Blackbaud Inc (BLKB) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Blackbaud fourth-quarter 2010 earnings conference call. As a reminder, 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. Good afternoon, everyone. Thank you for joining us today to review our fourth-quarter and full-year 2010 results.

With me on the call is Marc Chardon, our President and Chief Executive Officer. Marc and I have some prepared remarks, and then we'll open up the call for questions.

Please note that our remarks today contain forward-looking statements. These statements are based solely on present information, and are subject to risks and uncertainties that 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 afterward to give some further details regarding our financials. Marc?

Thank you, Tim, and thanks to all of you on the call for joining us today to review our fourth-quarter 2010 financial results, which were consistent with our guidance.

The fourth quarter was a solid finish to a successful 2010 for Blackbaud. While our Blackbaud Index of Charitable Giving shows that donations were essentially flat over 2009 in our year-end report, our year-over-year revenue growth, which started 2010 essentially flat, improved each quarter throughout last year and was approaching 10% by the time we exited the year.

The Company's increased growth was largely driven by improved execution and fundamentals in our two North American business units, driven by strong momentum associated with our expanding suite of subscription-based offerings, as well as the continued market acceptance of our enterprise CRM solution.

As we start 2011, we believe our end market conditions are stable, with isolated pockets of improvement. But it remains uncertain as to how quickly a macroeconomic improvement will positively impact the nonprofit sector.

We remain optimistic about Blackbaud's future. Our market leadership position in both off-line and online fundraising solutions, our strong product roadmap, and our successful initiative to optimize competitive win rates have not only served us well in 2010, they will put us in an even better position when the macro environment eventually improves.

Let's take a look at the financial highlights for the fourth quarter. Total revenue of $87 million was at the midpoint of our guidance and was up 9% compared with total non-GAAP revenue last year. This is an increase compared with mid single-digit growth in the last two quarters and a decline in revenue year over year in last year's fourth quarter.

In terms of profit, our non-GAAP operating income of $19 million and non-GAAP earnings per share of $0.27 were also in line with our guidance.

Similar to recent quarters, we continued to experience a trend towards our subscription-based offering, particularly within our general markets business unit, which is focused on small to mid-sized nonprofits. For the full year, unit bookings from subscription-based offerings increased well over 50% year over year, while subscription revenue in Q4 grew 12% on a year-over-year basis and increased to 25% of our total revenue during the quarter.

Let me remind you that there is a delay between when subscription bookings occur and when implementation is complete and revenue recognition can start. So while subscription revenue grew 12% on a year-over-year basis during the fourth quarter, our subscription bookings grew at a multiple of that rate, and is a primary driver to our growing backlog of both subscriptions and service engagements, which represents committed but not yet recognized business. This backlog was more than 40% larger at the end of 2010 when compared with the same number at the end of 2009.

Turning to the market environment, while our Q4 revenue was again consistent with our expectations and our growth rate improved to its highest level in nearly two years, our overall view of the market environment remains unchanged. We're optimistic that the worst is behind us. We believe market conditions are stable, but the number of delayed purchasing decisions continues to be much higher than pre-recessionary levels. So in that sense, we've not yet seen a material improvement.

The Blackbaud Index of Charitable Giving is largely consistent with what we're seeing in the marketplace. For the three months ended November 2010, we reported that overall giving remained relatively flat with a small increase in of 0.3% as compared to the same period in 2009. Our index results are based on donations to nearly 1,500 nonprofits with a combined annual gift revenue of $2.2 billion. In addition, recent surveys from the Nonprofit Research Collaborative showed that giving has still a long way to go to return to comparable levels of three to four years ago.

However, organizations are guardedly optimistic about 2011, with 47% planning increases in spending, 33% expecting to maintain their current level of expenditures, and 20% anticipating reduced spending in 2011.

All things considered, we believe it's prudent to plan our business based on a stable market until there is greater visibility into an upswing. We remain focused on execution and on improving in the areas that we can control, and in this respect, we are very pleased with the Company's progress against our strategic priorities during this fourth quarter and during the full-year 2010.

First, with fewer buying decisions getting funded, we focused on maximizing win rates in each of our market segments. We did this in part by improving how we package certain offerings and in part by properly positioning the benefits of our offerings relative to our competitors.

The success of our efforts is evidenced by a material increase in our domestic win rates from what we saw in 2009, which were already high levels. Our efforts were particularly effective in market segments such as online fundraising, small schools, and the high end of the market, to name a few.

A second area that exceeded our objectives in 2010 was our enterprise CRM initiative. We closed four new enterprise CRM deals in Q4, making 13 deals for the full year, which is just above our previously-stated goal of signing two to three enterprise deals per quarter, on average.

We continued to build on the Company's strong momentum in the higher ed vertical, adding Wake Forest and the University of Connecticut as customers. The NAACP and the Arthritis Foundation also selected enterprise CRM as their solution of choice in Q4.

On a full-year basis, our enterprise CRM-related business represented approximately 15% of the Company's total bookings, which is significant considering that Blackbaud has been in business for 30 years and this offering became available just over three years ago.

The third major accomplishment during 2010 was the successful reorganization of the Company's North American operations into enterprise and general markets business units at the beginning of the year. We believe this helped sales to our traditional midmarket customers rebound after being hit hard by the recession. This reorganization allowed us to provide a higher level of focus, resources, and accountability to better address the needs of fundamentally different customer segments.

We are very pleased with the agility of our general markets business unit, which spearheaded the launch of a number of new offerings over the course of the year, fine-tuning the packaging and pricing of our solutions to enable customers with tight IT budgets the opportunity to move ahead with more flexible subscription-based pricing. From a full-year perspective, the total bookings of our general markets unit, including subscription, software, services, and training, were up approximately 25% compared to 2009, a very strong performance in what is still a challenging market.

Our fourth strategic priority during the fourth quarter and full-year 2010 was growth in our suite of online funding solutions. Industry data show that online fundraising continued to grow as a percentage of overall donations to nonprofits during 2010, up 9% year over year in our most recent survey compared with donations raised through more traditional methods, which were down slightly on a year-over-year basis.

Blackbaud remains very well positioned to capitalize on this market trend with our Blackbaud Sphere offering, which is the world's most widely used online funding solution, powering over 35,000 events. During the fourth quarter, Sphere represented the largest portion of our overall subscription bookings, which, as I mentioned before, is the fastest growing part of Blackbaud's business.

We also continued to enjoy strong demand for our streamlined NetCommunity offerings, Spark and Grow, as well as for REI, which combines the functionality from The Raiser's Edge with NetCommunity's Spark and is delivered in a hosted environment. REI provides a simple, fast, hosted affordable solution to track all the details associated with building supported relationships using powerful online marketing functionality.

Finally, during 2010, we were pleased with the Company's ability to bring new products to market. A good example of this is the recently introduced ALTRU offering, which is a revolutionary software as a service solution for smaller arts and cultural nonprofits that offers a clear 360-degree view of the entire organization. ALTRU helps these organizations more efficiently cultivate supporters, schedule and sell programs, and manage their earned and contributed revenue. We are pleased with the initial success that this offering has achieved.

We also continue to expand our capabilities in analytics. Last week, we announced the acquisition of Public Interest Data, Inc., or PIDI, which, along with last quarter's acquisition of NOZA, provides us with an expanded solution suite and more powerful proprietary data. Our analytics solutions offer nonprofit customers substantial value add as they look to identify and develop new and existing supporters. These acquisitions strengthen our current offerings and should further solidify our already leading position in analytics for nonprofits.

As we look forward to 2011, we will focus on five strategic priorities. First, we will leverage our domain expertise and growing number of enterprise CRM implementations to deliver increasingly prepackaged offerings and accelerate the growth of our enterprise CRM customer base. This should further extend the offerings' appeal to a larger group of organizations at the high end of our market. As part of this initiative, we're also focused on successfully completing the small handful of large-scale early adopter programs that, on the one hand, open key market to us by virtue of helping us address unique product and service requirements, but which, on the other hand, entailed quite a bit of unbillable work that's hurt our services margins.

Second, we will focus on accelerating adoption of our newer offerings, including REI and ALTRU. Both solutions are high-value offerings sold under a subscription pricing model that makes it easier for customers to buy in the current economic environment. The results of these efforts are also critical as we assess the direction we want to take with our development of future offerings for the midmarket.

Third, we intend to extend our leadership position in the online fundraising segment of the market. Online fundraising is expected to be the highest area of growth in giving to nonprofits, and customers want an integrated view of their supporters and donors. Blackbaud is the only vendor with a leadership position in both online and off-line fundraising, and an integrated offering designed to meet this need.

Fourth, we will invest in growing our international business. We recently appointed a new president of our international business unit to identify and execute against the opportunities in those markets. It will be important that we benefit from the successful packaging, pricing, and promotion experiences in North America and apply those principles to improving our go-to-market execution and win rates internationally.

Market conditions remain challenging in these markets, and they seem to be 12 to 24 months behind the U.S. in terms of economic recovery in the nonprofit sector. Nevertheless, we believe that we can drive improved performance abroad in 2011, just as we did in the U.S. in 2010.

Finally, we remain focused on executing against our product roadmap. This will include bringing new offerings to market, in addition to enhancing our broad suite of existing solutions that are used by literally thousands of customers on a daily basis.

I should mention here that Lou Attanasi, our longtime head of product development, has decided to retire. We thank Lou for more than 25 years of service. He's been a visionary for the Company and has contributed to the huge success of so many of our market-leading products.

We have reorganized both product management and product development under Jana Eggers, who joined the Company last year. You will recall that Jana has a long and impressive track record, including several years at Intuit. Jana's history of developing and marketing small business and enterprise software, both installed and FAS solutions, equips her well to lead us in delivering on our product roadmap.

To summarize briefly, we are pleased with Blackbaud's performance in the fourth quarter and for the full-year 2010, particularly concerning -- considering the economic environment. We have restored modest growth in the business and remain confident in our ability to further accelerate growth as the economic environment improves.

With that, let me turn it over to Tim.

Thanks, Marc. Let me provide some further details now on our fourth-quarter and full-year 2010 operating results, before concluding with our guidance for the first quarter, some directional commentary for the full-year 2011, and a quick review of our capital management program.

Let me start with the income statement, and for reference here, let me just note that all revenue growth numbers that I will be citing are calculated off the 2009 non-GAAP revenue amounts. These growth rates will be somewhat less than what you will see in the GAAP numbers.

So beginning here, revenue was $87 million, which was at the midpoint of our guidance range of $86 million to $88 million, and up 9% on a year-over-year basis. This represented the highest quarterly revenue growth for Blackbaud in nearly two years.

Looking at the details of total revenue, subscription revenue was $21.7 million, an increase of 12% on a year-over-year basis. This represented an increase from the 10% year-over-year growth reported in the third quarter, and we believe subscription revenue growth will improve further during 2011 as sales of our subscription-based solutions have been growing at a much faster rate than our subscription revenue.

License revenue was $6.5 million in the fourth quarter, which represented a 4% increase compared to the year-ago quarter. License revenue may continue to vary significantly quarter to quarter since it is the smallest contributor now to our revenue and timing of revenue recognition from our enterprise CRM offering can skew numbers on a quarterly basis.

Our services revenue typically experiences a seasonal sequential decrease during the December quarter. However, it increased 3% sequentially to $24.6 million as our increased services headcount added in the last few months started to become billable. The 11% year-over-year growth in our non-GAAP services revenue was the highest level in over two years.

Our maintenance revenue represented the largest source of revenue during the quarter at $31.6 million, and increased 6% on a year-over-year basis. Our maintenance renewal rates have remained in the mid-90% range throughout this difficult, challenging economic environment.

Turning now to profitability and beginning with our non-GAAP results, starting with gross profit, we generated $53.2 million in non-GAAP gross profit in the quarter, representing a gross margin of 61.2%, which is below the 65.7% in the year-ago quarter and 62.7% in Q3. The decrease in gross margin on a year-over-year basis is largely attributed to the fact that we are still working through a handful of early-adopter enterprise CRM rollouts that have unique requirements and new functionality. Many of these are also larger-scale, multi-stage deployments, and we expect to make significant progress with these rollouts during 2011, which we expect will result in improvement in our services margin during the second half of this year.

Operating expenses were up approximately 3% on a year-over-year basis and roughly in line with the third quarter. Our overall management of operating expenses has been solid, while we are also making selected strategic investments in our growth initiatives.

For the quarter, non-GAAP operating income, then, came in at $19 million, which was also at the midpoint of our guidance range of $18.5 million to $19.5 million and represented a non-GAAP operating margin of 21.8%.

The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP diluted earnings per share of $0.27, which was at the high end of our guidance range of $0.26 to $0.27. As a reminder, we fully tax non-GAAP EPS amounts, even though the Company's cash tax rate is much lower due to our deferred tax asset and other tax benefits associated with recent business acquisitions. As such, our cash EPS is materially higher than the GAAP and non-GAAP EPS that we report.

In our earnings release, there is a full tabular reconciliation between our non-GAAP and GAAP results. But in summary, the fourth quarter GAAP operating income was $12.3 million, net income was $8.5 million, and GAAP diluted earnings per share was $0.20. This compared to GAAP results -- compares to GAAP results of $13.3 million, $8 million, and $0.18, respectively, in the same period last year.

As most of you know, our differences between non-GAAP and GAAP results typically only include two adjustments -- our amortization associated with the tangibles arising from business acquisitions and non-cash stock-based compensation charges.

In Q4, we also added back to GAAP earnings a one-time charge of $1 million associated with part of the cost of NOZA, an analytics data provider we acquired during Q4. This $1 million cost must be treated as an expense under the new M&A accounting rules. It should be noted here that we will have a similar one-time charge in Q1 associated with the just-announced PIDI transaction.

Turning briefly, then, to the full year in summary, our 2010 results were as follows. Total revenue was $327.1 million, an increase of 5% compared with non-GAAP revenue for 2009, and full-year non-GAAP income from operations was $67.4 million, representing a non-GAAP operating margin of 20.6%.

Non-GAAP net income was $41 million, leading to non-GAAP diluted earnings per share of $0.93. The full-year profitability on a GAAP basis was net income of $29.8 million, or $0.68 per share.

Let me now turn to cash flow on the balance sheet. We ended the fourth quarter with $28 million in cash, compared to $26.3 million at the end of last quarter. For the year, we generated cash from operations of $55.9 million. We used $10.8 million for CapEx, an increase over last year, as we continued to build up the infrastructure to support our growth in hosted offerings. We also returned $42.1 million to shareholders, $19.5 million in the form of quarterly dividends and $22.6 million earlier in the year to repurchase a little over 1 million of our shares. We did not repurchase any shares of our stock in Q4.

Total deferred revenue came in at $148 million, which was up 9% compared to the end of the fourth quarter of 2009. As you may recall, the largest portion of our deferred revenue is maintenance. However, the fastest growth segment within our deferred revenue is subscriptions, which had deferred revenue growth in excess of 20% on a year-over-year basis.

And finally, at the end of the quarter the Company's deferred tax asset had a balance of $49.8 million. This asset adds roughly $8 million to our cash flow on an annual basis, in addition to a cash flow benefit of approximately $3 million associated with the structure of several of our acquisitions.

Turning to guidance for the first quarter, we are targeting revenue of $83.5 million to $85.5 million, with non-GAAP operating income of $14 million to $15.5 million, leading to non-GAAP earnings per share of $0.19 to $0.21. This is consistent with our directional comments on our last earnings call, as we mentioned that expenses traditionally go up sequentially in the first quarter due to increases in employee-related expenses. As such, margins typically and should be this quarter at their low point in -- as we begin the year.

In addition, our first-quarter revenue guidance includes approximately $1.5 million associated with the PIDI acquisition for two months of operations. Their operating margin is in line with Blackbaud's; however, given the relatively small revenue contribution, the impact on our non-GAAP operating income is only a few hundred thousand dollars.

For the full year, then, for 2011, we are targeting organic revenue growth that approaches 10%, which would be an improvement from the mid single-digit range of 2010. Also, we expect our non-GAAP operating margin to be not less than flat on a year-over-year basis. And that -- and there is potential to expand that by as many as 75 basis points, depending upon how the economic and related growth environment play out over the course of the year.

In addition, we expect the PIDI contribution to be approximately $8 million in revenue for the full-year 2011, assuming 11 months contribution -- 11 months of contribution, and we expect that revenue to have a similar margin as Blackbaud's overall non-GAAP operating margin.

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 approved an increase in our annual dividend from $0.44 per share to $0.48 per share. The Board also declared a first-quarter dividend of $0.12, payable on March 15, 2011, to stockholders of record on February 28, 2011.

Second, as I mentioned earlier, we did not repurchase any shares of stock during the fourth quarter and we continue to have $50 million in capacity remaining under our authorization that was adopted on August 1, 2010. We will continue to balance the best ways to use our cash flow to enhance long-term shareholder value.

In summary, we are optimistic about Blackbaud's future. We are the largest and most profitable vendor exclusively focused on the nonprofit market. We have industry-leading product depth, and we have used the economic downturn as a time to aggressively invest in R&D and improve our long-term revenue and business model with a ramp in our subscription-based offerings. Finally, Blackbaud generates best-in-class profit margin and strong cash flow, which we will continue to use in a variety of ways to deliver value to our shareholders.

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

(Operator Instructions). Philip Rueppel, Wells Fargo Securities.

For you, Marc, could you give us a little bit more color about the macro environment? You made some comments about your previously disclosed index. Did you update that through December or did December change significantly from some of the data that you saw there, just from a general perspective?

And then, the last couple of quarters, the UK had been particularly weak. Have you seen any stabilization there?

Thanks, Phil. We have not released the December numbers at this point, and so I don't have a material update there. They should be out in about a week or so. So we're still working through that.

As for the UK, I think we've seen continued challenge. I would say we really are sort of where we were probably something like 18 months ago in the United States from the perspective of the nonprofit sector. You may recall they held on on the up side longer than we did when the economy went down.

So, I have not seen any improvement at this point in their economic environment, and they've got a much stronger sort of governmental cost and austerity program that is still, I think, leaving a lot of uncertainty in the market as they cut governmental expenses and especially governmental support to the nonprofit sector. And so, I really don't see that part of the world turning up in the next, say, 12 months, whereas I do feel that there is optimism in nonprofits in the United States, and I'm starting to see some of that.

Thanks. And then, you mentioned the successful reorganization and then, also, the addition of some service headcount and capacity there. Is there anything we should be aware of as you start to -- as you enter 2011? Any additional reorganization, or is that pretty much behind the Company right now?

There's nothing significant that I'd mention. I mean, any Company has some level of ongoing shifting of motion. But --

Great, and then for you, Tim, my last question. The decline in gross margins, you mentioned the ECRM. Was that primarily the -- what affected both the subscription and service lines, or was that just in the service line? I couldn't quite catch you.

I think it's predominantly in the service lines, Phil. And again, it has to do largely with, in the case of the year-over-year comparison, those few handful of very large implementations that are early adopters, and versus prior quarter, it has to do with professionals that we added during the quarter and at the end of Q3.

Ross MacMillan, Jefferies & Company.

Tim or Marc, those bookings numbers that you gave are obviously very impressive. I think you talked about similar strong bookings at the time of your analyst day last year. It's a little hard to know, though, exactly what it means without kind of the duration of those contracts. But I did notice you said deferred on subscription was up more than 20% for the fourth quarter, year over year. Is that growth rate a good proxy for, if you will, the subscription annualized contract value growth?

I think it's a decent place to start, but again, I think you have to be somewhat careful because, as you know, what flows through deferred revenue relates to what is billed. The backlog contains not only the portion that's in deferred revenue, but the unbilled portion of the total contract value that we sold. So, but I think that's a decent place to start in thinking about how we would see that growth occurring over future periods.

And as you think about your footprint of subscription services which continues to expand, is any of that cannibalistic to your maintenance-paying base, or is most of it incremental? I guess one of the things that's tricky about this is just figuring out kind of what is really all net you versus what might be conversion of existing maintenance-paying customers to a different solution or a different model.

There's essentially no meaningful conversion of existing customers to a model in the sense that they continue to pay maintenance. If we sell those things to an existing licensed customer, that's just an added sellback to them, Ross. So, and we have seen no recent change in our stopping of maintenance [for instance]. There's been no meaningful change in that mid-90 that is still our renewal number. So, you can safely say that subscription sales are essentially all incremental to the existing install base, either as new customers or as sales back to the existing base.

Great. And then, as you complete some of the larger BBEC rollouts, I think there's one particularly large one in a Midwest university, are there any -- aside from that triggering the ability to start to capture more margin on services as you've been maybe deploying a lot of consultants to get those projects finished at relatively low or no margin, are there any other triggers that -- getting through, if you will, some of these major milestones? Are there any other elements that could get triggered?

I guess I'm thinking particularly as to whether, for example, selling into higher ed, you might start to recognize more revenue upfront on some of these BBEC deals once you get past some of these deployments where that might be a gating factor on RevRec.

Actually, I would say that the small handful of early adopter projects are not in any way really a blocking factor in either our ability to sell to those same sectors or our ability to decide whether or not the revenue should be accounted for on a contract basis or on a license basis.

So for example, in the higher ed space, we have packaged ECRM offering in a prescriptive way for a smaller, much smaller price than, say, the very large project that we're talking about. And those are recognized on a software basis because they're very clearly delivered in a way that allows you to say the software is usable as delivered. So, they really are quite independent, and we're making our evaluation sector by sector as we productize the offerings and as we create a sort of preconfigured prescriptive offering to the sector.

So I would say they're completely independent, and in fact, the fact that we have made those early deals have been -- allowed us to use them as references despite the fact that we are still in implementation, and it had a material impact on our ability to bring customers into the market.

That's helpful. One last one, real quick for Tim. Just on the R&D spend in the quarter, I noticed it's down sequentially. Any comments on that? Any thoughts on that?

One of the things you need to understand is part of what's happening there is we do have at least one sizable engagement with an enterprise CRM customer where there is a good bit of customization going on.

So there is a transfer of cost that takes place out of R&D, out of the R&D line, then goes up to cost of services, and then partially on the balance sheet as a deferred cost. So, that's what's really going on there.

I think if you -- and then, secondarily, we had a project that came to an end in which we were using all third-party contractors. So, those two factors contribute really to that decline quarter to quarter.

(Operator Instructions). Mitch Bartlett, Craig-Hallum Capital Group.

This is George Kelly on for Mitch. Just a couple of quick questions on the enterprise side. First, on timing. I think you've announced about 45 wins. How many of those are contributing now, and are there any quarters this year that are going to be especially heavy with the new deals coming online?

I'm not sure exactly how to say -- exactly how much recognition we'll have quarter by quarter. We just don't really cover that.

For this coming year, I would say that our goal is to have three to five enterprise CRM wins per quarter. And that sort of is an acceleration from the two to three this past year. Ultimately we will get beyond that, but that's my set of objectives for 2011. I don't -- starting in the year, I don't have any way of guessing which quarter is likely to be higher or lower, but I would point out that the license revenue is a relatively small portion of our overall business, and we've always said that, from a quarter-to-quarter basis, we won't actually be able to project that very well.

The -- and by the way, I would say that there are 38 deals, ECRM deals, to be -- just give you the accurate number.

And then, secondly, just on the service margins, I think you had guided for them to come up in the second half of the year. What's kind of a good range to go for the second half of the year, do you think?

I think that -- you know, I'm reluctant to get very specific here because, as has been the case in our past, we don't guide to specific margin percentages on a line-by-line basis. But I think if you recall from our analyst day, we said that services margin were a key -- were going to be a key contributor in our margin improvement strategy over the next several years, so I think if we were able to achieve the 75 basis points of improvement, certainly there would be some contribution coming from our services margin.

Okay. Got you. And then lastly, just still on the enterprise side, competitive landscape out there. Has it changed at all recently? When you're out pitching, trying to win business, is it any different in the last six months or so?

I have seen no difference whatsoever in the competitive environment at the enterprise level. The win rates in the enterprise space are very, very high, and we've had a couple winbacks, as I mentioned before, for enterprise CRM.

The only thing I'd point out is that The Raiser's Edge win rate and the bottom part of the enterprise market, so sort of the $100,000, $200,000 deals, was up year over year, and I take that as a good sign of continued interest in that segment for The Raiser's Edge solution as well.

Sterling Auty, JPMorgan Chase & Co..

It's Saket here for Sterling. A few questions from our side. For the 10% growth in 2011, if you kind of split out two buckets, subscription and the nonsubscription part of your business, how do you kind of view the growth profiles of those in the year?

Without getting overly specific, I would say that, and I think this is kind of consistent with what we've communicated in the past, that one would expect with the growth that if you're looking at a 10% organic growth rate, subscriptions is naturally going to be higher than that.

And I think it's fair to say that if you look at license, although you can have some skewing quarter to quarter, is likely to be less, and I think certainly maintenance you would expect to be less, I think, in this year. Even though we had the benefit of some ECRM licenses that contributed sizably to maintenance revenue, we were still only able to grow about 6% with pretty consistent renewal rates.

So, maintenance is going to be lower, license is going to be lower, subscription is going to be higher than that, and services, it just kind of depends upon how everything rolls out for the year with respect to these major engagements.

Got it. And on that last point, on services, I think you guys hired about 50 resources last quarter. Were there any additional resources hired in the fourth quarter?

Yes, we did add a few resources here in the -- in Q4. I think the net add was around 15 heads. Those 50 that we added in Q3, most of those were added near the end of the quarter. So you get the sense of part of the cost movement and cost of services that occur quarter to quarter.

Right, right. I guess I think Marc had mentioned before that there were about 38 ECRM deals out there. How many of those are up and running?

About half of them are up and running. And there are a couple of other ones that there's part of it being used, so a customer might be using one of the pieces of functionality like, say, major giving, but not the direct marketing, or vice versa. So, as I said there, just about half have something going.

Got it. Got it. Last question, if I could squeeze it in. Tim, I know that we don't guide to cash flow, but with the 10% organic growth in revenue and a little bit of margin expansion, depending on the environment, I guess just directionally, how should we think about that $55 million in operating cash flow kind of trending in 2011?

I'd be disappointed, frankly, if our cash flow didn't grow potentially a little bit more than that, but I'm reluctant to get too bullish here.

I think if you look at some of the variables that affected cash flow, particularly in the fourth quarter, some of those should show some improvement year over year as we move through the first half of 2011. Obviously, in general terms, it's going to be a good bit larger. Cash flow should be a good bit larger than our reported income will be. But the exact size of that will depend upon some impacts coming through, mostly in working capital, and I think we've got some things that will work to our benefit there.

Got it. And I'm sorry, I lied. This will really be my last one, but any update on the CFO search?

We are in the process of looking at candidates and we are on track, roughly, where Tim and I thought we would be. But we're not ready at this point to give a specific date. Feeling good about the quality of the candidates we're seeing, though.

Matthew Kempler, Sidoti & Company.

Okay, a few questions here. First, on the Sphere side, the fastest-growing part of the business. If I recall, the Company was shifting more to a model on the Sphere side where it would be going to be transactional, as opposed to a monthly subscription. Is that still the case and does that mean we should see a little bit more variability again coming second and third quarter tied to events?

No. I'm not sure where the idea that we are being more transactional than subscription-based comes from. I don't think that's quite an accurate description of it. So, no, I don't think that it would be a meaningful shift to the variability based on transactions.

The transaction number, if I remember correctly, is less than a couple of percent of our overall revenue, if I remember that number correctly, although Tim will probably correct me if I get that wrong.

So no, in the Sphere business last year, we sold -- once again, we sold over 300 new customers, and there is a fee associated with that setup and there's a subscription associated with that, and some portion of them also have transactions revenue for our payment services gateway, but that's not in lieu of a licensing model. That is (multiple speakers) licensing in general.

Okay, and then when you mentioned one of the key strategies to extend the Company's leadership position in the online fundraising segment, could you elaborate a little bit more on kind of -- are there new initiatives behind this, to drive that in 2011? Or is it more a similar execution to what we've done in 2010?

2011 will see us coming to market with our Friends Asking Friends version 2 product, so that's continuing the roadmap for the combined product set for Sphere and NetCommunity.

We've seen quite a bit of interest in sort of the first major upgrade in Friends Asking Friends fundraising -- team fundraising functionality that the market's seen recently. And so that's certainly an interest, and the other is that we are putting the packaging of bringing the online and off-line fundraising platforms together as in The Raiser's Edge(i) because our customers are very clear that they are not giving up the off-line fundraising. They're adding online to their off-line.

So, that one's a continuation of the existing strategy that's worked quite well this year. As I've mentioned before, the unit growth in The Raiser's Edge come from The Raiser's Edge(i), that basically the non-i version was flat year over year, and in the coming year, you'll see only The Raiser's Edge(i) as our offering as we go into market. Everybody wants to have an integrated solution, and we're going to satisfy that.

On the ECRM side, could you maybe give us a little bit of a perspective from the prospect's point of view? Prepackaged solution versus the custom, what percent of the functionality do you think they get from a packaged solution? And then, what are the improvements we see in terms of implementation, speed, and maybe even service costs?

Well, they get the same product, so they don't get a subset of the functionality. They get the Blackbaud enterprise CRM product.

The distinction is they get a preconfigured version of it. That means that there is less professional services time, and also a prescriptive fundraising model that means that often times they are going and taking their model and using what's best practice in the product, rather than trying to customize the product to a non-best practice or a nonstandard fundraising model. I mean, a smaller organization wanting to spend mid-six figures is saying, well, there are other people out there doing this, I might as well just do it in a very similar way, and I'll put my added 10% difference on it, as opposed to saying I'm going to build the whole thing from scratch.

And that's the primary difference. So, if you look at the higher-ed space, you know that unit growth in the higher-ed space will continue to see some of the same number of big deals that we've seen over the past few years. I don't -- it's not like we're missing big deals in market. It might get a little better if the economy gets better. So if you see the number of deals per quarter going up, you can pretty much assume that many of those deals, if not all, are ones that are coming in a more prescriptive model that corresponds to what I was talking about. Does that help?

Yes, it does. And do you see rolling out the majority of the verticals that you want to target with that kind of a solution in 2011?

You know, I think that you will see those things come on over time. So, right now, the primary spaces where you can be easily prescriptive are a smaller direct marketing environment, a branch or a regional federated agency environment, and the higher education organization, so we're going to focus on finishing in those areas rather than coming across for every single potential vertical that there is.

And you'll also see in those numbers, by the way, several international deals in the ECRM market. We had a couple -- we had good deals a couple years ago and we had sort of a hiatus in the international market this year, and you'll see a re-acceleration in this coming year if the pipeline bears out the way I think it will.

[Chris Koh], Stifel Nicolaus.

Just a quick question on the guidance. Tim, I think you mentioned organically you expected it for the year to approach 10%, so just wanted to make sure. So that does not include the $8 million that's expected from the PIDI acquisition?

That's correct.

Okay, wow, okay, that's pretty good. And then, as far as on the enterprise CRM side, can you give us a little more detail as far as what was recognized this quarter from the four deals that were signed?

My recollection here is that on the software side, we had two, and I can't get into specifics on that, obviously, but we did have two that had upfront revenue recognition that contributed a sizable -- made a sizable contribution to our software revenue in the quarter.

Great. And then, just one other thing. In terms of your assumptions on the approaching 10% revenue growth, is that assuming (multiple speakers)

Chris, I want -- I just -- I think it's worth clarifying that was baked into our guidance. We did anticipate that when we built the guidance, just so it's clear.

Anticipate the --

That (multiple speakers) we were going to be able to recognize that revenue upfront.

Okay, you mean for those deals that you closed during the quarter?

Yes. Yes.

Got it. Thanks for that clarification. And then, as far as just on your assumptions for next year, Marc, so you mentioned it's kind of stable pockets of strength. Is the approaching 10% guidance organically assuming any pickup or are you assuming, similar to past quarters, just kind of a similar environment?

Yes. I am assuming a similar environment. I'm not -- I'm seeing some improvement in no decision, but very, very modest in the coming year, because I see that in several different surveys, there is an optimism that they will increase spending on fundraising and that they will increase spending, a significant percentage of them will.

But I don't actually see the economics of the giving having improved that dramatically. I think it's just that we've been in a down environment long enough that organizations realize they have to continue to invest in their fundraising and they have to continue to invest in acquiring new donors and new supporters, and so, if we saw a material improvement in the economy, it might actually help. Assuming it went through the donor line, it might actually help our donation line, but I think people have already made their decisions about the kind of money they will spend on a fundraising solution in the coming year.

And I'm not sure that you'd see a huge upturn from an economy on the purchase decisions. I think people have already sort of baked some increase, some modest increase, into their plans.

That is all the time we have for questions. I would like to turn the conference back over to the speakers for any additional or closing comments.

Thank you very much. This is Tim again. We appreciate your support and participation in the call, and we will look forward to talking with many of you over the next several weeks. Thank you so much.

Thank you very much. Good night.

Once again, that does conclude today's Blackbaud fourth-quarter 2010 earnings results conference. We thank you all for joining us.