Blackbaud Inc (BLKB) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. We would like to welcome you to this Blackbaud third quarter 2008 earnings conference call. Please take note that 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. Instructions will be provided at that time on how to queue up to ask a question. I would now like to turn the conference over to Mr. Tim Williams, Chief Financial Officer of Blackbaud. Please go ahead.

Thank you, very much. Good afternoon, everyone. Thank you for joining us today to review our third quarter 2008 results. With me on the call today is Marc Chardon, President and Chief Executive Officer. Marc and I will make a few prepared remarks and then we'll open up the call for questions.

Please note 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 I'll come back a little bit later to give some further details regarding our financials.

Thank you, Tim and my thanks to all of you on the phones for joining us today to review our third quarter financial results, which were in line with or above our expectations. In spite of the significant deterioration of the economic environment in the last month of the quarter, the resiliency of the Company's performance is a testament to Blackbaud's strong market position, attractive business model, and the high level of execution shown by our employees and our management team. I believe these factors will enable Blackbaud to continue delivering solid profitability and cash flow during the challenging period we see ahead.

Taking a look at our numbers, non-GAAP total revenue was $82.7 million, after adding back the deferred revenue write-off associated with the recent acquisition of Kintera. Q3 revenue was up 22% on a year-over-year basis, and was within our guidance range. A combination of organic growth, and the acquisition of Kintera, drove subscription revenue to $16.2 million, which is up 129% year-over-year. Subscription revenue was not only larger than our license revenue for the first time in the Company's history, but it was nearly twice as large. The increasing mix of subscription revenue further improves our quarter to quarter revenue visibility and predictability.

We've been stressing repeatedly over the past several quarters that you cannot look solely at license revenue as an indicator of what's happening with our solution sales. Subscription type offerings are increasing as a percentage of the mix. On an organic base which is to say without Kintera, subscription and licensing revenue combined grew 16% approximately year-over-year in the quarter, which I believe is pretty good in this market.

That said, license revenue came in at $8.1 million, which is down 5% year-over-year. This revenue line item, more than any other, reflects the negative impact associated with the increasingly difficult economic operating environment. The combination of in line total revenue and solid control over expenses lead to non-GAAP operating income of $19.2 million, which was above our guidance range of $17.7 million to $18.4 million, and represents a 23% margin. Non-GAAP EPS of $0.26 was at the high end of our guidance range.

Now, let's turn to our target markets. After going through the fiscal year end of approximately half of our customers in the second quarter, we felt we had a pretty good basis to estimate how our customers' purchasing decisions would be impacted by the economic environment. As a result of that experience and our overall analysis of our business, we adjusted our revenue outlook for the year down by 1.5% on our last earnings call. It's fair to say that the situation has worsened considerably since that time, and was certainly further exacerbated by the global financial crisis in the second half of the September quarter. This latest crisis was both unexpected, and we believe had and has continued to have a material impact on our market.

Notwithstanding these overall conditions, we continue to see a high level of customer interest across our solutions; however we've also seen an increased number of customers pausing, as the re-evaluate their business plans as a result of increasingly difficult economic situations. Obviously, we cannot control or predict the economy or its precise impact on our market, but we are currently planning our business in a manner that assumes that we're in a business environment that does not materially improve between now and the end of 2009. We're going to continue selectively investing in our strategic growth initiatives, while carefully managing our spending levels. If today's difficult environment continues, our goal will be to at least preserve our top line and potentially grow modestly.

With careful expense management we believe we can continue to invest and deliver non-GAAP operating income comparable to the full year 2008 expectation. Importantly as difficult as today's market environment is, we believe this is a long term opportunity for Blackbaud. We are optimistic that steady progress against our strategic growth initiatives will enable us to both strengthen our market leadership position and position the Company well for sustained long term growth when the economic environment improves. The drivers that will allow us to succeed in pursuing this long term opportunity are intact.

Namely, we still are early in bringing a new set of very promising solutions to the large and non-profit marketplace. Blackbaud is still the clear recognized market leader. We have a large and growing customer base and the industry's broadest and deepest suite of solutions tailored specifically to the non-profit market, and we're the domain expertise leader, with over a quarter of a century dedicated solely to serving the non-profit world. While the uncertainty of the economic environment has elongated sales cycles, we are pleased with the continued progress we're seeing in our key growth areas.

In the area of online fund raising our NetCommunity offering, which to remind you, requires The Raiser's Edge as the back end database, continues to be one of our fastest growing solutions. NetCommunity was once again the third largest contributor to our overall sales during the quarter, and it was an important component in the quarter's two largest software deals.

The most important development in the area of online fund raising during the quarter was the completion of the Kintera acquisition. Although it is early days, we're very pleased with how the two organizations are working hand in hand to make this combination a success. During the quarter we saw solid sales of Kintera's five [sub-sphere] solution, including renewals, upsells, extensions, as well as new business. With the Kintera transaction, we've added close to 4,000 customers to our customer base, and are now positioned to serve the entire non-profit market with the best-in-class online fund raising solution that runs independent of The Raiser's Edge. Customer response to the acquisition has been very positive, as evidenced by improved renewal rates and competitiveness, now that Kintera is part of the Blackbaud family.

During quarters we saw customers such as the University of Chicago and the Dana Farber Cancer Institute significantly expand their committment to our Sphere Solution, while new customers, such as DCI Group and Young Life, and National CASA, made significant initial investments. I'm very pleased with our progress on integration, and look forward to building on this exciting relationship in quarters to come.

We're also very encouraged by the continued strong market acceptance we're seeing of eTapestry, Softwares and Service Fund Raising Solution. During the third quarter, we enjoyed the strongest month ever in adding new eTapestry customers, and sales were up over 25% when compared both with Q3 of last year, as well as with the year-to-date results. As a reminder, eTapestry principally addresses the low end of our market, and was an important step in expanding our domain expertise of software as a Service Solutions.

In the high end of our market we continue to see a high level of interest and are making progress with our Enterprise CRM offering. I'm pleased to share that we closed two Enterprise CRM deals during the third quarter. The University of Oxford and the Lutheran Church Missouri Synod, both of which also selected our Direct Marketing and NetCommunity Solutions as far as their overall purchase. One also licensed our Financial Edge Solution.

In addition, since the end of the quarter, during the month of October, we've completed two additional Enterprise CRM deals, one with Southern Methodist University, and another, which is our first ever Softwares [are serviced] arrangement for Blackbaud Enterprise CRM, with the Southern Region of the Salvation Army. We're very excited about this transaction, and the traction this offering is getting in the market. We believe we're on track with our target of adding a couple of ECRM customers per quarter on average during the year. In fact we currently stand at six new Enterprise CRM customers added this year, when taking into account the two deals which closed in October.

Interested our Enterprise CRM offering is not only at the high end of the market, where we also continue to see interest from some mid-size customers as well. We currently have Enterprise CRM customers in each of the four key subverticals, and we remain focused on delivering successful implementations, gaining additional reference accounts, and ensuring we're ready to further scale this segment of our business in 2009.

From a geographic perspective, one of our ongoing growth initiatives is to scale our International Operations. During the third quarter our International Operations represented 20% of our sales for the first time in the Company's history, and on a year-to-date basis our International Operations has delivered strong sales growth of over 22%. Business has been solid across both Asia-Pac and Europe. We continue to believe there remains further opportunity to increase our International revenue as a percentage of our overall business.

As important as our new growth initiatives are, the majority of our new customers and large deals, which we define as contract sizes larger than $100 thousand, still come from our suite of core solutions, which include our flagship Raiser's Edge offering, Financial Edge, and The Education Edge. While our Enterprise CRM offering is our primary offering but a very high end of the market, we also closed five Raiser's Edge Deals with software license revenue of over $100 thousand during the third quarter, and The Financial Edge was an important factor in three of our top deals as well. Our average deal size across new and core solutions for the third quarter 2008 was at a record level in the mid $50 thousand range.

In summary, the economic environment has deteriorated significantly since our last earnings call and remains quite challenging. As a result we've seen an increased level of caution from customers and prospects. Operating against strong headwinds, Blackbaud was able to deliver third quarter results consistent with or better than our expectations and we made progress against our strategic growth initiatives. Most significant from a long term perspective is the continued strong reception of our NetCommunity, Enterprise CRM, and eTapestry solutions in the market. In addition our International Operations are executing well and delivering solid growth, and the early signs from the Kintera acquisition are very positive.

We will continue to manage Blackbaud with a focus on delivering strong profitability and cash flow during this difficult time, and we believe our growth initiatives position Blackbaud to sustain attractive growth rates over the long term, when the economic environment stabilizes and improves. With that, let me turn it over to Tim.

Thanks, Marc. Let me begin by providing some details on our third quarter operating results, then I will update our guidance and close with a very quick review of our Capital Management program. First, let me start with the Income Statement. As a reminder, due to the larger than expected deferred revenue write down associated with the Kintera acquisition, we mentioned on our last call that we will report non-GAAP revenue beginning with this quarter through the end of 2009. We believe adding back to deferred revenue write down is the only way to provide shareholders meaningful comparability of our top-line results for the next couple of years and it's most meaningful measure of our corporate performance. Also to be clear, all non-GAAP expense and profitability percentages will be based off our non-GAAP revenue total.

With that said, total non-GAAP revenue as you heard earlier came in at $82.7 million, Kintera contributed approximately $10 million to this amount, including $2.6 million associated with the deferred revenue add back. This total non-GAAP revenue figure was up 22% on a year-over-year basis, and was within our $82.5 million to $84.5 million guidance range.

While we have started the process of aggressively integrating parts of the Kintera business with Blackbaud, we estimate that Blackbaud stand alone total revenue would have grown approximately 7% on a year-over-year basis. This level is down from the recent past, due solely to the difficult economic environment which is beyond our control. While our optimism for the long term remains unshaken, we believe it is prudent to expect more modest top-line growth as long as the economic environment remains uncertain and challenging, which as Marc pointed out, we believe will be the case throughout 2009.

Looking at the details of our total revenue, non-GAAP subscription revenue was $16.2 million, an increase of 129% on a year-over-year basis. It increased to 20% of our total revenue in the third quarter, up from 10% in the year ago period. Kintera contributed approximately $6.1 million in non-GAAP subscription revenue in the third quarter; however even without the contribution from Kintera, subscription revenue would have increased by approximately 42% on a year-over-year basis. License revenue was $8.1 million in the third quarter, a decrease of 5% year-over-year. I'd point out that we did not recognize any license revenue in the third quarter from the two large ECRM deals that Marc referenced earlier.

Our non-GAAP services revenue came in at $28.9 million during the third quarter, an increase of 10% on a year-over-year basis, while our non-GAAP maintenance revenue came in at $27.5 million, an increase of 15% on a year-over-year basis. It is important to note here that maintenance revenue this quarter includes maintenance on the Fundware product. You will remember this is the accounting solution previously marketed by Kintera, which has over 1500 maintenance paying customers. Growth of the stand alone Blackbaud maintenance revenue was approximately 8%, and there's been no discernible change in our maintenance renewal rates in the current economic environment. We continue to enjoy rates in the mid 90s range.

Turning to gross profit, we generated $53.6 million in non- GAAP gross profit in the quarter, representing a gross margin of 65%, which was down slightly versus 66% in the previous year and last quarter. Importantly, you will note that our services gross margin improved just over 110 basis points sequentially. The slight degradation in overall gross margin was due to license revenue declining as a percentage in the overall mix of our revenue in the third quarter of 2008.

Turning to operating expenses, total non-GAAP operating expenses were $34.4 million or 42% of revenue, versus 40% in the prior year, and was in line with the previous quarter. As a result, non-GAAP operating income was $19.2 million above the high end of our guidance of $17.7 million to $18.4 million, and represented a non-GAAP operating margin of 23%. The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP net income of $11.4 million, and non-GAAP diluted EPS of $0.26, which was at the high end of our guidance range of $0.25 to $0.26. As a reminder, we fully tax our non-GAAP EPS amounts, even though the Company's cash tax rate is much lower, due to our deferred tax asset and other tax benefits associated with recent business acquisitions.

In our Earnings Release there's a full tabular reconciliation between our non-GAAP results and our GAAP results, which include the deferred revenue add back from Kintera, and the impact of stock-based compensation expense, and amortization of intangibles associated with acquisitions. In summary our GAAP net income was $7.3 million in the third quarter of 2008, compared with $8.8 million in the third quarter of 2007 while GAAP diluted earnings per share were $0.17, compared with $.20 in the prior year.

Let me now turn to cash flow in the Balance Sheet. We ended the quarter with $12.3 million in cash, up $2.3 million from the end of Q2. Quarter end cash balance includes $1.4 million from Kintera, but excludes the donor-restricted funds they collect as part of their ongoing client processing business. Cash flow from Operations was $26.5 million, bringing our nine month total to $48 million. A primary driver to our third quarter cash flow was our strong collections performance in the quarter.

Accounts Receivable decreased $7 million this quarter, to $57.2 million from $64.2 million at the end of the prior quarter. Although the extent of our collections performance is understated as $4.7 million in receivables associated with Kintera were included in our quarter end balance at the end of third quarter, and of course there was no balance at the end of the second quarter. DSO decreased one day from the prior quarter and remains in the high 40s. We continue to expect our DSO to decrease in the fourth quarter, now that we are past the accounting system transaction that we discussed on our last call.

At the end of the quarter the Company deferred tax asset had a balance of approximately $75.6 million. This asset adds roughly $8 million to our cash flow on an annual basis, in addition to an annual cash flow benefit of approximately $3.5 million, as a result of the structure of our three most recent acquisitions. Total deferred revenue came in at $122.9 million, up $12.8 million or 12% sequentially from the end of Q2, and up approximately 28% compared with the end of Q3 last year. This growth is the result of a combination of hiring maintenance renewal rates and strong growth in our subscription based offerings, as well as approximately $9.5 million of deferred revenue associated with Kintera.

We ended the September quarter with just over $60 million in debt. As you will recall we used debt to fund the Kintera acquisition of approximately $46 million, and additionally we used debt and available cash flow to fund our Capital Management program in the quarter. We plan to use our strong cash flow principally to repay this debt.

Let me now turn to our guidance. For the full year 2008 we now expect non-GAAP revenue of $305 million to $307 million, including an impact of approximately $19.7 million from Kintera. This reflects stand alone Blackbaud revenue growth in the 11% to 12% range which is less than our previous expectation, but consistent with the further deterioration we see in our market demand as described in Marc's comments. It is also arguably still at the bottom end of our long stated growth target of low to mid teens, which as we believe, commendable in this tough environment.

In terms of profitability we currently expect full year non-GAAP operating income of $68 million to $69 million, with about a $1 million impact from Kintera. This leads to non-GAAP EPS of $0.92 to $0.93.

Turning to our fourth quarter guidance, we currently expect non-GAAP revenue in the range of $82 million to $84 million, including an impact of approximately $9.7 million from Kintera. Non-GAAP operating income is expected to be in the range of $16- million to $17 million, leading to non-GAAP EPS of $0.22 to $0.23. As we mentioned to you last quarter, we expect to call out the separate impact of Kintera's financial performance through the end of the year, but beginning in the first quarter of 2009, we will focus exclusively on the combined Blackbaud business.

Finally I'd like to finish with a very quick update on our two part Capital Management program. First we announced today that our Board of Directors declared our fourth quarter dividend of $.10 per share payable, on December 15, 2008, to stockholders of record on November 28, 2008. During the third quarter, we paid dividends of approximately $4.4 million.

Secondly, we used $6.1 million to buy back approximately 311,000 shares of our stock in the third quarter, and we remain fully committed to using our cash flow to enhance stockholder value. Last quarter the Board of Directors authorized an increase in the Company's common stock share repurchase authorization to $40 million, and as of the end of the third quarter we had approximately $33.9 million remaining under this authorization.

In summary, we are operating in an extremely challenging environment and one that has candidly become more difficult in each quarter during 2008. It is uncertain when the market environment will improve, and we are operating the business right now with a strategy of trying to manage expenses closely, selectively investing in growth initiatives, and positioning the Company to strengthen its market position and reaccelerate growth when the market improves.

At some point the market and the economy will improve, and we want to make sure that we maximize our potential when that opportunity begins. We believe Blackbaud is uniquely positioned to do so based on our clear market leadership position in the non-profit sector. With that, let me turn it over to the operator to begin the Q&A session. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Philip Rueppel with Wachovia has our first question.

Yes, thanks very much. Regarding the environment, in the past you've talked, about at least you've drilled down a little bit into some of the sub segments. Has there been any change in looking at higher ed versus cultural institutions, and as you look into '09, do you sense any, are there any segments that will be kind of the first to lead us out, that we could look at as signs of kind of the recovery?

There's not been a significant change by sector Phil. Frankly, I don't think that you'll see any particular sector leading us out. I don't know of a reason why there would be a forward leading indicator in terms of effect. I would think that endowment-based sectors, in as much as they're touched, are going to come out a little later than sectors that are based on peoples need and demand for social services. And typically I think you see the arts and cultural sector recover sort of later than some of the other ones, but I would also say that the market, this particular market environment, is dramatically, I think different and worse than any of the ones we've gotten really good getting data on in the past 40 years. I mean, I don't think that we've lived through anything quite like this, so I'm not sure that there's a depth of data for comparable market difficulty.

And also, Tim, you had mentioned that you haven't seen any decline in core maintenance renewal rates. Are we coming up to a couple seasonally, a period where you start to see more maintenance renewal contracts go out the door, and this is something that you're a little bit more worried about as we enter into 2009?

Well just good question, Phil. When we look at maintenance renewals, our heaviest maintenance renewals clearly occur in the middle of the year. We do have a traditional spike also at the end of the year, but not nearly as significant as what we tend to see around the June 30 date.

We haven't started to see anything at this time with those maintenance renewal rates, and frankly, I can't speculate if it will happen, but in prior difficult times, even though there were not anything like what we see right now, we haven't seen any change in renewal rates by our customers. And we feel like we've got a very strong value proposition and a best-in-class service; all of our indicators about how our customers feel about what we're providing has been positive. So at this point, no change in our thinking there.

Great. And then just one final clarification. You'd mentioned that the two ECRM deals booked during the quarter, there were no license revenues. Are those going to be accounted for on a ratable basis, or at least on a longer term kind of arrangement similar to the ECRM deals you had booked prior in the year?

We had two deals, one will be ratable, which will be under contract accounting. The other one, which is a SASS offering, is going to await deployment of the product and so, right, okay I'm sorry. I was thinking about the one that was sold in October. Marc correctly pointed out, so the two that we're talking about are ratable recognition.

Great. Thanks very much.

Our next question now comes from John Neff with William Blair.

Hi, thank you. Kind of gets back to the whole environment question, but Marc, could you maybe address the perception at least versus the reality, or maybe if the perception is accurate, of the non-profit sectors being, call it higher beta than the four profit sector? More volatility or less volatility?

Well, John, I'd still believe that there's less volatility in the non-profit sector than there is in the core profit sector. I do see that, and we've been able to predict on a quarter to quarter basis relatively well what's going to happen. However, I think what we see is that some of the sector is sort of similar, like sort of at the one end the arts and cultural sector, and other parts are relatively insulated, but even now compared to what the full economy is feeling, so the data that the giving institute or other organizations have shown that the decrease even in recessionary times is lower than happens in the rest of the recession. And that's still, as far as all of the data we have both the quarterly data we do on our own spec marketing, as well as the data that external groups have, tell you that the sources of income are declining somewhat less dramatically than people might expect, given the impact of the Stock Market, the devaluation of sort of the financial assets that are involved. That being said, this is the worst downturn than the other ones that have happened since that data started getting collected in the early 60s.

Okay, could you compare and contrast the environment as it's impacting non-profits in the US and sales in the US, versus rest of world, given how strongly you're doing rest of world.

Well, I've just spent a week with customers in the UK, and they are nervous looking at the financial markets, but I do think that they feel somewhat less nervous than what I've seen in the United States. They are also more dependent on periodic giving in the UK, so people who give on a monthly basis from a direct debit environment on relatively smaller volumes, so there's a broader base of supporters on average for the average non- profit in the UK. And they've seen less impact in these small donations than you might have thought.

The are surveys that we've done say that people might not take a vacation, but they are going to continue to give their two pounds a month to their favorite charities, so that's the impact of that has been charities have been doubling down on keeping those people informed and on continuing to keep them involved, because it's their sense of belonging to the cause that keeps them giving that two or five or 10 pounds a month.

And I guess that's a good segue into my next question, which should be is there, in an economic downturn, can you talk about the effect between call it Raiser's Edge type fund raising activities, versus Target companies type fund raising, in terms of direct marketing, et cetera? Sort of the fund raising mix that customers look to employ?

That's a very good question, John. So I wouldn't think of it as Target or Raiser's Edge specifically. The real difference is that the tougher the environment, the harder it is to get new donors, and so getting new donors by list acquisition is a little harder than reactivating existing donors, and getting new major givers is a little harder than getting major givers that exist that you've got relationships with to step up, So what you see is for example of the Target business, there's a higher request for things like scoring and modeling in order to help identify how you get a little more out of your existing donor population, and you might see a little less purchasing of acquisition lists for direct marketing, or trying to go and figure out how to have some big events to try to bring new people into the major giving pool. So that's sort of the primary reservoir of revenue for these organizations is going back to their committed base who understand that the need is bigger, and sometimes they are willing to reach down deeper into their pockets.

Okay, and then last question again, Marc. You had mentioned Kintera had a renewal rate boost with existing customers post-acquisition, I think you also mentioned an up sell boost, just a little bit more color there, thank you.

Well thank you, John. We aren't giving specific numbers about renewal rates for Kintera, but what happens is that you get towards the end of a contract and there will be a decision about whether you add additional functionality, additional modules, whether you are interested in having a higher volume of contract committment, so those kinds of things are what we see. I gave an example of a couple of organizations in my prepared remarks, that renewed at a higher level than we previously had contracted with them, and that, again, is about how do you continue to cultivate an expanded number of people as your mailing lists grow, and as your need to get back to the base of people who are supporting you grow. That's where those contracts typically increase, and more and more that means that people are doubling down on the relationship building tools that they have, and that's true for online tools as well as traditional channels. So [your] product really provides a big chunk of that online as well as the BBNC product.

We just saw our first deal, for example, where you have both of them together, where you have the best of the - - as you added sort of the event functionality that the sphere product produces for the customer to the cultivation, because they are trying to reach a broader set of people in their already existing supportive base and identify them and then connect them back to their existing base. So that's the kind of thing that happens in this environment, as we are observing.

Moving on to our next question from Tom Roderick with Thomas Weisel Partners.

Hi, guys. This is Chris Cohen for Tom Roderick this afternoon.

Hello, Chris.

How are you?

So far so good.

Good to hear. Good job on the operating expense line this quarter guys, and I guess that does kind of bring up the question just ballparking on the guidance for Q4, it looks like you guys are implying operating margin in Q4 in the 20% range or so. Given that you guys have done a pretty good job this quarter , is there reason that we should expect that not to continue from a profitability

Actually, great question, Chris. If you look at the Company historically, and you sort of look Q4 versus Q3, it's been pretty common for us to see a sequential decline in our profitability between those two quarters. If you look back at Q4 2006, for example, it was about an 11 % decrease compared with Q3. Q4 last year, the decline was less significant, but we sort of had a blowout quarter from a sales standpoint and from a licensing revenue standpoint.

The truth is that when you look at Q4 this year and sort of consistent with prior years, there are a number of things that do drive our costs up a bit in Q4. Number one, we do our Annual Customer Conference occurs in Q4 and that is a sizeable investment for us as I'm sure you can understand. We will have a full quarter, and there were some planned cost increases in the quarter related to Kintera, which we had planned for all along. In addition, you heard us talk on the call about selective investment, insofar as investing in various initiatives, so we have selectively added some heads. There are probably a few more that will be added that will support those initiatives.

And then finally, one of the things that we talked about in prior quarters is the Iowa transaction, and that particular transaction will all be recognized in the fourth quarter. There have been some costs deferred related to that, both selling costs and delivery costs, services costs, which will get picked up this quarter, so all of that factors into the increase that you're seeing in Q3 versus Q4.

Great. That's very helpful, Tim. Thank you. So I guess then just kind of a similar question, but as far as on the pipeline, you had mentioned that eTapestry was doing quite well. Given what I would expect to be some cost sensitivity on the part, in the face of kind of uncertain giving, and revenue expectations, is there any potential, per se somebody who may have been looking Raiser's Edge, instead going I'll take eTapestry instead, and then you mentioned you were targeting some mid-sized non-profits with Enterprise CRM. I had been under the impression that that was the larger scale non-profit target. Is that something that you guys are newly strategizing, or did I just miss that earlier as far as the target for Enterprise C RM?

So to take the two parts of your question, I do believe that we've seen some of the very smallest potential Raiser's Edge customers choose to go with eTapestry. It's become a Blackbaud offering, and there is an overlap between the two of them. Certainly, we have sort of a 0% financing offer for the Raiser's Edge, which spreads the payments out over a three year period,which helps get rid of the up front cost, and we had some modest interest in that, but not a huge interest, which is sort of actually in the economic environment a little bit surprising. I would have thought we might have seen a larger uptick. So I gather from that that the up front cost of buying a license versus a subscription is material, especially at the very smaller part of the market, and we have seen some indication that people are moving towards eTapestry for that, but in the middle portion of the market , by that I mean the core , the traditional Raiser's Edge customer size, I don't see a huge move in that direction, despite an offering that was actually relatively attractive.

So from that I wonder whether people are wanting to spread everything out over three years or some portion, or have the money in hand and just want to get it done, and not have to worry about paying it over a period of time, so that was the first part of your question. I may have been imprecise in talking about the mid size for the ECRM. For ECRM mid-size means how do you get it down below

Okay.

And when I look at Southern Methodist, I say that's almost a mid size deal, and our question is how do we package that sort of not mega University but good size University, how do you package that and make that more accessible to that same size school on a more sort of repeatable basis, and a more packaged environment, and so that's what I meant, So it's the very high end of the Raiser's Edge, sort of 100,000 in software, and some $400,000 deals; that to me is sort of a mid size deal, I guess I misspoke, a small size deal for the ECRM market.

Great. Thanks for the clarification.

Thanks for bringing that up because I obviously didn't make it very clear to everybody.

We'll now move on to Lawrence Betrone of W.R. Hambrecht & Company.

Marc, to extend that conversation out a little bit on the sales experience you've had over the last couple months, I'm just wondering what changes if any you've seen in terms of the sales cycle, particularly for your license products and/or ECRM, now that you've got more offerings and more possibilities that you can offer clients than you did for example, at the beginning of the year, does that help your sales folks in terms of going into potential clients, to give them a cheaper option if they don't want to extend a lot of capital up front? And again I'm thinking more in the last couple of months in particular.

Well, to be clear, there's not been a change in the offering since the beginning of the year. We acquired eTapestry in August of last year, and we've had this team approach offering and the ECRM offering since the early part of last year, so the portfolio of fund raising offerings, other than adding sphere to the mix on the online side, has stayed the same throughout this period. As I said, I've seen a modest shift in the low end of the Raiser's Edge business towards our eTapestry offering, and we've seen a modest shift at the high end of our Raiser's Edge business towards the ECRM offering. Both of those offerings are doing quite well, and so I think that we're going to continue to see some of that growth over time, but what I find is in the middle of the market, I have not seen that same movement towards a SASS offering or a subscription based offering, because we have a subscription, we have a hosted offering, and we have a financing option.

As to the change of the sales cycle itself, in the middle of the market is the place where the sales cycle has changed the most, where you have actually seen sort of the finance function or the Board itself entering into the sales cycle relatively later in the sales cycle, and where the middle market was very often in the past driven by a specific bad experience where they didn't treat a certain segment of their population well or they lost donors and they wanted a better and stronger system or a new person came in, now they are really more focused on adding an ROI component to the selling cycle, which is sort of understandable in the environment where they are today. They are trying to figure out where the best ROI cut is if they have a funding problem, and what people are - - they double down on trying to get more out of their existing population.

That's part of why I believe the maintenance rates, the renewal rates continue to stay high, because it's the primary tools for doubling down the Raiser's Edge. And so that middle market are the people that are truly in a place where the Raiser's Edge started and have been using the product for maybe decades for many of them, to satisfy and grow their major giving basis. I think that what we're seeing is people focusing more resolutely on that, but the sales cycle, as I said, has changed for new customers, where the ROI focus is clearly one that is sort of higher percentage of the sales cycle getting involved in it.

I see. Now Tim, just on the operating margins a little bit you talked about Q4. As we've talked about in the past you've made a lot of investments over the past year in people and infrastructure. I'm just wondering if you think, as you move through '09, and I'm not asking specifically to comment on individual numbers, but do you think you can move the operating margins perhaps closer to the mid 20s let's say where it was two years ago or somewhere around there, as you move out of some of these investments? I realize some of that is going to move into OpEx on the expense side, but I'm just wondering what your thoughts are in terms of managing the P&L.

Well, it's first of all, Larry, we're not ready to give any guidance obviously for 2009, and quite honestly a lot of this is going to depend on what happens to our market environment. As I said, we're assuming right now that that market environment does not improve in 2009, and we've also said that we're going to try to continue to selectively invest. And with other cost management, we believe we can perhaps achieve a margin that's comparable to '08, but we're just not prepared to get anymore specific, and I certainly am not ready to talk about something in the mid 20s.

Okay. And just one last question. I unfortunately missed it, but you were commenting on Kintera 's contributions in the quarter. I think I heard you say $6.1 million of the subscription revenue were from Kintera. I also thought I heard over $10 plus million came from Kintera in total. Do I have that right or am I missing something?

It was $10 million in total.

And the difference is the other applications like Fundware and the analytics products [of ten], it's just the donor advised financing services.

Okay, very good. Thank you.

(OPERATOR INSTRUCTIONS) Moving on here going to Horatio Zambrano with Jefferies & Company.

Hi, I'm here for Ross McMillan. Tim, I had a question following up on the last question. If I back out the maintenance, or what I think is remaining out of the $10 million for Kintera, does the Blackbaud core maintenance go down sequentially slightly, quarter-over-quarter and is that just a function of how licenses working through and the renewal rate?

No, I think we said that, I said that maintenance on an overall basis for where the Company grew about 8%, if I remember correctly year-over-year in the quarter.

Okay.

We're not looking for sequential decline in Q4 either.

Okay. I guess I was also looking for a little bit more color on just the ECRM pipeline, and some of the deals that you have signed recently like the Salvation Army and Oxford. What's the total market opportunity for these deals? Are you expecting follow on transactions from those deals, and what does the overall pipeline look like today, say versus a year ago ?

Well, today versus a year ago is significantly larger, but I won't go into how much larger. I have publicly said that they're on the order, somewhere between 150 and 250 Universities that will, in my opinion, be making decisions that look like the ones we're talking about, so multi-million dollar decisions over the next five to seven years. I stick by that. I'm still very convinced that's the case, given the current agent of the existing technology, and the need that they'll face.

I'm not giving any sizing for outside of that, but if you take a look at our customers, Save the Children and HEIFER, there are a lot of other international non-governmental organizations that look very similar, and in fact those are just the US branches of these. Many of them have multiple chapters around the world, some of whom will come on board, so over time you could see extension for the international non-governmental space internationally. You'll see at a place like HEIFER, we've gone live with one portion of it, and there's follow-on business associated with that ,and the second phase to come live next year . So there is a lot of potential over time for ongoing business with many of these organizations, and in each sector the ongoing business opportunity is quite different, depending on the business model of the sector

Ross let me add just one other thing that is not specific to your question, but relates to a question I answered earlier. Let me just interject here, because I think I've confused things a good bit here. Talking about the four ECRM deals that we've done, I just want to clarify, we did two in Q3, and we've already done two in Q4, in early October. Two of those deals, one in Q3, one in Q4, will be done on a ratable basis. The revenue recognition related to the software, and in fact, the one we did in October is a SASS deal and we're not going to have any income recognized on that for the better part of 2009 at a minimum, because we have to wait until the software is deployed. But we in fact did recognize some software revenue on one deal we did do in Q3, and we will recognize, we believe, software on a deal we've concluded in October. So sorry for the confusion but I needed to clarify that.

Okay, that's helpful. Any comments on the Salvation Army deal? It sounds like it's a Southern chapter. Do you think that there's room, what's the sort of decision-making to go across some of the other national chapters here?

Well it's not a chapter. It's a region, so it's a very large region for the Salvation Army and there are some other regions . One of them has made a decision not too long ago; others will, I'm sure, be looking to see how well this goes. That's the nature of these things. They make choices on a relatively independent basis, and that's true of the Save the Childrens around the world, each one is, they're relatively independent and many of them are, like Doctors Without Borders, and it's also true of many of the regional organizations in the United States that the regions have a modest, somewhere between a modest and large amount of economy. So the very best thing, and I've been talking about building reference accounts and making every one of these deals successful as we go through. This is a perfect example, we do a very good job here, and there are a certain number of faith-based and human service organizations that will be looking very carefully at this very prestigious and very influential organization as they go through this

Okay and last question, just on hiring. How many people were hired in the quarter, and I guess did you guys talk about your forward plans in that area?

No, I think what we said was, and we have never really talked specifically about the net addition to headcount. Clearly in the quarter, we had a modest net addition, we'll have a modest net addition probably in Q4, but it will not be all that significant. The key is, we're talking here about selective, careful investment in those areas which are important strategic initiatives for us, and that's where we're focusing our investments on.

And you'd see a certain amount of increase in the product development, like Tim says focusing on those areas of investment. There is work to be done in every single Enterprise CRM sector, when we sell the first or the second customer, in bringing the product along to be truly adapted to that sector, in the full detail of what we've actually sold, and that's part of why you're in contract accounting for many of those pieces of business.

We have a connector between the Raiser's Edge and Sphere that we're delivering, which is a new product set. We have the ECRM version that we are moving the team approach customers from. Each of those things are sort of an ongoing investment stream, as well as investing in the generation eight products [there], so the version eights, of The Raiser's Edge, The Financial Edge and The Education Edge. And if this were my own Company and my own personal money, all of it, I would continue to be investing in those things, and so I'm doing that on behalf of the shareholder at this point, because I want us to come out of this storm with critical mass, and having really built on the leadership position that we do have, which gives us the opportunity to come out much stronger, building on the product offering that we're talking about.

That's what the choices are relative to the investment and that's where we're going.

Okay, thank you guys.

Our next question now comes from Brent Thill with Citi.

Thanks. Tim, can we just talk a minute about how you think about worse case scenarios, and I apologize for bringing that up, but if you look at the 7% gross stand alone this quarter, is it fair to say that you still believe you can grow through this? And I know you aren't giving guidance for '09, but the margin guidance for Q4 is low 20s, and could we assume a 5% growth in the 20% Op margin would be considered worst case scenarios, that you've modeled into what you're looking at?

You know, Brent, to be honest with you I just can't answer the question. We think that we're planning the business prudently, by saying that we don't see an improvement in the environment. We're not prepared to get specific on 2009 and what that translates into in terms of an overall growth rate, so I wish I could get more specific with you here, but what we're telling you is sort of the guidance we've given our management team about how to plan their businesses going forward. And we'll have more to say on the next call.

So just to look at Q4 since you have given that number, it looks like you've effectively scrubbed the license number to go to low single digits.

Well, you mean in terms of growth year-over-year?

In terms of absolute dollars.

Oh. I'm not quite sure.

You mean in terms of millions of dollars of revenue?

Right. Because if we assume service maintenance and subscription is going to modestly grow, then the only offset to that is the license side, right?

Well there's services too, Brent.

Right.

So, I mean, the point here is if what you're saying is we certainly expect some software revenue in Q4, I'm not putting a number on that, but I would remind you that Q4 last year was a blowout quarter. We had over, it was a record quarter for us in terms of license revenue. We did almost $10 million in software revenue, and it was a 20% grower. We signed five deals that were greater than $1 million, so we had a gangbuster quarter, and we're in a much different market condition right now. So I'm not putting a number on it, but obviously you can draw your own conclusion from what I'm saying about what that number is.

That's fair. I'm just trying to understand the variables in terms of how you're thinking about Q4, and I guess you're looking at the licenses and services as the two biggest variables, relative to your guidance.

Yes, sir, absolutely.

Thank you.

Gentlemen, we have no further questions in our queue at this time. Mr. Chardon, I'll turn the conference back over to you for additional or closing remarks.

Thank you all for taking the time to be with us today. I know it's a tough environment. We're making progress against our growth initiatives. I'm delighted to see the results of subscription revenue and license taken together, and I do really feel like the investments we're making are going to make a difference as we start to see a little bit of daylight. I'm not sure the daylight is going to happen before the end of next year, so that's sort of a summary of what Tim and I had to say today, and thank you for your time and questions. We look forward to talking with some of you individually one on one later.

Again, that concludes today's conference call. Thank you for your participation. Have a good day .