Blackbaud Inc (BLKB) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Blackbaud first quarter 2010 earnings conference call. Today's call is being recorded.

(Operator Instructions.)

It is now my pleasure to turn the conference over to Mr. Tim Williams, Chief Financial Officer of Blackbaud. Please go ahead, sir.

Thank you very much. Good afternoon, everyone. Thank you for joining us today to review our first quarter 2010 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 that our remarks today contain forward-looking statements. These statements are based solely on present information and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.

Please refer to our SEC filings, including our most recent annual report on Form 10-K, and the risk factors contained therein, as well as our periodic reports under the Securities Act of 1934, for more information on these risks and uncertainties, and on the limitations that apply to our forward-looking statements.

Also, please note that a webcast of today's call will be available in the Investor Relations section of our website. With that, I'd like to turn the call over to Marc, and I'll come back a little bit later to give some further details regarding our financial performance.

Thank you, Tim. And my thanks to all of you on the call for joining us today to review our first quarter 2010 financial results, which were in the upper half to high end of our guidance for the first quarter.

While the economic environment for non-profit environments remains challenging, we are encouraged by a few initial signs of stabilization among small and mid sized non profit organizations. That said, our high level view of how the economic environment will impact spending decisions in our market for the rest of 2010 remains unchanged. Accordingly, we will continue to focus on delivering strong profitability while we invest in our key growth initiatives.

We are pleased that Blackbaud has continued to strengthen its already leading position in the online fundraising segment of the market, and we are confident that the implementation of our product roadmap and the delivery of several new solutions will enable the Company to continue gaining market share as the spending environment improves.

Let's take a look at the financial highlights for the first quarter. Total revenue of $76.2 million was above the midpoint of our guidance and up subtly on a year-over-year basis. We did a solid job managing expenses in the quarter, which contributed to the Company's ability to deliver non-GAAP operating income at the high end of our guidance. The associated non-GAAP operating margin of 19% was up approximately 60 basis points compared to the first quarter of 2009.

From a top line perspective, there are a couple of items that I would point out. First, while our Q1 total revenue was essentially flat year-over-year, our subscription revenue grew 14% and remained the highest growth contributor to our overall business. Subscription revenue is now three to four times the size of our professional license revenue and we expect it will continue to grow as a percentage of our business. It's also worth pointing out the continued solid growth in our maintenance revenue, which was up 9 percent year-over-year.

2009 was arguably the most difficult environment that Blackbaud has faced in its nearly 30 year corporate history, and maintenance grew at 9% for the year. These results were possible only because of the high renewal rates we enjoyed as a result of our best in class solutions, industry leading demand expertise and the close relationships that we've built with our customers.

This highly satisfied customer base is important as we continue to innovate and deliver new solutions as we have historically had great success in selling a large percentage of new offerings to our existing customer base. We have a deep understanding of the conditions of the market. Our sales, service and support professionals are in regular contact with more than 20,000 existing domestic customers as well as with thousands of prospects. In addition, we have over 10,000 non profit organizations using our SAS and hosted solutions on a daily basis. And as a result, we have access to more complete and current data on contributions, both online and offline, large and small, than any other technology solution provider to the non-profit market.

Our customers range from the very small to extremely large, and they are in all of the key vertical sub-segments of the non-profit market. This broad array of information that we receive from these sources is incredibly valuable to us and gives us a pretty complete picture of what's happening.

On recent calls, we've not called a turn in our market, even though our financial results have met or exceeded our guidance. While our first quarter financial results were again consistent with our expectations, we still have not seen a material change in buying behavior from an overall perspective. As a result, we continue to plan our business based on the assumption that the macro environment will not improve materially during 2010.

Our experience suggests that recovery in the non-private industry will lag overall improvement in the economy as individuals and corporations wait to see the economy improve before they increase their giving meaningfully, and non-profit organizations, in turn, respond with a greater willingness to invest. As a result, we're still cautious on the near term market environment.

That said, there are also factors that provide us with longer term optimism. First, interest in our solutions continues to be high. When budgets and the spending environment improve, we believe Blackbaud will be well positioned to capture a very sizeable portion of any increase in demand in the marketplace.

Second, while it's too early to consider as a trend, it was encouraging to see a few signs of stabilization in the small to mid sized organization segments of our market during the first quarter. On prior calls, we've highlighted this area of the market as being the hardest hit by the economic recession. We believe part of the improvement we saw can be attributed modestly increasing donations and small non-profits, and part is due to improved execution on our part.

The most to a customer centric business unit organization at the beginning of the year is bringing increased focus, agility and accountability. An example of our improved agility, which I'll discuss further in a moment, was the launch of some offerings that are particularly attractive to these smaller organizations.

Although Blackbaud is the largest software provider focused on the non-profit marketplace, we continue to refine our go to market strategies to further improve our win rates and gain market share. We're quite pleased with the success of our efforts in the online fundraising segment of the market where Blackbaud has established a solid leadership position.

We have the sweetest solutions in the online fundraising market including Blackbaud Sphere, our best in class, functionally rich complete internet marketing solution that we acquired as part of the Kintera acquisition, Blackbaud NetCommunity, our best in class integrated internet marketing solution, specifically designed to work with Razor's Edge customers, and Blackbaud's NetCommunity Grow, a simpler and easy to -- sorry -- easy to play version of NetCommunity, sold exclusively on a subscription basis, which has been particularly effective in the current difficult economic environment.

And now, in Q1, we launched NetCommunity Spark. This is an online giving and e-marketing solution without the content management features of Grow for organizations that want an affordable way to complement or expand on their existing website with a proven tool for engaging donors. Similar to Grow, Spark is sold exclusively as a subscription, and non-profits can easily upgrade from Spark to NetCommunity Grow.

During 2009, well over 300 new organizations became Blackbaud Sphere customers, bringing the total number of organizations using Sphere to over 2,000, which makes it the world's most popular online fundraising solution with more new customers choosing Sphere every month. Sphere customers represent about half of Blackbaud's total online solutions customers. And Friends Asking Friends, pioneered within Sphere, has enabled the NPOs, non-profit organizations, to effectively raise money through almost 40,000 team fundraising events. We continue to invest in this platform to expand our capabilities and solidify our market leadership position.

During 2010, Blackbaud will bring the market upgrades to Sphere's already strong functionality in areas such as Friends Asking Friends, email marketing, website content management, online donation processing and advocacy. While investment in our core Sphere platform continues, we're also making solid progress with the development of the online solution offering, which will combine the best features of Sphere and NetCommunity on our Infinity platform. We will introduce the first version of this combined offering in the second half of this year with additional features and functions scheduled for the first half of next year. We believe this combined offering will set a new standard for online solutions.

Another area of differentiation for Blackbaud is systems uptime. This is absolutely critical for customers with any type of online offering. Blackbaud has made substantial investments in its data center infrastructure, and is achieving systems uptime for Sphere customers in the four-nines range, which compares very favorably with competitors. Some of them average more downtime in a week than Blackbaud has in a year, and customers and prospects are starting to take notice.

Our investments have also provided us with a competitive advantage in the speed responsiveness of our Sphere solution to users around the world, a good example being the speed at which pages download. In addition to have invested in great solutions and data site infrastructure, we've also invested heavily in customer support to bring Sphere customer satisfaction levels inline with Blackbaud's best in class levels. We've made significant progress to date, and believe we will achieve our overall goal in 2010.

During the first quarter, we continued to also make progress with our Blackbaud Enterprise CRM. While the first quarter -- the fourth quarter of 2009 saw an unusually strong performance for enterprise CRM, we continue to plan our business on the assumption that we close on average two to three of these transactions per quarter. During the first quarter, we closed enterprise CRM deals with two customers. One of these customers, a large human services organization in the United States, purchased the solution on a Software as a Service basis. Our second enterprise CRM transaction structure was [Manner]. The other purchaser is a large worldwide organization that spent a long time targeting the first customer. They are piloting the use of enterprise CRM with six chapters in the Pacific Rim. That would be our first enterprise CRM deal in the Pacific region. If this pilot is successful, there could be a worldwide rollout of the solution.

There continue to be high interest levels in our enterprise CRM offering across our key vertical markets. In addition, we're pleased with the progress of customer implementations of the solution. The experience that we are gaining with these customers enables Blackbaud to enhance our vertically focused out of the box functionality, which will be valuable in future implementations. We're also refining our implementation methodologies, which help customers get into production more quickly.

Our pipeline of enterprise CRM opportunities continues to remain healthy. We believe we're well positioned to achieve our goals in this area for 2010, and we continue to expect this offering to be an important long term contributor to Blackbaud's overall growth. We will be adding to the capabilities to our enterprise CRM offering in addition to our other solutions as a result of the small technology acquisition we made several weeks ago in the area of social media networking.

Blackbaud is a trusted business partner to over 22,000 customers worldwide, and we're focused on being the thought leader to help our customers leverage new communications channels and social networking opportunities to optimize their fundraising capabilities and their constituent relationships. The technology that we acquired allows customers to leverage social networking sites like Face Book and integrate information directly into their CRM applications such as the Razor's Edge and enterprise CRM. The opportunity came to us as a result of work we were already doing to integrate our respective solutions for several customers.

Also, on the new product front, in Q1, we launched Razor's Edge I, a hosted solution that offers customers the Razor's Edge along with BBNC online giving and e-marketing functionality. It's being sold under a traditional perpetual license model. We sold nearly 100 units of this offering in its first quarter, and we have already built an attractive pipeline of additional opportunities. Along with NetCommunity Spark for the RE install base, this offering is part of our effort to unlock some of the demand in the key middle market segment of our business.

During the second quarter, we will be launching the first version of our next generation arts and cultural solution built on the Infinity platform. This solution, offered under the Software as a Service model, will combine relevant components of the Razor's Edge, Financial Edge and General Admissions ticketing functionality. This easy to deploy solution will be a particularly timely offering for arts and cultural organizations as they've been amongst the hardest hit by the recession.

We believe this integrated solution will help lower barriers to adoption in a tighter spending environment so that museums, zoos, aquariums, botanical gardens and the cultural segment, arts and cultural segment, can move more quickly and realize the fundraising and relationship benefits from a unique solution, which gives them for the first time a truly 360 degree view of all their supporters. This solution will also add to the momentum we're seeing with our subscription offerings.

In summary, Blackbaud continues to deliver solid financial results in light of the continued difficult market environment. We remain focused on execution, investing in our key growth initiatives and continually improving our go to market strategies. At the same time, total expense management, profitability and cash flow will remain priorities.

While we remain cautious about the market environment near term, we are optimistic about our long term future. We are highly differentiated in the marketplace based on our significant customer base, our broad suite of applications and nearly 30 years of experience in the non-profit market. We are investing aggressively in R&D to introduce new and expanded solutions on our Infinity platform, which is further reinforcing our long term market leadership position and will contribute to the continued growth of subscription revenue as a component of our overall business.

With that, let me turn it back to Tim.

Thanks, Marc. Let me begin by providing some details on our first quarter operating results. Then, I will follow that with our guidance for the second quarter of 2010 before wrapping up with a very quick review of our capital management program.

First, let me start with the income statement. As you heard earlier, revenue was $76.2 million, which was above the midpoint of our guidance range of 75 to $77 million and up slightly on a year-over-year basis. As we have indicated in recent calls, our year-over-year total revenue growth is well below our long term target of low to mid teens growth, which we believe is principally the consequence of the difficult economic environment impacting our end markets. Our long term target of low to mid teens total revenue growth remains our goal in a healthier economic environment.

Looking at the details of total revenue, subscription revenue was $19.2 million, an increase of 14% on a year-over-year basis. It increased to 25% of our total revenue in the first quarter, up from 22% in the year ago period. On a sequential basis, subscription revenue was down slightly from Q4 because the variable portion of subscription revenue, which is based on customer transaction volumes, was down consistent with our historical trends. Our customers tend to run fewer major events during the first quarter, which drives this component of subscription revenue. We expect this portion of subscription revenue to increase sequentially in the second quarter along with overall subscription revenue.

License revenue was $5.2 million in Q1 compared to $7.4 million in the year ago quarter. There are a couple factors that contributed to the year-over-year decline. First, we are seeing increased adoption of our subscription based solutions such as NetCommunity Grow, our small school solution and some others. In the place of traditional perpetual right licensing arrangements, we are selling these subscription based solutions.

However, the biggest factor affecting the Q1 year-over-year comparison is that last year's first quarter included a greater contribution from large enterprise CRM deals with upfront revenue recognition versus no similar contributions from such deals in this year's first quarter.

Our services revenue came in at $20.1 million, a decrease of 9 percent on a year-over-year basis, which is principally related to lower levels of license revenue that we have experienced over the last year. A more significant portion of our services work is being deferred along with the related license revenue, particularly for many of our enterprise CRM deals. This revenue will be recognized as revenue in future periods.

Additionally, the shift in mix to more subscription based offerings is pushing out services revenue to the future as GAAP requires the services to be recognized over the term of the related subscription agreement. While this is all hurting current periods comparatively, we believe it should certainly help future periods. Services revenue also declined sequentially, which is consistent with our normal seasonal trends.

Our maintenance revenue represented the largest source of revenue during the quarter, and it came in at $30.6 million, an increase of 9% on a year-over-year basis and up 2% sequentially. Our maintenance revenue -- our maintenance renewal rates continue to be in the mid 90% range despite the tough economic conditions. Recurring revenue now represents 65% of our total revenue compared with 60% in the first quarter last year and 62% in Q4.

Turning now to profitability and beginning with our non-GAAP results, starting with gross profit, we generated $47.8 million in non-GAAP gross profit in the quarter, representing a gross margin of 63%. This was roughly flat with the year ago quarter and down from 66% last quarter as a result of the lower license revenue mix. Also, remember that services margins historically are weaker in Q1, which relates to the challenges of scheduling work with customers and the fact that we typically do more internal training during this quarter.

The combination of inline revenue and continued solid cost management led to non-GAAP operating income of $14.5 million, which was at the high end of our guidance range of 13.5 to $14.5 million and represented a non-GAAP operating margin of 19%, a little over a half a point improvement versus Q1 last year.

The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP diluted earnings per share of $0.20, which also was at the high end of our guidance range of $0.19 to $0.20. As a reminder here, we fully tax non-GAAP EPS amounts, even though the company's cash tax rate is a good bit lower due to the 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 and GAAP results, which include the impact of stock based compensation expense and amortization of intangibles associated with acquisitions.

In summary then, first quarter GAAP operating income was $9.7 million, net income was $6 million and GAAP diluted earnings per share was $0.13. This compared to GAAP results to $7.8 million in operating income, $4.1 million in net income and $0.09 respectively in the same period last year.

Let me now turn to cash flow and the balance sheet. We ended the first quarter with $23.3 million in cash, up approximately $.5 million from the end of Q4. Cash flow from operations was $7.3 million in the first quarter. Accounts receivable dropped this quarter to $48.9 million from 50.2 million at the end of the prior quarter, leading to a days sales outstanding at the end of the quarter in the mid 40s, which is roughly inline with historical performance.

Total deferred revenue came in at $132.1 million, which was up $15 million or 12.8% on a year-over-year basis due principally to the deferred revenue recognition associated with several significant enterprise CRM deals closed over the last year along with the solid sales momentum related to our subscription based products and services. The sequential decrease of approximately $3 million is largely consistent with the historical seasonality we experienced, driven by the timing of annual maintenance renewals. We had no debt outstanding under our line of credit facility.

And finally, at the end of the quarter, the Company's deferred tax asset had a balance of $60.6 million. As a reminder, this asset adds roughly $8 million to our annual cash flow. In addition we also had a cash flow benefit of approximately $3 million that we pick up annually associated with the structure applied to a couple of our most recent acquisitions.

Let me now turn to our guidance for the second quarter. For the second quarter this year, we are targeting revenue of 78.5 to $81 million with non-GAAP operating income of 15.3 to $16.5 million, leading to non-GAAP earnings per share of $0.21 to $0.22. From a full year perspective, we remain focused on several goals, including delivering at least low single digit revenue growth and continuing to manage expenses closely.

Regarding cost, I should note here that we did adjust salaries for the vast majority of our staff, most of which took effect on April 1. As many of you know, we made no such adjustments last year, but we believe it was important to do so this year to maintain our employee retention rates and morale, particularly with expectations that the US hiring market will begin to improve later this year.

Notwithstanding this and other investment decisions we are making, we still feel that if we can achieve low single digit revenue growth, our goal would be to expand our non-GAAP EBIT margin by a few tens of basis points.

Finally, I'd like to finish with a very quick update on our two part capital management program. First, we did announce today that our Board of Directors has declared our second quarter dividend of $0.11 per share payable on June 15th, 2010 to stockholders of record on May 28th, 2010. Second, we did not make any share repurchases during the first quarter. We still have approximately a $30 million level of capacity remaining under 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, we are pleased with the high level of the Company's execution. We continue to deliver solid financial results, strengthen our leadership position across multiple segments of our overall market opportunity, and we are investing in new solutions that we believe will enable Blackbaud to gain further market share when the macro environment and IT spending environment eventually improve.

With that, let me turn it over to the operator, and we will be happy to take your questions. Operator?

Thank you.

(Operator Instructions.)

Our first question comes from Ross MacMillan with Jefferies and Company.

Great. Thanks a lot. Tim, just a clarification on the subscription revenue - two things. One is should I add back all the Kintera deferred revenue write down back to that line to get a true picture on the historical subscription run rate? And then, secondly, it sounds like, as you mentioned, there is an element which is more kind of transaction based. Is that the sole reason for the sequential decline? Thanks.

The -- I'm going to answer those in reverse order, Ross. The answer to your last question is yes, it did have to do with the volume related activities. The second point or your first question, the numbers that I gave out and that I referred to already have the add back in the prior year. So, the Q1 comparison in '09 was adjusted for the add back related to Kintera. And that's reflected in our non-GAAP results.

In the case of Q1 2010, the number is GAAP and non-GAAP. We've stopped adding back for the Kintera adjustment because, frankly, it's not material, either in this quarter or for the rest of the year. So, we feel that's the best comparison.

That makes sense. But, just so I'm clear, the Q4 '09 number should include the full deferred revenue write down to get that -- into subscription to get a like for like.

That's correct, and that would not be the number that shows on the face, obviously, of our financial statements, but with the other numbers we've shared with you in the past.

That's great. And maybe one just follow up - you've obviously got a number of new products both in the pipeline and coming to market or had already come to market. If we take something like RE8 for arts and culture, how are we thinking about this or how should we think about this in the context of existing customers in that vertical and the new offering? And how should we think about the potential for kind of losing some maintenance revenue but scaling some subscription revenue, if you will, if you can understand that concept, swapping one for the other?

Yes, I think I got that. Well, first, the solution in the arts and cultural is not RE8 for arts and cultural. It's an integrated solution that's composed of fundraising, some accounting, ticketing, various different online marketing and content management and so on. So, it's actually an integrated solution that covers probably a dozen different functions and competes with things as far away as Constant Contact.

And so, it will essentially be very -- relatively unlikely that a significant number of RE7 customers would want to move to that. It's target is somewhat lower in the market in terms of smaller organizations, as well. So, I think you're relative safe assuming that there's not a significant cannibalization in this current calendar year, and we haven't made projections for next calendar year.

That's great. Thanks so much. Congratulations.

Thank you, Ross.

Thanks.

Moving on, we'll hear from Tom Roderick with Thomas Weisel Partners.

Hi, Marc. Hi, Tim. Good afternoon.

Hey.

Hey, Tom.

I heard you spend a little bit more time on this call talking about some of the newer offerings around BBNC, particularly Grow and Spark. And I was wondering if you could just take a few minutes to sort of address how you think about the addressable market opportunity there? Particularly as you go downstream with the product set here, how big do you think this opportunity is? What's the typical size of customer that you're going after? And can you just spend a little bit more time reviewing the metrics in terms of early adoption on those two modules? Thanks.

Well, the market for internet overall is actually larger than the market for the Razor's Edge in terms of the number of customers because there's a market for content management, there's a market for online fundraising, there's a market for advocacy. And so, by the time you add up all the different internet markets, the number of potential customers is quite a bit larger.

On the other hand, they're not all that different in size in terms of mix than the customers we've served with a combination of eTapestry and the Razor's Edge and enterprise CRM in the past. So, they cover the same sort of scope from top to bottom, but there are several different sort of sub-markets, if you will, and people could cover them.

The -- today, we've not -- we're not giving sort of, other than sort of an indication when we went to market and the amount of success we had in the first quarter or so, we're not calling out individual product lines in terms of volumes. But, I can say that the opportunity to have these as subscription based products has been, I think, a significant part of our ability to start seeing some unit sales increases, so actual unit increase in the -- what was traditionally called the core market, what we call our general market, our mid market section. So, we do see some portion of the results we're having there being based on having SAS offerings in the online portion of the business.

Okay, good. Turning to the product development side, can you talk a little bit more about Razor's Edge 8? And particularly, you've highlighted the move to the vertical and arts and cultural here to take that to a SAS model. How aggressive do you plan on making -- to move to other verticals, and how should we think about R&D as a percentage of revenues kind of in the mid and longer term related to those developmental efforts? Thanks.

Well, the -- as I've said the -- I think I said the last time, I feel pretty comfortable saying that we're at a pretty good size in terms of R&D in terms of headcount of the organization that we have. And so, you might see a modest amount of sort of expansion of margin based on R&D growing slower than the business if, in fact, revenue -- or when revenue starts picking back up. It's about 13.5% of revenue now. And to me, I don't see any need to expand it dramatically at this point. Things could change, I suppose. But, I feel pretty comfortable where we are.

We're not making a specific statement about the order in which RE8 will come into the market, which segments and which sizes. But, we have said that it will be in market as a SAS offering first. And you're starting to see parts of RE8 show up in solutions like the arts and cultural solution. And we will have more to say about this in the second part of this year.

Okay, very good. Thank you, guys.

Thanks, Tom.

And we'll take a question from Sterling Auty with JPMorgan.

Hi, guys. It's (inaudible) here for Sterling.

Hey (inaudible).

Just two questions -- hey, guys. How are you?

Good.

Just two questions from my side - so first, you maintain the guidance of tens of BPS of margin expansion for fiscal '10. And given Q1 results and Q2 guidance, it would seem to imply a little bit of an uptick in the second half. I guess my first question is where do you see -- what line items do you see yourself getting the most leverage out of?

Well, I think that your synopsis here is correct. We had a little bit of margin improvement, about a half a point in Q1. If you look at Q2 and our guidance for Q2, we obviously do pick up some higher human resource cost drive by the salary adjustments that I talked about. So -- and we still expect to see a little bit of margin pressure coming through in services.

In the second half, we do see some improvement in those services margins, which have to do with working our way through some of the lower margin enterprise CRM projects. And then, in addition to that, we would expect to see some identified efficiencies, efficiencies that we've already identified in our cost structure that we would expect to come through. So, in one area in particular, for example, I believe in fourth quarter, we do expect to see some improvement related to our data center operations because we'll be entirely out of one of our data centers as part of that data center consolidation project that we've talked about a couple times.

So, I think the point I want to stress is it's not going to come just in one area. I've mentioned a couple. There are others also. But, you are correct in your assertion. We do expect to see some improvement in the second half, yes.

Got it. That's helpful. Second question is more housekeeping. CapEx was fairly large in the quarter compared to kind of your historical run rate. What drove that?

What drove that was basically nothing more than the timing of some payments related to some invoices. We actually placed some purchases at the end of the year, given our situation, and we just weren't able to process those invoices quite as quickly. So, they really were transactions that we committed to at the end of 2009. And a lot of those investments that we made were related to these infrastructure investments that Marc talked about.

Okay. And just one follow up on that - so, is it fair to kind of model CapEx in line with sort of your quarterly run rate of between 1 and $2 million?

I think that either that, or if you think about it, I think that's reasonable. But, I think you ought to think about CapEx in an overall annual -- in annual terms. And one would expect -- I would expect that our number is going to be roughly in line with where we've been the last couple years.

Okey-doke. Thank you.

Thank you.

Moving on, we'll hear from Mitch Bartlett with Craig Hallum.

You gave some interesting numbers on Sphere, and I wonder if you would just go back in time when you bought it -- when you bought Kintera. What was going on with the customer base at that time? You went through a period of stabilization. Now, you're seeming like you're starting to grow again. What exactly do those numbers look like? And that business also has a good transaction component, and maybe you could kind of refresh us on what that -- the fundraising revenue component that is part of that. And then, you went through and you talked about how that product can change over the next year. What -- how is that positioned against maybe Convio, which is trying to get public this week?

Well, let's see. There's a lot of questions in there. Yes, we didn't give a ton of detail about the customer base in any particularly sector detail when we did the acquisition of Kintera. But, there were fewer than 2,000 Kintera active Sphere customers at the time, and we were -- and so, we've grown the customer base somewhat. Obviously, there was some -- there was a rate of defection that was associated with some concerns about services and customer support that was higher than is typical for a Blackbaud customer base, and we're making progress towards getting sort of their ongoing sort of transactional customer, subscription customers up to a level that's similar to what we would see for our other subscription offerings. We feel like we'll get to that point of retention some time during this year.

There is a significant portion of the business that is transaction. And many of the new customers that we sold last year have a significant transaction component. Much -- many of those sales were back to base sales to existing Blackbaud CRM customers or for organizations that wanted to do an event fundraising platform, for example, in addition to the Razor's Edge. And those products don't put much actual revenue immediately into the revenue -- into the P&L. They come in as the events come online. And event season is typically more towards the middle of the calendar year than it is at the beginning and the end. So, we'll see more of that, as Tim said, sequentially in Q2 and 3 than we saw in Q1.

I'm -- I don't make it a practice to compare our product set to the products of other organizations specifically. I feel very comfortable that the Sphere platform as we have it today is a very competitive platform by view of its win rates. So, I'll let you draw your conclusions about Convio or any of the other organizations that are out there selling the internet platform. We continue to improve our win rates against our competitors in the internet space. And as for the existing platform, which will get better, we have a huge investment. We spent about $10 million last year in R&D on the internet solutions. And that's going to bear fruit in next generation offerings for transacting trends and (inaudible) later in this year. And I think it's going to be hard for any of the other vendors to keep up personally, but that's just my opinion.

Mitch, just giving you some color on -- one of your questions had to do with the transaction based revenue component. In Q1, that number as a percentage of subscription revenue was kind of in the 17% plus range. It was obviously a little bit higher than that in Q4. I would say, though, that these are both periods which are not the strongest in terms of the contribution that they make to subscription revenue. Really, we tend to see more -- even more events run in Qs 2 and 3.

In addition to that, I would say that if you were to look at it year-over-year, and I don't have any precise numbers at my fingertips here, but I would say that we have seen some nice growth in that component of subscription revenue, partly because we've had more -- we've seen good increases as part of the growth in the -- in terms of selling the Sphere solution, we are seeing and have seen and I think we alluded to this a couple times last year, we've seen more sales that involve that as the component or the key component that -- as to how the product is priced. So, it is very important and is a big contributor for us.

So, customers are willing to go more variable with you, which might provide some significant upside if fundraising does return over the next business cycle. Is that a fair characterization?

I think it's reasonable, although you have to be careful about drawing too big a conclusion on that because a lot of it is around specific events as opposed to that the customers want to run. And for many of these customers, it could even be first time events. So, we'd be cautious about how much impact you would expect from this, but it should be positive in general terms given the improvement in giving.

And, Marc, I was focused on the win rate. Didn't you say that there were like 300 new customers in the quarter of base of 2,000?

No, I'm sorry. If I said that, I misspoke. There were 300 -- there were well over 300 new Sphere customers last year in 2009.

Okay, okay. I was timesing that by four, and I was getting a very good win rate.

Yeah, that would be -- hey, look, a guy can always dream.

Yes, thank you.

(Operator Instructions.)

And now, we'll move onto Matthew Kempler with Sidoti & Company.

Good evening.

Good evening.

You mentioned earlier that you're seeing some initial signs of improvement among your small and mid sized customers. I'm wondering if you could just elaborate a little bit on that and talk about what you're seeing happening in the donations in the first few months of this year, and maybe even on the hiring side among your end clients.

Yes, so we have, as I said, about over 10,000 customers who use our products online, many of them SAS and some hosting. And so, we have agreements with many of them to look at sort of the ongoing transaction volumes. And when you look at the transaction volumes for organizations that raise sort of in the $1 million a year range, you're starting to see a couple of quarters -- I'm sorry -- a couple of months, so getting now to about a quarter, of average increase revenue when you're not seeing sort of that level of actual growth over average in the very largest organizations, for example.

So, in some sense, it's much like small business sometimes leads in the recovery in the United States. Well, small non-profits seem to be somewhat leading the recovery here. That said, we also saw an increase, the first increase in sort of unit sales to those small customers in the past little while through this downturn. So -- and it was -- it's not 100% increase, but it was double digits, and that's a good thing to start seeing some more units be sold. They're being sold as SAS more often then they were in the past, so you don't necessarily see every single dollar in your license revenue line in day one. But, it's nice to see a few more customers coming out of that no decision pool.

As we said, the no decision pool still remains large. But, the intention of about 45% of them is to get back in market with a year -- within a year. And if that's in fact the case, I think we still could see some potential firming up in that. I'm not counting on it yet, though, because a quarter does not make a trend.

Okay. I appreciate those details. And then, when we talk about the subscription side of the business, we're hitting on a number of the segments that are driving growth - the internet solutions, hosting, donation processing. Can you kind of rank them in order of opportunity, internet solutions versus your hosting versus donation processing, where you think the growth will come from over the next couple of years, which will be the most important drivers?

Well, if you're talking about the next couple of years, I think that there's a reasonable balance between hosting and online. But, I think that the online SAS will probably be leading the way in that context. The hosting is relatively unpenetrated for the traditional RE install base, so there's a significant opportunity there for those sectors who decide they want to add the internet to their existing solution because they sometimes make the hosting decision along with the SAS internet decision so they get all of the machines out of their office.

And so, in some ways, I don't actually separate the online and the hosting opportunity enormously because they are oftentimes connected. Our customers are typically the ones who want to have both an online and offline or traditional fundraising component. That's where a lot of this demand comes from, and so a lot of the back to base demand comes from. And that means that they often go hand in hand. That said, I think subscription's likely to be the fastest growing component of our revenue for some period of time.

Okay. And then, finally, I want to understand a little bit more about this new solution that the company is planning to launch in the second half that combines the best features of Sphere and NetCommunity on the Infinity platform. Is this an enterprise targeted solution, and did you say it was a SAS solution, as well?

Well, it can be sold as a SAS solution or as a license, professional license, just as BBEC can. It will be -- it will work both in the mid market as well as in the enterprise market, will work with the Razor's Edge as well as -- or any Generation 8 solution, in fact, so -- as well as ECRM. It's typically going to start sort of at the enterprise level probably initially because that's where there are ECRM type customers, but it can also run as a standalone application. It is over time an upgrade to Sphere customers and it is over time both our standalone and our SAS and our professional license offering.

That said, I expect transition for the install base to be very (inaudible). We have 90% of our Team Approach customers still on Team Approach three years after the acquisition. I expect many Sphere customers to stick with their current platform for quite a period of time, and that's why we continue to invest in that platform, too.

Okay. And just give me a little more insight into what this brings to the table that clients aren't getting today purchasing these solutions individually?

Well, purchasing which solutions -- if I -- so, you mean purchasing Sphere versus ECRM individually or whatever?

Right. Well, it's combining the best features of your products. So--.

--So, traditionally, the NetCommunity product has been -- it started off by being a way of surfacing your fundraising platform onto the internet, so doing marketing that's driven by a cross platform strategy, online and offline. It was very much focused on cultivating donors. And platforms that are typically online platforms without a CRM associated are very much focused on acquiring donors. But, retention and a 360 view of the constituent are not built in.

So, when you get the two together, you go from acquisition through cultivation and retention up until and including say a plan gift, you have -- and you see all of the online and offline transactions at the same time, at the same time for the same individual, the data are very clear that if you can get donors to engage with you both in a traditional offline manner as well as an online manner, the value to you as an organization is dramatically higher. And people are smart. They're figuring that out and they're looking for us to give them a solution that allows them to go beginning -- first contact through plan gift and, online offline, all kinds of the interactions that you have in a relationship with an organization. And that's what the integrated solution provides you. And so, you get to go there sort of gradually along the way.

So, longer term, this would be your lead solution, though, correct?

Absolutely, yes, just like Team Approach longer term - an upgrade to Team Approach is BBEC and an upgrade to RE Enterprise is BBEC. In the long term, the upgrade to BBNC enterprise or BBNC and Sphere, whether enterprise or core, is BBIS. That's long term.

Okay. Thank you.

Thank you.

And now, we'll open the floor up to Phil Rueppel with Wells Fargo Securities.

Thanks. This is actually [Pria] for Phil. I have a quick one. Did you see across the board virtual market improvements in the S&B segment or was it any specific vertical? And also, the new internet, the REI product, did it exceed your expectations?

Well, the REI product did. It exceeded -- didn't exceed our dreams, but it exceeded our expectations, yes. And actually, we were seeing some improvement in some of the sectors where we have vertical applications. And so, that's where the integration story is actually, I think, starting to bring people back in market. We saw some improvement in the arts and cultural sector. We saw some improvement in the education sector, which have both been somewhat challenging. And -- but, on the other hand, I think that I would say that in general, the results in the mid market were improvement across the product lines and across many of the verticals.

Great, thank you.

Thanks, [Pria].

And there are no further questions. I'd like to turn it back to our speakers for any closing or additional remarks.

Once again, thank you to all of you for participating on the call. We look forward to chatting with many of you over the next few weeks. Feel free to give us a call and thank you again for your support.

Thank you, all, very much. Good day now.

Ladies and gentlemen, that does conclude our conference for today. Again, thank you for your participation.