Blackbaud Inc (BLKB) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Blackbaud second quarter 2009 earnings conference call. Today's call is being recorded.

(Operator instructions)

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 second quarter 2009 results. With me on the call is Marc Chardon, President and Chief Executive Officer. Marc and I have prepared remarks and then we'll open up the call a little bit later 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. Marc?

Thank you Tim, and my thanks to all of you on the call for joining us today to review our second quarter 2009 financial results.

While the economic environment remains challenging, Blackbaud's worldwide organization executed at a very high level and as a result delivered second quarter revenue and profitability that were consistent with or above the high end of our guidance ranges.

At the same same, as I'll discuss in a moment, we continued to make solid progress expanding on our market leadership position in online fundraising solutions. While demand for these solutions does not always translate into upfront licensing revenue, since they're increasingly being sold on a subscription basis, a continued significant improvement in our position in this segment is very encouraging especially when combined with the progress of our other growth our initiatives.

In a moment, Tim will cover the financials in detail. But let's take a look at the highlights. Our total non-GAAP revenue of approximately $77.2 million was consistent with our guidance. This represents growth of approximately 7% over the year ago period and was a sequential increase from $76 million last quarter.

The combination of in line revenue and continued tight control of expenses enabled Blackbaud to once again deliver operating profitability that was above the high end of our guidance. Moreover, at the halfway point of 2009, the Company's non-GAAP operating margin of 20% is right on track with our full year target. We believe this is a significant accomplishment particularly when you consider the investments that we continue to make in our growth initiatives and the challenging economic environment in which we are operating.

Looking at the makeup of our revenue, subscriptions remain the highest growth component of revenue in the second quarter both on a year-over-year and sequential basis. In fact, the sequential growth of our subscription revenue was at the highest level since we acquired Kintera and began including their results in our financial statements. In the second quarter, our subscription revenue was three times the level of our license revenue, which remains our smallest contributor to revenue.

Total recurring revenue, made up of both subscriptions and maintenance, increased to 61% of total non-GAAP revenue, up from 59% last quarter and 49% in the second quarter of 2008.

Blackbaud's business model has increasingly evolved through its product sales on a subscription basis over the past several years and we believe it will continue to move in that direction. As I have noted before, our long-term product roadmap supports the continuation of this trend. Although this transformation results in lower first year revenue when compared with the upfront revenue generated by perpetual license sales, we continue to achieve significant current period profit margins while also building greater visibility into our long term revenue and cash flow. In fact, we had a very strong cash flow performance in the second quarter and in the first half of the year.

Now, let me address the current status of our market. While we delivered better than expected revenue in the first quarter, we were candid in our remarks during last quarter's call that the market environment remained challenging and we were not yet seeing an improvement. While certain market segments continued to perform better than average, such as higher education, the overall market environment was generally consistent with our expectations in the second quarter. While it did not appear worse than recent quarters, it also was not improving.

There are, however, some signs that are modestly encouraging. For example, we saw a small amount of fiscal-year-end buying in the last couple of days of this past quarter. While this was not a material amount to our overall operating results to be clear, the behavior was something that we didn't really see in either the June 2008 or the December 2008 quarters.

In addition, there are some customers that seem to be adjusting to the new economic environment by deciding that if conditions aren't worsening but seem likely to remain challenging for the near term they can no longer wait to make the investments needed to improve their results.

Our pipeline of opportunities remains solid and our efforts to fine tune our positioning has helped to drive continued improvements in our win rates against competitors. However, it's too early to determine if customers will begin to move ahead with investments at a faster pace than they have done over the past 12 to 18 months, or if they will remain cautious when it comes time to actually commit to a technology investment. As a result, we continue to plan to manage our business in a manner that does not assume an improvement in the macro environment.

Last quarter we mentioned that we'd identified approximately $10 million of incremental 2009 cost savings as a result of our ongoing efforts to run our business as sufficiently as possible. As Tim will explain more fully in a moment, we've identified additional incremental savings, some of which we realized already in the second quarter.

Should market conditions worsen we believe that we could achieve additional cost savings. Overall though, we are very pleased with our day-to-day execution in the area of cost management and we continue to target delivering a full year non-GAAP operating margin of 20% or better.

While we're taking actions that we believe are important to deliver strong current period operating profitability and cash flow, it's important to remember that we are also continuing to invest significantly in growth initiatives that are critical to our long-term success. Our goal is to ensure that Blackbaud is well positioned to enjoy accelerated revenue growth when the economic environment does eventually improve.

During the second quarter, we were particularly pleased with the success of our online fundraising initiatives. In the past, we have spoken about our Blackbaud NetCommunity offering, which is targeted at users of our Raiser's Edge solution, and our Blackbaud Sphere solution, which was part of the Kintera acquisition just over a year ago.

During the second quarter we saw strong demand for our NetCommunity Grow offering which packages a subset of the core components of NetCommunity with a prescriptive implementation and ongoing e-marketing consulting. This results in a quickly implementable subscription-based solution.

I'm really pleased with the sense of urgency that we showed in quickly building this new online offering which helps our Raiser's Edge customers tangibly improve their business in this budget constrained market environment.

This Grow version of NetCommunity represented over half of our total net community units sold in the second quarter, increasing from five units in the first quarter to 44 in the second quarter.

Now I don't plan on providing quarterly updates to this figure, but I did want to put into perspective the magnitude of the market acceptance, competitive strength of this particular solution.

In addition, because the Grow release is only offered on a subscription basis, we are effectively spreading approximately $1.5 million in sales over the course of these contracts as opposed to recognizing it upfront.

Now, as I just mentioned, we also continue to be pleased with the performance of Blackbaud Sphere. Customer satisfaction levels continue to rise and the related renewal rates and expansion of existing agreements are very encouraging.

Finally, we also recently launched a set of online solutions specifically designed for the K-12 vertical market. This suite is also being offered on a subscription basis. Based on very early feedback, we're optimistic that this offering will be well received in the marketplace.

Blackbaud continues to build on our market leadership in the online segment. And we are well on our way to becoming the clear long term winner in online solutions for the nonprofit market just as we long ago established the Raiser's Edge as an industry standard.

We continue to make progress with other software as a service subscription-based solutions, such as eTapestry, which delivered a respectable performance in light of a difficult economic environment. eTapestry is ideally suited for the low end of the market where IT resources are more scarce and organizations do not wish to own software or manage an internal computer infrastructure. For these nonprofits, a simple and easy to implement fundraising solution deployed in a software as a service manner is ideal.

Of course, for other organizations looking for the most complete fundraising solution available, the Raiser's Edge continues to be the widely acknowledged market leader.

On the eCRM front, we remain pleased with market acceptance and interest levels, as well as the progress of our implementations. We continue to target the largest nonprofit organizations with this solution and receiving a growing level of interest from larger mid-tier nonprofit organizations which we would have served with the Raiser's Edge offering in years past.

In the second quarter, we signed two eCRM deals, one of which is an existing Team Approach customer. Both second quarter deals were with customers in the healthcare sector.

You will recall that we had record eCRM sales activity last quarter, but we have always stressed that sales of eCRM will be variable quarter to quarter based on the large deal sizes and longer sales cycles associated with these transactions.

In addition to the two deals we signed, we made progress in the sales cycle of several other exciting eCRM opportunities and remain on track to meet or exceed our goal of closing, on average, a couple of new eCRM deals each quarter.

With eTapestry, the Raiser's Edge, and eCRM we believe we are able to meet the fundraising needs of all nonprofit organizations no matter what size.

The last component on our business that I'll highlight today is Target Analytics. During the second quarter, we saw solid sales activity and in particular an increase in list sales business compared with the previous quarter. List sales have historically been a key contributor to Target Analytics revenue but over the last year list sales have been negatively impacted by the economic environment as customers were less concerned with new donor acquisition and more immediately focused on existing constituents. We think that this is potentially another encouraging sign of some improvement.

In summary, Blackbaud continued to deliver solid financial results in the midst of a difficult economic environment. Interest levels in our solutions remain high and there are some very early signs that are more positive on the margin.

However, sales visibility is still low and we are planning and executing our business with the expectation that the market environment will remain challenging.

Most importantly though, we continue to focus on and invest in improving Blackbaud's long-term value proposition to our customers and our competitive position in the nonprofit market.

We are growing our base of subscription revenue, we are extending our clear leadership position in online fundraising, and we are executing well with respect to developing, delivering and selling solutions that meet our customers needs now and in the future. We believe the benefits of these efforts will become increasingly apparent in our financial performance as the economic environment eventually improves.

With that let me turn it over to Tim.

Thanks Marc. Let me begin by providing details on our second quarter operating results followed by our guidance for the third quarter and wrapping up with a very quick review of our capital management program.

First let me start with the income statement. GAAP revenue came in at $76.4 million. And after adding back $800,000 for the second quarter impact of the purchase accounting write-down associated with Kintera's deferred revenue, you get to non-GAAP revenue of $77.2 million. This represented an increase of approximately 7% compared with the second quarter of 2008.

We estimate that Blackbaud's second quarter total revenue, excluding the contribution from Kintera, would have decreased approximately 6% on a year-over-year basis and would have been down about 4% on a constant currency basis. This is in line with a decline of approximately 3% that we highlighted last quarter.

Obviously this year-over-year movement is well below our long term target of low to mid teens growth and we believe is principally the consequence of the difficult economic environment impacting our end market, and to a lesser degree the short term impact related to the increasing shift in our business to more subscription-based transactions.

Looking at the details of our total revenue, non-GAAP subscription revenue was $17.9 million, an increase of 99% on a year-over-year basis. It increased to 23% of our total revenue in the second quarter, up from 12% in the year ago period. Even without the contribution from Kintera, subscription revenue would have increased by approximately 29% on a year-over-year basis.

License revenue was $5.8 million in the second quarter compared to $9.6 million in the year ago quarter. The decline in license revenue is a result of two factors. First, this is the revenue line that is most directly impacted by delays in the timing of deals because of the difficult market environment. Second, as Marc pointed out, we have seen an increased level of interest in our subscription-based offerings, as well as licensed-based deals whose structure results in rateable or some other form of deferred revenue recognition.

Our non-GAAP services revenue came in at $23.1 million, a decrease of 9% on a year-over-year basis but up 5% sequentially. Year-over-year decline is a natural derivative of the reduction seen in license revenue over the past 12 to 18 months, which has also resulted in a reduction of services related projects.

In addition, another consequence of the difficult economic environment is that it is not uncommon for some customers to delay the delivery or performance of certain of our services engagements, training in particular. That said, we've been managing attrition and recruitment very carefully over the last several quarters in anticipation of lower services volumes. And as a result, the sequential growth in revenue combined with a cost of services reduction of approximately $700,000 produced a 600 basis point improvement in our services margin compared with the first quarter.

Our non-GAAP maintenance revenue represented the largest source of our revenue during the quarter and it came in at $28.9 million, an increase of 10% on a year-over-year basis and up 3% sequentially. Our maintenance renewal rates continue to be in the mid 90% range despite the more challenging economic environment.

Turning to profitability. And to be clear here, all non-GAAP expense and profitability percentages that I will refer to are based on our non-GAAP revenue total. So starting with gross profit we generated $49 million in non-GAAP gross profit in the quarter, representing a gross margin of 63% which was consistent with last quarter and compared with 66% achieved in the year ago quarter.

Turning to operating expenses, our continued focus on identifying cost savings enabled the Company to lower the non-GAAP quarterly operating expense run rate by nearly $1.5 million compared to the first quarter. Elements of savings came from sales and marketing, R&D and G&A, all.

The combination of in line revenue and solid cost management led to non-GAAP operating income of $16.5 million, which was above the high end of our guidance of $15.3 million to $16.3 million and represented a non-GAAP operating margin of a little over 21%.

The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP diluted earnings per share of $0.23, which was again above the high end of our guidance range of $0.21 to $0.22.

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 assets 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 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 $6.6 million in the second quarter of 2009, compared with $9 million in the second quarter of 2008, while GAAP diluted earnings per share was $0.15 compared with $0.21 in the same period last year.

Let me now turn to cash flow and the balance sheet. We ended the second quarter with $18.5 million in cash, down $4.5 million from the end of Q1 principally because of substantial debt retirement. Cash flow from operations was $22.1 million in the second quarter and $34.5 million for the first six months ended June 30. This represents an increase of more than 50% compared to the first half of 2008.

While this comparison is against a somewhat weak prior year six month period due to the impact we experienced then from the implementation of a new accounting system, it still represents very solid execution from our team in a very difficult market environment.

Accounts receivable increased this quarter to $59.2 million from $47.3 million at the end of the prior quarter. This increase is very much in line with our normal seasonal movements in accounts receivable.

Our DSO at the end of the quarter was in the mid 40's, also consistent with historical performance. We believe our performance here reflects strong collections overall, again in a difficult environment.

We ended the June quarter with approximately $42.3 million in debt, which was down almost $20 million or a third compared to the balance at the end of the previous quarter. As we discussed last quarter, our first priority was rebuilding our cash balance to over the $20 million level which was accomplished during the first quarter. We remain comfortable with our ability to service our remaining debt load based on the strong cash flow of the Company.

Total deferred revenue came in at $132.5 million, which was up $22.4 million or 20% on a year-over-year basis. And at the end of the quarter, the Company's deferred tax asset had a balance of $69.5 million. As a reminder, 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 applied to our three most recent acquisitions.

Let me now turn to our guidance for the third quarter of 2009. At this stage, we expect total non-GAAP revenue of $76 million to $78 million, non-GAAP operating income of approximately $15.5 million to $16.5 million, leading to non-GAAP earnings per share of $0.22 to $0.23.

Taking a look at the full year we continue to make progress identifying incremental cost savings, and we currently expect total non-GAAP costs and expenses, including cost of sales, to be in the range of $245 million to $250 million for the full year. This is a further improvement of $5 million to $10 million from our previous estimate of total non-GAAP costs and expenses in the range of $255 million that we discussed in our last quarter's call.

We remain committed to our role of delivering a full year non-GAAP operating margin of 20% or better.

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 has declared our third quarter dividend of $0.10 per share payable on September 15, 2009, to stockholders of record on August 28, 2009.

During the second quarter we paid dividends of $4.5 million.

Second, we did not make any share repurchases during the second quarter. We still have approximately a $30 million of capacity remaining in our $40 million share repurchase program and we will continue to balance the best ways to use our cash flow to enhance long-term shareholder value.

In summary, the Company executed at a very high level in the second quarter and the first half of the year. In a difficult environment the Company has delivered profitability margins in line with our goal for the year, while we continue to make progress against our long-term growth initiatives and build an increasingly subscription-based business model.

We believe the research and development initiatives and go to market strategies that we are executing against are solidifying Blackbaud's market leadership position and position us well for when the economic environment improves.

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

Certainly thank you. (Operator instructions.) Tom Roderick with Thomas Weisel Partners.

Hi guys, this is [Chris Ko] sitting in for Tom. Good job on the expense side of the equation especially given your tone it sounded like things are kind of going sideways for a little bit.

So I did have a question though on the -- so on the budget setting process you mentioned that -- or Marc I think you mentioned this, that at the end of the quarter some people just decided to use it or lose it on the budgets. For fiscal year '10 on the budget setting plans are you seeing anything there that would lead you to believe that maybe you could get some grasp of what their IT spending plans are for fiscal year '10, for people that ended their fiscal in June. And how is that playing out so far?

Well, everybody is being quite cautious. As I think we've said before I think the nonprofit sector does somewhat lag the economic environment. And organizations, whether they have increased fundraising so far this year or decreased, are facing increased demand. And so they're being very judicious in how much money they can afford to put into IT. They fall into a couple of categories. There are those organizations that have decided it's going to last long enough that they need increased resources. And that's a minority of organizations, and so they have increased their investment in IT. And I think that they're -- I'd have to say the majority of them are under very tight budgetary constraints and for that reason I said I don't foresee us planning for an increase in the purchasing environment in the near future.

Okay, thank you very much. And then I guess on the NetCommunity Grow product, you guys mentioned that that was a strong point during the quarter. I'm sorry if I missed a press release or something on this, but is this something that you guys actively tried to market during the quarter or is this something that there was just a higher degree of interest given the environment?

We did market but obviously we market mostly in areas that are read by a nonprofit organizations as opposed to some (inaudible). One telling factor was that of the sales of Grow in the quarter, of the 44 sales, almost half of them came from customer-initiated leads. So the marketing did seem to be striking home.

I think that when people get a broader understanding that Blackbaud provide a simple, easy to implement entry level fundraising -- online fundraising solution that they have been interested in coming directly to us. So, that was very encouraging. So it was in response -- it was mostly customer driven response to a modest amount of marketing in nonprofit specific channels.

Great. And then I was wondering lastly if you guys could provide some color on the average selling prices in maybe the core RE market. Are you seeing -- I wouldn't necessarily can -- wouldn't say that cannibalization is the right word but are you seeing a decline as far as Raiser's Edge? I would assume from your license sales that this might be the case. But is RE dropping quite significantly relative to what you would have expected? And just more kind of short run small budget investments?

I would say that in general we're not seeing a substantial change in our ASP. It's perhaps down a bit. But it's not a significant change in terms of the overall ASP. Our issue is really more of units than it is ASP, Chris.

Okay, great. Thanks guys.

Phil Rueppel with Wells Fargo.

Can you hear me now? Sorry about that. This is [Tria Forsham] in for Phil. Just following up on the earlier question. What impact is the layoffs in the nonprofit sector having on your business. You talked about units. How -- especially in the renewal business what impact are you seeing?

I'm having a hard time hearing -- she said the impact of something in the nonprofit sector. What is that? Impact -- ?

Can you hear me better now?

Yes, I can.

I'm sorry about that. Impact of the layoffs on the nonprofit business. You talked about units in answer to the previous question so I'm curious on that.

Well, there have been layoffs in many sectors around the world, and nonprofit world is not exempt. It doesn't appear to me -- I mean we don't have statistical data, but it doesn't appear to me that there's a significant connection between our customers and whether or not they're going to buy and/or whether or not they renew and the layoffs. So we've not seen any particular -- but what we haven't -- we've seen no particular increase in organizations going bankrupt. And that's -- you can see that in our maintenance renewal rates which remain the same as they were during healthier economic times. And I think that some organizations, layoffs and budget cutting went together, and some organizations they were unrelated.

Okay. And following up on a comment you made during the prepared remarks, do you think you've seen a bottom in your business especially as it relates to new licenses?

Well, from a new license perspective, remember that you need to look at subscription and new licenses together. And so there's one question which is what's the mix look like in the future and we will probably have subscriptions growing faster than licenses even when a recovery occurs. So you'll just see the subscription growth rate higher than license growth rate over time.

Now, I do not think that we've necessarily seen the beginning of a recovery. To paraphrase Winston Churchill, we may have seen the end of the decline.

Okay. And one more. Can you give a little more color on your expense controls in terms of -- you mentioned it's across the board, but a little more color would be helpful.

Would you like me to talk a little bit about where those expense savings have come from?

Yes, that would be helpful.

Yes, okay. Well, when you talk about this and I think we've tried to make this point in our previous calls, that the savings have come from across the entire organization. It's been a really significant effort by every member of the management team and so we feel really good about that.

In addition to that we've been getting these savings from a variety of different areas and so, no surprise, a big part of the roughly $20 million or so in savings that we're now talking about relative to where we started the year, roughly probably 30% of that is related to payroll and benefits. And part of that is we did not give any increases at all to the man- -- entire organization, normal salary adjustments. But more importantly I think we've done a very solid job of managing our attrition and replacement hiring so that we've been able to achieve significant savings there without having to do an across the board headcount reduction.

In addition to that, unfortunately we haven't been able to pay as high a commissions that we might otherwise be paying if sales were performing a lot better. That reduction in commissions is directly related to our lower revenue. It's probably somewhere in the $3.5 million range. In addition, because our performance is not quite what we had hoped it would be when we entered the year, we're generating some savings against our bonus plans.

We've also saved a substantial amount of dollars in travel. Probably somewhere in the neighborhood of around $5 million. Part of that would otherwise have been billed to customers had we incurred it but there's a sizeable portion of just travel related expense that flows through to our various categories in the P&L. And we're achieving savings there.

So I think you get a sense they're in a whole variety of places but it's been an across the board effort by the entire team.

Then if I could squeeze in just one last one, could you talk about your performance in eTapestry? Did you see -- how was it sequentially and year over year?

eTapestry continues to do well especially in terms of units. It's very close to its plan which makes it somewhat of a bright point in the context of the corporation from a units perspective. Units tend to be somewhat less. The ASP has gone down in the sense that there are fewer large sort of eTapestry deals than we've had in the past. So, in general we're very, very pleased with the results that we're seeing in terms of sort of unit and momentum. And we're actually reinvesting a little bit in additional lead generation because we think there's potential for some incremental improvement there.

And also I would just add that, in addition to the comments Marc was making about the sales side, I would also tell you that we did have a nice little bit of growth on the revenue side as well as you would expect with the subscription -- our model.

Thank you.

Sterling Auty with JP Morgan.

Yes, thanks. Hi guys. A couple of questions. First, you mention the renewal rates being still in the mid 90s. Was that just on the maintenance? Can you talk to what you've seen in the subscription side of the house as well?

Yes, the maintenance renewals on -- let me just go through this just a little bit. Our maintenance renewals are in the mid 90s. When you look at subscription renewals you have to kind of break it down in pieces. If you look at our Internet solutions, direct marketing solutions, and hosting, our renewal rates are very much in the same range as our traditional maintenance renewal rates.

When you go to our Analytic solutions, which is a variety of different offerings that we provide to the market, that are used by different customers for different purposes, the renewal rates there have traditionally been in the mid 80s to mid 90s and in general we're seeing the same thing at the present time.

Finally, with respect to the Sphere offering, which we got in the Kintera acquisition, I think as Marc pointed out we've seen a significant improvement in the renewal rates there which is something that we expected when we made the acquisition. And we've been very pleased with what we've seen there. So a good improvement there.

Okay. And on that last point, on Kintera specifically, if you look at the kind of cost structure that you acquired, the business that you acquired, can you just talk to how much of the savings that you're experiencing now is just getting better efficiency out of that asset in particular?

Well I wouldn't say that -- I think the way I would position it, Sterling, is to say that we are sort of at the point where we expected to be with Kintera in terms of their cost structure. We're not done. We haven't achieved all of the cost synergies that we can achieve, but I would say that in general terms our cost structure's about where we expected it to be at the time we made the acquisition.

And we did have cost savings built into the 2009 plan when we gave our initial numbers of 265. So that included a couple of million dollars of cost savings in engineering. It included cost savings in data centers and public company costs. None of those are included in the improvements that we've made this year; they were already baked into the initial plan.

Okay. And then last question. As you look at the competitive landscape, so you mention there are organizations that, you're right, they feel like they have to move now to move to the next generation of how to interact with the donors, et cetera. But I have to imagine that the number of opportunities is smaller given the environment . I would imagine that means that the competition for those RFPs is even higher. Can you talk to the competitive landscape by type of organization as well as size of organization, both from some of the dedicated guys in the space versus what you might be seeing out of use of a salesforce.com or even any talks of anybody else moving into the

Well, if you look at the largest organizations we have a very, very high win rate. The Blackbaud Enterprise CRM product is simply unmatched, there's nothing like it in the marketplace today. So, when you look at the special sector of people like the higher ed -- the very big, higher ed organizations or the very big healthcare organizations, the very big chapter-based organizations we're doing very, very well. And so in that space actually that's a fair amount of growth. Actually we're seeing growth at this point.

If you look in the core market, what you see is, as you say, a somewhat lower amount of opportunity, although the opportunities are not that much lower than in past years. The real change is that in most sectors, in essentially all sectors of mid size, being no decisions after looking is the part that's increased. So, if you had 100 opportunities and no decisions in the past were 40 or so percent, they might be 50 or 60% now depending on the sector.

So, yes, there is in some sense more competition for the remaining parts and yet we represent the largest, the safest, the most financially secure and the highest customer satisfaction vendor essentially in the market in most segments. And so the win rate that we are experiencing once there is a decision made, the percentage of those cases that we win is going up regularly, quarter by quarter here.

And we're very pleased at our -- at the improvement in the win rate. And I believe that's an acknowledgement for the quality of the organization, the quality of the customer satisfaction and also the belief that in times like these you need to make sure you invest with someone who's going to see you through the hard times.

Got it. Thank you.

John Neff, William Blair.

Hey guys thank you. Just kind of a for profit/nonprofit kind of question. But for profits in a recessionary environment maybe they'll be able to justify technology investment to improve efficiencies. I think you alluded to this before so I think I know what the answer will be but can NPOs do this or is it less likely to do it -- to go for technology driven efficiency out of concern for maintaining services?

The answer is both occur. The larger the organization the more likely it is that they have an investment budget and a professional IT organization that knows how to evaluate sort of the difference between capital and operating expense. And in the mid-size organizations it truly depends on whether or not there's someone in the organization who has a clear understanding of how an investment in a new fundraising system can bring them results in the time horizon of the downturn.

And so that's part of why you see some of our areas the kind of uptake, for example, on Grow, which is a subscription-based offering and a lower end entry point. They believe they can get a return faster by doing that than paying for an upfront fee and doing a more complete and full featured website for example. And so you do see some decisions that are driven in the financial decision towards a periodic payment versus an upfront payment.

But that typically again depends on whether someone has a firm belief that spending money now will get more people taken care of during a period of increased demand.

Something interesting, this Listening Post project survey that came out recently found that mid-sized NPOs seemed to be feeling the most severe effects of the recession. Is that kind of consistent? I don't think you used the expression, but in recent quarters your sales have been sort of barbelled. Sort of eTapestry's fairly strong, eCRM fairly strong, and then it's been the core solutions sort of in the mid-point. Would those survey results sort of corroborate what's going on with your sales in terms of the pattern there?

It sounds to me like a pretty fair assumption. We don't have any specific details from any third party market experts other than the kinds of things that you've read. But to me, yes, that sounds like a very fair assumption. I think the middle-sized organizations are feeling the squeeze.

And then historically the nonprofit sector, employment has increased during past recessions unlike the for profit sector. Probably haven't seen any statistics on that but if that's -- any anecdotal sense of whether that's been true so far during this downturn? And whether yes or no, is that showing up in your maintenance renewals, your training? In other words, are people signing up -- are you seeing much degradation in terms of the number of people being renewed at contract time, et cetera?

Well, two things. First, when you look at "unemployment" in the nonprofit sector, many of these studies include volunteers. And so those sectors where demand is going up and is visible in the local community, say food banks, you see a dramatic increase in the number of people who come out to help and the amount of work that goes in. So it's very hard to know what the "paid" versus unpaid employment figures are and what they mean. We've seen it all over the board. So that's a primary distinction that I'd make. And Tim has a comment.

Yes, I would also add to what Marc said just on your comment about training. It certainly isn't showing up in training. I mean we're not -- our training business is down year over year. It represents a lower percentage of our total services revenue. We are seeing people just stay away from training. And so I'm not sure that's indicator of whether or not there are fewer or less people at the nonprofit but it certainly wouldn't support that there was an increase.

And in terms of maintenance I mean we have seen -- I'm -- it's clear that if you look year over year, there probably are a higher number of customers who are deciding they want one less [seat] of a particular product on their maintenance program. But in general when you add that all up, it's still not that significant in terms of our overall percentage of renewals, John.

That's helpful. And then sort of speaking of renewals, Tim, just given the importance of the eTapestry renewal rates to combat the risk of cannibalization with some of the core solutions, how are those holding up?

Yes, they actually went up just slightly this last quarter. In fact, I mean when you're talking a tenth of a point either way -- when you're in the mid 90s already, a few tenths of a point are a nice thing long term but they have gone -- they've been trending up slightly. People are not changing horses in the middle of the stream.

That's great. Thank you, guys.

Thanks John.

(Operator instructions.) Ross Macmillan with Jefferies.

Hi Tim, hi Marc. Three separate questions. First one, services were up sequentially I think for the first time in three quarters. I don't know if -- I came on a little late so you may have talked to that. But could you just talk -- speak about that a little bit?

Second one, the $5 million to $10 million of additional cost savings, is it more of the same? And I guess specifically we're not making any headcount cuts here I presume.

And then I have a follow-up. Thanks.

Take the second one first, which is no, we're not making headcount cuts to do that $5 million to $10 million other than management of attrition but there's no generalized headcount cut involved in that.

And in terms of services, Ross, I would merely characterize what we've seen sequentially in services, as I think you know that our first quarter tends to be not a particularly strong quarter for us from a services standpoint in any event. Normally first quarter and fourth quarter are a little bit weaker and so I think all you're really seeing in the sequential movement in services is something more related to seasonality than anything else.

And just on that point, you're obviously getting a lot of services around the eCRM deals. So I think -- is it fair for me to assume that the connection between services and license fees historically is breaking down here because of the different licensing arrangements under eCRM?

Well, I think that's true and I would also point to the fact that as we've said, the increase in the number of subscription offerings that we are doing is affecting us as well. So it is eCRM. It certainly is having an impact but also the subscription offerings as well where there's a period of deferral before you can even begin to start recognizing the services. You have to wait until the software is deployed, the product is deployed, and then there's rateable recognition over the remaining life of the contract. So all of these are factors that enter in.

Great. And then my follow up was I think you mentioned you're starting to see some more mid-tier interest for eCRM. Does that have any implications for how you're thinking about development of RE8? Thanks.

Yes. So when I say mid, I was talking large mid. So the kind of project that would have been the biggest RE project of the past is sort of a mid-sized eCRM project. [Think] projects that are in the high six figures (inaudible). So, I would say that there's very little in what's happening in the high mid market eCRM that is a direct influence or impact on the Raiser's Edge 8 development path. They're very different markets in the sense that 8 is really about sort of smaller organizations -- RE8 is about smaller organizations where people typically wear more hats than there are people, and still at the low end of eCRM there are typically more people per role than there are roles. So it's the difference between a professional tool and an enterprise platform or an enterprise application. And they are going along quite separately and independently.

That's very clear. Thanks. Good job on the costs.

Sterling Auty with JP Morgan.

Yes, thanks. I'm back guys. I figure first time in I'd get all the questions that I could. On the commentary about managing the attrition, can you give us what the total headcount was at the end of this quarter versus last quarter?

It's basically -- without getting into a finer point it's basically a flat headcount.

The flat headcount has a tendency to mask two different trends. There's down through attrition in most areas of the company and there is up in R&D and there's up in services in the UK where we have the two large eCRM deals, and there's a small amount of up in sales in a couple of the remote geographies. So, there's puts and takes in that number and it nets to zero.

And the important thing to also remember, Sterling, is when we started the year and we were looking at our cost structure of around $265 million, that cost structure clearly contemplated that we would have some additional headcount being added normally in the second quarter.

And so part of what is -- you've got to balance through all of these pieces, the attrition, where we have to add heads and where we're not needing to recruit.

Okay that makes sense. And have you guys disclosed when -- what the timeline is on Raiser's Edge 8?

No. One thing I've said is that it would be the first integrated generation 8 solution for the core market, would be in limited release by the end of this calendar year and would be in general release in the first half of next year. And it would be an arts and cultural solution that would include components of Raiser's Edge 8 and that's the only specific thing that I've said.

As you think about that platform, is there any ideas around what that might actually do for your services revenue because it seems like while I'm sure some of your customers are -- while your customers probably get that as part of the maintenance program, it would still seem like because the integration -- the implementation of it would drag with it quite a bit of service revenue opportunity.

The upgrade services? Do you mean upgrading of the existing installed base or do you mean new sales or what?

No, the existing customers, the existing customers that are on 7 and below where they want you to actually come in, help with the upgrade to 8, perhaps everything from migrating data and just implementing the system.

In the past as we've gone from one version to another there has been an increase in service revenue associated with that. Some organizations elect to do it pretty much on their own and some organizations -- many organizations elect to spend some amount of money on services.

So I think you can expect to see over the next couple of years after the generation 8 products come out some services associated with the migrations. That may be offset by the generation 8 products being [task] products which may sort of spread other services out into future years. So, I'm not calling ahead of time which of those two factors is a bigger one.

Okay. All right. Thank you guys.

Thank you, Sterling.

Thank you. And gentlemen, it appears I have no further questions at this time.

All right. Well at this point we want to thank everybody for participating on the call and look forward to chatting with those of you who have follow-up questions in the days and weeks ahead. Thank you very much.

Thank you very much. Have a good evening. Bye bye now.

Thank you. And ladies and gentlemen, that does conclude today's conference.