Blackbaud Inc (BLKB) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Blackbaud 2015 second-quarter earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jagtar Narula. Please go ahead, sir.

Good morning, everyone. Thanks for joining us today for Blackbaud's 2015 second-quarter conference call. Today we will review our financial and operational results for the second quarter of 2015, and provide commentary on our progress towards achieving our goals for the full 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 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 our 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.

During this call, we will discuss non-GAAP organic revenue growth, which we believe provides useful information for evaluating the periodic growth of our business on a consistent basis. Details of our methodology in calculating non-GAAP organic revenue growth can be found on the Investor Relations section of our website at www.blackbaud.com. Also, please note that a webcast of today's call will also be available on the Investor Relations section of our website.

Before I turn the call over to Mike, I would like to highlight some of our upcoming investor events. Our team will be participating in the following upcoming conferences: The Pacific Crest Global Technology Leadership Forum on August 10th in Vail, Colorado; and the Oppenheimer Technology, Internet, and Communications Conference on August 11th in Boston. We will be hosting one-on-one meetings with management at these conferences, so please contact Investor Relations if you are interested in meeting with us at one of these upcoming events.

Also, please note that our 2015 Investor Day will be held on December 3 in New York City. There will also be a live online webcast of the event. We will provide more details as we get closer to the event. If you are interesting in attending the event live in New York, please contact Investor Relations.

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

Thank you, Jagtar. Today we are reporting our second-quarter 2015 results that reflect the benefits of our market leadership position, our strong and integrated product portfolio, and a continued shift in our business to one driven by a reoccurring subscription revenue base. Tony will provide more detail about our second-quarter financial performance a little later during the call.

Consistent with last quarter, I would like to provide a Q2 update on the status of our five growth strategies, as we outlined at our Investor Day last September; and then end the call with a comment on our outlook for the balance of 2015.

So let's begin with a review of our five growth strategies. The first of our five strategies is accelerating our organic revenue growth. As discussed at our Investor Day last fall, our goal is for annual organic revenue growth of 6% to 10% on a constant currency basis. In Q2, we achieved non-GAAP organic revenue growth of 5.6% versus last year, and 7.2% on a constant currency basis. Year-to-date, our non-GAAP organic revenue growth is 7%, or 8.4% when normalized for foreign currency.

Also, subscription revenue organic growth for the quarter, an important metric for us, was 14.9%. Our growth is supported by our strategy of investment and innovation and focus on quality and integration of our solutions. We continue to be pleased with the impact that this strategy is having on our revenue growth.

Last quarter I talked about our enterprise CRM platform, which we released version 4.0 late last year. Client reaction to the new version is very positive, and we're seeing rapid adoption. Of our clients live on enterprise CRM, approximately 80% are now using one of the two most recent versions of the software. The improvements in this latest version of the product mean two things: greater revenue from client adoption, and lower cost supporting legacy versions of the product.

Another example is eTapestry, our entry-level CRM product. Our focus on innovation and product integration has been one of the keys to continued success of this product. This year we've made updates to the product with deeper integration to both our payments platform and our analytics capabilities. The payments integration now includes the ability for customers to process ACH donations in the application, in addition to credit card donations.

Recent updates include integration with our social media finder analytics capability from proved donor targeting via social media. The application of our strategy has helped eTapestry with both unit sales growth and improved client retention.

Supporting our growth strategy are the overall trends of the nonprofit sector, which continue to be strong. A report on US charitable giving was released this past month by the Giving USA Foundation, which shows the US market was very healthy in 2014, with total US giving reaching $358 billion, a 7.1% increase from 2013.

Furthermore, giving continues to move online. An example is Giving Tuesday, a global day of giving, founded in 2012 by the 92nd Street Y in partnership with the United Nations Foundation. We are a founding partner of the event. In a report that we just issued, we showed that Blackbaud saw a 36% increase in online donations during the latest Giving Tuesday.

These trends of a healthy market, combined with diversity of fundraising channels, supports our growth strategy of offering a deeply integrated suite of solutions to support our clients' needs.

Our second strategy is accelerating our move to the cloud. I would like to note that subscription revenue accounted for more than 50% of total revenues this quarter for the first time in Company history. Now, last quarter I talked about our newest cloud-based solutions, Raiser's Edge NXT and Financial Edge NXT. We continue to make progress with these solutions on both a solution and sales front.

On the solution front, two weeks ago we announced the general release of Raiser's Edge NXT. The general release follows both the early adopter program and a limited availability release. While the general release of Raiser's Edge NXT is a milestone, we have had customers using the product in a live production environment for some time.

On the sales front, customers continue to show strong interest in the NXT products. Raiser's Edge NXT exemplifies our strategy. It's a subscription-based solution that takes our customers out of managing infrastructure and provides a strong return on investment. It also provides compelling, new, innovative features and deeply integrates capabilities such as payments, online marketing, and analytics.

Customers have responded very well to this new offering. While we typically don't discuss sales data of individual products, I would like to mention that we have sold over 1,000 units of Raiser's Edge and Financial Edge NXT to both new and existing clients. We currently have over 225 customers live that are made up of North American and international nonprofits.

To show customers the advantage of Raiser's Edge and Financial Edge NXT, we have held a series of roadshows across the country, which included Boston, New York, Los Angeles, and San Francisco. The purpose of these roadshows is to share the vision of NXT, the new user experience, a roadmap going forward, and the estimated return on investment. The roadshows have been positively received; and we are, as a result, planning additional shows for the second half of the year.

Our third strategy is the expansion of our total addressable market or TAM. Today our TAM is over $5 billion and is expected to grow to approximately $6.5 billion over the next three years. As we discussed previously, our strategy is to expand our TAM through tuck-in and strategic acquisitions. We did this last year with the acquisitions of WhippleHill and MicroEdge, and we have focused on rapid integration and successful operational execution of these acquisitions.

We just held our K-12 annual conference, which we hold separately from bbcon, which is our general Blackbaud user conference. We had record attendance at the conference, which was up 75% over last year.

On the solution front, we have focused our post-acquisition efforts along our strategy of innovation and integration. As a result, we have seen sales accelerate in the K-12 space, and in some cases we are replacing several stand-alone solutions with our integrated suite.

A real example of this is Father Ryan High School, a Catholic co-educational college preparatory high school located in Nashville, Tennessee. They recently purchased our integrated suite of K-12 solutions, including Raiser's Edge NXT, Financial Edge NXT, and the WhippleHill On Products. The result is that they now have the software they need to manage fundraising, their financials, and the school operations, including; admissions, student information, website content, and student learning.

The integrated offering, we believe, is a compelling proposition; and, in this case, we are moving the school from three competitors offering point solutions to our integrated suite. The advantage for Father Ryan High School is that they now have one vendor in an integrated product suite.

Our fourth strategy is to continue the optimization of our back-office systems and infrastructure. This initiative is progressing well as we continue to streamline and mature our internal processes. Additionally, our formal quality program is well underway, as our several process improvement initiatives all aimed at streamlining internal operations, improving quality, and ultimately providing better scale and margins as we continue to accelerate subscription revenue growth.

Our final strategic area of focus is a three-year margin improvement plan. Our long-term aspirational goal calls for a non-GAAP operating margin of 20.5% to 23.5% by the time we exit 2017. This is a 300 to 600 basis point improvement from our baseline of 17.5%, which was the midpoint of our original 2014 guidance.

In the second quarter, we achieved an operating margin of 20.6%, which represents a 120 basis point improvement over the same quarter in 2014. On a year-to-date basis, our operating margin improvement now stands at 150 basis points over the prior year, and 160 basis points over our 17.5% baseline. We expect to continue to see operating leverage improvement across our business over time.

Overall, I'm very pleased with our progress in the quarter. We continue to maintain focus and execution on our five-point growth strategy, and we continue to see solid organic revenue growth from our investments while momentum builds due to our NXT launch. At the same time, our ongoing focus on efficiency will allow us to drive both increased investment and shareholder returns.

Now I will turn the call over to Tony to provide more detail about the second-quarter performance. Tony?

Thanks, Mike. Good morning, everyone. Thank you for joining us today to review our 2015 second-quarter performance. We had a solid quarter and have strong, continued momentum as we head into the second half of the year.

Before we review the quarter's results, let me just remind everyone of the presentation changes we've made this year to our P&L and disclosures. As I discussed in our last earnings call, in 2015 we've changed our income statement to reflect the ongoing transition of the business towards subscription.

First, we have reordered the P&L from largest to smallest revenue stream to better align with our focus on subscriptions and recurring revenue. Second, we've combined the software and other revenue lines to reflect the decreasing importance of software revenue to our business.

Year-to-date, our software and other line represents 2.7% of total revenue, down from 4.4% in the same period last year. Also, we no longer view target analytics as a separate reportable segment, due, in part, to the continued integration of analytics into our solution portfolio. The revenues and associated cost for offerings historically provided by target analytics are now presented within each of our other reported business units, based upon the business unit servicing the end customer.

Now let's turn to the second-quarter performance. We delivered non-GAAP revenue of $158.7 million, an increase of 13.9% over the second quarter of 2014. Organic growth was 5.6% when compared to non-GAAP revenue for Q2 of last year. Excluding the impact of currency movements, the organic growth rate was 7.2% when compared to the same period last year. The organic revenue growth was driven primarily by recurring revenue, which grew 8.9% year-over-year on an organic basis. Our recurring revenue represented 75.9% of total revenue in Q2. This compares favorably to 72.8% as reported in last year's second quarter.

Please note that our calculation of organic revenue growth reverses some of the second-quarter 2014 revenue associated with Blackbaud Netherland. We consummated the divestiture in Q2 2015, and organic revenue growth includes the results of BBNL in our consolidated results for the same period of time in both Q2 2014 and Q2 of 2015. With this transaction, we will now distribute our eTapestry product into the Dutch market through a partner while we continue to sell and support Raiser's Edge and Blackbaud CRM directly, via the UK. We view this model as a better approach to serve the local market.

Our non-GAAP gross margin was 59.4%, which compares favorably to our non-GAAP gross margin from last year's second quarter. The improvement was driven by improved margins in subscriptions and services.

Moving down the income statement, we generated non-GAAP operating income of $32.7 million, representing a non-GAAP operating margin of 20.6%. Adjusted EBITDA was $38.2 million, with non-GAAP net income of $19.2 million, and non-GAAP diluted earnings per share of $0.41.

Now let's turn to the cash flow statement and balance sheet. In the second quarter we generated $43.3 million in cash flow from operations, which was up $11.5 million year-over-year. We spent $8.3 million in CapEx, including capitalized software in the second quarter. We had net debt of $244.3 million at the end of the quarter.

On the capital structure side of the business, in July, after the close of our second quarter, we exercised on the accordion feature of our 2014 credit facility and increased our revolving debt capacity by an additional $100 million. We exercised this feature to take advantage of favorable market conditions and expand Company liquidity, while ensuring that we have adequate capital flexibility to support and grow our business.

In summary, we executed well against our strategic plan. We are ramping performance as a result of our investments targeted towards sales, retention, innovation, and quality, as well as the expansion of our addressable market. We continue to execute on our capital deployment strategy to maintain a strong balance sheet, return capital to shareholders and create growth and scalability.

With that, I will hand the call back over to Mike.

Thanks, Tony. I want to get to your questions, so I will quickly summarize our performance and provide our current 2015 outlook. Our second-quarter performance reflects the impact of our strategy and focused execution on the business. Our organic revenue growth reflects our investments in the business, our shift to subscription, and the increasing integration of our products. Our launch of Raiser's Edge NXT fits squarely into the strategy.

We also continue to focus on efficiency and profitability. Our year-to-date improvement in operating margin over the prior year reflects the results of these efforts. While we are pleased with the progress we've shown this year, we are not done, and believe there is room for continued improvement.

Now, turning to our 2015 full-year outlook, I'm pleased to say that we are updating the 2015 guidance we initially discussed as part of our 2014 year-end earnings conference call. The update reflects solid year-to-date results, the divestiture of Blackbaud Netherlands that Tony spoke about earlier, and progress on our operating margin improvement objectives, while also continuing to support the business through additional investment. This additional investment includes upgrades to infrastructure to drive scale, and additional sales and marketing investment to support the expected growth of NXT.

We now expect non-GAAP revenue of $635 million to $645 million, non-GAAP operating income of $118 million to $122 million, non-GAAP operating margin of 18.6% to 18.9%, non-GAAP diluted earnings per share of $1.47 to $1.53, and cash flow from operations of $115 million to $125 million.

With that, I'd like to open up the line to your questions.

(Operator Instructions). Tom Roderick, Stifel.

Hey everyone, Good morning. So, let me kick it off by -- I will throw the first one at you around NXT, so congratulations on getting that product launch out the door. And, it sounds like the early adoption has been pretty darn good, with over 1,000 customers it sounds like you've already landed.

Can you talk a little bit more about what the profile of the early adopter looks like? Are these all Raiser's Edge 7 customers that are hosted? Maybe talk a little about how many of these customers are upgrading to additive modules and upsizing their contract as they move over to the NXT.

And how has this transition contributed to your deferred revenue line? I noted that was up 17% in the quarter, which looked really nice, and drove those solid cash flows. So just a few questions around that to start. Thanks.

Sure, Tom. It's Mike. Morning. A couple things there. We're very pleased with the results on the NXT launch. As you know, we announced it in the fourth quarter last year and pretty much went to market quite aggressively, and pretty happy with the program. Both the go-to-market and the product side having gotten several clients up and live, and quite satisfied.

The profile is a pretty big mix, actually. And the clients sold are a pretty big mix, between both domestic North American and international clients; also a pretty good mix between net new customers to Blackbaud and Raiser's Edge 7 customers, both hosted and on-prem customers. And so we see a pretty good mix there. It's not necessarily one kind of profile type. So we're pretty happy with that whole mix.

The adoption has been strong with existing customers. We've started with an outreach across the board. We implemented roadshows that I talked about, that are moving through all the major cities in the US. And the response has been so positive, we are going to continue to do that in those roadshows. We get existing and new customers, but the existing sales have been with both existing and new. So we're pretty happy with that launch.

Customers are opting to pick up the integrated solutions set, higher up in the good-better-best pricing model. So we're pleased with the actual results of the product, as the customers are giving us some great feedback on the change in their business. But they are opting for more integrated solutions by moving up the good-better-best model, and so we're pretty pleased with that as well. The value prop is pretty high for customers when they opt to do that.

And Tony, just a follow-up on the last part of that question. Can you comment on how the 1,000 early adopters contributed to the deferred revenue line this quarter?

Yes, not specifically, Tom, as you are aware, but there's two things affecting deferred revenue that you should consider. So the NXT sales have been very positive, so that's obviously moving deferred in the right direction. We do have the bit of an anomaly in the shift because we just went to general market availability on RE NXT. Financial Edge NXT is not yet available.

So you're going to get a bit more deferred revenue on those products because they have not actually launched at all of the customers yet. So that will be a bit of a build in deferred until such time as they launch and we start [relieving] that revenue. And that's a bit offset by the impact that we had on the acquisitions from last year because of the write-outs of deferred revenue. So got a little bit of mix in there; but, all in all, very positive from what we've seen on the NXT products.

Perfect, thanks. Let me throw my next question at you, Tony, just turning over to the margin side of the story. 300 bps up quarter-on-quarter was well ahead of what we were expecting, and I think well ahead of what you guys were guiding for. It looked like a lot of that came from gross margins. So I guess a few questions around the margin structure.

I know payments can be seasonal, so how did payments look this quarter? How did they impact the gross margins? And how do we think about the seasonality in payments going forward?

And then on the OpEx side of it, now I guess you are a year into WhippleHill and MicroEdge, almost. Have we reached a more naturalized operating expense level? And you've reduced, I presume, a number of duplicative expenses. Can you talk about what on the OpEx line is naturally down? Or were there any sort of one-time effects that come back after NXT gets launched? Thanks.

Sure. So on the margin side, I would say we had good contribution again this quarter, just like we did last, across the board. So I wouldn't say any specific usage, payments, normal online subscriptions, maintenance, or any of those were out of whack with our expectations. So I think everything there was relatively consistent.

I think what we saw on the gross margin line, which obviously helped the operating margin, was the significant improvement on the services margin front. That's two quarters in a row now that we've had a substantial improvement there. And that's been, as you know, a big focus of ours and is a big ongoing focus.

And then we had some good improvement as well in subscription and maintenance margins, offset a bit by licenses and other. And that's really a mix issue, Tom. As you know, license revenue, once we changed the face of the P&L this year, license revenue was combined with other income. License revenue historically had about a 90% margin, and those margins are still holding fairly strong, but other revenue had about a 30%.

And as license revenue declines with the transition to NXT, and even as we start selling some CRM on the enterprise space on subscriptions, that's just going to be a mix issue where license and other will go down as a percentage. And because license was the strongest margin of all, and it's shrinking, will have a little bit of impact.

But overall, very strong gross margins, and I wouldn't say that's driven by any specific product, just overall good performance. And some of that is from the investments we made last year that are not -- those costs not repeating; and then some of the efficiencies and effectiveness we're just gaining in the business. But again, I think most proud of the improvement we've seen in services, and we're hopeful that we'll see the continued improvement there.

On the OpEx side, I think we have probably largely stabilized. We are still making some investments in the back office. We are still making some integration investments on the MicroEdge front, but those are much more targeted than what we had last year. So I'd say that's a much more normalized run rate.

That said, over the long term, we still expect to see some continued and improved margin expansion. And I would expect that some of that will come from OpEx versus gross margins.

Did I catch everything there, Tom?

I think you got it all. And I gave you a laundry list. I appreciate the detail. That was great. Thank you, guys. Nice job.

Stan Berenshteyn, Dougherty & Company.

Hi, actually it's Sidoti & Company. So, you saw a sizable amount of revenue coming from maintenance, about 20% of sales. Can you give us an idea of what kind of opportunity that you see to upgrade those clients to a subscription? Obviously maybe some of those clients are on your ERP platform, on your Blackbaud platform. But can you give us an idea of what kind of upgrades that you can see, and how long it will take to play out, to upgrade them from maintenance to subscription?

Sure. This is Mike, good morning. So, specifically for the mid- to upper-tier NXT market, Raiser's Edge market, we think we have a substantial opportunity over time for those clients that pay maintenance for that product to move to the NXT platform, and move from a maintenance to a subscription revenue model for us. So we think that that's a significant opportunity. And we think it will take a number of years to make that transition happen, and we're frankly not going to force it. We're going to just -- that will be more of an evolution than a revolution, if you will. That will happen.

The other thing that will happen, if you can think about the makeup of the revenue lines and now the product lines of the Company, even with a strong maintenance line, given the subscription growth, maintenance revenue as a percentage of total will go down because of subscription revenue growth that is growing so much.

And on the NXT line, we're signing a pretty decent amount of net new customers straight into subscription revenue.

And lastly, the acquisitions that we've made in the last year drive organic subscription revenue growth, as well. So the mix will continue to change, even with healthy maintenance revenue, because of the fast-growing subscription line.

Okay. What percentage of your user base is represented by maintenance?

Well, maintenance in the total revenue is roughly about 25% now; roughly 25%, 26% -- we can give you the exact number -- of our total revenue. Our reoccurring revenue is about 76%, roughly. And I mentioned in my prepared remarks that subscription revenue is now over 50%. And so, if you take the 50%; the 25%, 26% from maintenance; that's our 76% recurring revenue.

Yes, I meant in terms of (multiple speakers) quantity of users on a percentage basis.

Yes. I think, Stan -- this is Tony -- the key there, we don't specifically break that out today. We have broken out in some of our prior information that we have approximately 13,000 Raiser's Edge customers. And because we just launched the first subscription version of that product, you can argue that a large portion of those obviously are maintenance paying customers today, since we only have 225 live on NXT.

A large portion of Financial Edge customers, which is between 4,000 and 5,000 that we've announced publicly before, largely will be maintenance customers. And then you'd have a lot of legacy products from earlier, WhippleHill and MicroEdge that were maintenance paying customers, and then Blackbaud CRM.

Most all of our other products would be subscription-based or usage-based. That said, many of our customers have multiple products. The difficulty is many of our customers would have both on-prem and SaaS, cloud-based solutions.

Okay. And just to switch gears a little bit, looking at online payments, obviously you've been adopting that into a product like eTapestry. So maybe you can give us an understanding of, are clients that have historically had eTapestry and did not have online payment, have they upgraded to this module? Or are you really seeing just new clients roll out onto eTapestry with online payment?

Yes, we're seeing both eTapestry and Raiser's Edge; Raiser's Edge NXT, for example, clients adopting our payments set of solutions, both mobile and online. A key differentiating factor is the deep integration that we have with products like eTapestry or Raiser's Edge NXT -- is a significant differentiating factor for us. So we see new clients and existing eTap and Raiser's Edge clients adopting our payment solutions.

Great, thank you.

John Rizzuto, SunTrust.

Good morning. A couple of questions here. As we look toward 2016 -- I'm not going to ask you to give me guidance; you would've given it to me if you wanted to -- but as you're starting your planning process, the thing that we're looking for, of course, is the net loss of the acquisition benefit being replaced by the synergy, and where that's going to end up. And so, as you start doing your planning, what are the key triggers you're looking for across sales, operation, your customer base?

Where it makes sense, would you expect to really leverage these things as far as, okay, like K-12 should be a good mix for A, B, C; this is going to be a good mix for here? You've talked about this, about when people go to NXT, lots of the synergies that are being created, the upsell.

So I'm just looking for a little qualitative aspects around your planning for next year. And specifically as you go through this client list, you go through your go-to-market strategy, where you're going to be looking to start leveraging the synergies.

Sure. K-12 is a really good representative a case of what we're doing. That was a year ago, what has turned out to be a fantastic fit for Blackbaud in the K-12 market. We integrated the WhippleHill On Products, which basically run the school, with our Raiser's Edge and Financial Edge products, and now with NXT. And in that marketplace we historically would have sold Raiser's Edge or Financial Edge. Now, in a lot of cases, we are selling a full integrated suite that includes the four On Solutions that run the school, and our Financial Edge and Raiser's Edge NXT platforms; so, a multi-module, fully integrated solution set.

And in a lot of cases, we're displacing two, three, four vendors that are point solutions. We've ramped up into that in the back half of last year, post-acquisition. We went very fast with WhippleHill; we've integrated the back-office operation, so we got a lot of synergy.

It took about five months to integrate the back-office operations of WhippleHill. And so that team focused on that vertical are really focused on expanding go-to-market and driving innovation and product roadmaps. And it's been very successful. So when we think about -- in terms of future, we think about expanding our ability to drive that in the K-12 space, continuing to use that as an example.

And from a TAM expansion standpoint, I think that that acquisition on the MicroEdge one is sort of a tipping of the hat of how we think about near adjacency tuck-ins, and how to leverage an integrated suite in a particular market-focused area.

Okay. Another, along the same lines, strategic and anecdotal, I suppose. When we look at a lot of the other industries -- financial services, chemicals, whatever, what have you -- we get a good grip or a good understanding, at least to look at what they're running on-premise, where those systems tend to be, and where there's ripe for conversion and modernization.

We, of course, don't get that type of insight into the data centers of a lot of nonprofits. And for a lot of nonprofits, it's hard to tell-- what is their data center? So when you look now at modernization efforts in the nonprofit industry -- in fact, the industry itself is getting very exciting -- what do you look at? And how much of that is really ripe for, lack of a better word, modernization?

Sure. So if you just look at some of the industry statistics, it's a very large and very fractured industry just in the United States. It's actually the -- the nonprofit industry is the third-largest employer in the US. So it's a huge industry. If you look at the total spend, it's in the trillions, if you count employment. If you look at the donation growth in the US, it's been very, very healthy. It was a big growth. In fact, last year over 2013, it has pretty much tracked US GDP for the last 40 years. And the donating public, if you will, have been, I think, trained by and conditioned by a lot of new software initiatives over the last 10 years related to social or mobile online banking or other areas.

And the nonprofit industry, from a donation standpoint, although it is massive -- and I'm just referring to the US; it's pretty big around the world -- less than 10% is online. That's growing in mid-teens, so it's growing multiples of the whole industry as far as donations and the methodology. And so we see a big opportunity to take the industry forward related to integration with social, mobile, and online, and integrating analytics and payments into full solution suites. So we think it's a big market, and it's a big opportunity to modernize nonprofits with cloud-delivered solutions, and NXT is a perfect example of that.

Okay. If I'm looking at this now, I saw a lot of the numbers that you are putting out there in your quarterly deck, what you brought into the market, what you presented to us at the investor-day last year. But if I want to start actually looking at your headroom within a year -- to get to the growth rates that you're going to ask from your salesforce and from your team, the whole Company, what are the key limiting factors quantitatively? Is it feet on the street? Is it -- trying to just understand a little bit better what are the limiting factors, that gating factors; where you're going to invest to accelerate, if you will, your market share gains and your presence in the overall market?

Sure. First, in our Investor Day presentation -- and we continue to include this material when we're on the road -- we spent a lot of time last year clearly defining the total addressable market. And in fact we also included our view of our current market share by solution type. There's a slide in there that has the TAM and the growth of the TAM. So we think there's a lot of headroom related to our opportunity to grow in each of those sectors. And that's a pretty large TAM. It's about $5.5 billion last year, growing to almost $7 billion in the next several years. And then there's a -- which covers our current solution sets.

So we think there's a lot of opportunity there. We continue to look at sales efficiency, and we continue to look at our distribution channel. And we frankly time any expansions around that with product availability and readiness. So the Raiser's Edge and Financial Edge NXT press release, that was a couple of weeks ago -- I think it was on the 14th -- and then some of my prepared comments today, we've sold over 1,000 units. We have 225 live. We time that with our thoughts around sales footprint and distribution channel expansion.

So I believe our opportunity to continue to grow is around the continuation of solid execution in the Company. And I think we've executed well, year-to-date this year and last year, and I think that focus will continue.

And it's a combination of things. So, it's understanding how quickly we can grow the distribution channel, combined with bringing innovation to market like NXT. And in fact our enterprise CRM product 4.0 that we announced last November, we're doing extremely well. We didn't talk much about that in the prepared remarks, but we're doing extremely well with that 4.0 version in the market, and we just announced that last November. And so we look at the distribution channel timed with the readiness of new products and new solutions. And it's really all about the continuation of executing well.

Lastly I'll mention -- in that TAM, we also identified about $15 billion of total addressable market related to application software in the space, outside of current solutions. Now, WhippleHill expanded that; MicroEdge expanded that; and we think there are more potential opportunities related to expanding our TAM into that larger space.

Okay, great. Thanks a lot, and nice quarter.

Pete Wahlstrom, Morningstar Investment Research.

Good morning, thanks for taking my questions. Could you provide a quick update on the ECBU strategy, and maybe some of the changes that Brian has started to implement? And maybe I'll layer in on that, as well as some of the goals that he's really accountable for, just coming out of the gate.

Yes, sure. The strategy really hasn't changed. We focus on enterprise customers. Our enterprise -- I just mentioned our 4.0 release of our enterprise CRM product that we announced last November. Predominantly the client base in the enterprise customer business unit that Brian is responsible for is the channel for that. We do sell that product, though, around the world. And we are quite pleased with our results year-to-date in our international business unit, and ECBU related to that product.

So his focus is really -- the strategy hasn't changed. It's the enterprise customer, and also includes our Luminate Online product for of those enterprise customers. And his key objectives are to continue to focus on customer satisfaction and to expand our footprint with the largest nonprofits in the world. He brings a great enterprise background, if you've read the press release on him. Basically he's had a career with enterprise customers around services and sales and software delivery for large customers.

It's a bit of a different model than our general markets business unit, and Brian brings just a fantastic leadership and focus. So no change in strategy; just continued execution, and being a bit more aggressive around expanding that business footprint.

Okay. And maybe circling back to ask one of the prior questions a little bit different way. When you're signing on new customers, either on the NXT or other cloud-based kind of platform, with implementing or introducing a good-better-best model, what are those customers signing up for? Maybe just a broad representation of how many are at the lower end of the spectrum versus how many are already at the -- adopting the full suite, or at the best side?

Yes, they are pretty spread out on the good-better-best. The interesting thing to note, though, is on the bottom line, the good if you will, includes multiple products deeply integrated that provide a wider value prop for our customers beyond Raiser's Edge stand-alone as it was previous to NXT. So, even the entry-level on the good-better-best -- even the entry-level provides significant functionality beyond stand-alone Raiser's Edge. so even opting there moves them to a more feature-rich cloud platform.

So we don't break out -- we typically don't give customer numbers by product type, because that would be a never-ending list, given the product line; and we don't plan on breaking them out at levels, either. But just to reiterate, the entry level is a higher level than an existing RE customer.

Okay. And when the sales team is engaging either existing customers or prospective customers, how many are they finding -- how many of the customers or prospective clients -- now many of them are really stuck with a legacy platform? And what are some of the hurdles for challenges that they are facing in order to ultimately make the change? And could that result in some of the decisions not coming for quite a while?

Yes, so we're either talking to typically existing Raiser's Edge customers or net new customers that could be on a competitive platform, or more likely on a combination of things like Quicken or some other things, for example. And so it depends on the customer's current state. But one of the really innovative things we did with Raiser's Edge NXT that has just resonated quite well, beyond the capabilities of the platform, is we have pretty much automated the infrastructure go-live part of a conversion. So for many of our customers, the ones that have not typically customized -- the migration, if you will, from Raiser's Edge 7 to NXT is literally the click of a button.

And one of the biggest pain points in the industry is the many months it takes to move data from one CRM system to another, given the lack of IT staff that typically nonprofits have. So it's a real competitive advantage to go to existing Raiser's Edge customers and have really sort of a frictionless way to move to NXT. Big, competitive selling point for us beyond just the new platform and the new capabilities. The operational move is a resonating very, very well with customers. And that's why we're able to announce that we've got over 225 live, and we're able to move quite quickly bringing customers live.

Okay, very good. And last question for me: are you finding that you are staffed appropriately internally, either from a sales or from a developer perspective, as you think about scaling for growth?

Yes, that's always a point-in-time question. We made some pretty significant changes in that regard, focused on NXT, focused on CRM 4.0, focused on Luminate, and eTapestry. Sort of across-the-board, we made a lot of changes going back more than a year now to really get a lot more aggressive in product integration and innovation. We also made some changes in field sales headcount. And frankly that's sort of the never-ending analysis. So, do I think we're in good shape today, on this date? Yes. Do we look at it continuously? Absolutely. And we will continue to do that.

We're really focused on making sure that we're meeting the market's needs and taking advantage of, I think, the growth opportunities; and being a lot more aggressive, from an innovation and integration standpoint, than we historically have been. And so far this year, we're pretty pleased with the results.

Okay. Thank you very much.

Stan Berenshteyn, Sidoti & Company.

I had just two quick follow-up questions regarding the client upgrade cycle. Now, I realize that NXT just rolled out, but are you seeing clients move to a hosting solution before upgrading to NXT? Or are clients typically leaping from on-prem, straight to NXT?

We actually have a campaign to get them to go to hosting and then to NXT, because it's easier for them, frankly, to make the transition. So we are seeing that. And there's a little bit of uptick in revenue for us. And there's also an easier service environment we think for them as well.

And how long have you found that it takes to upgrade to NXT? Or how long does upgrade take -- months, weeks?

From Raiser's Edge 7 to NXT?

Yes.

Yes, so it could be a little different by customer. If they have customized, it takes a bit longer. If they have the vanilla Blackbaud-hosted Raiser's Edge 7 to NXT, that could be measured in hours or less. You virtually could come in on a Monday morning having made a decision on Friday to go live, and you're on the new system Monday morning.

And if you are on-prem, how long does that take (multiple speakers)?

It takes longer because of the coordination of data. Again, it's not long if you are not customized. If you are, I mean if you've customized integrations to some other systems that you might be using, it could take longer. So it's a little bit different by the customer profile.

Okay. Thank you.

But it's not nearly like an enterprise, though, customer; very different.

Yes, I was going to say it's typically weeks to a handful of months even for the most complex in the midmarket, typically, Stan.

Okay, great. Thanks.

Gentlemen, with no other questions in queue, I will turn it back to you for closing remarks.

Thanks, operator. I'd like to close by saying first half of 2015 was strong start to the year. The business performed well. We're on track to achieve our updated guidance, and tracking to our longer-term aspirational goals. We look forward to reporting our progress on these goals in the future. Thanks, everyone, for your participation.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.