Blackbaud Inc (BLKB) 2012 Q2 法說會逐字稿

Greetings and welcome to the Blackbaud second quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tony Boor, Chief Financial Officer. Thank you, Mr. Boor. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us today to review our second quarter 2012 results. With me on the call is Marc Chardon, our President and Chief Executive Officer. We both have prepared remarks and then we will open up the call for your 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 Quarterly Report on Form 10-Q, our most recent Annual Report on form 10-K and the Risk Factors contained therein, as well as our periodic reports filed 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 on the Investor Relations section of our website. During this call, we will be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business.

A reconciliation of GAAP and non-GAAP results is available in the press release we issued today, which is available on our website at blackbaud.com. With that let me turn it over to Marc to review our high level financial performance and business highlights. Then I will come back at the end to provide a greater details on the second quarter results, as well as guidance for the third quarter and full year 2012. Marc.

Thank you, Tony and thanks to all of you today for joining us on the call this afternoon to review our second quarter results. On a standalone basis Blackbaud delivered revenue and profitability that were consistent with our guidance, which was solid performance in view of the more challenging macro-economic environment.

During the second quarter, we also made significant progress integrating Convio. As we look ahead, there are certainly challenges that we must face, but we remain very excited about our combined Company's position in the market, the positive impact that Convio will have on our financial model. We have significantly increased the size of our business, targeting the fastest growing segment of the nonprofit market, online fund raising and we have done so with what is clearly the industry's Best-In-Class solution.

Blackbaud is now well-positioned to deliver best of both words offerings to nonprofit organizations the most comprehensive CRM and online funds raising solutions. In addition, Blackbaud has been evolving to a subscription-based model over the recent years, and the addition the addition of Convio has dramatically accelerated this process. Let me provide a summary level review of our second quarter results.

We generated consolidated income revenue of $113.7 million, and non-GAAP operating income of $19.3 million. On an apples to apples basis relative to our guidance, we recorded standalone Blackbaud revenue of $99.6 million, which was consistent with our guidance range of $99 million to $102 million.

For the first time in our history, subscription revenue was the largest component of our overall revenue. [Cona] Convio's revenue made a meaningful contribution, and complementing that standalone Blackbaud subscription revenue remained fastest growing of our business with 15% year-over-year growth. Similar to last quarter, our subscription-based units out numbered perpetual licensed units by a ratio of over five to one, as we saw strong demand for our subscription-based offerings including hosted versions of our classic products, The Raiser's Edge and The Financial Edge.

From a profitability perspective, we generated standalone non-GAAP operating income of $17.1 million for the second quarter, which was generally consistent with our guidance range of $15.5 million to $17 million.

From a macro perspective, we shared the view in recent quarters that while the market environment was not robust it was stable to slightly improving. This was due in large part to the rebound in charitable contributions, which provided more comfort for nonprofit organizations to move forward with technology investments. The stable to improving trends in giving did not continue in the second quarter, however.

Our Blackbaud charitable giving index increased by only 1.6% year-over-year for the first three months ended June 2012. And our upwardly revised forecast for the month of May was an increase of only 0.7% year-over-year. This is down from peak growth rates in the low to mid-teens range in the fall of 2011, and many sectors such as cause and cure, human services, arts and cultural and International have actually seen giving decline on a year-over-year basis in recent months.

We do not view the current market environment as comparable to what we saw in 2008 and 2009, but the slow down in charitable giving combined with greater economic uncertainty on a global basis did create a more challenging market environment on the margin during the second quarter. At the same time, it's important to note that our pipeline of opportunities remains quite solid across each of our business units, enterprise, general markets and International.

We're very focused on doing everything we can to position Blackbaud to gain share in what we see as the $16.5 billion global market opportunity for delivering technology solutions to the none profit industry. We believe that roughly half of this market opportunity is in what we characterize as the enterprise segment of the market. The majority of the largest and most sophisticated none profit organizations in the world are still running their core operations on legacy systems that are decades old and need replacing.

We closed two CRM deals during the second quarter Dignity Health and a large disease focused organization. And we had a large CRM deal that closed very early in the third quarter. The number of new (inaudible) wins lighter than in recent quarters, though we've always said that this figure could be lumpy given that we're dealing with a limited number of sizeable transactions.

We achieved several major CRM implementation milestones during the second quarter, and another early in Q3. The University of Michigan, which is a marquee account, and the largest implementation in our history went into production during Q2.

We had one of our early adopter customers for CRM go live and stop running their legacy system in June. We had another early adopter CRM customer complete the final phase of their implementation in the June quarter, including the conversion of ten separate source systems into an already live instance of Blackbaud CRM.

The completion of this data conversion is the first step required to roll out CRM to over 400 users across their territories. I'm pleased to share that we're now in production with each of the handful of early adopter CRM customers that received concessions in Q4 of 2011, those that had particularly challenging implementations with new or unique functional requirements.

This represents and important achievement. Though there is still some work ahead of us in this area, we're providing a heightened level of post deployment support given the scope of these launches, and in one situation the customer is spreading their go-live events for several different chapters over the course of several quarters. The last go-live that I wanted to highlight is the American Bible Society, who went into production on Blackbaud CRM last week.

This is particularly meaningful because it represents our first conversion from PIDI to Blackbaud CRM. As we look ahead, we have a strong pipeline of CRM opportunities, and we believe we're well-positioned to continue gaining market share in this large market opportunity. Our general market business units delivered a solid performance for the quarter. The GMBU has been the largest driver of Blackbaud standalone subscription business on an historical basis and that continued during the second quarter.

We continued to see a growing portion of GMBU sales migrate subscription based offerings, which is a positive for our business, though it does stretch out the timing for recognizing services (inaudible). We're pleased that our International business generated positive growth in sales for both the second quarter and the first half of the year. We continue to see our leadership changes and increased focus as having a positive impact on our execution. At the same time, from a short-term perspective, we're facing the same European economic headwinds as other companies.

Longer-term, there's no change in our view that the International market should grow meaningfully as a percentage of Blackbaud's business, and we'll continue to invest in that region. Let me turn to our progress on the Convio acquisition. From a high level point of view, we're on track implementing our integration plan. This has been a significant undertaking as we're not running Convio as a separate division. The Convio team has been truly integrated into Blackbaud from day one.

And the level of detail and work put into make it successful that is been extraordinary. We set for ourselves 30, 60 and 90 day integration plans following the close of our acquisition, and we've successfully met each of our primary objectives. One of our initial priorities was the organizational design for our combined operations. After less than two months of work, as planned, we started offer the second half of the year with the integration an realignment of our combined sales and professional service organizations complete.

During the second quarter, we also brought together our product and technology teams, and they have been hard at work analyzing our product portfolio, speaking with customers of Blackbaud and Convio, and putting together our future product roadmap designed to serve not only current customers but the larger market. The first phases of the roadmap will be rolled out to customers and the market in the third quarter.

We're confident that we have the best of both worlds. World class capabilities in both CRM and online fund raising, and we feel very good about the quality of our work, the rigor of our analysis and the direction we plan on taking. It will take time to both communicate and execute on our integrated project strategy, but we are confident that it will be well received by the market based on the positive feedback we have been receiving, thus far, from customers and prospects. There are a number of factors that we have taken into consideration, as we have integrate the operations of Blackbaud and Convio, and create a set of consolidated operating and financial plans.

Let me walk through some of the key details and assumptions behind our plans. First, for the full year 2012, we expect the traditional Blackbaud subscription, maintenance, and license revenue to be generally consistent with how we were looking at our business at the time of our last earnings call. However, we expect our services revenue to be well below where we previously expected.

This is due in part to the recognition of services revenue being stretched out, either over larger and longer implementations, or due to being bundled with subscriptions, and recognized ratably. Second, Convio's near-term contribution to Blackbaud's financial performance will be lower than their standalone trajectory would have otherwise suggested due to the fact that the elongated regulatory approval process impacted their sales cycles, as customers waited to see if Convio would or would not be acquired, and what their product roadmap would be.

Third, we plan to maintain investments in our growth initiatives. We just brought onboard the largest acquisition in the history of the Company, and we have an opportunity to bring together our solutions and deliver a unique and powerful value proposition that we believe will help us to gain significant share in a $16.5 billion global market. As such, it's important that we invest to take advantage of this opportunity. At the same time, we're focused on leveraging our combined scale and realizing operating synergies as quickly as possible.

To that end, while we will only realize a portion of the benefit in 2012, we have taken actions that we expect will yield $9 million to $10 million in annualized cost savings by the end of 2012. Tony will provide further details on our guidance in a moment, but from a summary perspective we're targeting consolidated non-GAAP revenue in the range of $460 million to $465 million for the full year 2012, along with non-GAAP operating income in the range of $72 million to $75 million for a 16% non-GAAP operating margin. From a long-term perspective, we've never felt better about our value proposition, breadth of functionality, and competitive differentiation.

We remain very confident in our ability to meet our long-term objective of consistent low to mid-teens revenue growth. In addition, we believe we can drive the Company to a 20% combined company non-GAAP operating margin by as early as next year, with a potential for further margin expansion over time.

We believe that with our acquisition of Convio, we have the opportunity to grow our Company, generate more significant profitability and cash flow, and move to a revenue model that is increasingly based on recurring revenue. With that let me turn it over to Tony to review our financial details, results and guidance in more detail. Tony.

Thanks, Marc. Let me now review our consolidated second quarter results, including the stub period contribution of just under two months from Convio. On a go-forward basis, we will be reporting revenue purely on a consolidated basis. However, I will provide a summary view on the performance of standalone Blackbaud for the second quarter in order to provide comparability to our previously issued guidance.

Total combined Company non-GAAP revenue for the second quarter was $113.7 million, an increase of 21% on a year-over-year basis. Standalone Blackbaud total revenue for the quarter was $99.6 million, which was consistent with our guidance ever $99 million to $102 million, and represented 6% year-over-year growth. Subscription revenue was $40.8 million, a 58% increase from the second quarter of 2011.

The addition of Convio helped drive subscription revenue to more than 35% of our second quarter total revenue, representing the single largest contributor to our overall revenue for the quarter, and highlighting the dramatic evolution of our business model over the last several years. On a standalone basis, Blackbaud subscription revenue was $29.7 million representing a solid year-over-year increase of 15%.

Maintenance revenue of $33.9 million for the second quarter was up 4% on a year-over-year basis. When combined with our subscription revenue, our total non-GAAP recurring revenue was $74.7 million for the second quarter or an annualized run rate of approximately $300 million and nearly two-thirds of our total revenue. Licensed revenue in the second quarter was $4.5 million, down 11% year-over-year.

The combination of license revenue being at a small absolute level and the relatively large deal sizes and long sales cycles can add volatility to our license revenue line and lead to variability in quarterly comparisons. For example, the largest CRM deal we were targeting for the quarter closed shortly after the end of the second quarter.

Our reported license revenue for the second quarter would have actually been up on a year-over-year basis had it closed during Q2. Professional services revenue was $32.4 million, a 14% increase year-over-year with a significant majority of the year-over-year growth due to the addition of Convio in the quarter. On a standalone basis services revenue grew 4% on a year-over-year basis, and 23% sequentially. We are make good progress on finalizing the work relative to a handful of early adopter CRM imitations that we discussed a few quarters ago.

This should benefit our services revenue and margin performance in the second half of the year. However, as Marc noted, our services business is facing other headwinds that we believe will hold back services revenue growth in the second half of the year. As I turn to our second quarter profitability, please note that the revenue percentages and margins cited will be based on our consolidated non-GAAP revenue and our non-GAAP expenses. On that basis non-GAAP gross margin was 60% compared to 61% in the second quarter of 2011.

We expect some improvement in our gross margin in the second half of 2012 due in part to continued progress on early adopter CRM deployments that I just mentioned. Consolidated non-GAAP operating income was $19.3 million, which represents a non-GAAP operating margin of 17%. On a standalone basis, Blackbaud's non-GAAP operating income was $17.1 million, which is generally consistent with our guidance of $15.5 million to $17 million. Our consolidated non-GAAP diluted earnings-per-share were $0.24 for the quarter.

As a reminder, our standalone Blackbaud non-GAAP EPS guidance was $0.21 to $0.23. Turning to the balance sheet and cash flow. We ended the second quarter with $21.2 million in cash and equivalents, a decrease from $46 million at the end of last quarter, due to using a portion of our cash balance as part of the overall consideration for the Convio acquisition.

Our balance sheet also reflects the $260 million we drew down from our credit facility to pay for the acquisition of Convio. I would like to finish by providing greater detail on our updated full year 2012 financial outlook. Our previous guidance was for the full year 2012 revenue of $410 million to $420 million. Our updated non-GAAP revenue guidance is $460 million to $465 million after adding back the deferred revenue write-down of Convio that we estimated approximately $6 million.

Our consolidated non-GAAP revenue guidance takes several factors into consideration. Moving forward it will be difficult to break out performance for standalone Blackbaud versus Convio because we have already integrated our sales organizations and go-to-market approach. We have integrated our product teams and are working on a combined Company product roadmap.

That said, in rough terms we now expect core Blackbaud revenue to be several million below the low end of what we were initially targeting for 2012. Specifically, our services revenue expectation is now approximately $10 million to $13 million less than our prior guidance assumed. At the enterprise level average deal size has grown significantly during the first half of 2012 and total services engagements have also been larger than in the past.

However, the revenue is being recognized over a longer period of time due to the length of time associated with these larger deployments. At the general market level our mix of business continues to shifts towards subscription offerings, and as a result we have more services revenue that is being deferred and recognized ratably over the life of the contract.

Lastly, we believe there's an elements of overall macro environment having an impact, which Marc described earlier. Another consideration is that we estimate Convio's 2012 stub period revenue contribution at approximately $5 million to $7 million lower than their standalone trajectory may have otherwise suggested at the time we announced the transaction. The delayed regulatory approval process impacted Convio's ability to grow their monthly recurring revenue run rate prior to joining Blackbaud, and also delayed the rollout of our integrated product strategy.

We will shortly be rolling out the strategy, which is a necessary step to improving sales productivity related to several of our combined company solutions. Finally, with while the macro environment entering Q3 is more uncertain than recent quarters, we do continue to have a strong sales pipeline across each of our business units, enterprise, general market and International. We do not plan on providing revenue mix guidance moving forward, but given this is the first time we are bringing together Blackbaud and Convio, we will provide an extra level of disclosure on a one time basis.

For the full year 2012 we expect our total non-GAAP revenue mix to approximate the following. Subscription revenue at approximately 35%, maintenance and services revenue both at approximately 29%, license revenue at 5% and other revenue at 2%. From a profitability perspective, we initially provided guidance for standalone Blackbaud to generate non-GAAP operating income of between $82 million and $84 million for a 20% non-GAAP operating margin along with non-GAAP EPS of $1.12 to $1.15.

We are now forecasting non-GAAP operating income of $72 million to $75 million, which would equate to a combined company non-GAAP operating margin of approximately 16% and non-GAAP EPS of $0.90 to $0.94. There are several factors to take into consideration within the profitability expectations.

First, the reduction in our services revenue expectations for 2012 has a meaningful impact on bottom-line profitability and does the lower -- as does the lower initial revenue contribution from Convio. Second, as it relates to expenses, we do plan to maintain investments in our business as Marc noted earlier. At the same time, we are highly focused on realizing synergies from our combined company.

We expect to exit 2012 with an annualized cost reduction of $9 million to $10 million though only $4 million will be a achieved during 2012, as a result of when the acquisition closed and the time it takes for actions to translate into results. And we fully expect to realize greater benefits as we focus on additional synergies made possible by our increased scale, however, such benefits are not expected to be realized until the 2013 time frame.

Finally, below the operating line, we expect to have interest expense of approximately $5.5 million for the year, including $4 million in the second half of 2012 related to the debt incurred to finance the Convio acquisition. As it relates to the third quarter, this will be the first full quarter of reporting results on a consolidated basis.

We currently expect non-GAAP revenue in the range of $125 million to $128 million, non-GAAP operating income of $18 million to $20 million, interest expense of approximately $2 million and non-GAAP EPS of $0.22 to $0.24. We are not providing guidance beyond 2012 at this time, but there are a few items that are worth mentioning at this point. We continue to believe that we can accelerate revenue growth to the low to mid-teens range on a sustained basis longer-term.

This is a level that we have achieved prior to the economic slowdown, and we have increased the size of our business targeted at the fastest growing segment of the market with the acquisition ever Convio. From a profitability perspective, we believe that we have an opportunity to return to 20% non-GAAP operating margins during 2013, as we realize the benefits from integrating our operations during 2012. Just based on realizing a full year of the $9 million to $10 million in cost savings we get our non-GAAP operating margin into the 18% plus range to start off next year.

And as I mentioned, when there are meaningful additional opportunities to realize synergies. In addition, there's no change to our view that we have room to scale margins beyond 20% over time. To summarize the second half of 2012 will be a transition period as we set the stage for realizing greater synergies in our business in 2013 and beyond. From both a revenue and cost perspective.

We believe our efforts this year will enable Blackbaud to move to quickly improve to a combined Company non-GAAP operating margin of 20%. We also believe our in the business will further strengthen our market leadership position and ability to gain share in a $16.5 billion market opportunity. We feel very strong about all the reasons we moved forward with the acquisition of Convio, and believe successful execution of our plans will put us in a position to create significant shareholder value. With that we're happy to take your questions.

Thank you. (Operator Instructions). Thank you. Our first question comes from the line of Tom Roderick with Stifel Nicolaus. Please proceed with your question.

Hi, guys. Good afternoon. I gather it's a little bit early to talk in a detailed fashion about the product roadmap, but then are you going to get to your customers on that here in the next months or two. But at a high level, I'm curious if you can help us think about the overlap, particularly in the online segment of the market between the BBNC product and (inaudible),and now with Convio. As you march toward the rapidly online growing market, how would you encourage us to think about what product wins out over time, what architecture wins out over time, and what period we should think about that happening in?

Well, it's a bit early to go into the details, specifically. Obviously, at the high-end of the market we have acquired a very important offering in the Luminate online offering, and so you would expect to see the Luminate online offering be a -- be a leading offering in the enterprise space. That's the easiest and most obvious. There are very important features in BB CRMs, the Blackbaud CRM product that includes an online functionality, and that functionality includes events as well, so you will have for some period of time two sets of offerings because there are two different sets of needs, and there are two different sets of -- of customer types.

What you will see when we bring the information out to the market is that some of the features that are required by customers in -- on one or the other side will get moved from one platform to another and over time you will see -- eventually see migration. That will not be a short-term process. So -- and in the -- the mid-market(inaudible) you will have to wait I'm afraid to see what comes out of it, because there are quite a few different kinds of online properties there, and there's also some online features and functionalities that are just about to come to market that will help us talk through the migration plan. So it's really pretty much second half of this quarter when we will be talking about it with customers, and you can expect us to give you full details on the next call or when we -- when we visit with you after the announcement has been made public.

Okay. Thank you, Marc. Hey Tony, looking at the numbers and some of the revenue pushouts for the this year, so let me hit kind of two of the items just briefly. So on the services side $10 million to $13 million less this year but that seems to be more timing than -- than -- than the actual total aggregate number. Can you just walk us through a little bit more detail as to what sort of impacts that timing? Do you need more implementation heads, how do you sort of shorten that cycle? And does that -- does the bulk of that revenue effectively just flow into 2013 now on the services side?

Yes. Tom. So two large impacts. One being on the CRM side of the business, and we have seen a different mix this year than what we had originally planned. So we're seeing fewer but larger CRM deals than those typically, as we have seen, have a longer implementation time period, and so I don't think we have a head issue. We have ample professional service heads in the organization, but we have fewer larger deals, and they have got a larger implementation timeline. So those revenues obviously are going to get pushed as those timelines gets pushed out. Then on the mid-market side of the business, that's more so things getting recognized ratably over a typical three year life, instead of as the implementation would have been done under a perpetual deal.

Just to give you an idea, you know, large implementation typically is given by the customer's ability to -- to manage the -- through the process and the steps that -- you know, the bigger the implementation the more steps, and so if you were to think of something like $50,000 to $100,000 of services per contract happening every month, you know, if that contract is $500,000 of services it might be a year to 15 month contract.

If it's a million dollars services it might be two to two and a half, and if it's a three or four it might be a -- a two or a three or maybe even more year project. So doubling contracts services side may mean things don't happen in 2013, even in the enterprise space that some of what might have happened in 2013 gets pushed out into 2014 and so on.

And then some of the investment that we're continuing to make are to -- in efforts to bring CRM down market, make it more affordable for some of the smaller enterprises, and so that's one of the places we're continuing to spin the bit as to hopefully bring in more smaller deals here in the future.

Excellent. That's great detail. Thank you and I will jump back in queue.

Thanks, Tom.

Thank you. (Operator Instructions). Our next question comes from the line ever Ross MacMillan with Jeffries. Please proceed with your question.

Yes. Thanks a lot. I also just wanted to ask on that services line, is -- I just want to be absolutely clear that there's no change in the way that you recognize services aside from the fact that with the subscription contract you recognize ratably and then we also have the separate issue of the longer deployment, but I just wanted to make sure that none of this is a recognition change. It's just that you're expecting now, more of that mid-market license to come through with subscription licenses?

That's correct.

Great. Thank you. And I had a question on the -- on taxes actually, for Tony. Could you just remind us of your expectations for the tax rate for the combined entity, and then historically Blackbaud has, obviously, had a benefit on cash taxes. Could you help us maybe understand what you think the cash tax rate might look like for the combined entity?

Yes. So we're going to be in a little bit odd shape this year, Ross, because of some of the none deductible expenses that we're incurring related to the acquisition so that's going to drive us up a bit from a tax rate perspective, and then I think the -- the second thing that we have is the government has not extended R&D credits, obviously yet as well, so we're taking a bit of a double hit from a cash tax perspective this year.

I don't know if you have looked at the balance sheet, but we had some accounting treatment noise on the balance sheet on the deferreds, but we still have all of the legacy Blackbaud deferred assets, and we still think that we'll benefit from about $13 million of NOLs that we acquired with Convio benefit by $13 million of cash on the NOLs we acquired from Convio, but we had to record a big deferred tax liability as a result of the intangibles for book purposes, so that's masking some of that.

From a cash tax perspective, we expects for 2012, unless something changes from an R&D credit extension perspective, we think we will be slightly above 20%, which is quite a bit higher than where we have been historically. If the R&D credit gets extended that rate is probably going to drop down to the high teens.

Yes.

And then I would expect we're kind of in the high teens rate in 2013 and beyond, would be what I would guess, assuming R&D credit comes back.

That's a little higher than where we have been, historically.

But that's the function of the larger profit base, I guess?

Yes. And we've had some one-off different adjustments for tax purposes over the last two or three years that's helped get us into a single-digit or a low double-digit a couple of times.

Okay. Then I wonder if you could just give an update on -- it sounds like once you get the product roadmap out there it's going to have a -- it's going to act as a catalyst if you will for the sales organizations as well, because it's going to become clear for everybody, both the customer and yourselves. A, is that a correct assumption, and b, just from a timing perspective as we think about, for example, this quarter. When do we think we will get that clarity and when will the sales force be really able to fully engage?

Well, there are two parts to that. We have given a first indication to the sales force of how they should handle individual new sort of categories of -- of opportunity in the pipeline. So what do you sell to a customer who has no Blackbaud CRM and is looking for online if you're an enterprise sales rep. Well, the answer Luminate online. So most of the sales situations --sales reps got training in the middle of July that anticipates the results of the roadmap.

You know, not -- not every detail and certainly not anything about Sunset or -- or migration strategies, but for new in type line opportunities, so I think that you can expect to see some improvement in the -- in the part of the market that got some freeze or slowed down in the quarter that we are in, and then some later and I will remind you, however, that most of the things that slowed down are subscription-based or ratably recognized, so you won't necessarily see an immediate or a huge upward tick in revenue based on bookings that might come from that, however.

Yes.

I think it's relatively clear in terms of the rest of the -- the rest of the information should be in market by the end of the quarter, and certainly we plan on making a very clear and -- you know, and significant statement of it at the Blackbaud conference, which happens at the very end of September and the beginning of October.

That's helpful. And then one last one. You commented, although you're not guiding for fiscal 2013, clearly but you commented that it was possible that you could see more than the full realization of the run rate synergies at the end of this year, and perhaps getting up to closer to more towards the 20% non-GAAP operating margin next year. Is that a total function of -- of revenue growth or do you think you have got ample opportunity that, you know, that the operating margin target for next year is something that's in your control and that, you know, 20% is, at least, a very approachable number?

I believe 20% is a very approachable number. There are a number of things that we had to spend this year that we don't have to spend next year in order to bring the companies together. I mean, you know, it's a silly example, but we paid for two conferences and we're going to have one.

You know, so there's stuff like that we had to do and extra sales kickoff that we didn't otherwise have to have and -- and frankly also the clarity in organization that will come from being clear about roadmap and the customer allocations will, over time, mean that we can cover more accounts with fewer products and fewer people. I don't mean to say we're going to reduce people per se. I just mean that more accounts per sales rep, you know, happen when you have a larger portfolio of -- when you ever a larger portfolio of offerings and it's easier to cover more accounts when you have fewer -- you know, fewer clearer portfolio.

I think, Ross, from an exit run rate perspective with the $9 million to $10 million that we have identified, I would almost say in the bag at this point, we'll exit the year at about an 18% to 18.5% run rate. So we're well on our way back to that 20% before identifying any other opportunities in the coming months.

Great. That's really helpful. Thanks a lot, guys.

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

Hi, guys. [Sackett] here for Sterling. Most of my questions have been answered, but just had a few quick modeling ones. So first, how much of the lower organic revenue guidance is coming from the more challenging environment versus timing of services contracts?

So I think when we look at a combined company, we certainly know that we -- the expectations of where we are on the Convio side, whether that's timing of the deal, getting approval or what, we're $5 million to $7 million short of where we thought we would be there. On the Blackbaud legacy side, as we said $10 million to $13 million is from the services side. There's certainly -- at least we get some sense that there's some impact of the softening of the market. It's hard to put our fingers on what that is, but I would put more of it on the lengthening or the recognition on the services side and the Convio market. I don't know if you have anything.

Yes. It is rather hard to separate the Convio softness for whatever freeze happened because of the deal from the market. I would say that the smaller the organization, the more sort of caution and lengthening of sale cycle we're seeing. And so today I wouldn't characterize it as having lost things.

I would characterize it as it's taking a little bit longer for us to get through sales cycles, and that was -- that -- you know, that's consistent with nervous customers, and so if someone's nervous because of they don't know what the roadmap is, or nervous because of the economy, it's very hard to tell those things apart. That -- that lengthening of cycles is a meaningful part of the 10% to 13%. It's not 10%. It's probably some number larger than 10%. And it shows up, both in the mid-market, as well as sort of smaller enterprise deals being also somewhat harder to close or taking longer to close.

Great. That's helpful. Maybe just a follow-up on the environment. You know, I believe June is the fiscal year for some of your nonprofit customers. You know, as you have --you have talked to them just about budgeting for next year and it sounds like for -- it sounds like the June quarter was a little bit challenging for software overall, do you think that some of them have embedded more conservative spending plans for the next fiscal year?

Well, I haven't talked with them, personally, so I don't really have a lot of detail about that and often times, you know, you don't necessarily get a direct correspondence between, sort of, budgeting processes and decision cycles, because usually the budget for a spending with us has been determined, especially in larger accounts, sometime back as opposed to in the coming -- in the coming budget. So we have not seen any meaningful shift in budget loss.

So no fundings in our sales cycles. And that would be where I would see that. And I don't of any personal information from accounts or any anecdotal information talking about budget changes. I just know that people are concerned about what fund raising will look and that things are slowing down, and so people are paying a little more attention in the sales cycle.

Got it. Very helpful. Thank you.

Thank you.

Thank you. Our next question comes from the line of Matthew Kempler with Sidoti & Company. Please proceed with your question.

Thank you. So I just wanted to step back on the standalone business side. You know, after several quarters of low double-digit organic revenue growth we have seen the last three quarters at kind of the mid-to-high single-digit its. Could you review, kind of from your view ,what are the key items that have been holding us back from achieving though those targets? Is it purely the macro or is there something else in the shift of subscription, or are there other pieces at play.

So, Matt, I think right now from a guidance perspective on our legacy business, standalone Blackbaud business, I would say that the only place that we've really made any adjustments to our previous expectations was on the services business. So I think, as we look at the subscription and maintenance and license lines of our P&L, those are still balancing out kind of right where we would have expected them to be for the year.

So this combined company guidance that we just gave, when you think of it tray standalone perspective is, I would say solely isolated to the services line, and as we spoke with a question just a minute ago, I think that services' shortfall on this year is largely isolated to two things. Macro environment's tough to put a finger on yet today.

Certainly more volatile and down a bit, but that longer life on bigger CRM deals, that mix is quite a bit different than what we had planned for the year, and so that's deferring the revenue out further on the CRM deals and then in mid-market, we're seeing a faster switch over to subscription on some of the legacy products than what we originally anticipated, and that's getting that ratable recognition over three years. I would say it on that legacy side of the Blackbaud business that is the largest driver by far.

Okay. And then circling back on the sales side. So we have integrated in (inaudible) the sales and marking organizations. Have you -- are there any change in the structure and how the sales teams are addressing the market? Any change -- any major changes in the compensation plans?

We have not made dramatic changes in the sales coverage type models, so the enterprise organization is still broken down by sort of very large strategic accounts, and then by vertical, and then sort of mid-market accounts broken -- mid-market enterprise accounts broken down by vertical. The general markets business sales models have really not changed at all. Coverage model.

We have made a modest shift in commission structure to sort of bridge the gap between the Convio model and -- and the -- and the Blackbaud model at the enterprise, which gives more credit for recurring revenue and gives somewhat less compensation for services. Now, before you say is that the cause of the services reduction, that's only just been announced in July so the change in services mix inside of our business, you know, was happening well before that -- that shift.

Certainly people are still compensated on services an I expects services will continue to grow in the way that we've described, but we are -- we are focusing on shifting the model and increasing the recurring revenue portion of our business and as such we have made it somewhat more attractive for the larger account sales teams to push, you know, for accounts to -- to either upsell and/or to bring on new solutions that have a -- an ongoing revenue stream.

Okay. Thank you. And then just two quick model questions. On the amortization of intangibles data, you may have given it already, but what should be the run rate going forward for that line item?

So I have that here somewhere. And we're -- we haven't put together a specific on just amortization so I will give you depreciation and amortization, because we don't normally break that out, but I knew that you would need it. So I wouldn't do this over the long-term but now we're currently estimating purchase price allocation that will have depreciation and amortization expense of roughly $30 million in 2012.

And we would perfect depreciation and amortization to go up 25% to 30% next year. And we've still got to nail down some of our purchase accounting. Matter of fact, the team and I have been on a couple of calls this week working on that so we still have some moving pieces on the final purchasing accounting that could affect the finite-lived intangibles.

Okay, okay. And then roughly what kind of restructuring charges, integration charges, should we expect through the end of this year and are any of those cash?

I can tell you what we had on a GAAP basis in the first half. We haven't given any guidance and weren't planning to at this point on anything for the second half. Deal costs in the first half of the year was $6.4 million, integration costs at about $3 million.

Okay. Thank you.

Yes.

Mr. Chardon, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Well, I would just like to thank everybody for joining us today on the call and I hope to see and/or talk with -- with you in the near future. So thank you very much and talk to you soon.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.