Blackbaud Inc (BLKB) 2010 Q2 法說會逐字稿

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

(Operator instructions).

I would like to turn the conference over to Mr. Tim Williams, Chief Financial Officer of Blackbaud. Please go ahead, sir.

Thank you very much, Operator. Good afternoon, everyone. Thank you for joining us today to review our second quarter 2010 results. With me on the call is Marc Chardon, President and Chief Executive Officer. Marc and I have prepared remarks, 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 financials.

Marc?

Thank you, Tim, and my thanks to all of you on the call for joining us today to review our second quarter 2010 financial results, which are highlighted by revenue and earnings per share toward the high end of our guidance. Our general markets and enterprise business units both delivered solid results in the second quarter, and we experienced strong demand for our enterprise CRM offering and our expanding suite of subscription-based solutions, both of which will have positive financial impact in future quarters.

We believe there has been an improvement in the economic conditions affecting the nonprofit market, as reflected in some increased willingness to invest in technology. Blackbaud is executing well in this environment as we continue to bring both new products and innovative high-value packaging of existing offerings to our market. We're excited by the market's acceptance of these new solutions and are confident that Blackbaud will continue to strengthen its market position and expand its market opportunity as we implement our long-term product roadmap.

Let's take a look at the financial highlights of the second quarter. Total revenue of $80.7 million was toward the high end of our guidance and was up 6% on a year-over-year basis. From a profitability perspective, our non-GAAP operating income of $15.8 million was toward the midpoint of our guidance, while non-GAAP EPS of $0.22 was at the high end of our guidance.

Blackbaud has a long history of generating substantial cash flow, and we generated $17.4 million in cash from operations in Q2. We believe cash flow will become an increasingly important metric for Blackbaud over the long term as our business continues to evolve toward subscription-based solutions, which can shift the profitability of the Company to future periods as this portion of our revenue grows. Our subscription revenue grew 15% on a year-over-year basis and represented over 25% of our total revenue during the quarter compared to 9% in the same quarter three years ago. Subscription revenue remained approximately 3 times the size of our license revenue even after we account for experiencing a strong rebound in the license sales during the second quarter.

Let me give you some initial perspective on this evolution. First, perpetual software license units sold in Q2 were essentially flat year over year, both for the second quarter and for the first half of 2010, in fact, while the number of units sold with subscription-based pricing surged by over 75% on a year-over-year basis during each of those periods. Second, subscription-based components of our largest transactions in Q2, those with contract values greater than $100,000, grew to 50% of the mix, up from 33% in the same period a year ago, while software license sales went from 16% of that mix to approximately 9%. We have built a subscription revenue base with an annual run rate of more than $80 million, and our visibility and predictability continues to improve as subscriptions become a larger percentage of our overall revenue.

Now let me turn to market conditions. Even though our total revenue has met or exceeded our guidance throughout the economic downturn and interest levels for our solutions has remained at high levels, we consistently communicated that we had not yet seen nor forecast any improvement in the willingness of nonprofits to invest in technology. We did mention a few signs of stabilization in the small to midsize segment of our market in last quarter's call. These prospects and customers have been the historical core market for Blackbaud and were particularly hard hit by the economic recession, certainly harder than the high end of the market.

Since then, we've seen some additional encouraging signs. First, demand was solid in our general markets business unit, which serves small and midsize organizations, as well as in our enterprise business unit. After a sustained period of declining sales, growth has been positive in both quarters during 2010 and in the double-digit range for both business units in the second quarter. Second, we saw a modestly increased level of buying activity near the end of the quarter from some of the midsize customers that have a fiscal year-end at June 30.

While it's still too early to officially call a turn in the nonprofit market, it is also clear that we have some encouraging [data points] in Q2. In addition to the two that I just mentioned, our own Blackbaud Index of Charitable Giving shows an upturn in giving since the beginning of the year, and demand at the high end of the market remained solid. All things considered, we are starting to invest a bit more aggressively, particularly in building out headcount in professional services to deliver against our services backlog, which is well above historic levels.

In addition to modestly improving market conditions, another reason for our growing optimism from a longer term perspective is the continued traction of our enterprise CRM offering. During the second quarter we closed four enterprise CRM deals, bringing our first half performance to the high end of our target of closing, on average, two or three deals per quarter. We continue to build on the Company's strong momentum in the higher end vertical with significant wins this quarter at Boston University and the University of North Carolina at Chapel Hill.

In addition, we had a major contract signing at Junior Achievement USA, which is noteworthy because Blackbaud is replacing the horizontal CRM offering of one of the larger ERP vendors. Blackbaud was not in a position to win the Junior Achievement business when they were first in market several years ago, as we were still in the early stages of developing our enterprise CRM offering. But now we have a highly differentiated solution, built from the ground up for nonprofits, and that, combined with our industry-leading domain expertise, made the difference in securing this important account.

Finally, our win with the Hospital for Sick Children Foundation is interesting, as we will be upgrading the customer from The Raiser's Edge to our enterprise CRM offering. Blackbaud is the only vendor that has solutions designed specifically for the nonprofit market which scale from the smallest organizations through the midmarket and all the way to the largest, most complex distributed national and international nonprofit organizations. We continue to devote significant resources to making sure our enterprise CRM deployments are successful in each key vertical segment.

As Tim will comment further, our efforts in deploying some of our larger, more complex products -- projects with early adopters of new functionality continue to impact our services margin from a near-term perspective. We believe these are wise investments that will yield significant long-term benefits as we ensure that we have strong references and round out incremental functioning that can and will be used for the future deployments. We believe Blackbaud is well positioned in this segment of the market as we close out 2010 and enter 2011, particularly if market demand continues to firm up.

In addition to Blackbaud's success with our enterprise CRM offering, we are also very pleased with the Company's traction in the online fundraising space, where our solutions are being sold on both standalone basis as well as the component of a larger integrated solution. Our flagship offering for standalone online fundraising is Blackbaud Sphere, which is the world's most widely used online fundraising solution. Investment in our core Sphere platform continues with the first release of a new offering which will combine some of the best features of Sphere and NetCommunity on our Infinity platform which is scheduled for the second half of this year. We believe this combined offering will set a new standard for online solutions.

We are also enjoying strong market demand for our streamlined NetCommunity offerings Spark and Grow, as well as for total solutions that are packaged with one of these offerings. For example, we saw further increases in demand for our REi, Raiser's Edge i solution, during the second quarter, which is our recently introduced solution that combines the Raiser's Edge with NetCommunity Spark, delivered in a hosted environment. As we noted last quarter, this offering is part of our effort to use creative packaging and subscription pricing to unlock some of the unmet demand in the key middle market segment of our business.

We're also seeing solid and growing demand for our product packages targeted at schools, one of which offers a simple solution of essential administrative functionality in a hosted environment to small K-12 private schools. Another is targeted at larger schools and offers a menu of application choices including online fundraising along with Blackbaud's core solutions, Financial Edge, Education Edge and The Raiser's Edge.

We believe nonprofit organizations will increasingly demand online fundraising capabilities that are fully integrated within a multichannel strategy. This will include the Internet, non-electronic channels such as personal contact and direct mail, as well as emerging channels such as text managing and social media.

Blackbaud is the leader in both traditional as well as online fundraising, and we've made two small investments this year in technology that enable us to more effectively and quickly integrate social media technology into our broader product offering. We believe this will position Blackbaud very well from a long-term perspective, particularly considering the fact that we have approximately 23,000 customers and industry-leading domain expertise with decades of experience exclusively focused on helping nonprofit organizations optimize donor and constituent relationships.

In summary, we are encouraged by the stabilization and improvement we've seen in the market environment during the first half of the year, and in the second quarter, in particular. While it's too early to call a turn in the market, we are more encouraged looking to the second half of the year than we were entering the first half.

We also believe that Blackbaud is executing at a high level. Our product, marketing and sales teams have worked hard throughout the economic downturn to improve our messaging and [competitiveness], which has led to a steady improvement in win rates across our broad product category. We have also improved the Company's organization structure and ability to quickly adapt to market opportunities, as is evidenced by the quick introduction and success of recent launches of product and packaged offerings.

We continue to invest aggressively in research and development as well as sales and marketing to introduce new and expanded solutions on our Infinity platform, which we believe will further reinforce 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 over to Tim.

Thanks, Marc.

Let me begin by providing some details on our second quarter operating results. I will follow that with our guidance for the third quarter of 2010 and a quick review of our capital management program.

Let me start with the income statement. Revenue was $80.7 million, which was at the high end of our guidance range of $78.5 million to $81 million and up 6% on a year-over-year basis and 6% sequentially. We are encouraged that growth returned to our business in the second quarter and first half of 2010, and we are confident that Blackbaud will ultimately return to low to mid-teens growth in a healthier macroeconomic environment.

Looking at the details of total revenue, subscription revenue was $20.4 million, an increase of 15% on a year-over-year basis, and a sequential increase of 6%. Subscriptions increased to 25% of our total revenue in the second quarter, up from 23% in the year-ago period.

License revenue was $7 million, representing a 20% increase compared to the year-ago quarter. The primary driver of the strong year-over-year increase was the contribution from two of the enterprise CRM deals completed in the quarter. License revenue can be lumpy on a quarter-to-quarter basis, particularly depending upon the timing of recognizing revenue related to larger enterprise CRM deals, but it is noteworthy that license revenue increased on a year-over-year basis for the first time in two years during this second quarter.

Our services revenue came in at $20.9 million, an increase of 4% on a sequential basis but still down 7% year over year. We have recently started to increase resources in our services organization in both our consulting and analytics businesses as a result of the firming in market demand that we have increasingly seen in the first half of 2010 and the consequent increase in the backlog of undelivered services engagement. There is potential for services revenue to return to year-over-year growth at some point in the second half of 2010, other things being equal.

Our maintenance revenue again represented the largest source of our revenue during the quarter at $31 million, and increased 7% on a year-over-year basis. Our maintenance renewal rates have remained in the mid-90% range throughout this difficult economic environment.

Total recurring revenue, composed of the combination of subscription and subscription revenue represented 61% of our total revenue in the second quarter, compared with 60% last year.

Turning to profitability and beginning with our non-GAAP results, starting with gross profit we generated $51.2 million in non-GAAP gross profit in the quarter, representing a gross margin of 63.5%, which is consistent with the year-ago quarter. The margin from our fastest growing source of revenue, subscriptions, improved by almost 100 basis points year over year.

However, with respect to services margins, we continue to make fairly significant investments in the implementations associated with a small number of key early adopters of our enterprise CRM solution. We believe these investments will pay off in future periods with strong references and broadened functionality that will have appeal in several of the vertical sectors of our market.

Another factor here is the continuing weakness in training revenue, our highest margin services revenue component. Training revenue was down almost 24% versus a weak Q2 last year. I'll discuss services more, including the reason for our longer term encouragement, when I discuss our outlook.

Overall, expenses grew about 7% year over year and 5% sequentially.

As we noted in our conference call, our last conference call, we reinstituted salary merit adjustments this year, effective at the beginning of the second quarter, and this is a big driver of the expense increases. In addition, we started to add net adds during the quarter and made important discretionary adjustments and investments in areas like sales and marketing in support of our new offerings.

For the quarter, then, non-GAAP operating income came in at $15.8 million, which was in the middle of our guidance range of $15.3 million to $16.5 million and represented a non-GAAP operating margin of 20%, which was up from the 19% in Q1 but down slightly from 21% in Q2 last year, due principally to the just-mentioned payroll-related expenses.

The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP diluted earnings per share of $0.22, which was at the high end of our guidance range of $0.21 to $0.22. As a reminder here, we fully tax 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 impact of stock-based compensation expense and amortization of intangibles associated with acquisitions.

In summary, second quarter GAAP operating income was $11.2 million, net income was $6.8 million and GAAP diluted earnings per share was $0.15. This compared to GAAP results of operating income of $10.8 million, net income of $6.6 million and EPS of $0.15 in the same period last year.

Let me now turn to cash flow and the balance sheet. We ended the second quarter with $13.3 million in cash, down from $23.3 million at the end of last quarter, due to using approximately $21.5 million in cash to repurchase 958,000 shares of the Company's stock during the quarter. A portion of the stock repurchases was funded by the Company's revolving credit facility. $3.5 million drawn under this facility was outstanding at the end of the quarter. However, the majority of these share repurchases was funded by the Company's cash balance as well as our quarter's -- as well as the quarterly cash flow. In the second quarter we generated cash flow from operations of $17.4 million.

Accounts receivable increased this quarter to $62 million from $48.9 million at the end of the prior quarter, consistent with our normal seasonal patterns. DSO at the end of the quarter was in the mid 40s, also in line with our historical performance.

Total deferred revenue came in at $145.5 million, which was up 10% compared to the end of last quarter. We ended the quarter with $4.2 million of total debt outstanding, with the primary driver of that being the previously mentioned share buyback activity in the quarter.

And, finally, as of June 30, the Company's deferred tax asset had a balance of $59.7 million. As a reminder, this asset adds roughly $8 million to our cash flow on an annual basis. In addition, we have a cash flow benefit of approximately $3 million associated with the structure of several of our acquisitions that is not reflected on our balance sheet.

Turning to guidance now for the third quarter, we are targeting revenue of $82 million to $84 million, with non-GAAP operating income of $17 million to $18 million, leading to non-GAAP earnings per share of $0.24 to $0.25. In light of what we are seeing in the market, we are adding some heads in professional services and a few other revenue-generating positions, and these investments are reflected in our Q3 guidance.

As you know, we have not given specific full-year guidance, but I would say that based on the Company's first half performance as well as a stabilizing and improving macro environment, we have increased confidence that the Company will generate positive revenue growth for the year. In addition, it is quite possible that we will see greater than low single-digit revenue growth that we were originally targeting.

From a profitability perspective, we originally communicated that we were going to target non-GAAP operating expansion at a few 10s of basis points for the full year. This was based on an expectation that the market environment would not improve and we would not increase hiring. However, market demand has started to firm earlier than we expected, and we are starting to selectively hire in revenue-producing roles, as I just commented. We certainly welcome this tradeoff, as it means we will be in a better position to accelerate our progress toward our long-term revenue growth targets, and we believe we will be in a better position to achieve a level of margin expansion in 2011, other things being equal.

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 $0.11 per share, payable on September 15, 2010 to stockholders of record on August 27, 2010. Second, I just spoke to the resumption of our share buyback activity in the quarter. It is worth highlighting that we have approximately $8.2 million in capacity under that existing authorization as of June 30. We also announced today that our Board of Directors have authorized effective August 1 a new program to repurchase up to $50 million of the Company's common stock, $50 million of the Company's common stock. The old authorization will expire on July 31.

In summary, we are pleased with the Company's execution in the quarter. We are encouraged by growing evidence of a stabilizing and improving market demand. Blackbaud is continuing to strengthen its market leadership by investing in new solutions. We believe this will contribute to the Company's ability to return to low to mid-teens growth over the longer term and as our subscription revenue continues to become a larger percentage of our overall mix.

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

Operator?

Yes, thank you, sir.

(Operator instructions).

We'll take our first question from Ross MacMillan, with Jefferies.

Thanks a lot. Congratulations on the quarter. So, the first question would just be just going back to your description for the full year, Tim, sounded like previously you had said in the 10s of basis points. At least as I can calculate through Q3 it looks like it's going to be running at about 20%, which I believe would be below the run rate for the first three quarters of last year. So is there any more color you could provide around the operating margin view for the full year now, as opposed to the 10s of basis points expansion?

Well, Ross, we're not really in a position to get very specific at this point about Q4, in particular, which would be necessary here in order to give a more complete picture of where we think we're going to finish out the year. Obviously, the point we're making is we are going to add some headcount here in Q3, and potentially even add some further headcount in Q4, to support some additional growth and ramp-up in our services engagements, our professional services engagements and deployments. And so it's not -- we're not in a position to give you a specific number, but we would expect to show some sequential improvement from Q3 to Q4 in our margin, but we're not in a position now to be able to say that we'd achieve that 10s of basis points improvement.

That's fair. And, just to be clear, those headcount additions are predominantly in professional services, to be deployed around, I presume, predominantly BBEC deals.

Yes, but they're also -- there's also been some growth in our general markets business unit, as well, particularly as it relates to any of these new packaged offering and subscription offering.

The amount of headcount would sort of be similar across the two business units, Ross, in terms of the professional services part of it.

Okay.

There's also some modest increases in sales and marketing heads.

And I should say, too, Ross, it would also be -- there's also some growth embedded in here, a few heads, related to our analytics business, as well, for deliveries and (inaudible) there.

Okay. And then just last one for me, the license number you noted, first growth in two years, 20% growth, so, as I understand it, on these BBEC deals where you are recognizing revenue through milestones, once you start to effectively build in the functionality that certain verticals might want, there's the potential for deals to become more recognizable upfront. I'm just trying to understand whether we've kind of hit an apex maybe in one of the verticals like higher ed which might lead to a more consistent higher license revenue, perpetual license revenue contribution as a result.

I think that's a very good analysis of the situation. That is very much the case of what we're seeing. The only caution I would give is that, as you can appreciate given the size of these deals, they are subject to -- they're subject to pretty heavy negotiation, and you can always run into specific requirements on certain deals that could require us to defer the license income revenue recognition. But I think your overall analysis generally is on point, and we'd be more likely to be able to recognize something given what we have [invested here].

That's great. Thank you.

We'll move on to our next question to Phil Rueppel, with Wells Fargo.

Thank you. This is actually [Priya] for Phil. So, based on all these new products you've introduced, I was wondering if you can talk about your experience with different delivery models and different products but not all the same price points, and traction with all these models.

Well, I think the only sort of direction we can give you is that, as I mentioned before, the unit sales or the license sales were essentially flat in terms of the number of sales, and so the subscription-based ones, whether they are hosted or SaaS, were where the unit growth is seen. So we don't really break that out, however, in any more detailed a fashion than that. What you're seeing, though, is that those subscription sectors are really across pretty much the core market. I mean, you're seeing them in our verticals, where, like education and the arts and cultural sector, as much as you're seeing them in sort of the more traditional RE or FE-type sales. So it's pretty much across the board in terms of some of the factors. At the eCRM level, contract accounting is where the deferral happens, as opposed to subscription.

Okay. And sales hiring, I was wondering if you could probably give us a number of -- total number of hires that you might make for the rest of the year, and any changes in sales strategies, different products and, again, like we'd said, the different delivery models.

Well, we're not going to get -- I don't want to get into exact specifics on exactly the exact number of heads we're going to add on the services side. The plan right now, as best I can characterize it, would be that we're going to add a few dozen billable resources to our services organization over the second half. I want to also point out, and I think it's very important, that we are going to be somewhat flexible here. We're also going to employ the use of some third-party contractors that will give us a little bit of added flexibility regarding -- with respect to the needs for those particular deployments. But that's kind of as near as I can get to this, Priya. As I said, a few dozen heads for sure, and then we'll vary that depending upon how we see things roll out.

From the sales model perspective you're unlikely to see any real significant changes. There will be, if we continue to see firming up of market demand, you could see us hire a few more heads for some specialized sales areas like selling training, for example, where we have had a significant downturn during the market and training may start coming back at some point during this upturn, if there is in fact an upturn.

Okay, and then one last one for me, transaction component, I mean, was that a big component of your subscription revenue this quarter?

So, the transaction component was a sizable portion of our subscription revenue. It did grow sequentially and was up over last year. But the fixed component also grew sequentially and grew over last year.

Great. Thank you.

Moving on to our next question from Tom Roderick, with Stifel, Nicolaus.

Hi, guys. Thanks. I apologize. I jumped on the call just a few minutes late coming over from another call, and I think I missed some of the details around the macro commentary, so, Marc or Tim, perhaps you could just repeat that. I heard you say that the environment is getting better, second quarter in particular looking better than the first. But could you possibly break that down with respect to were you still seeing it at the low end of the market, low and mid end, are you starting to see the big deals come back, just any more granularity you may have provided? That would be helpful. Thank you.

Okay, one of the encouraging signs is that it's generally pretty broadly based. We saw it across the core business as well as in the enterprise space. Sort of the high end of core and the low end of the enterprise is still probably slower in recovering than -- so there's sort of a sandwich happening there. But you saw it across verticals, arts and cultural, education, as well as sort of the more traditional pure product sales. We had growth in both businesses in the quarter and in the half at double-digit growth and significant double-digit growth in Q2. That said, I'm not calling a turn, because you never know. We also had a small number of organizations that had very fast buying cycles in June, which is the first time in a long time that I've seen anything that even began to be a whiff or a hint of some end-of-fiscal-year selling. It was not significant, but it was really the first time that anybody's come and said, "Wow, this thing just came in."

If you look historically at other slowdowns in the past, how quick are your customers to move when they start their end donation dollars start to increase? I mean, I guess the numbers from Giving USA and some other organizations are suggesting that after a couple of years in decline nonprofit donations are finally back up, and it seems like your customers are taking note of that. Is there a pretty quick turnaround time, or should we kind of expect that this is still a traditional, two-, three-, four-quarter lag?

I think the lag is still evident, and the data that we have, we have thousands of customers that we host, and we created a Blackbaud Index of Charitable Giving and a Blackbaud Index of Online Giving, both of which you can look at on our website. They indicate that there was some significant uplift because of the Haiti disaster both in large organizations as well as in small organizations. Those organizations have turned positive, but it's still too early to tell what portion of that was disaster-related versus, if you will, systemic. I also wonder what's going to happen as we sort of approach the elections and then past the elections in terms of the overall economic environment. So, while I'm encouraged, I'm not entirely ruling out a downturn in the market, in the overall market later in the year.

Okay. Fair enough. Can you just talk a little bit about the product upgrade cycle? Looks like you had a pretty meaningful sequential jump in R&D. Does that give you enough R&D capacity to build out the versions, particularly around arts and cultural, that I think you're aiming to host or build in a software-as-a-service environment? Do you have enough capacity on the R&D side, or should we expect perhaps another jump up in R&D with an offset somewhere else?

Well, I don't know that you'll see big jumps in R&D. I feel pretty comfortable with the level of R&D investment that we have. That doesn't mean that in any quarter you might not see some increase for a specific purpose, but we're pretty comfortable. The product for the arts and cultural actually goes to general availability on the 31st, so we got through that, but the run rate for that product won't be going up. That's already built into the headcount.

Okay. Last quick one for me, on the eCRM side, you're clearly doing a nice job there. Sounds like you closed a couple of deals, closed some of those out. Can you talk a little bit about what the pipeline for forward eCRM activity looks like? And, as you look at that pipeline, is this more education tilted at this point or is it more kind of the federated nonprofit organization tilted?

Well, I think that the pipeline covers pretty much all of our verticals, and, yes, we probably -- and if you looked at our 30-plus customers you'd probably find that the largest single sector is the university space. Certainly we've gotten further there in terms of packaging the product into a prescriptive offering. That said, it covers everything from international to education to family and human services to development to healthcare and to advocacy organizations, so pretty much across the board, religious, faith based. So it's pretty much across the board. And the pipeline is strong enough for me to be confident that we'll meet or exceed our goal in units, two to three per quarter, but I'm not calling a turn up there, either.

Okay, very good. Thank you. Nice job.

Thanks, Tom.

We'll move on to Matthew Kempler, with Sidoti & Company.

Hey, good evening. So, I wanted to first follow up on the services side of the business, if you can maybe just help us understand a little bit more about what exactly you're seeing in the backlog there, because the way I had thought about it was professional services headcount was up at the end of '09 versus '08, we've got revenues lower here, though, so I would've thought there's -- that you had some additional capacity to work with, unless it's more about revenue recognition and those guys are being fully utilized.

Yes, the part of the problem that you have to keep in mind, Matthew, is that there is some -- there's a lot of puts and takes going on in the cost of services that is a little confusing. Remember that when we look at our subscription offerings we're having to defer some of our direct costs associated with the implementation of those offerings. So that's having an impact when you look at the movements and cost of services.

But the bigger impact that we're seeing is that we are incurring substantial costs associated with a few of our early adopter implementations, as we said in our prepared remarks, and that is -- that's having a very significant impact on the overall margin here, which, just looking at it, sort of tends to understate really what the real utilization of those resources are. So the point is we're at the stage with a significantly increased backlog in our services over where we were at this point last year that clearly justifies our decision here to invest in some resources to support some additional revenue growth.

Okay. And then I was wondering if you could comment on the international business, what percent of revenue it was there, and do you have the sense that the nonprofit industry overseas is recovering similar to the US -- any differences?

Yes, I'd say that the Canadian and Australian markets are going pretty much in concert with here. The UK market was slower to go into the -- or slower to have the recession impact the buying behavior of nonprofits and appears to be slower to get out of it. So the [BBP] and Canada were in line with the kinds of sort of optimism and sense that things are going better, and we have yet to see that in the UK.

Okay, and the percent of revenue from international in the quarter was --?

Oh, I'm sorry, 15% last quarter.

15%, okay. And then I saw that you opened up an office in Hong Kong. Is that tied primarily to the eCRM pilot that you've been working over in the Asia-Pacific region, or are there other opportunities that you see there?

Actually it was primarily driven by the other opportunities. The subsidiary in Australia has been sending a person to Hong Kong back and forth for a year and a half or so. We have a significant set of customers and market opportunity there, and it came time to have a Chinese national residing permanently there managing the business rather than having someone fly in and out.

Okay. And then, lastly, regarding the new buyback authorization, should we at all interpret that as saying that you're not seeing much attractive in the M&A space right now, or would you be likely to focus on buybacks and M&A in tandem?

I would say that the primary reason for the increase in the authorization is we worked our existing authorization down, as I said, to about $8 million. We wanted to have the additional capacity to move as we felt appropriate. We still are continuing to look for viable M&A opportunities. That search never stops. So I don't think you can make any further assumptions than that, Matthew.

Okay, thank you.

Thanks.

(Operator instructions).

We'll move on to Mitch Bartlett, with Craig-Hallum.

Hi, thanks. Marc, Tim, I think a lot of folks have already kind of talked about this, these questions, but I'll try it again. I think you said subscriptions were up 75% in units. That's pretty remarkable. I'm sure there is in that base a lot of growth at the lower end in Spark and Grow and whatnot, but maybe you could just give us a little more. How does that look as far as average subscription prices year over year and the number of new customers in that versus existing customers expanding out [and things like that]?

We haven't given out average prices for subscription. Clearly, the subscription revenue in a given year is lower than the same or a similar offering would be if you were selling it as a prepaid license. If you think about modeling it so that you recover something like the overall investment in license, equivalent license, plus the services over somewhere around a four-year period, a three- to four-year period, closer to four, you get a pretty good idea. So if our ASVs are somewhere between 20 and 40, depending on the product down in that space, you'd be spreading some of that out, perhaps not quite entirely equally, a little bit more upfront, over a four-year contract or a three-year contract.

And the amount of the business that is new versus back to base is actually quite balanced. The REi offering is obviously typically new. They may be, could be an FE customer, for example, but they are new units. Sphere goes both back to base and off base. And, obviously, the Spark and Grow are essentially almost 100% back-to-base sales. So it's a broad mix, and we're seeing strength across that whole dimension. And, obviously, yes, the units are core units typically, what we call general market units, although we've seen some uptick of the Grow product at the lower end of the enterprise.

And just in terms of units, the only additional color I might add, Mitch, would be that if you looked at the key area, the key offerings of the Company and you looked at it year over year in the second quarter, I think pretty much without exception if you looked at the units we had growth every single -- in every single area, but obviously, as Mark said, in terms of units Grow and Spark were big, big contributors to that year-over-year growth.

All right. That's good for me. Thank you.

Thank you.

Thanks, Mitch.

We'll take our last question from Sterling Auty, with JPMorgan.

Hi, guys. It's (inaudible) here for Sterling. Hey, two questions from --

(Inaudible).

Hey, Tim. Hey, Marc. Two questions from my side, really, so, first, with June being a common fiscal year for nonprofits, I was hoping you can give us some color on how the budgets for fiscal June '11 are looking in terms of donations and text spending, and I have a follow-up.

Well, typically -- we haven't seen their budgets yet. Oftentimes it takes them longer to establish it than just the end of July. And so we don't have a strong view of that at this point. I will also point out that many of these organizations are quite hesitant, given what's happened to fundraising over the past two years. And for any organization that's based on relative amount of volume giving, the big volume giving period is actually December, not June. And so many of these organizations readjust budgets, especially if they're thinking about going upwards, in midyear in their fiscal years even if they do have a June fiscal year. The ones that typically do have June fiscal years often tend to be more in the education space, and we're not seeing huge upticks in any sort of buying behavior, but we're seeing a significant increase in number of these organizations in market now.

What we haven't seen is a decrease in no decision. So people come in, kick the tires. The unit increases we've seen have been essentially 100% based on new people in market as opposed to any change in the ratio of no decision, which are historically much, much higher than the rate of no decisions in the past. So there's still some room for no decisions to go down. We've not seen a change in that direction. And once that starts going in a good direction that's when I'll feel really good about sort of the chances of this being permanently behind us.

Right. Now, I guess, for Tim, you had noted in your prepared remarks that cash flow is going to become an increasingly important metric with the subscription model. I think you did somewhere between $17 million and $18 million in cash flow from ops this quarter. Can you give us some context on the shape of that for the second half of this year, especially in the context of some of the increased hiring that you're doing? Thank you.

You bet. Well, as you have heard many times, we don't give specific guidance on cash flow, and I'm certainly not prepared to do that. However, I would say this. If you look at historically how we've performed here, and in general terms rarely have we had situations where cash flow from ops hasn't significantly exceeded what we've achieved from an EBIT standpoint, and so, on a non-GAAP basis, and that was certainly true this quarter, $17.4 million in cash versus $15 million in EBIT.

And, frankly, our cash flow, I think, in the quarter was held down a little bit because we had a significantly higher proportion of our mix in terms of the timing of the billing of our accounts receivable occurred later in the quarter, and so as a result the add-back, if you looked at the cash flow statement, you'd see a pretty big jump in both the six-month and in the three-month periods. So, I think we'll certainly see some meaningful impact as we roll through here in Q3. But I feel quite confident that we will do in cash flow as we have historically. I think we'll perform substantially better than where our EBIT is going to perform. And that's probably as best I can do at this point.

That's helpful. Thank you.

Okay, thanks.

We have no further questions at this time.

Mr. Marc Chardon, I'll turn the conference back over to you for any additional or closing remarks.

Well, thank you so much, and thanks, everybody, for spending time with us today. While it's too early to call a turn, I'm feeling better about the second half than the first based in part on bookings relative to the economic climate, in part bookings driven by packaging and subscription pricing, and certainly based on the eCRM momentum. We have 14 eCRM customers live now, including nine out of the first 11 that were sold from the 2006 to 2008 period. So we're building critical mass and momentum there.

The combination of some subscription-based offerings and the deferred revenue from eCRM may mean some of this will show up in future quarters. It will mean that some will show up in future quarters. And the combination of the services backlog and increase in bookings leads me to feel comfortable spending a little bit more than we might otherwise have done on sales and marketing on the one hand and a combination of permanent professional services heads and contract professional services heads on the other relative to the services backlog.

We are going to have an investor/analyst day in October during our annual conference in October, on the 20th of October. I'm looking forward to seeing many of you there. And I'd just, again, like to thank you for continuing to follow us and for the good work you do.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.