should show some improvement. But, at this stage, we're not prepared to say when we think we can get back to that overall target rate. We just think that we should be able to see some good improvement next year.

Great. Thank you.

And we'll go next to Ross MacMillan with Jefferies & Company

Hi, thank you. This is [Herasio] for Ross. Congratulations, guys on a good quarter.

Thanks, Herasio.

A just, I guess, going back to the license number, which grew 9% this year and your guiding to sort of --

This quarter.

For the quarter, I'm sorry, and 14% year-to-date. Your guidance would imply somewhere in the 13% to 14% at the mid-point. And could you remind us last year when you had the Q4 that kind of fell off to 4% growth, what the reason for that was? And why, how you're feeling about the pipeline this year to be able to come in at these numbers for the year?

The reason last year was we had one large deal that moved out of the quarter, because they decided to add additional products to what they were buying and we needed to go through an additional sales cycle. I feel actually quite confident. Otherwise, I wouldn't have put the number out there. We do have a larger number of large deals this quarter to deal with. So that does improve your chances of being the range, in my opinion.

Okay. And then in terms of the -- sort of the ECRM pilots or sort of customer counts today, any updates or color you can give us on sort of adoption of either the Blackbaud direct marketing or ECRM product?

Yes. We have -- should the first of the ECRM deals should go live in this month and that's going well. The other one is in implementation and going very well. And, in the first month of this quarter, of this fourth quarter, we've just closed our third ECRM customer.

We have quite a few as I mentioned of those in the pipeline also want the direct marketing solution and we have several direct marketing customers implemented and using it and happy. It's a relatively quick implementation compared to ECRM.

And are --

(inaudible) and strong.

Good. And are these ECRM customers that you recently closed, are they coming more from the Target install base? Are they new? Or are they just sort of Blackbaud prior customers?

They are not from the Black -- Target installed base. The milestones for migrating Target customers won't happen until next calendar year. They include a university, a Heifer International, as we've mentioned before, which is a customer that Target or Blackbaud could have served in the past. And the third one is an existing Blackbaud customer.

Okay. Thank you very much guys. Congratulations again.

Thanks, Herasio.

Thank you.

And, we'll go next to Bob Stimson with WR Hambrecht.

Hi, Marc, hi, Tim. How are you tonight?

Great.

Great, thank you.

Hey, Tim. Maybe you can help me a little bit on the comments. It sounds to me that you're going to maybe take some of these larger deals and kind of do, I hate to use the buzzword, the software as a service. So the one guidance I'm trying to get is, how should we kind of think about deferred revenue? And is that number increasing kind of on a normalized basis year-over-year at a faster rate than revenue growth? Or about the same?

I would say that it's probably not growing quite as fast. And the reason that it isn't growing quite as fast, Bob, is because you've got that huge base in deferred revenue that just simply relates to maintenance. We still bill our maintenance in advance each -- at renewal. And so, still it's a very sizable portion of our deferred revenue is still associated with maintenance. That said, I think you are going to see higher rates of growth in our deferred revenue than what you have seen here at four.

Okay. And then, Could you just -- are you basically saying that a little bit of the margin, going back to Adam's question, a little bit of the margin readjustment that you're making for the fourth quarter, can you maybe quantify what happened in the service department? You gave us a little sense about how you kind of staffed up for. Is it utilization rates? Is it hiring? Is it basically coming from -- solely from the service aspects of the business? Or is maintenance getting more expensive, et cetera?

No. It's not really maintenance. It's really -- it's really what -- it's really related to our services business. And, what we're really talking about here is that we have -- we've done a terrific job of identifying and finding this talent, some of which is not easy to find. Hiring it in anticipation and what we see in our building pipeline for our solutions. And, what you've got here in addition to that, is that frankly we've experienced some lower attrition as well.

So, what that all means is that the utilization rates aren't quite as high as what we might have anticipated. But, we feel good about what we see in our pipeline and therefore good about where our staffing levels are. And the advantage is that as we go into '08, we're not going to have to hire on a bunch of folks at the beginning of the year as we've done in the past. Which I thinks sets us for a better Q1.

Got it. Thanks a lot, guys.

You bet.

And we'll go now to John Neff with William Blair.

Hey guys.

Hey, John.

Marc, you had mentioned you tripled the addressable market this year. I just wanted to clarify. Are you measuring that according to revenue? Revenue --?

No, no, no. I don't think it's quite -- it's probably not quite that in revenue. It's -- I really meant addressable organizations, so. But it's actually -- it's actually -- I wouldn't -- it wouldn't surprise me if it were somewhere very close to that in revenue as well. I mean given that what we're saying is that we sort of more than tripled the number of customers we could address and we've increased the number of things we could sell to them, but a large number of the new customers come from that bottom 200,000.

Okay. Great. And then, a quick question I had was, you haven't quantified, to my knowledge, the investment that you did make in services. I assume that you're not going to want to do it know, but, I was just wondering if you could possibly give us a sense of the order of magnitude of the investment that you've made in services maybe in terms of head count over the past --?

Yes, John. Basically, I think as you look at the quarter, I believe it was about 40 heads was the increase that we saw in the quarter. And then, as I said, we also had slightly lower attrition than what we had expected.

What did that 40 heads represent percentage-wise?

Not exactly sure. Let me do a quick check. And, I'll do a quick calculation here and I'll come back to you on that. Do you have another follow-up question?

A quick thing on --

We'll tell you in a minute.

We'll tell you in a minute, if not.

Okay. International revenue as a percentage of the total?

International is about 15%. And, it was a pretty balanced positive performance across all geographies.

Great, great. Thanks, guys.

Thank you. And we'll get back to your question after the next one.

And we'll go next to Kirk Materne with Banc of America Securities.

Yes, thanks very much. Marc, obviously you talked a lot about being able to roll out sort of the marketing of Enterprise CRM in a bigger way and some of the direct marketing and issues. Could you just maybe give some more granularity about what that entails in terms of expanding the market -- the marketing of it? Is it hiring new sales guys?

And, I guess, what do you have to do from a sales perspective? And, I guess a marketing perspective as we look out to '08 in terms of bringing on new head count or just retraining some of the existing sales force?

The sales force that's currently there covers the kinds of accounts that we want to sell to, so I don't see any real significant change in the number of sales reps. It's really opening up the process -- the gate on the process was basically a problem that said we would only be pursuing X number -- a small handful of deals at a time. And so what you really have is pre-sale support and professional services, sort of rationing the amount of customers and putting them to ones that we would thought would be good references over time.

So, it's really not -- there's no incremental expense involved. It's really a question of opening up the number of accounts that the professional services organizations will support. And, as Tim pointed out, we have a few more people there than we expected to have.

So there to, I don't see an increase in head count. And, it's not -- it's not like this is a mass marketing. When you go to sell to someone like Heifer International or a major university, you do it through relationships and through your sales force of professional services org.

Okay. So, just from a technical standpoint. Really, the expertise is coming from some of these professional services folks you've already hired to a certain degree?

We feel very comfortable that we can handle, with the kinds of technical people we have and the skill sets we have, the ramp that we have in front of us completely. Yes.

Great. That was the only question I had. Thanks.

And, just back to John Neff's question. That additional head count probably was something in the 10% range in terms of additional heads.

And we'll go next to Tom Roderick with Thomas Weisel Partners.

Hey, guys. This is actually [Chris Koh] in for Tom today. Good quarter, guys. Good job.

Thank you.

I just wanted to double-check with you guys on the progress that you're making on your standalone in that community -- Initiative Scorpio? And, is that still on track? I think you guys said last quarter that it was on, I think it was scheduled to come out in the first half of '08. I don't remember whether it was first quarter or second quarter. And, what are -- I don't know if you've speaking with anyone with the feedback that you're getting on that.

Our plans are unchanged in terms of the timing. So, yes, we're on track. I've actually seen the platform. It's in a state that we can demonstrate to a small number of customers. We're in the process of identifying the right early adopters for it. And, we clearly talked with a number of our target team approach customers, who are obvious candidates over time to be early adopters and customers of time.

Great. Thanks. And then, just back to the margin. I know you guys have probably had enough of these, but I just want to make sure I understand it correctly. So, it sounded like there were two kind of offsetting facts. One being the increased services head count. And then two, you guys said that you were ramping up the sales training from the first half that you hired.

So, is it safe to say that -- would it be right to model flat to slightly up from Q1 '08, Q2 '08 and then kind of a step up function in the second half of '08? Or do you think it should go -- should I think about it a different way?

Well, I think the two factors we talked about was the services head count. Not about sales training. What I said in my comments had to do with software licensing revenue and the fact that some of what we're seeing there could actually end up being spread out over several quarters as opposed to coming all upfront. I think that again we're reluctant to get into any detail on 2008 as far as what the margins will be certainly in the first couple of quarters.

But, I will say that we're not going to get back to 27 to 28 next year, but we would expect to see some improvement in our margins. Our operating margin overall probably something from an estimation standpoint, you want to look at something in sort of the 50 basis points to 100 basis points area. That would probably be a decent place to go. But, we're really not going to get any more detailed than that at this point.

No, no, that's understood. Thank you very much. And then the last thing, as far as, you mentioned that there's been some pretty good communication between eTap and Blackbaud as far as cross -- or not initially cross, but lead generation. Are you guys cross training the sales reps in that sense? Or is there any consolidation expected in the sales forces with those two? Or between Raiser's Edge and eTap?

I think of those two organizations through the foreseeable future as being two separate entities as we said when we announced the deal. And nothing I've seen has changed my opinion. They really serve quite different customers for the most part. The overlap is very, very small. And, the customers who are eTapestry customers really value the product road map that they have in front of them and they built a strong model for selling software as a service, which is actually, in many ways, quite a different sales process and model than the one that we use in a sort of more integrated, more customized solution with The Raiser's Edge.

So, I am quite confident that over the next quarters and the next year at least, we would see no integration in the enterprise organ -- sorry, in the sales force.

Great. Thank you very much, guys.

Yep.

Thank you.

And we'll go Alan Cooke with Merrill Lynch.

Great. Thank you very much. In terms of your license growth. So at the mid-point of your guidance range for this year, you're coming in at around 13% growth. Is that the sort of growth that you would expect say next year and longer term in your license revenues?

Alan, as you know, we've not given specific growth rate estimates for specific line items typically, in terms of longer term projections. And, we're really not prepared to give any guidance regarding '08 at this point. We'll hopefully have more to say about that in coming weeks. But, at this point, we're not really ready to give any guidance around that.

And, as you know, what we've consistently said is that these growth initiatives that we have implemented and are implementing that are going well here are designed to help the Company continue to sustain really solid growth in the low to mid-teens area and we've had pretty good success in outperforming that and would hope to try to do that.

If you look at the Company's organic growth rate, just forget Target and eTap, for the year-to-date we're at about 18% in revenue growth on an organic basis. So, the whole concept here of our growth initiatives is try to continue to sustain good solid growth in total revenue, but we're not prepared to get into any more detail than that right now.

And we fully expect subscription revenue to grow faster, significantly faster than the softer revenue coming in.

Right, okay. Thanks. And then my last question is, with respect to your acquisition plans, are you -- do you plan to do any more within say the next 12 months or more? Or do you think you're going to take that time to digest Target and eTapestry?

Digest sounds like a meal. I -- we're taking the appropriate amount of time and energy to make the integration successful and we've always said that if the right opportunity presents itself, we'll be just happy to consider it. So, I can't say much more than that. I've also mentioned that as we consider our international options next year, we might be in a position where we might be considering something on the international front.

All right. Thank you.

Thanks, Alan.

And, it appears we have no further questions. Mr. Williams, I'd like to turn it back to you for any additional or closing remarks.

Okay. Well, thank you everyone for joining us on the call. And, we look forward to chatting with you in the near term. And thank you very much for your support.

Thank you all. Bye, bye.

And ladies and gentlemen that does conclude today's call. Thank you for your participation. You may now disconnect.