Blackbaud Inc (BLKB) 2014 Q3 法說會逐字稿

Good day and welcome to the Blackbaud 2014 third-quarter conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Robert Weiner. Please go ahead, sir.

Good morning, everyone. Thank you for joining us today for Blackbaud's 2014 third-quarter conference call. Today we will review our third-quarter financial and operational results for 2014 and provide commentary on our recent acquisition of MicroEdge, as well as our progress toward achieving our goals for the full year.

We will also provide a brief update on our key points of our Investor Day, which we held about 45 days ago in New York.

Joining me on the call today are Mike Gianoni, Blackbaud's President and CEO, and Tony Boor, Blackbaud's Senior Vice President and CFO. Mike and Tony will make prepared comments, and then we will open up the call for your questions.

Please note that our comments 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 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 a combination of both GAAP and non-GAAP measures are more representative of how we internally measure the business. However, non-GAAP measures should not be considered in isolation from, or as a substitution for, GAAP measures. A reconciliation of GAAP and non-GAAP results is included in the press release we issued last night, which is available on our website at www.blackbaud.com.

Our team will continue to be accessible to meet with investors in the coming months. Beginning next week we will meet with investors in New York and Philadelphia. In December we plan to meet with investors in Atlanta, Kansas City, and will present and participate at the Credit Suisse TMT Conference in Phoenix. Please contact Investor Relations here at the Company if you are interested in meeting with management in one of these locations.

I am now pleased to turn the call over to Blackbaud's President and CEO, Mike Gianoni.

Thanks, Rob. Good morning, everyone. Thank you for joining our call today to report our 2014 third-quarter results. We're continuing to gain momentum in our organization, which was the theme of our 2014 Investor Day. At this Investor Day in September, we clearly communicated the Company's five-point growth strategy, defined the large market we participate in, and its specific growth dynamics. So taken together, these represent a compelling opportunity over the foreseeable future.

We believe the Company is at the beginning of a period of accelerated growth and increased profitability, which should drive consistent appreciation of enterprise value over the long term. We'll strive to report our progress towards our long-term aspirational financial goals, which we announced at Investor Day in a plain speak, easily understandable manner which we hope will resonate with members of the investment community as we execute on our strategies. Please review our Investor Day presentation, which can be found on our website. I hope it will become a useful reference tool as we move forward with and execute against our strategies.

Our third-quarter and year-to-date financial performance reflects a trend of increasing momentum in our business, with increased recurring revenue, including subscription-based revenue, driven by solid traction in many of our solutions across the portfolio. We continue to benefit from growth in a number of rapidly growing solutions, including online, mobile, analytics, and payments.

License revenue continues to decline as a percentage of our overall revenue base as planned, and we expect it to make up less than 2% of our overall revenues as we migrate our core Edge products to the cloud.

Now let's turn to a brief review of the financial results for the third quarter. Non-GAAP revenue was $146.2 million. Non-GAAP organic revenue growth was 7.3% over the third quarter of last year. Non-GAAP operating income was $27.2 million, with non-GAAP net income of $15.8 million and non-GAAP diluted earnings per share of $0.35. We generated cash flow from operations of $40.4 million during the quarter.

In the quarter, organic revenue growth for subscriptions was 15.9%, and year to date it was 14.3%. Subscriptions revenue continues to accelerate, driven by our core solutions. Our growth in subscriptions on a GAAP basis was 28.8%.

Today, with our third-quarter organic revenue growth of 7.3% and our year-to-date organic revenue growth of 6.9%, we continue our trend of growing at higher than historic levels. More importantly, we have accelerated our organic growth rate from the second quarter of 2014 and believe the improvements we've made earlier this year to increase alignment, integrate product solutions, and refine processes will continue to show results.

In the third quarter, we continued to strengthen our operating platform for the long-term and subsequently closed the MicroEdge acquisition on October 1.

Specifically we made some very significant announcements for our new products. We announced that we are bringing our flagship products for the cloud, with Raiser's Edge NXT and Financial Edge NXT, which will be drivers of future growth. With the announcement of these products, Blackbaud is offering an exciting path to the cloud for both our current and prospective customers. The forthcoming Edge NXT solutions provide a simple migration path to the cloud as the system architecture shares a common database, enabling quick and seamless migration. This is a huge plus for our customers.

In the third quarter, we also added new talent and capabilities to the team, with key additions in product development and marketing.

We continue to focus on operational improvements through the rollout of new internal systems, process improvements, and further refinements. We implemented programs focused on operational excellence beginning in our products area with plans to cascade these programs throughout all key functional areas of the Company. And we completed the previously announced acquisition of MicroEdge, which significantly expanded our total addressable market or TAM. Most importantly, this acquisition provided entry into a near adjacency of the market that was not historically a focus of the Company.

Blackbaud has historically been focused on the fundraising segment of the giving market, and both MicroEdge and our recent acquisition of WhippleHill, extend our TAM and bring us to new customers and market segments. MicroEdge expands our TAM by over $635 million, and WhippleHill expanded our addressable customer base in the K-12 market by three times, from approximately 4,500 to nearly 15,000 potential customers. So early days in both of these markets.

WhippleHill and MicroEdge are the first two acquisitions we've made that do not have fundraising solutions, so they are true adjacent market expansion markets for us. This is a very powerful for our Company and customers, as we now can provide more comprehensive solutions to our expanded customer base with better integration and improved value propositions. For example, in the K-12 marketplace, we now have a full suite of front- and back-office solutions. This market has been asking for better integration, and we have begun integrating the WhippleHill front-office solutions for the Raiser's Edge.

Also, we are leveraging our capabilities in the back office in areas like engineering, sales, operations, and finance to help accelerate growth in these businesses. As an example, by the end of this year, we will largely have all of the WhippleHill internal systems migrated onto our Blackbaud systems.

MicroEdge's CEO, Kris Nimsger, has joined Blackbaud and will lead Blackbaud's Foundation and Corporate Markets Group, reporting to Joe Moye, President of our Enterprise Business Unit. We're happy to have the MicroEdge employees join Blackbaud.

The acquisition has provided entry into the foundation, grantmaking, and corporate markets where we had not previously participated. And it also allows us to connect the entire giving community end to end, opening up the entire giving ecosystem from grantmaking to corporate culture responsibility, foundation management, and outcomes management. This combination will let us connect the industry in a way that hasn't happened before. I'm very excited about the opportunity and our potential to take MicroEdge to the next level on the part of Blackbaud. Tony will comment on the funding of MicroEdge a bit later in the call.

I would now like to wrap up my comments by turning to some exciting things that we've done as an organization to improve transparency and communication. For our investors, we held our 2014 Investor Day on September 12 in New York. This event, which we expect to hold annually, served as a catalyst for the Company as we've clearly defined our future, our strategy, and our focus on execution. We hope that those of you who attended and participated over the webcast were able to clearly see the excitement we have about our future prospects, as well as the focus and alignment we have internally on executing on our strategies and delivering on both 2014 and our long-term aspirational financial goals.

And finally, we held our annual customer conference three weeks ago. It was a very successful event where we discussed many of the things I mentioned with a focus on new innovations, including sharing details on Raiser's Edge NXT and Financial Edge NXT. It was great to hear a room filled with a few thousand customers clap and cheer throughout parts of the presentation.

We also provided a clearer view into our plans for online platforms such as Luminate Online and Online Express, along with providing details on virtually every every major product, including Blackbaud's CRM for enterprise clients, eTapestry for the smaller, less sophisticated nonprofits, Luminate CRM, and our payments processing platform. And for the first time, we highlighted our crowd fundraising solution, EveryDayHero, which was quite popular in the Expo Center, because it opens up new channel of donors for nonprofits and integrates with the Raiser's Edge, providing nonprofits a direct to consumer channel and wider awareness at no additional costs.

These initiatives paint a new picture of Blackbaud. We're focused with greater alignment in energy and have very clear action plans and strategies to execute with focused resources and capabilities to mimic delivering performance. I'm very excited about our future and pleased with our progress thus far.

As I previously noted, we are increasing our momentum and resolve, which we expect will heighten and widen our competitive mode through experience, expertise, and innovation with a singular focus on the giving market and best serving our customers' needs.

Thank you for your time this morning. And now I will turn the call over to Tony to provide more detail about the third-quarter performance. Tony?

Thanks, Mike, and good morning, everyone. Thank you for joining us today to review our 2014 third-quarter performance.

Our third-quarter performance was solid and expanded on our trend of acceleration. We continue to report strong results in our core products with customers just beginning to embrace recent product upgrades.

I'm really excited about our recent announcements for the new Raiser's Edge and Financial Edge NXT products. We have accounted for the new NXT product launch in our expectations for 2014 and long-term aspirational goals for 2015 through 2017 that we shared at our Investor Day.

We expect the Raiser's Edge and Financial Edge NXT solutions to become industry standards for product excellence and functionality, much like the current licensed version of these products have become, and we're very excited by the initial responses that we heard at our recent customer conference, bbcon.

Operationally it was another solid quarter of progress for the Company. We made significant strides implementing our new best-of-breed automation systems and processes, which we detailed at our Investor Day.

You may recall that we've been speaking about maturing our business by implementing several new and innovative systems focused on streamlining and automating back office and operational process functionalities. We will complete many of the upgrades this year. These new systems and processes will help us to become more efficient while providing scalable platforms to support our future expected growth.

In all, we are taking 24 disparate systems and/or manual processes down to six that will support the entire organization and will provide us the ability to layer on new and acquired assets seamlessly, as we are doing in the fourth quarter with WhippleHill.

Now let's turn to the third-quarter and year-to-date financial performance. Non-GAAP gross margin was 57.9%, which continued to reflect the mix change resulting from increased year-over-year payment solutions revenue. Our year-to-date non-GAAP gross margin edged down due to the presentation change for payments revenue, which was partially offset by improved maintenance margins resulting from a larger year-over-year contribution from BBCRM and leveraging our scale for efficiencies.

We continued to see the effects on gross margin from the change in presentation for our payments revenue from net to gross, which we made in last year's fourth quarter. This is the last quarter that we will see that comparable impact. The presentation change reduced non-GAAP gross margin by approximately 300 basis points in both the third-quarter and year-to-date periods. I'll remind you that this change is merely optical and does not affect gross margin dollars.

We generated non-GAAP operating income of $27.2 million, representing a non-GAAP operating margin of 18.6%, inclusive of our year-to-date 2014 incremental investments of $11.5 million. As a reminder, we previously announced that we expect to invest $17 million for the full year in 2014. These investments are focused on four primary objectives: accelerating organic revenue growth, optimizing our product portfolio, accelerating our transformation to a recurring revenue company, and increasing our long-term operating efficiencies.

Now let's look at the balance sheet and statement of cash flow. We ended the third quarter with $54 million in cash. Our debt balance at the end of the third quarter was $171.1 million and when netted against cash on hand resulted in a net debt balance of $117.1 million. We generated $40.4 million in cash flow from operations, and we paid out $5.6 million for our quarterly dividend.

Now I will discuss the integration of WhippleHill and acquisition funding of MicroEdge. In the third quarter, we made very good progress relating to the integration of WhippleHill. We also began extensive planning for the acquisition of the MicroEdge business, which we completed on October 1. While MicroEdge is larger and more complex compared with WhippleHill, our integration programs will be leveraged to help integrate MicroEdge. We expect a contribution from MicroEdge business in Q4.

As Mike mentioned, MicroEdge has become part of Blackbaud's Enterprise Business Unit.

To fund the acquisition, we drew down approximately $140 million in cash on our $250 million total revolving line of credit, which we used together with approximately $20 million of cash on hand to pay the $160 million purchase price. As a result of this draw, we had approximately $315 million of total outstanding indebtedness at the beginning of the fourth quarter. This represents approximately 2.4 times our annual EBITDA, which we are comfortable with and is well within our targeted range for debt levels.

I'd like to spend the balance of our time on the call this morning to cover two important points: our long-term operating margin improvement plan and our full-year 2014 guidance. We are implementing a three-year margin improvement plan that has several primary drivers. As an aspirational goal, we hope to achieve 300 to 600 basis points of operating margin improvement by the end of 2017. The most significant driver of the improvement is expected to come from internally generated sources as follows.

First, we expect to generate significant returns from our 2014 investments in our sales and customer success teams. We are already seeing a very solid initial return, and the visibility for increasing returns is clear. Second, we will gain greater efficiency and operating leverage from our investments in and focus on operational excellence in all key functional areas of our organization. And third, we will improve the effectiveness and returns on our professional services business.

Additionally, we will also benefit from external growth drivers coming from increased use and penetration of online payments, analytics, and mobile applications, as well as the overall market shift to the cloud and subscription-based solutions.

As part of our expected operating margin improvement, we've been clear about our expectations for overall financial performance, both in the short term and over the longer term. At our Investor Day, which we held about a month and a half ago, we released both our long-term aspirational goals and commented on our financial guidance for 2014. The operating margin improvement plan I just spoke about was one of those longer-term aspirational goals, and we also set long-term organic revenue growth and aggregate cash flow goals for the period from now until the end of 2017.

As Mike mentioned, our Investor Day was designed to provide greater clarity, including a simple path to follow as we execute against our strategies, with clear goals tied to our objectives in the mission. The beginning of 2014 is the start of our journey, and I am pleased to say that we are again increasing our full-year financial guidance. The increase reflects the addition of MicroEdge for the fourth quarter and solid overall year-to-date results and performance above previously expected growth.

Our updated 2014 revenue guidance is a range from $565 million to $570 million, which is an increase of $15 million to the midpoint of the range for the full year compared to the update we made at the end of the second quarter. This update, together with the update we made at the end of the second quarter, represents a $25 million increase in revenue to the midpoint of the range compared to our original guidance, which we issued at the start of the year.

We are also updating our 2014 non-GAAP operating income guidance to $98 million to $102.5 million, which is nearly even with our 2013 non-GAAP operating income and is inclusive of the expected $17 million of incremental investments that we are making in 2014. This updated goal represents an increase of $3.25 million to the midpoint of the range from our guidance we issued at the end of the second quarter and reflects expected continuing core business strength and the addition of recently acquired MicroEdge.

It also represents an operating income increase of $5.25 million to the midpoint of the range compared to our original guidance, which we issued at the start of the year.

This translates to a non-GAAP operating margin of 17.3% to 18.0% and non-GAAP diluted earnings per share in the range of $1.25 to $1.29, which represents an increase of $0.06 to the midpoint of the range compared to our guidance we issued at the end of the second quarter. We are very pleased with the increased momentum and traction that is driving our accelerated growth and enabling us to raise our guidance.

I'd like to wrap up my remarks by saying that we remain focused, energized, and committed to achieving our 2014 financial guidance, and we are actively working toward achieving our long-term aspirational goals. We participate in a large, growing, and dynamic market, and we're well positioned to lead in the areas of customer service, quality, market leadership, and performance. We're excited by the strategies that we've developed and look forward to delivering increased value to our shareholders.

With that, we'd like to open up the line for your questions. Operator?

(Operator Instructions). (technical difficulty)

I was wondering if you could start with -- just a high-level question here. You are less than a month off your user conference, but certainly enough time to get some feedback from your clients. What did you hear back from your customers regarding the expected transition to NXT? What were they most excited about, what were their biggest concerns, and how do they think about the transition on pricing from their existing maintenance payment stream towards a subscription stream?

Tom, it's Mike. I would say that the response was even better than we expected. It was -- people were really clapping and cheering in the room when we went through the product, the deliverables, the demos, the differences in the product, the new technology and the new architecture, the ease of migration, which is quite significant. One of the challenges in this industry and others with these types of solutions is migrations can be painful. The existing Raiser's Edge to the Raiser's Edge NXT, and the same with (inaudible) NXT migrations are quite simple and quick and straightforward.

So, the operational awareness of that and the product itself went over extremely well. We also are going a lot deeper around integration because we're focused on the solutions, not just single products in the bbcon or our conference audience really understood that quite well, and it was accepted quite well.

Great.

So we have a pretty high number of clients that have contacted us post that, and we're talking to them about migrations and time frames and pricing as we speak. So I'd say it's very, very positive.

Okay, great. Tony, let me throw the next question at you. Just in terms of the impact from MicroEdge, it's certainly wrapped into your numbers. You indicated a [$15] million revenue guidance increase relative to your last round of guidance and you beat by a little bit this quarter. How much of that $15 million increase is related to MicroEdge? And I guess part of that question is also trying to get a feel for how much we should be lifting our models next associated with the MicroEdge impact? Thanks.

Yes, thanks, Tom. By the way, we will be reporting our pro forma MicroEdge SEC numbers sometime around mid-December, I believe is the due date on that. So watch for that. It's coming. It would give you more granularity on MicroEdge. But I would tell you we don't want to break that out separately from a guidance perspective, but overall it's a low to mid $30 million run rate business with margins that are accretive to our current operating margins.

Great. So, accretive even today?

Yes, sir.

Okay. And last question for me here is the payments business seems to be one, even aside from just the net to gross move. You've put more emphasis in it this year. You've certainly seen some success. Can you talk about the impact of payments as it pertained to your success in the last quarter? And if you could address the ALS Ice Bucket Challenge and what you were able to do for that customer, I'd be curious to understand how that impacted the model in the quarter as well.

Sure. This is Mike again. So, payments. What's interesting about the quarter I would say that I wouldn't highlight necessarily payments. We had pretty strong revenue performance across the major product portfolio in general. Payments was strong, but so was really everything else. And it was pretty evenly spread, which to me is a really good news.

We do continue to focus on payments. We focus on a lot of our products. I'll add that the Blackbaud CRM, pending 4.0 release, had a fantastic response at our client conference as well. And we continue to have good results again across the product portfolio. We'll continue to drive payments.

Related to ALS, that was obviously -- has been fantastic for that organization. I think now the numbers are in the same time period where they would have raised $5.5 million. They've raised $115 million. I think that's roughly accurate, so for them it's been fantastic.

Their online presence, which is where all that fundraising came through for the most part, is one of our products, is Luminate Online. And so we participated in that as far as being their solution provider, kind of behind the scenes.

What was really clear to them and a lot of our larger clients is our ability to scale. Really unexpected pop in volume for them, because that went viral, as you quite well know, and we were able to support the volume in that really short time period. And it really was an interesting point for our larger clients that we're able to scale as we continue to bring more innovation to the market, which is really important for the big guys. So we're really happy that that all worked out well for that institution.

And Tom, just on some numbers, our non-GAAP subscription growth was almost 21% in the quarter. Recurring subscription revenue growth was 16%. So to Mike's point, we grew really well with recurring subscription. That would be excluding usage in payments. And then usage grew very well, as did payments, so we saw good growth across the gambit on subscriptions in the quarter.

Excellent. Thank you, guys. Nice job.

(technical difficulty).

Hi, it's Sterling Auty from JPMorgan. So, on the margin front, at the Analyst Day when you outlined the 300 to 600 basis points of improvement, there was kind of a profile I thought where year one, it would be down; year two, you kind of get back to breakeven; year three, improving, as you did the rest of the migration in terms of the customer base to the cloud. Has any of that changed? Because the way you described it today, I guess I was a little bit confused. It almost sounded like you are expecting straight up and to the right improvement over the next three years.

This is Tony. I'm not -- we could circle back on the Investor Day presentation, try and dig into that a little more, where you came away with that thought. I apologize if that's what you thought we articulated. We would expect moreso the latter of what you just spoke about, that it would be an improvement upwards to the right over the next three years. So, we -- we're not giving guidance yet for next year. We'll do that on the next call. But at this point, I would expect you can see some improvements in 2015, 2016, and 2017 to hopefully get us to that 300 to 600 by the end of 2017.

All right. Great. Thank you for the clarification. On the revenue growth, so similar type of question, not to -- 7% growth that you see now, I think you outlined the aspirational goal of the 10% organic growth. Is that similarly you expect a somewhat steady improvement from here, and how do we think about what MicroEdge will contribute to that growth acceleration?

So, we were -- that 6% to 10% was organic growth. So for next year, you would exclude the impact of WhippleHill and MicroEdge in that growth calculation. It wouldn't be until the following -- after you pass that first full year that we would include that in organic growth.

Our growth target of that 6% to 10% over the next three years organic revenue growth would be inclusive of the RE and FE NXT shift and related impact. So, with that again, since we aren't giving 2015 guidance yet, I would expect some drag on revenue next year on growth rates as a result of that transition from what has historically been largely license maintenance to a fully cloud-based subscription offer and ratable recognition.

That being said, I think we still have a good opportunity to maintain a reasonable organic growth rate next year. And that then, as you work through that migration, obviously we expect that to ramp upwards to the right as we get through that initial transition period.

But we have already seen quite a bit of transition, if you recall, because we got several of those RE clients now in subscription-hosted solutions as we do for Financial Edge. And you can see this quarter the impact of that transition over the years. We had less than 2%, which I think is the first time ever of our revenue was in license fees. So, license is certainly a very, very small piece of the total pie nowadays.

Okay, okay. And then putting the two together then, obviously you've made the investments and talked about the operational inefficiencies. To keep margins improving towards that three-year goal while having, let's say, a pause in the revenue acceleration (technical difficulty).

Did you get cut off? Hello?

I believe he just disconnected. (Operator Instructions).

Good morning. It's Peter Wahlstrom calling from Morningstar. So, you are about to lap the period of increased investments in the next couple of quarters. Given the recent sales momentum, is there a case for extending some of those elevated investments, and maybe how are you evaluating this option?

So, I think as we alluded to, if you break the investments down into the four major buckets, I would say the place that there could be a likely opportunity, if we saw the right return on the investment, would be in the expansion of the sales and marketing investments. We've seen really good ramp-up on those investments thus far this year. We should start benefiting from the revenue side of those investments in Q4. Because there was a fairly long period of time of getting the folks hired, getting them trained, getting their book of business built up, et cetera., and then most of what they're selling is subscriptions. So you wouldn't see the revenue early on.

So we should start benefiting from that Q4 of this year and certainly going into next. So I would say that is the place we'll continue to focus on opportunities for sales expansion if we think it's going to drive the proper return on investment.

The other place that I would say there is some potential is in the customer success and retention areas that we've invested in. So, as we shift more and more of the business to subscription-based offerings, we're very keenly focused on ensuring our customers' success and trying to hold retention levels high. And so that would be the other place if we're seeing a proper return on investment where we might continue to add.

But I don't think you would hear us talk about those. I would assume that any investments along those lines would be more in line with the revenue growth and not so out of the ordinary as we had this year. Most likely we would not be speaking to them as a big growth investment as we did this year.

Okay. Very good. And from an organic growth perspective in the quarter, as you're looking at it across your customer segment, are you seeing particular success in maybe one sect or vertical or either in ECBU or GMBU maybe outperforming the other?

No, I think we're seeing good growth. And Mike can speak to this as well, but we've had really positive acceleration in this subscription line, which includes the online and usage in payments and analytics as well. We've made a big push with Mike coming on board, much harder than we had historically of getting back to base with that broader suite of solutions instead of just the point solutions, and then integrating all of those products as well, I think is having a positive impact.

The CRM product in enterprise has done well. That's driving I believe about half of our maintenance growth. That base of CRM customers now getting up to enough breadth and size that it's starting to have an impact on -- positive impact on maintenance growth rates. So that's driving some of that growth there. And I think the only place we see any real stagnation would be in licenses because of the shift to subscription. And then secondarily (technical difficulty) because we've done two things, largely. We've bundled a lot of the services into the subscription offers, so you are getting a hit there with the ratable recognition. And then secondly, we've done a great job, I think, on reducing the amount of service associated with the large enterprise CRM engagements, and so that's been relatively flat as you can see this year, which was a little bit of a drag on our overall growth rate.

I'll just add I think a key point to note is that last year license revenue was about 3% of our total, and Tony mentioned in the second quarter it's about 2% of our total.

So, when we talk about transition to the cloud, a high percentage of our revenue today is subscription revenue, and the low to mid 40% of total is subscription. And our recurring revenue in the third quarter in total was 72%. So if you think of that in those terms, this transition to the cloud, we're talking about a few products inside of the Company, not the Company. And if you look at our subscription growth in the quarter, and our GAAP subscription growth was almost 29% -- 28.8%, and our non-GAAP subscription growth was almost 21%. So I think those are key points to remember as we talk about transition to the cloud. Because this transition started a while ago.

Okay. Thank you very much.

Good morning. James Gilman of Drexel Hamilton. It seems that things are going quite well there in the Low Country. My question for you is around basically if you were to continue to make maybe small tuck-in acquisitions, how do you prevent those from being disruptive to your operations as you seek to streamline them over the coming years?

Yes. It's a good question. So, what's interesting about the two acquisitions we've made this year is they're -- WhippleHill, back in June, was the first acquisition that the Company has made that is not fundraising software but a near adjacency.

So quickly out of the gate, we've integrated some of their products with some of ours. So, for example, we've got early integration with Raiser's Edge right now, and that provides a really interesting value proposition for those K-12 clients in that we're providing solutions that cover the front and back end. So we're able to go to market with four, five, or six solutions as opposed to one or two in that marketplace.

And we're operating those in a way that it's exclusively focused on that K-12 market but leveraging the rest of Blackbaud. So, as an example, as we mentioned earlier on the call, that by the end of this year, we would have essentially shut off all of the internal WhippleHill systems and migrated them to our internal systems, yet they operate solely focused on that K-12 market. So we get internal operating leverage while we still maintain a high focus on that vertical market. Meaning it's not that disruptive for us to do this.

Great. Thank you. And I have a follow-up question. This is really around technology as you move to the cloud. As you have gone down this path here in transition to the cloud, how has the evolving technology within the cloud space assisted you and maybe helped improve your margin outlook? Thank you.

Yes, I'll talk about the technology a bit. So, what's really interesting about when we talk about the Raiser's Edge NXT and Financial Edge NXT is that the underlying technology is a very modern, high velocity platform for us. And so our expectations are that we will move more and more of our products to what I would call highly scalable, new cloud technology that's high velocity.

So I will use a specific example. We have a fantastic online product called Online Express that's been out for not long in the marketplace. We have several hundred clients on it, and we're accelerating that.

It's included with Raiser's Edge NXT, and that particular online product that is in that Raiser's Edge NXT bundle is a very modern, high velocity product. What I mean by high velocity is we put new functionality out in the market every week or every other week based on client needs and feedback. So we are able to move quite quickly and deploy new capabilities, whether it's better integration or new functionality, and be very nimble. And we've done that with Raiser's Edge NXT and Financial Edge NXT as well.

So we're pretty excited about the underlying chassis, if you will, of the new platform for scalability and to drive innovation and to really be able to, in a much quicker way and more nimble way, meet our clients' needs. So we think over time that will be a significant competitive advantage for us, especially as we move to more and more integrated solutions.

Thank you.

(Operator Instructions).

Hi. Jeff Meyers from Cobia Capital. Just a housekeeping question. If you guys can just say what the payments revenue was this quarter, then what it was a year ago?

But we don't break out -- Jeff, it's Tony. We don't break out payments separately in the P&L. You can get last year's number from the workbook that we have posted on our website. So that would give you last year's because of the accounting change, presentation change. But we do not break out payments separately currently.

Got it. Okay. What about just in the terms of how fast that grew? Any sort of big picture --?

It was certainly a good quarter. I think we don't get that specifically, but I did note earlier on the call, if you heard that, that our non-GAAP recurring subscription revenue grew at 16%.

Right.

And then between usage and payments, it would largely make up the rest of that total subscriptions bucket, and that grew at a non-GAAP rate of about 21%, almost. So like I said, payments and usage was growing at something north of the 16%.

Right, right. That makes sense. Okay. Thanks, guys.

And it appears we have no questions in queue at this time. I would now like to turn the conference back over to Mike Gianoni for any additional or closing remarks.

Thanks, operator. Thanks, everyone, for calling it. We're excited about the Q3 and year-to-date results and really focused on executing our strategy, which we communicated at Investor Day. So thanks, everyone. Have a good day.

And this does conclude today's conference call. Thank you all for your participation. You may now disconnect.