Blackbaud Inc (BLKB) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Blackbaud Second Quarter 2011 Earnings conference call. One note that today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at the time for you to queue up for your questions.

And I would now 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 second quarter 2011 results. With me on the call is Marc Chardon, our President and Chief Executive Officer. Marc and I have prepared remarks and then we'll open up the call a little bit later for questions.

Please note our remarks today contain forward-looking statements. These statements are based solely on present information and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent annual report on Form 10-K and the risk factors contained therein, as well as our periodic reports under the Securities Act of 1934 for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements.

Also, please note that a web cast of today's call will be available in the Investor Relations section of our web site.

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 thanks to all of you on the call today for joining us today to review our second quarter 2011 financial results, which highlighted by revenue and profitability that were above the high end of our guidance. In addition, for the second consecutive quarter, the Company delivered double-digit organic revenue growth and total revenue growth in the mid teens. This improvement in our growth is being driven by several factors -- stabilization in market demand, high interest levels for our subscription-based offerings, growing adoption of our Blackbaud CRM product, the return to strong growth in our services revenue, and continued solid execution from our general markets business unit.

Now let's take a look at the financial highlights for the second quarter. Total revenue for the quarter was $93.4 million. This was above the high end of our guidance and was up 16% year over year. On an organic basis, revenue growth was approximately up 13%. These growth levels were at their highest levels for the last two years. And in terms of profitability, non-GAAP operating income of $19.2 million and non-GAAP earnings per share of $0.27 were also above the high end of our guidance.

As in recent quarters, we continued to experience a trend towards our subscription-based offerings, especially in our general markets business unit, which is focused on small and midsized nonprofits in North America. On a relative basis, our subscription-based unit sales were up approximately 35% year over year while our software unit sales were roughly flat. And those overall results were driven by demand for our suite of our online fundraising offerings and from eTapestry, our low-end SaaS CRM solution.

Additionally, it's worth pointing out that nearly two-thirds of our Q2 Raiser's Edge bookings came from a growing contribution of REI license deals, which include a hosting arrangement, and Raiser's Edge sold on a pure subscription basis where sales of traditional perpetual licenses with upfront payment arrangements represented only about one-third of our bookings.

As a result of this strong growth in our broad suite of subscription offerings, our annualized subscription revenue run rate is now over $100 million year and the annualized run rate of total recurring revenue is approaching $0.25 billion per year.

For the quarter, organic subscription revenue growth reached the high teens. And we expect that performance to continue over the remainder of 2011 based on the growth in subscription bookings that we have generated over the last several quarters and a solid pipeline of opportunities. Our subscription revenue grew a healthy 9% sequentially during the second quarter excluding the $1.7 million one-time benefit in the first quarter that we had previously disclosed.

Another big contributor to our improved total growth in revenue in the quarter came from services. It's encouraging to see a return to meaningful year-over-year growth here as our services offerings were particularly hard hit during the economic downturn. The growth in Q2 was driven by implementations associated with contracts signed both from last year and from earlier this year in addition to the growing number of subscription-based deals that have been going on.

Turning to market demand, we would still not characterize the buying environment as being back to pre-recessionary levels, but we're now approximately a year into what we consider a firming of demand. New evidence of this is the fact that we've started to see our training sales and revenue go up to a degree we believe that many nonprofits are starting to behave as if the current market environment is the new normal and as such it's important for them to invest in solutions that will provide and ROI and to help them drive fundraising.

Although we're encouraged by our ability to deliver double-digit growth in a stable market environment, we're also mindful that unemployment has been on the rise, economic growth projections have recently pulled back, and consumer confidence remains at very low levels, not to mention the recent week of stock market momentum in the negative direction, so we continue to be measured in our enthusiasm. That said, we remain confident that we can sustain double-digit organic growth should the current market environment persist and even faster growth in a more robust demand environment.

During the second quarter, our Blackbaud CRM offering delivered another strong performance. We closed five new Blackbaud CRM deals in the second quarter, which equals our record performance in the first quarter and is consistent with our stated objected to ramp quarterly signings beyond our previous target of two to three deals per quarter on average. To be clear, there will continue to be quarter-to-quarter fluctuations in the number of Blackbaud CRM contracts, but we're encouraged by our performance in the first half of the year, as well as by the health of our enterprise pipeline.

During the second quarter, we signed Blackbaud CRM deals with United Way of Toronto, which is the largest United Way in North America, Father Flanagan's Boy's Town, Simon Fraser University, the American Bible Society, and with an existing customer in our healthcare sub-vertical. It's worth noting that two of these three Q2 deals were upgrades, one from the enterprise edition of the Raiser's Edge and one from our PIDI DonorDirect CRM solution. We expect to see a growing number of upgrades to Blackbaud CRM in the quarters and years ahead. Each of the five deals have a contract value in the seven-figure range, which is fairly consistent with the deal sizes we've seen in the past.

The growing unit sales of Blackbaud CRM, both the new customers and back to our installed base, lead us to believe that we are approaching a level of product maturity, momentum with customers, and implementation expertise that will create an even more significant gap between Blackbaud and our competition. As we continue to press forward with further innovation and enhancements, we believe we can achieve sustainable competitive differentiation at the high end of our market and move Blackbaud past the early adopter stage to mass adoption of our solution.

We also continue to strengthen our leadership position in the online fundraising solutions, which address the fastest-growing segment of the overall fundraising market. To put the growth in our online fundraising solutions in perspective, for both the quarter and the first half of 2011, sales of our online fundraising solutions exceeded sales of the Raiser's Edge in spite of the fact that we generated double-digit year-over-year growth in sales of the Raiser's Edge in both of those respective time periods.

The second quarter represented a record quarter for our Blackbaud Sphere and our Blackbaud NetCommunity offerings and we continued to generate significant growth for our suite of packaged offerings, many of which integrate online fundraising capability with our constituent relationship management solutions. Customers increasingly do not want to manage their offline and online channels in a siloed fashion. They're looking for a vendor that can deliver an integrated, multichannel offering. We believe that Blackbaud is uniquely positioned to meet this need. We've established a dominant leadership position with our CRM fundraising offerings over the last couple of decades and we have the industry's most widely-used online fundraising solutions. The strong growth of our online fundraising solutions is the single biggest reason that our annualized subscription revenue run rate is scaled to over $100 million. We're also seeing growing demand for hosting of our traditional solutions, the Raiser's Edge, Financial Edge, and Education Edge.

As I've noted before, building the partnering relationships with solution providers who are sector leaders in their own right will be a driver of our growth, particularly as we strengthen our ability to serve smaller nonprofit organizations.

Earlier today, we announced an exciting first step in this direction, our partnership with Constant Contact, the clear leader in email marketing. As noted in our joint announcement, this partnership is designed to provide smaller nonprofits with the tools and training they need to optimize their email marketing. We have agreed to integrate key products. For Blackbaud, this will involve linking eTapestry with Constant Contact's email marketing tools. We will also combine our expertise to develop seminars, training, and best practices specifically designed for the nonprofit sector. Additionally, leveraging our analytics expertise, we will help nonprofits enhance their efforts through the use of our analytics tools.

Finally, we're focused on growing our international business as I've indicated before. I believe that long term we can roughly double international as a percentage of our overall business. In order to get there, we will continue to focus on a combination of organic growth and targeted acquisitions. Our commitment to international markets is evidenced by the appointment of Brad Holman as President of our international business unit last November and last quarter when we announced country leadership transitions in both the UK and the Netherlands. Recall that we established operations in the Netherlands via our acquisition of a leading provider of nonprofit software in that country two years ago.

Our most recent experience continues to suggest that the economic environment facing nonprofits in Europe is behind the economic recovery in the US market. In addition, it will take some time before our leadership and go-to-market changes to have a positive impact. That said, our international business unit delivered solid growth during both the second quarter and the first half of 2011 and we believe we have the potential for accelerated growth of this business unit and its operations over time, just as we've done in the US.

Before I turn it over to Tim to discuss our financial results in more detail, I wanted to provide a quick update on our CFO transition. We're very close -- we were very close to hiring an excellent successor during the last month, but ultimately the candidate withdrew for personal reasons in the final stage of the recruitment process. While we were disappointed, I remain committed to finding precisely the right person to lead us in this important area. The good news is that throughout this process, we received a high level of interest from very qualified individuals. In addition, Tim Williams has been very generous and put his retirement on hold in order to ensure that our CFO transition process runs smoothly. Tim has agreed to extend his stay for another three months to the end -- the reporting of our third quarter results and to make himself available on a consulting basis thereafter. In the meantime, we will continue to work to identify and hire the next financial leader to help Blackbaud scale while leveraging the very strong finance team that has supported Tim during his many years of service.

To summarize our overall performance, we are very pleased with the Company's second quarter and first half financial results. Our total revenue growth again accelerated to a multiyear high driven by strong growth in our subscription and services revenue, another record-tying quarter for our Enterprise CRM offering, and by continued growth in demand for our online fundraising solutions and integrated multiproduct offerings. We believe we're on track to meet our full-year objectives and that we are well-positioned to continue gaining market share in each of our key target markets.

With that, let me turn it over to Tim.

Thanks Marc. I will provide some further details on our second quarter 2011 operating results in addition to our guidance for the third quarter and full year and then provide a quick update on our capital management program.

Let me begin with the income statement. As you heard earlier, revenue was $93.4 million, which was above the high end of our guidance range of $90 million to $92 million and up 16% on a year-over-year basis. This represents the highest year-over-year quarterly revenue growth rate for Blackbaud in two-and-a-half years. As Marc noted, our growth was 13% organically -- that is excluding PIDI contribution to revenue during its second quarter as part Blackbaud.

Looking at the details of total revenue, subscription revenue was $25.9 million. This represented an increase of 27% on a year-over-year basis and 9% sequentially if we exclude the previously-disclosed one-time benefit occurring during the first quarter.

The strong growth of our subscription revenue is a reflection of its increasing mix as a percentage of our total bookings driven by the factors Marc talked about earlier, particularly the success we have had brining to market a wide range of subscription-based offerings. Even excluding the contribution from PIDI, year-over-year growth would've been approximately 19% for our subscription revenue.

License revenue was $5.1 million in the second quarter, representing a 27% decrease compared to the year-ago quarter. This decrease is a reflection of the continuing shift in our sales mix to a higher percentage coming from subscription-based offerings. On a sequential basis, license revenue actually increased 12% due in large part to seasonality.

Services revenue grew 34% on a year-over-year basis to $28 million as the increased services headcount added in recent months are becoming increasingly productive. This represented the fourth consecutive quarter in which our year-over-year services revenue growth has improved, which is an indication of the firming market demand following the trough of the recession. It is also a reflection of the strong demand that we have seen for our Blackbaud CRM offering and our suite of subscription-based offerings.

Maintenance represented the largest component of our revenue in the quarter at $32.6 million, an increase -- and this represented an increase of 5% on a year-over-year basis. Our maintenance renewal rates have remained in the mid 90% range, which is the principle reason that maintenance revenue has continued to grow at a modest level even though our license revenue is on track to decline year-over-year again in 2011.

Turning to profitability and beginning with our non-GAAP results, starting with gross profit, we generated $56.7 million in non-GAAP gross profit in the quarter, representing a gross margin of approximately 60.7%, which compares with 63.5% in the year-ago quarter and 61.2% in the first quarter.

The primary driver to the year-over-year decline in gross margins is the strong growth in our services revenue, which is a lower-margin source of our revenue. In other words, it's mix-related.

Looking at the details of individual -- of the individual gross margin lines, as expected, services margins improved on a year-over-year basis and we expect that to be the case for the full year as well.

Subscription margins, however, declined year over year all as a result of investments we are making in our infrastructure to meet the significant increase in demand that we have seen for our hosted and SaaS offerings.

Operating expenses were up approximately 6% on a year-over-year basis and up 1% compared to Q1. Our overall management of expenses remained solid, although we are also making strategic investments in growth initiatives as we have shared with you previously.

For the quarter, non-GAAP operating income came in at $19.2 million, above the high end of our guidance range of $17.5 million to $18.5 million, and represented a non-GAAP operating margin of 20.5%. That represents a 90-basis point improvement compared to the year-ago quarter.

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 above the high end of our guidance range of $0.24 to $.025.

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 assets and other tax benefits associated with our 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's a full tabular reconciliation between our non-GAAP and GAAP results. As most of you know, our differences between non-GAAP and GAAP results typically only include adjustments for amortization associated with the tangibles arising from business acquisitions and noncash stock-based compensation charges.

In summary, second quarter GAAP operating income was $13.8 million, net income was $8.9 million, and earnings per share was $0.20. This compares with GAAP results of $11.2 million in operating income, $6.8 million in net income, and earnings per share of $0.15 in the same period last year.

Let me now turn to cash flow and a few balance sheet items. We ended the second quarter with $33.4 million in cash compared to $24.1 million at the end of the first quarter. We have generated $37.8 million in cash from operations in the first six months of 2011, which represents an increase of 53% compared with the first six months of 2010. Total deferred revenue came in at $157.5 million, which was up 8% compared to the end of the second quarter of 2010. And finally, at the end of the quarter, the Company's deferred tax asset had a balance of $44.3 million. This asset adds roughly $8 million annually to our cash flow. In addition, we have an annual cash flow benefit of approximately $3 million associated with the structure of several of our acquisitions.

Let me now turn to guidance for the third quarter. We are now targeting revenue of $95.5 million to $97.5 million, which would represent year-over-year growth of approximately 16% at the midpoint of the range with non-GAAP operating income of $20.5 million to $21.5 million leading to non-GAAP earnings per share of $0.28 to $0.29 based on an estimated share count of approximate 44.2 million shares.

Based on our first half results and our guidance for the third quarter, we now feel more optimistic about the Company's ability to deliver full-year 2011 organic revenue growth of 12% to 13%, which would be an improvement over what we had previously previewed for you and a meaningful increase over the mid-single digit growth in 2010. We expect our full-year non-GAAP operating margin to be in the range of what we delivered in 2010 with room for slight non-GAAP operating margin expansion. We are encouraged by the continued stabilization of market demand, as well as our execution in each of the business units and our targeted growth opportunities. As such, from a near-term perspective, we will continue to place a premium on reinvesting revenue upside back into the business as we are focused on achieving a sustainable organic growth rate in the low to mid teens and even higher levels of growth for our subscription revenues.

To put this in more specific terms, we are now targeting total revenue of $374 million to $378 million for the full-year 2011. Non-GAAP operating income is expected to be $76.5 million to $79 million, leading to non-GAAP earnings per share of $1.06 to $1.09 based on a share count of approximately 44 million shares.

Finally, I'd like to finish with a very quick update on our capital management program. Today we announced that the board had declared a third quarter dividend of $0.12 per share payable on September 15, 2011 to stockholders of record on August 26, 2011.

In summary, we are pleased with the Company's second quarter and first half performance, both of which have been better than our guidance. Blackbaud has returned to solid revenue growth based on strong demand for our subscription solutions and consistent improvement in our services business. We are extending our market leadership positions in all segments of the market and continuing to invest in our strategic growth initiatives based on the sizable market opportunities that we see ahead.

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

Thank you. (Operator Instructions). And from Wells Fargo Securities, we'll go to Philip Rueppel.

Great. Thanks very much and good afternoon.

Hello Philip.

Hi. Could we dig a little deeper into the strong eCRM demand? Can you talk about the pipeline in the second half kind of as you move past the early adopter stage? Is there any different seasonality to this business? And then secondly, there wasn't much commonality in the deals, a pretty diverse group of customers. Is that reflected also in the pipeline? I mean, is there any one particular segment where it's being received more strongly?

So starting from the back, we have a pretty broad pipeline because we've got leading customers in each of our verticals and we're making good progress on the early adopters and we're making good progress getting customers in each of the vertical slides I guess I'd have to say that the most -- the biggest part of the pipeline or the single largest sub-vertical is the education sector, higher education.

And in terms of overall seasonality, I don't see any significant sort of decision-making seasonality. I think it's just very long sales cycles and they seem to be somewhat less Q2 and Q4-oriented than others, but you do see a little bit of year-end push in some organizations. So, I mean, the cost and the payments are spread out over quite a period of time and -- in many cases. And I think that these organizations are focused really on the right decision and they take the time it takes.

Great. Thanks. And just one other, sort of shifting to subscription and subscription revenue, I know it's early on in that business, but have you started to be able to see what your renewal rate for subscriptions are and is that similar to your maintenance renewal rates? And then secondly, I think Tim, you mentioned that subscription margins were down this quarter due to some more infrastructure investment. Is that investment going to be an ongoing kind of thing or was that really focused in the second quarter?

Thanks.

I think the subscription renewal rates vary which component of subscription. And for most of the new, the software subscriptions, we're not far enough into the lifecycle to have a meaningful answer to that. The exceptions are obviously the eTapestry subscriptions and Sphere subscriptions where in the sectors, which are our core markets, the core part of our target market, the renewal rates are in the same range for eTapestry and somewhat slightly slower on average in the Sphere space, in part due to the fact that some people will buy an event, a single time, as a single time one year and then maybe -- and then not do an event the following year at the very low end of the market.

So I would say with respect to the infrastructure investments, I would say that as we look at the rest of 2011, I would say that you will continue to see the kind of investment we saw in this quarter. I don't consider that to be a one-time event. In fact, part of the investment we've made is in additional resources, people, and so those expenditures, those costs, expenses, will continue in future quarters. And I should add that you're likely to see some more sizable CapEx expenditures this year relative to prior year. I think, though, as that revenue continues to grow in future periods, certainly in 2012, we would expect to see -- realize some benefits from scale as we look at the infrastructure to support our subscription-based offerings.

Great. Thanks. That's helpful.

And next we'll hear from Mitch Bartlett with Craig-Hallum.

Yes, Marc, early on the -- in the script you talked about something being up 35%. And I wondered if that was the online fundraising that you --

(Multiple speakers)

I'm sorry, you're very low voice. You -- did you say 35 -- that I spoke about something in the script saying that it was a 35% increase in something? Is that what you're saying?

Yes.

(Multiple speakers)

-- early in the script, you said --

(Multiple speakers)

-- and I wondered if that was the online fundraising solutions that you were talking about.

No. What it is was the general markets business, so our low and mid-market customer business unit, when you look at unit sales for the year, the license unit sales were flat and subscription unit sales of all kinds, which would include eTapestry, would include online fundraising, were up 65%, so it was both eTapestry and online -- sorry, 35%, I'm sorry, that was a mistake, sorry, 35%, wishful thinking on my part.

(Multiple speakers)

-- were up 35%. So it was all subscription-based units.

Very good. And then if you can still hear me, I like the characterization of the market environment as this is the new normal that you talked about. Maybe you could just expand on kind of how nonprofits are viewing the IT purchase right now and where the pipeline is, how the win rates are looking overall.

So I think that we have seen very little change in the no-decision part of our pipeline. The size of the pipeline is larger. The no-decision rate has stayed somewhat the same. The length of average decision doesn't seem to be getting particularly any longer, although the number of people involved in the decision process in midsized organizations is higher, more finance scrutiny, et cetera, et cetera. Our win rates have remained very high in the general markets and in the enterprise and in the international space, although international is somewhat behind in terms of overall win rate when you combine both no-decisions and win rate. So we haven't seen a dramatically -- a different market sort of pipeline environment through this process. And the primary difference in the buying motivation that came from the downturn is people don't want to pay a big upfront sum anymore in many cases. Some organizations still do. More enterprises do than midmarket organizations it turns out. And so we -- what I've seen in the buying motivation is people have decided that they're not going to wait until the world gets great again because they don't think it's going to. And so they have to make decisions maybe more carefully than in the past, but they have to start to invest to increase their fundraising, to increase their connection to their constituents and supporters.

That's great. Thanks. I'm sorry about the bad connection here.

No worries. I just turned up the volume.

Next we'll go to Ross MacMillan with Jefferies.

Thanks a lot. I came on late, but I had a question really on the subscription business. If I look at your total business and look at the change in deferred, you've got really a nice acceleration. But when I look at the subscription revenues, it seems to be very kind of lumpy, I think last quarter up sequentially 17%, this quarter up only 1%. Can you just help me understand why we have that lumpiness in the subscription line?

Thanks.

What we said on the call earlier, which you probably missed, Ross, is that you need to remember that in the first quarter we had a one-time adjustment in there that impacted our sequential growth. I believe the one-time number was $1.7 million in that first quarter. So if you take that out, the sequential growth I believe was 9%, so pretty nice sequential movement.

Great. That's real helpful. And then just on the investment, I'm just trying to understand, you're now getting up to low teens organic growth for the year, but it sounds like your margin structure this year will be just slightly higher than last year. And it feels to me like you've maybe decided that you're going to invest a little more this year because I think you've said historically that at a mid-teens organic growth rate you think you would be getting up towards maybe your 75 or 100 basis points a year. Is it fair to say that this is a little bit more of an aggressive investment year and that's a decision you've taken?

I'll let Marc comment as well on this, but I would say the answer -- the simple answer is yes. I think that what we're seeing is the opportunity here to invest perhaps a little bit more aggressively on some of our -- in some of our initiatives than what we had anticipated earlier in the year if we were to get to this kind of growth rate.

I think on top of that I would add that some of the infrastructure investments that I've alluded to here regarding our subscription-based offerings and the expenditures there, I think those are an area where we think it's real important that we make those investments and strengthen that area because it is where we're getting a lot of our growth and it's important to have the kind of infrastructure there that will support our longer-term objectives, so.

And then maybe one very final one, I know it's not a big part of your business yet, but international, did you have any material FX impact in your numbers?

The FX impact was virtually nonexistent, Ross. On a constant-currency basis, the performance was almost exactly the same.

Great. That's all from me. Congrats.

Thank you.

Thank you, Ross.

(Operator Instructions). And we'll go to Sterling Auty with JP Morgan.

Thanks. Hi guys.

Hi.

Just wondering in terms of the demand that you're seeing, can you kind of characterize whether it's existing customers that are upgrading and expanding and versus kind of I hate [to talk] greenfield, but maybe new customers where maybe it's competitive wins or replacements?

A very large percentage of the subscription sales are -- and the REI sales are to new customers. So most eTap sales are to new customers, all of the -- essentially all of the REI sales are to new customers. There's obviously some back-to-base selling of online solutions to existing CRM customers. And so there's not really a material shift in mix between sort of our traditional we get something short of half of our bookings from existing customers and something north of half of our bookings from new customers.

So for those new customers, especially in the REI, what do you find is the characteristics? In other words, what is the description of the type of customer that you're seeing come in? Are they a first-time mover in that direction, are they replacing an older system or an older alternative solution?

Most REI customers are replacing an existing fundraising solution. And they've decided typically two things. They want more sophisticated fundraising, so that's why they want RE, and they want to have an integrated view of their constituent and be able to market across multiple different channels or styles of contact, including social media and online, and that's where they want the I.

And because it's hosted, that has a lot of appeal as well.

Got it. And then last question, when you look at the gross margin, between the investment that you're making and the mix, how should we think about the -- where the level of gross margin can get to in terms of where it should bottom and over what time frame? So in other words, where do we get to the bottom and then maybe, you know, an expansion of gross margins off of that?

Well, as we've said I think a number of times, we're not going to guide to specific margin percentages within the P&L. Our overall view has been we've got an overall target given an organic growth rate in the low to mid teens. We've got a stated objective of how we want to move our margins over time modestly to get back to a level that we think is achievable.

Having said that, I would offer up that as I said earlier, I don't think -- I think you're going to see continued investment in our infrastructure and support for our subscription-based offerings. So I wouldn't expect major changes in our -- in the kind of margins you're seeing here in the first half and in the second quarter for the rest of this year. I do think we -- and I think it's logical to suggest we're going to see some continued improvement in our services margins. We've talked about that a number of times. You saw that in the second quarter. We would hope to see that in the second half as well and I think further improvements obviously next year.

As to how that's actually going to play out bottom line in an overall gross margin, I'm not prepared to set a specific target on that. We would expect to see some improvement in gross margins over time as a contributor to how we get to our overall operating margin improvement.

All right, thank you.

And next we'll hear from Tom Roderick with Stifel Nicolaus.

Hey guys. This is Chris Growe for Tom. Good job on the quarter.

Thanks.

Hi Chris.

Hey. So Tim and -- or Marc, I think you've mentioned in the past that you've kind of given us some qualitative guidance on how bookings have grown in the general markets and the enterprise business. I was just wondering if you could maybe give us a little more color in terms of how they compared relative to recent quarters in terms growth rates for bookings.

Well, I think that both of those business units have seen bookings growth rates that are similar to what we might've seen in the previous quarter and maybe a modest acceleration in one of the cases. But we're not giving specific bookings numbers or guidance around that. The international business has been a little bit slower. And that's consistent with the economic conditions that especially the European market faces.

Fair enough. And then just in terms of Tim, I noticed the long-term deferred had a little bit of a jump here. So was that reflective of a SaaS Enterprise CRM deal or can you just maybe clarify in terms of what's driving that increase in long-term deferred there?

I don't have a quick answer for that one. Let me come back to you.

Okay, that's fine.

I'll be back here in a second.

Okay.

My guess is without looking at some details, it probably has to do with some contract length for going out further, that our contract length for our deals is increasing. But let me double-check that.

Okay. Okay, that's fine. We can take that offline. But in terms of -- I just wanted to clarify one other thing as well in terms of the -- you mentioned that there's two-thirds of your Raiser's Edge bookings were from REI and RE subscription. And if you can maybe give me a refresher, when did you guys start allowing customers to pay for RE in a subscription basis? And is that still pretty much an on-premise Raiser's Edge implementation, but they're just paying for it in a different manner?

So the RE subscription is part of a suite solution. So in the case, for example, of the small school solution, you can have an RE component of a small school solution, which you're paying on a per-student basis basically, I mean, to simplify it slightly. We do not sell at this point a subscription RE as a standalone single product sale.

Got it, okay.

You buy REI, you buy a license, but it's paid over a period of time. And you have a subscription to host it.

Got it, okay. Okay, great. And then in terms of just one more on the Enterprise CRM deals, you mentioned they were all seven-figure deals. That's -- is that a total contract value number or a -- an annual number?

Contract value number.

Great. Thanks guys. Well done.

Thank you.

Thank you.

And there are no further questions at this time. I'll turn the conference back over to management for any additional or closing comments.

Thank you very much for your participation on the call and your support. We will look forward to speaking with you as we get out and meet with investors and look forward to chatting with again next question. Thank you very much.

Thank you all very much. Good night now.

That does conclude today's conference. We thank you for joining.