Blackbaud Inc (BLKB) 2014 Q4 法說會逐字稿

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

Good morning, everyone. Thank you for joining us today for Blackbaud's 2014 fourth quarter and year-end conference call. Today we will review our fourth quarter and year-end financial and operating results and provide commentary on our plans for 2015, including our financial guidance for the year.

Joining me on the call today are Mike Gianoni, Blackbaud's President and CEO; and Tony Boor, Blackbaud's Executive Vice President and CFO. Mike and Tony will make prepared remarks, 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. In addition, we discuss non-GAAP organic revenue growth which we believe provides a useful tool for evaluating the periodic growth of our business on a consistent basis.

In this non-GAAP financial measure, we reflect certain revenue derived from our payment processing services for the year ended December 31, 2013, on a gross basis rather than a net basis for presentation consistent with 2014. Non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies acquired in the current fiscal year.

For companies acquired in the immediately preceding fiscal year, non-GAAP organic revenue growth reflects presentation of full year or stub period incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period. And it includes the current period non-GAAP revenue attributable to those companies.

We believe this presentation provides a more comparable representation of our current businesses' organic revenue growth and revenue run rate.

There was no incremental non-GAAP revenue attributable to companies acquired in the immediate prior fiscal year in either the fourth quarter 2014 or full year 2014 measures of non-GAAP organic revenue growth.

However, non-GAAP financial 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.

Now let's take a look at our upcoming investor relations activities. Our team will meet with investors in Salt Lake City and on the West Coast the first week of March and we will be presenting to and meeting with investors in New York at the Sidoti Emerging Growth Conference the week of March 16.

Please contact us here in Investor Relations at the company if you are interested in meeting with management in one of these locations. I'm 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 on our 2014 fourth quarter and year-end results.

In 2014, our company clearly gained momentum operationally and financially while positioning our enterprise to perform well and enabling us to scale revenue and profitability in the future. During this past year we executed against our strategies, which were designed to drive an extended period of quality enhancement, product and service innovation, and increased operating efficiency and financial performance for Blackbaud. Our execution throughout the year was focused and strong leveraging our domain expertise and market leadership in the global giving market to deliver solid progress on our five-point growth strategy which we outlined at our Investor Day this past September. I'm very pleased with our progress in 2014.

Our team of approximately 3,000 associates executed well and our leadership team is very grateful for and proud of their focus and determination during the year. Their dedication to serving our customers and their missions enabled our company to achieve these key milestones in 2014. We accelerated our operational momentum and financial performance while at the same time we increased our capabilities to lead innovation in our markets. We made key product decisions and provided a clear road map.

We launched compelling product upgrades to many of our solutions, including the Raiser's Edge, eTapestry, Luminate and the latest Blackbaud CRM 4.0 release. We introduced key new cloud-based solutions Raiser's Edge NXT and Financial Edge NXT.

We enhanced our expertise through key hires. We strengthened our balance sheet and capital structure. We expanded the scope and scale of our business through two key acquisitions that substantially increased our total adjustable market and finally, we are able to increase our financial guidance on two separate occasions as we progressed throughout the year. We will discuss 2015's financial guidance a little later during this call. Overall, Blackbaud had a strong year. Now let's drill down on some of the specifics.

Our fourth quarter financial performance continued to reflect focused execution with a strong subscription based revenue growth. We are continuing to benefit from solid contributions from many of our solutions across the portfolio. This broad-based growth indicates that our solutions are meeting our customers' needs with increasing adoption of cloud-based subscription solutions which bodes well for us as we launch the general release of the new Edge NXT solutions later in the year.

We also made progress creating better efficiencies in our professional services operation. We will continue to work in this area to improve resource mix, utilization, and profitability in 2015 and beyond. And we also continue to enjoy strong reoccurring revenue which represented approximately 73% of our total fourth quarter revenue including a record 47.9% of total revenue derived from subscriptions.

Now, let's turn to a review of the financial results for the fourth quarter.

In the fourth quarter, non-GAAP revenue was $157.5 million. Non-GAAP organic revenue growth continued to accelerate to 7.5% as compared to the fourth quarter of last year. Non-GAAP operating income was $27.6 million with non-GAAP net income of $15.5 million and non-GAAP diluted earnings per share $0.34. We generated cash flow from operations of $16.8 million during the quarter. Non-GAAP organic revenue growth for subscriptions was 12.5%.

Our operational focus during the fourth quarter continued to be on executing against our five growth and operational improvement strategies. On the first day of the quarter, we closed on the acquisition of MicroEdge and began the integration process which, of course, continues this year.

Now let's look at the full-year financial and operating performance for 2014. This time last year, we said that we would focus on delivering the following financial guidance for 2014, which I will compare against our actual performance.

Our 2014 initial guidance which as I stated we had increased twice during the year were as follows. Non-GAAP revenue of $535 million to $550 million. We finished at $570.7 million. Non-GAAP operating income of between $92 million to $98 million and we finished at $101.7 million. Non-GAAP operating margin of 17.2% to 17.8% and we finished the year at 17.8%. Non-GAAP diluted earnings per share of $1.16 to $1.24 and we finished at $1.27 approximately $100 million cash flow from operations and we finished the year at $102.3 million.

Our non-GAAP revenue, non-GAAP operating income and non-GAAP diluted EPS exceeded our guidance while non-GAAP gross margin adjusted for the net to growth presentation change, cash flow from operations and free cash flow were also strong. These results are gratifying, especially when you consider the $17.5 million of incremental investments we made during 2014. Higher than expected cash tax payment swing of $13.7 million and a 106 basis point negative impact from a net to gross presentation change.

As the team and I reflect on our 2014 financial performance, we're proud of our achievements. We received a solid passing grade and it was a job well done.

What's also very exciting is what these results illustrate. Very clearly in my opinion that our model, our strategies and the actions we implemented in 2014 are the right strategies to ensure that we drive an extended period of quality enhancement, product and service innovation and increasing operating efficiency and financial performance for Blackbaud. This is what I stated just a few minutes ago that our strategies are designed to fuel these improvements.

When comparing our actual results to our initial guidance, we will clearly see a significant amount of operating leverage. This nicely illustrates the leverage that we have in our business model enabling us to achieve the high end of our guidance for operating margin for the year and it also illustrates that our strategies have been effective. This is worth noting as these results again include $17.5 million of incremental investments that we've made in the business in a $13.7 million cash tax swing in 2014. The cash tax swing is greater than the $11 million that we have originally planned.

Now let's turn to an operational review of 2014. We focus on five strategies which proved effective.

The first of the five is accelerating organic revenue growth. We accelerated our non-GAAP organic revenue growth throughout the year and built on first-half momentum in the second half with 7.1% total non-GAAP organic growth for the full year of 2014 and 7.5% in the fourth quarter. Our performance was fueled by three main drivers.

First, product integration. We integrated analytics, mobile, online, and crowd fundraising into key solutions including the Raiser's Edge, Blackbaud CRM and eTapestry. Additionally, we continued our focus to integrate our payments capabilities across the portfolio.

Second, innovation and quality. We focused on a few primary themes shifting our edge products to the cloud, completing the new release of our enterprise Blackbaud CRM platform and continuing to drive mobile capabilities. Additionally, we implemented an enterprise-wide program focused on quality enhancements initially being implemented in solutions, engineering and product management and cascading in 2015 and beyond through all key operating functions.

And third, go-to-market strategies. We invested in our sales, marketing, and customer success and retention teams. We invested approximately $7 million in these areas during 2014 as part of our incremental investments. Our nearly 14% organic subscription growth for the full year is a strong driver of our results and we'll continue to see the benefits in the future.

The second area of the five is a clear product road map which includes accelerating our move to the cloud. We are able to address both of these objectives in 2014. We provided our customers with clear product road maps laying out how we have and how we will integrate certain functions that we have acquired and/or developed over the years into a clear and concise solution portfolio that is both compelling and comprehensive.

In 2015, we are continuing our work toward optimizing our product portfolio both through new innovation and by consolidating functionality into our best-of-breed solutions. We invested over $4 million in these areas as part of our 2014 incremental investments.

While we are very pleased with the results of these efforts, we'll continue to invest in optimizing our product portfolio. And we also made a very significant and I must say long-awaited announcement of our new cloud-based solutions, Raiser's Edge NXT and Financial Edge NXT. These are the last two solutions in the mid market to complete our move to a cloud-based operating model. We are focused on making this transition smoothly, successfully, and at our customer's pace, which supports a study and predictable transition for our shareholders.

What's key here related to our NXT announcement is this platform is a very modern architecture consisting of our microservices design and open APIs. A very important capability is our ability to move existing Raiser's Edge and Financial Edge customers seamlessly and quickly from their current environment to the new offerings.

This is a game changer; changing a historic need for lengthy migrations. This is a significant competitive advantage for us along with the modern architecture and product capabilities. These technical capabilities who now we call a cloud 2.0 architecture that many cloud software companies do not have. It provides for a high-velocity environment which again is not all that common.

The third area of focus in our list of five is the expansion of our total adjustable market or TAM. At our Investor Day, we outlined a very large and growing market in which we participate and where we are the market leader with more than 30 years of specialized domain expertise.

Today Blackbaud's capabilities are unmatched in our space and we are very well positioned to serve, innovate and continue our market leadership in all the segments within the broader dynamic global giving markets. Today our TAM is over [5 billion] and is expected to grow to approximately [6.5 billion] over the next three years. That's an approximately CAGR.

Additionally we remain focused on capitalizing on opportunities in the fastest growth areas of the market which includes online and payments. We were also highly successful expanding our TAM in 2014 to both tuck-in and strategic acquisitions. A tuck-in example is WhippleHill, where we expanded our K-12 private school's addressable market. A recent strategic example was MicroEdge which brought us into new markets including the foundation corporate social responsibility and grant space which are synergistic to our core.

The fourth strategy is the internal focus of optimizing our back office infrastructure. We consolidated 24 disparate systems or manual processes into six best-of-breed systems in 2014. We have a little lingering work to do this year but we are largely completed with the heavy lifting. We invested approximately $6 million in back office optimizations during the year as part of our incremental investments. A strong testament to our increasing capability to scale our business and the improvements that we made in processes enabled us to quickly integrate the back office of WhippleHill during the second half of 2014 which we acquired just last June. In 2015 we will work to integrate the back office of MicroEdge.

And lastly our strategic plan -- a final area of focus is a three-year margin improvement plan. Our long-term aspirational goal called for a 300 to 600 basis point improvement by the time we exit 2017. As I stated earlier, our initial guidance this year was to achieve a 17.5% non-GAAP operating margin at the midpoint. And we came in at 17.8% for the full year. So it's great to finish ahead of our guidance for the year.

We're proud of our team's ability to generate this leverage and growth. More importantly our 2014 performance demonstrated strong progress for the achievement of our long-term aspirational goals for the period of 2015 through 2017 which I'll touch on in just a minute.

Now I have just a few more important points to discuss to wrap up my comments about 2014. These points are very important to cover as we significantly strengthen total key areas of the business. We created enhanced capabilities to accelerate both quality and innovation and I'd like to cover a few areas.

We made structural changes putting a new functional area, a center of quality and operational excellence and added experts in process and business systems all focused on delivering increasing customer satisfaction, innovation and efficiency. We upgraded our expertise in leadership in engineering and product development, focused on increased quality, improved innovation, and increased speed and efficiency. We invested in our product management capabilities. We improved alignment and heightened expertise to experience new leadership which has increased our capabilities to deliver superior customer solutions. We increased the size of our sales force and invested in customer success and our cloud delivery model to improve both our go-to-market and subscription-based support organizations. We added significant expertise in our back office areas, including finance, legal and compliance, and our service delivery organization, corporate IT and systems. Overall, Blackbaud had a great year that really changed trajectory of our company and significantly strengthening our operating platform.

Now let's turn to 2015. Let we begin my discussion with an outlook for our operating and customer environments.

Our markets and operating environment have been pretty steady with a trend of continuing above-market growth and online giving. Competitively, we continue to see point solution companies when we're out in the street and our approach of offering are fully integrated solutions is a great advantage. We are positioned well competitively to continue to leverage our expertise and build increasing advantages for our market-leading solutions which are on our path of increasing quality and innovation.

As we view opportunities to expand our scope in 2015, we continue to see and believe that solutions and companies that can fulfill our acquisition criteria are most attractive when they will expand our total adjustable market, add new and improved solutions, accelerate our move to the cloud, drive accelerated revenue growth and provide us the opportunity to gain leverage and efficiency.

Let me wrap up my comments about our outlook for the discussion of our primary areas of focus and our financial guidance for 2015.

Our primary areas of focus are as follows -- launching our Edge NXT solutions, continuing to drive growth and market penetration, of Blackbaud CRM for the global enterprise market, continuing to expand our online systems penetration, including payments, driving sales growth through integrated product solutions, completing the back office integration of MicroEdge, expanding our quality and innovation initiatives and delivering our financial and operating goals for 2015. This is the part of our discussion that is really meaningful to our organization as much as it is to our shareholders but maybe in a different way.

Our 2014 performance -- our outlook in 2015 financial guidance are a source of great pride for our organization. It's not too often that a software company in the midst of important product transitions, issues financial guidance that calls for steady and stable revenue growth, margin expansion, and increased cash flow. Blackbaud is expected to deliver all three in 2015. Steady and stable non-GAAP revenue growth, expanding margins, and accelerating growth in cash flows.

Tony will provide some background on what effect we estimated and included in our guidance regarding the recent volatility in currency rates. We believe we're very well positioned to execute on these financial objectives and to achieve our 2015 guidance. We're also on track to deliver against our long-term aspirational goals. We're very proud to be in this position and the commitments of our teams are to continue to perform at a high level to increase shareholder value.

Here's our 2015 financial guidance. Total non-GAAP revenue of $625 million to $645 million. Total non-GAAP revenue growth between approximately 10% to 13%. Non-GAAP operating income of $112 million to $118 million. Non-GAAP operating margin of 17.9% to 18.3%. Non-GAAP diluted earnings per share of $1.39 to $1.47 and cash flow from operations of $110 million to $120 million.

This guidance is consistent with our long-term aspirational goals for 2015 through 2017 that were detailed at our Investor Day this past September, which are organic revenue growth of 6% to 10%, non-GAAP operating margin of 20.5% to 23.5% or 300 to 600 basis points of improvement by the end of 2017, and our goal for aggregate cash flow from operations of $400 million to $450 million.

As I mentioned earlier, our 2014 performance, along with our 2015 guidance puts us well on our way to achieve these long-term aspirational goals, and we remain confident in our ability to deliver. Tony will discuss the key assumptions that we have used in developing our 2015 operating plan and financial guidance shortly.

I'd like to now wrap up my comments by saying that we remain highly focused as an organization by continuing to lead our industry, by heightening our innovation and thought leadership and by increasing our competitive advantages. I look forward to reporting on our progress and seeing many of you in the coming months as we're speaking with members of the investment community.

Thank you for your time this morning. And now I'll turn the call over to Tony, who will provide a deeper dive on our fourth-quarter performance and give more detail of our outlook for 2015. Tony?

Thanks, Mike. Good morning, everyone. Thank you for joining us today to review our 2014 fourth quarter and full-year performance.

Our company performed well in the fourth quarter with strong and increase in organic growth of 7.5% and continued broad-based contributions from across our product portfolio. We had solid growth in each one of our primary revenue categories, subscriptions, services, licenses and maintenance with 20% growth for subscriptions, 7% growth for maintenance, 5% growth from services, and a nice rebound in license sales this quarter with more than 28% growth, driven by several new deals for our recently released Blackbaud CRM product. Our maintenance revenue continued to do benefit from our success in the global enterprise customer market.

During the fourth quarter we also saw strong contributions from our payments, analytics, mobile and online solutions which were driven by their integration earlier this year into the Raiser's Edge products. It's also important to note our subscriptions growth at 20% was not impacted by the net-to-gross presentation change we made for our payment solutions in the fourth quarter of 2013. The anniversary of that change occurred at the end of the third quarter so our fourth quarter is a clean apples-to-apples comparison.

Let me take a minute to one last time explain this presentation change.

The total impact for the net-to-gross change was an increase to revenue of $32.2 million in 2014, compared to $22.2 million in 2013 had the presentation change been in effect for all of 2013. The impact is associated with the change in presentation for certain of our payment solutions from a net revenue presentation to a gross revenue presentation methodology. The presentation change reduced non-GAAP gross margin by 340 basis points and reduced operating margin by 106 basis points for the full year of 2014.

I'll remind you this this change is merely an optical change on the face of the income statement and does not affect gross profit or operating income dollars. Based on current accounting guidance, we will continue to report on a gross basis going forward.

During the quarter, we benefited from a legal settlement of approximately $1 million relating to a prior acquisition which helped us to drive some of the better-than-expected Q4 performance. Most of the expense side associated with this dispute was incurred in prior periods.

Non-GAAP gross margin was 56.5%, which increased by 74 basis points year over year driven largely by strong quarter for software deals with some deals pushing from the third quarter into the fourth quarter.

Our subscriptions, maintenance and services margins were all relatively stable with the fourth quarter of 2013. We generated non-GAAP operating income of $27.6 million, representing a non-GAAP operating margin of 17.5%, inclusive of approximately $5 million of incremental investments we made in the fourth quarter as part of our 2014 incremental investment plan.

Now let's look at the balance sheet and cash flows.

We ended the year with $14.7 million in cash, our debt balance at year end was $280.6 million and when netted against cash on hand results in a net debt balance of $265.8 million. We generated $16.8 million in cash flow from operations during the quarter and we paid out $5.5 million for our quarterly dividends.

A significant element to consider about our fourth quarter performance and outlook is the financial impact caused by the transition we're making to the cloud-based Raiser's Edge NXT and Financial Edge NXT solutions which are transitioning from perpetual license-based offerings to cloud-based subscription offerings. I'll drill down on this topic a bit more as this is an important element of our expected future trajectory for investors to understand over the next 18 to 36 months.

Let me address two key points about this topic.

This transition has been estimated and included in our 2015 financial guidance and within our long-term aspirational goals. I would urge that investors use our financial guidance and long-term goals as compared against our actual performance to track the transition of our NXT solutions. And as we go through this transition over the next 18 to 36 months, we will be impacted financially in three primary ways.

Ratable revenue recognition associated with the accounting treatment for cloud-based subscription offers, deferral of revenue associated with the Edge NXT solutions sold between now and when customers migrate to those solutions following general market release, which is expected to happen in the second half of 2015, and an anticipated reduction in back-to-base sales.

I'll now tackle the impact on revenue recognition related to our transition from selling perpetually licensed Raiser's Edge and Financial Edge software in our next generation cloud-based offerings.

In Q4, we began selling multi-year Edge cloud-based subscriptions, which provide customers with the right to migrate to NXT solutions when released, which is expected to happen in the second half of 2015. And on January 1st, we began selling our Edge solutions exclusively as cloud-based subscriptions with the same right to migrate. In each scenario, less revenue is recognized upfront that's under the perpetual license model; software revenue is recognized upon delivery of the perpetual license. Under the subscription model revenue is recognized ratably over the initial contract term which in this case is typically 36 months.

Customers who now purchase our Edge solutions and multi-year cloud based offers are effectively buying a Raiser's Edge 7 or Financial Edge 7 subscription as well as a Raiser's Edge NXT or Financial Edge NXT subscription for use once the NXT solutions are generally released.

Ratable recognition of revenue on Raiser's Edge 7 and Financial Edge 7 subscriptions will not change. However, based on accounting guidance, the NXT subscriptions are allocated more value. Therefore, a greater portion of total contract value will be deferred until a customer migrates to the NXT solution. At that time, ratable recognition of the remaining revenue allocated to the NXT solution will be recognized over the remaining contract term.

Revenue from professional services will continue to be recognized upon delivery at the front end of the contract. However, we expect average amount of professional services revenue per deal to decrease as fewer services should be required for subscription solutions.

In addition we anticipate some stall and back-to-base sales as some existing customers may very well reduce their purchases of additional new licenses or modules in anticipation of a move to NXT. The transition is expected to have dampening effect on our revenue, our margins and net income in the near term. I will remind you that license revenue was approximately 3% of our total revenue in 2014.

Let me reiterate the most significant point. We have included the estimated impact of these items in our 2015 financial guidance and in our long-term aspirational goals.

I'd like to now wrap up my comments with a discussion about our 2015 guidance and the assumptions that we made developing our 2015 operating and financial plan.

The first and most significant thing to note is the dynamic I just discussed about the transition to our cloud-based subscription model for the Raiser's Edge and Financial Edge NXT solutions. This is expected to negatively impact our organic revenue growth rate during the transition period which is one of the primary reasons why our 2015 non-GAAP organic revenue growth guidance is approximately 5.5% at the midpoint, including recent foreign currency fluctuations and 6.8% at the midpoint on a constant currency basis.

In calculating this rate, we apply the actual foreign exchange rates we incurred in 2014 to our 2015 estimates. Therefore, our guidance for non-GAAP organic revenue growth for 2015 reflects both the NXT transition and recent foreign currency fluctuations. This guidance on a constant currency basis at the midpoint, is well within our long term aspirational goal for organic revenue growth of 6% to 10%.

To help with your modeling efforts let me point out our primary foreign currencies causing this forecasted negative impact as well as our rate assumptions for 2015.

Of our approximately 13% of total revenue derived internationally in 2014, euro-based transactions represented approximately 1%, British pound-based transactions represented approximately 4%, Canadian dollar-based transactions represented approximately 5%, and Australian dollar-based transactions represented 3%. These are the primary currencies creating the impact.

We use the closing prices on January 30th, 2015 as our measurement date for modeling the impact of exchange rates for these currencies. Based on these assumptions we estimate the currency impact to decrease revenue by between $8 million to $9 million which equates to a negative drag of approximately 140 basis points on our non-GAAP organic growth rate in 2015. It is also impacting our operating margin by approximately 30 basis points which is about half of the margin improvement we would have expected to generate in 2015, again, if adjusted to a constant currency basis.

While we cannot predict with certainty where rates will end up, we are very pleased to issue guidance for 2015 that includes solid operating margin expansion inclusive of foreign exchange volatility as well as our expectations for strong double-digit growth of non-GAAP operating income and cash flows from operations.

One last item that is also important to understand about our 2015 guidance is how we are going about the transition to Edge NXT cloud-based solutions from our Edge on-premise products and how this transition is reflected in our maintenance and subscription revenue lines which we believe will continue to be a source of stability and predictability in our business model.

We are not [sunsetting] Edge on-premise products and we'll continue to support the products in our existing customers for the foreseeable future which will continue to be reflected by an ongoing contribution to our maintenance revenue line.

Many of our on-premise Edge customers are also on annual or multi-year hosting contracts. Hosting revenue can be a significant portion of total contract value and will continue to be reflected by an ongoing contribution to our subscription revenue line. And because we are transitioning with our customers based on their needs, the predictability of our revenue will remain high and the revenue transition will be measured over time and not result in immediate or exaggerated impact which ensure steady and sustainable cash flows and opportunity to gain margin and operating efficiencies.

I'd like to turn to some assumptions we used to develop our 2015 plan.

We expect to continue utilizing excess cash to reduce debt during the year. We expect capital expenditures of $24 million to $26 million which includes estimated capitalized software development costs. We are modeling an effective tax rate of 36% to 38% for 2015. And for cash flow we expect cash flow from operations to increase in 2015 to our guidance range of $110 million to $120 million which is a change from our earlier projection. We anticipate this double-digit growth primarily due to a change in the timing of income tax payments.

The timing of the expected increase in cash tax payments which we earlier projected for 2015 is now projected to be incurred in 2016. This occurred because we made an overpayment in 2014 due to a late extension of Bush-era tax incentives. We also received a tax benefit from stock-based compensation awards that either vested or were exercised during the year and we received tax benefits associated with the WhippleHill/MicroEdge acquisitions.

Our cash flow from operations guidance is inclusive of the tax benefits arising from the acquisitions and the expected negative impact on revenue from the transition of our Edge NXT solutions. It's very important to point out that these assumptions and their expected impact, positive and/or negative, have been considered and/or included in the company's 2015 financial guidance.

In summary, 2014 was a great year. We significantly increased the momentum of our business more than doubling recent historical organic growth rates and executed well against our initiatives that were designed to strengthen our operating platform and lay the foundation for continued momentum and increasing competitive advantages going into and through 2015.

Our better-than-expected 2014 performance positions us well in 2015 to manage and execute on the launch of NXT solutions, continuing growth across our product portfolio, continuing investment in innovation, quality, product optimization, and enterprise scalability, and achieving our 2015 financial objectives of non-GAAP organic revenue growth of 6.8% at the midpoint and on a constant currency basis, non-GAAP operating margin expansion of approximately 30 basis points, and approximately 60 basis points on a constant currency basis, and accelerating double-digit growth in cash flows. We look forward to executing on our objectives and delivering a strong 2015 performance. Thank you for joining us today.

Operator, please open up the line for questions.

(Operator Instructions).

Hey, gentlemen. Good morning. Tom Roderick here. Hey, listen. I was hoping you can provide an update with regard to the NXT product itself and the milestones that you've made on the development front. I think, you know, originally back in October you were targeting a Q2 2015 release. What are you hearing back from customers that have been at the beta program? How have you been achieving towards the milestones on the development front? And do you still feel like Q2 and late Q2 -- let's call it June -- would still be the appropriate time for a [GA] release?

Hey, Tom. It's Mike. Yes. We are on track. We're getting some very good feedback. We've had clients using the system in an early release mode for quite a while. We started to sell Raiser's Edge NXT and Financial Edge NXT in the fourth quarter, had a nice uptick in actual sales. We've had many, many clients raise their hand to be first in line and we're sorting through all that, as well. So from a development standpoint, we're feeling very confident in our progress, and we expect to hit our initial goals of getting this rolled out and starting in the end of second, beginning of third quarter.

Great. Tony, I may have missed it. I heard you give the adjustment on the currency side, so midpoint of the guidance here, organically 5.5% if you adjust that for currency, 6.8%. What would be the right way to think about the impact of selling NXT at multi-year edge deals with the rev rec assumption obviously that you can't take revenue until that product is released? What's the headwind out on the -- on revenue growth this year?

We haven't given any specifics on it, Tom. But there's three major factors that I talked about in our prepared comments. Effectively, you get a deferral of revenue on anything that we're selling in Q4, and then Q1 and Q2 before the actual launch. A big portion of that revenue's going to get deferred until the product actually launches in the second half and get ratable recognitions instead of software treatment on the NXT product, as well and then we anticipate and have built into our guidance expectation for some reduction in back-to-base sales for existing customers, i.e. probably buying less user licenses and less new modules because they're anticipating moving to NXT so all of those factors are built into our guidance.

Then the other thing I'd share you is that we're effectively selling customers today both a RE 7 for instance or FE 7 solution and the rights to a NXT. So they're effectively getting a Raiser's Edge 7 and a Raiser's Edge NXT when they buy a solution today. And so we have to allocate the revenue between those two -- both are subscriptions between those two products. And so you'll get rev rec on the RE 7 subscription between new and when they go live on NXT and then you'll -- whatever revenue, which is a larger portion of the revenue is allocated to the NXT portion of the contract will get recognized over the remaining contract term on a ratable basis. So assume they bought in January, get six month on RE 7 of revenue and then probably recognize the remaining over 30 months on a normal 36-month contract.

Yes. Got it. Okay. Mike, can you talk a little bit more about the growth in the payments business? That has been a question with all the accounting change last year. But the actual functional growth in payment, it seems like you've done a lot to improve the capabilities in payments within both Raiser's Edge and the online side of the business, as well. What are you seeing on that front -- in that business still continue to grow and what other things do you have to do to capture more functionality and integrate it more deep within your products?

Sure, Tom. We started -- we talked about this several times last year and it continues which is a pretty big focus on deeply integrating payments across our solutions set. The nice side about that is not just the short-term upside but the fact that the online part of the industry is growing at multiples of the total industry. And so as we continue to add payment capabilities to all of our online platforms -- and we're not done with that yet but we're pretty aggressive on getting that done -- we'll pick up revenue and then we'll pick up the organic growth of that in clients to those online platforms and then having those online platforms continue to grow essentially in multiples of the entire industry. But I think that the organic growth future for that component of our subscription revenue is pretty positive.

Wonderful. Thanks, guys. I'll jump back in queue. I appreciate it.

Thanks, Tom.

Thank you.

Good morning. It's Peter Wahlstrom [given the call] from Morningstar. Thanks for the questions.

Hey, Pete.

Hey, Pete.

Maybe following it up on the payment side, can you really remind us as to whether you view this more of white space for Blackbaud? Is it an untapped market? Or does Blackbaud need to displace another acquirer in certain situations?

You know a lot of it is white space. The payments capability -- most of the industry is still cash and check, and that's primarily because most of the industry is still yet not online. In fact, it's less than 10% of the total is online. And so there's the upside and the sort of converting the industry, if you will, the more automated online and kind of mobile capable payments within our own platform. But then it's also early days for the industry in general because most of the industry is not online like summarize that as white space and new opportunity.

Okay. And do you view that as -- because the nonprofit area is just a little bit more below the radar? It's a niche area. I guess what I'm trying to ask is if this is a growing market that's expected to grow at multiples of the overall giving market. It seems like it would be attracting a little more competition as well. Are you seeing Blackbaud having some semblance of success in this market? Or is it becoming a little bit more difficult to go into some of those customers?

Yes. We don't see any new competitors. It's a -- the nonprofit sector in general is pretty fractured so we don't have any large online competitive threat, nothing new that we've had in the last several years. And we're -- we enjoy a pretty substantial incumbent position with our traditional CRM platform. So we think we're positioned quite well from a payment standpoint and we're focused on integrating our payments platform with our existing online platforms which is not yet complete, as I mentioned earlier and also, you know, selling new clients to our online systems, which just pulls the payment transaction capability with it as well.

Very good. And one last question. Just from an operational standpoint, you've essentially completed the back office improvement goals that you started a year ago. And I understand that there's more work to be done. But how would you characterize or quantify the benefits of these in your 2015 op margin goals expanding by 30 basis points and also along your three-year margin improvement plan?

Pete, this is Tony. You're right. We had a really good year last year as far as back office and we were able to largely get rid of 24 disparate systems or manual processes and move to six best-of-breed and so we're, I think, well positioned to drive more growth and gain efficiencies and leverage as a business. In 2015, the difficulty you have as far as margin is twofold.

One, currencies are dragging on both our organic growth rate and our margins. On op margins, we estimate the currency impact to be about 30 basis points so where guidance is showing about half of what we anticipate year over year.

The second side of that is there's a lot of efficiencies we're starting to see as business which play into that long-term aspirational goal of gaining 300 to 600 basis points in operating margin. A lot of that benefit in 2015 is actually offset by some of the impact of the NXT shift. So with that revenue getting pushed out, some decline and expected decline in back-to-base sales, et cetera, that revenue is largely 100% fall through to earnings. And so we're -- I actually feel very positive in our guidance that we're increasing our operating profits and cash flows as strongly as we are, inclusive of both the FX and the impact of this NXT shift. I don't recall ever seeing another software company that's been able to do that when they went through a transition so we feel really positive about that in 2015. And then 2016 and 2017, again we still feel good about our long-term aspirational goals and that's what you're driving towards which is 300 to 600 basis points.

Hey, Pete. It's Mike again. Just one operational add that I think is a key point, we, last summer, shut off the last system of an acquisition we made a few years ago. And the change in our focus and capability is such that when we purchased WhippleHill in June, we shut off all of their systems in six months so we're a lot more aggressive in gaining those synergies when we make acquisitions and just from an internal focus standpoint.

Okay. Thank you very much.

You're welcome.

And this will conclude our question-and-answer session. I'll turn the call back over to your host for closing remarks.

Hey. Thank you, everyone. Thanks for listening to the call. We look forward to seeing all of you in our upcoming Investor Relations trips. Have a good day. Thank you.

Ladies and gentlemen, this does conclude your conference for today. Thank you for your participation.