Blackbaud Inc (BLKB) 2017 Q4 法說會逐字稿

Good morning, everyone. Thanks for joining us on Blackbaud's Fourth Quarter and Full Year 2017 Earnings Call.

Today, we will review our financial and operational results, provide commentary on our performance in the context of our 4-point growth strategy and discuss our 2018 financial guidance.

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'll open up the call for your questions.

Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business.

Unless otherwise specified, we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. A reconciliation of GAAP and non-GAAP results is available in the press release we issued last night, and a more detailed supplemental schedule is available in our presentation on our Investor Relations website.

Before I turn the call over to Mike, I'll briefly cover our upcoming investor marketing activity, which is available on our Investor Relations website. During the first quarter, our team will be attending the JMP Securities Technology Conference in San Francisco, the KeyBanc Capital Markets Emerging Technology Summit in San Francisco, the Raymond James Institutional Investors Conference in Orlando and holding meetings with investors in Boston, New York, Salt Lake City, Portland and Seattle. Please reach out to Investor Relations if you're interested in connecting at one of these events.

With that, I'll hand the call over to Mike.

Thanks, Mark. Good morning, everyone, and thanks for joining our call today.

I'm pleased to report a very solid finish to 2017 and another strong year for Blackbaud as we furthered our strategic initiatives, strengthened the company's financial profile, achieved our full year financial guidance and delivered against our long-term aspirational goals.

Our cloud solutions, powered by Blackbaud SKY, continued to lead the industry, scoring high marks with market researchers, like Forrester, Gartner and IDC. We were named to Fortune's 56 "Companies Changing the World" list, climbed IDC's ranking of the World's Top Cloud Software Vendors to the 24th largest globally and most importantly, yielded impressive results and drove outcomes for our growing base of over 40,000 customers.

We recently updated our total customer count to over 40,000 because several of you have asked about this, and we will likely do this annually going forward. We have a lot to cover this morning, and we want to get to your questions, so let's get started on the progress that we've made against our 4-point growth strategy.

Our first strategy is to deliver integrated and open solutions in the cloud. The industry is undergoing a digital transformation, and we are uniquely positioned to enable the shift given our breadth of portfolio, decades of industry experience and most advanced set of capabilities in the market. The market itself remained very solid through the end of 2017 and continues shifting online. In fact, on Giving Tuesday this past November, online donation volume grew by 20% compared to 2016. And our Blackbaud Index this year reported growth in online donations pacing 3x faster than total giving.

Heading into 2018, we're not speculating on the new U.S. tax law potential impact on charitable giving, but I'll make a few points here to help you better understand our positive outlook. First, charitable giving in the U.S. is massive and it's not going away. In 2016, total donations were $390 billion, which is $17 billion more than 2015. And the growth in giving has been closely correlated to U.S. GDP and the S&P 500 for decades. Second, our only products that monetize donations are payment processing and online social platforms. We are less than 10% penetrated into our payments TAM and have significant opportunities ahead for future penetration. Also, online giving stands at less than 10% of total donations. Third, we are well diversified from a product standpoint, with many of our products unrelated to fundraising. And finally, our fundraising solutions are specifically designed to accelerate revenue and reduce total costs of ownership for our customers, which Forrester confirmed in their total economic impact studies. This leads me to our second growth strategy, which is to drive sales effectiveness.

This market is continuously seeking more cost-effective and efficient ways to manage their organizations and achieve their missions. A great example is Feeding America. A customer whose mission is to feed America's hungry through a nationwide network of member food banks and engage the country in the fight to end hunger. They raised millions of dollars using Luminate Online and just recently adopted Blackbaud's payment solution with the goal of improving donor retention and automating time-consuming manual processes. After transitioning to our integrated payment solution, their back-office eliminated days of manual effort, and they were also able to generate over $500,000 incremental donor revenue, leveraging our donor sustainer capabilities. And because $1 raised equals 10 meals for families in need, they can map the implementation of our payment solution to providing millions of additional meals. That's real customer value. In fact, our solutions are even transforming the way organizations operate. The CEO of Alzheimer Society of Toronto told us that she now logs into Raiser's Edge NXT every single day and says it's been a complete game changer in how she manages the organization. The move to selling preintegrated solution suites instead of individual point solutions continues to be a key competitive differentiator for our sales teams. Our sales teams are now fully running and managed on a common sales operating model. This includes common procedures, training, key operating metrics, compensation plans and reporting, which is driving increased productivity. We now stand at 434 quota-carrying heads, which is a 9% increase over 2016.

Let's turn to our third strategy, which is TAM expansion. Our goal is to expand TAM into new or newer adjacencies with acquisitions and product investments. We've been executing this strategy for several years now and expanded our TAM by roughly $2 billion through acquired businesses over the last few years. This year, we closed on AcademicWorks in the second quarter, adding scholarship management and stewardship software to our portfolio in JustGiving in the fourth quarter, one of the world's leading online giving platforms, broadening our ability to serve both individual donors and nonprofits.

The integration of these organizations is well underway, and we're pleased with the early results of both businesses, which will expand TAM, fuel revenue growth, improve profitability and accelerate our move to the cloud. We also introduced Blackbaud Labs in the fourth quarter as a means to incubate new ideas and foster our strong culture of innovation and creativity within Blackbaud with the sole focus on developing new capabilities internally and bringing them to market.

We remain active in evaluation of opportunities to expand our TAM through acquisition and internal product development.

Our final strategic initiative is the focus on operational efficiency, to strengthen the business and deliver improved profitability. Since we first introduced this initiative in 2014, you've heard us talk a lot about the transformational changes we are making in the business, driving us towards a more scalable operating model that creates efficiency and consistency in how we execute. We're largely complete after the move to centralized customer operations for services, support, sustained engineering and customer success. And in Q4, we furthered this effort by centralizing marketing under Catherine LaCour, who's been promoted to Chief Marketing Officer and will continue reporting directly to me.

In setting our long-term aspirational goal, we've improved margins annually and delivered 350 basis points of operating margin improvement using 2014 constant currency, inclusive of heightened investments to drive future growth and in the midst of migrating our customers to the cloud. We see opportunity ahead to further improve profitability through infrastructure optimization, continued focus on operational excellence and execution against our internal productivity initiatives. For example, we're underway executing a cohesive workplace strategy to better align our organizational objectives with our geographically diverse workforce, which numbers roughly 3,000 in total. This strategy first began with the announcement of our new global headquarters, and we're excited to now be leveraging WeWork to replace some of our existing offices and expand our footprint into new locations. We've already successfully transitioned 3 of our offices in Cambridge, Emeryville, California and Toronto, moving our employees into highly modern and more collaborative facilities and the early feedback is overwhelmingly positive. The offices are more essentially located for our employees and closer to our customers. The key for us is optimizing our office utilization, improving our geographic coverage and distribution and enhancing our employees' daily experience to improve productivity and effectiveness.

Overall, I'm very pleased with our performance in the quarter, which allowed us to deliver on our full year financial guidance. And as you can see from our 2018 financial guidance, we have a very positive outlook.

Tony is going to cover the financials in more detail, but I wanted to acknowledge the significant achievement we've made executing our long-term aspirational goals to accelerate revenue growth, improve profitability and cash generation. These goals were truly aspirational in nature when we introduced them at our Investor Day back in September 2014 and provided clarity around our strategic growth and financial objectives. With the combined success of our results last year, our outlook for 2018 and the recent change in the federal tax law, we are awarding an equity grant of approximately $2,000 for each Blackbaud employee not currently receiving equity so that all employees are owners and can participate in the company's success.

I'll now turn the call over to Tony to cover our financial performance in greater detail before we open it up for Q&A. Tony?

Thanks, Mike. Good morning, everyone.

We posted a solid quarter for a strong finish through the year, allowing us to achieve our full year financial guidance and execute well against our long-term aspirational goals, which are now complete. As Mike mentioned, we first introduced these goals back in 2014 and relative to our performance at the time, we set a high bar for ourselves to improve revenue growth, profitability and cash generation, all within the midst of our transition to the cloud. We performed well against these ambitious goals and more importantly, we've strengthened the business, delivered greater value to our customers and positioned ourselves for future growth and scale. I ask you to refer to yesterday's press release and the investor materials posted to our website for the full detail of the quarter and full year financial performance. Today, I'll focus on key highlights so we can get to your questions.

Our fourth quarter revenue was $219 million, an increase of 4.4% on an organic basis over 2016 and tracked our internal expectations. Seasonally, Q4 continues to be our peak quarter in terms of revenue dollars and recurring revenue mix, which represented 84% of total revenue, the highest in our company's history. This is 400 basis points higher than Q4 of 2016 and 8.8% growth on an organic basis.

Recurring revenue consists primarily of subscriptions revenue, which accounted for 70% of total revenue in Q4. This is an 840 basis point improvement over Q4 of 2016, representing strong revenue growth of 16.2% on an organic basis. We continued reducing the mix of services and other revenue, which declined 12% versus Q4 of 2016, as expected, and represented only 16% of our total revenue mix for the quarter.

On a full year basis, we delivered $791 million in revenue, which exceeded the midpoint of our guidance and represents 7.7% growth over 2016 or 5.4% on an organic basis. Our organic recurring and subscription revenue grew 10.1% and 17.9%, respectively. And they now stand at 83% and 66% of total revenue mix. This means that 4 out of every 5 dollars of revenue is recurring and growing organically in the double digits. I want to emphasize that recurring revenue growth is a key measure for us as it represents the core of the business and is expected to continue growing as percentage of total revenue.

Services and other revenue declined 11% versus 2016 and represented 17% of our total revenue. This is a 370 basis point reduction in total revenue mix and a large drag on total company growth. We successfully drove an accelerated decline in our Professional Services business this year by furthering our shift and focus towards selling cloud-based solutions and increase in the rate of innovation in our products. We anticipate that services revenue will continue to decline in 2018, although at a slower rate than in 2017.

Turning to profitability. Our gross margin was 58.2%, which is a 70 basis point decline versus Q4 of 2016. We generated operating income of $46 million, representing an operating margin of 21% and diluted earnings per share of $0.61. For the full year, our gross margin was 59.9%, which is a 20 basis point improvement over 2016 and driven by subscriptions gross margin, which crossed above 60% to 60.3%, improving 220 basis points over 2016.

We generated operating income of $163 million, representing an operating margin of 20.6% and diluted earnings per share of $2.17. Both operating margin and diluted EPS were strong and exceeded the midpoint of our full year financial guidance. Progress against our operating efficiency initiatives have enabled us to reinvest in the business while simultaneously improving profitability. Our 2017 operating margin adjusted for 2014 constant currency was 21%, which was a 350 basis point improvement associated with our long-term aspirational goals. This strong performance highlights that we've been steadily building a stronger and more effective business that will position us for future growth and scale.

Moving to the cash flow statement and balance sheet. Our Q4 free cash flow was $43 million. We continued making necessary innovation and infrastructure investments to support our move to the cloud, amounting to $2 million in CapEx for property and equipment and $8 million for capitalized software development. As expected, the total amount of software capitalization largely leveled off in 2017 after a ramp over the last several years. For the full year, we invested $10 million in CapEx for property and equipment and $28 million for capitalized software development.

Our full year free cash flow was $138 million, which exceeded the top end of our guidance range. Free cash flow increased $28 million or 25.7% when compared to 2016. And our free cash flow margin of 17.5% for the full year was exceptionally strong, accelerating 250 basis points over 2016.

I want to point out that we completed the significant cash tax planning project in late 2017 that allowed us to accelerate certain expenses and defer certain revenue for tax purposes. As a result, we paid only $4 million in federal cash taxes during 2017 and currently don't anticipate paying any federal cash taxes in 2018. I'm also very pleased with the execution against our long-term aspirational goal to generate $500 million to $550 million in aggregate operating cash. We finished at the high end of this goal by posting $547 million in aggregate operating cash from 2014 to 2017.

During the quarter, we paid out $6 million in cash dividends to shareholders and ended with $408 million in net debt. Our capital strategy calls for a debt-to-EBITDA ratio of less than 3.5x and at the end of Q4, we stood at 2.1x.

Now let's turn to 2018, starting with our financial guidance, which is inclusive of the estimated impacts from the adoption of ASC 606 in Q1 of 2018. We are guiding to a full year non-GAAP revenue of $870 million to $890 million. Non-GAAP operating margin of 20.6% to 21%. Non-GAAP diluted earnings per share of $2.75 to $2.88. And non-GAAP free cash flow of $165 million to $175 million. This represents strong performance over 2017 across all fronts, particularly our free cash flow.

Using the midpoint of guidance, free cash flow is expected to improve 23% or $32 million. And free cash flow margin will improve 180 basis points to 19.3%, which is particularly a strong acceleration for the second year in a row. This implies a 430 basis point improvement since 2016.

I'll now turn to some assumptions that we used in developing our 2018 guidance. We are expecting services to continue to decline in 2018 for the second straight year, although at a slower rate. We're also expecting somewhat muted operating margin accretion in comparison to the pace we've set for the past several years, given key 2018 incremental investments into sales, marketing, R&D and our workplace strategy.

Our new global headquarters require significant onetime investments that will position us well for future growth and scale over the long term. Our non-GAAP tax rate is being revised from 32% in 2017 to 20% in 2018, primarily driven by the U.S. federal rate change, which is a benefits to our diluted EPS. We are not expecting to be a cash taxpayer in 2018 based upon our cash tax planning work that we completed in late 2017. Our estimate for 2018 combined capital expenditures is $45 million to $55 million, which includes costs required to be capitalized for software development. We are estimating capitalized software to be relatively in line with 2017 with the year-over-year increase primarily associated with the fit out of our new global headquarters.

In Q4 of 2017, we recorded restructuring charges associated with the execution of our workplace strategy that Mike covered, and we expect additional charges in 2018 as we exit some of our existing leases to leverage WeWork. Our deployment of capital strategy hasn't changed. We will continue to pay a dividend, invest in our growth and operating initiatives, continue paying down debt, providing capacity for future acquisitions and we're making 2 incremental 2018 investments with the onetime stock grant to our employees and new global headquarters.

From a new accounting standards perspective, we'll be adopting ASC 606 in Q1 of 2018. We expect that the impact to revenue will be minor and will include some reclassifications between revenue line items on the P&L. The largest financial impact will relate to increased deferral of cash-based commissions, which will be amortized over a longer 5-year life. This will positively impact operating margins, but will have no impact on cash. And we will be using a full retrospective method for adoption, which requires us to restate 2016 and '17 as if the standard was in place at that time. We'll be combining maintenance and subscriptions into a single recurring revenue line moving forward, given the excellent progress we've made in shifting the revenue mix to subscriptions and due to the immateriality of remaining maintenance streams. And finally, we'll be moving to one segment, no longer breaking out market group level detail in order to align our financial disclosures with the way we now manage the business.

I'll close by saying continued execution against our strategic plan is allowing us to strengthen the business and improve the underlying fundamentals of the company. We're maintaining our disciplined approach to balanced investments that drive growth with improved profitability, and we will 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'd like to open up the line for your questions.

(Operator Instructions) We'll take our next question from Tom Roderick with Stifel.

So I guess I wanted to start a little bit with just some of the moving parts in the 2018 guide. And I appreciate, Tony, the help on the direction on services. But maybe more specifically to the subscription line here, I'm curious if you can add some more details relative to how we have to think about the moment when we start to see some of this acceleration in the model. You've put some nice investments into sales over the last couple of years. So I was hoping you could talk about productivity that you're seeing in the Salesforce. Should that lead to acceleration this year on the subscription line organically. And then some of the headwinds that you faced last year relative to end of lifing of products and some of the back-to-base movements you had. Just talk about some of those moving parts and how they should impact subscription this year. That'd be really helpful.

Yes. Thanks, Tom. On the sales productivity front, we feel good about the trends we're seeing overall in productivity. Obviously, you have a bit of a drag as we continue to add new headcount to the team. You've got to get those folks hired and onboarded and ramped and trained and productive. I think one of the things we have to keep in mind is as we have shifted this business so much towards a subscription model that it takes a bit longer as well to see the productivity materialize in the financial statements because we don't get that revenue recognition upfront. So get the folks onboard, get them trained, pipelines built and selling, but then the revenue gets deferred over the contract life versus upfront. So that's one of the impacts. So it'll be a little longer kind of tail on that before you see it in the P&L versus the old days, under the software model. Overall, the other thing to keep in mind, we've added -- I think we added about another 9% to our sales -- headcount this last year, which is kind of the same rate we've been doing each year, about 10%. The overall base of the business, especially subscriptions, is getting to be fairly large. We'd expect subs, by the time we exit '18, is probably starting to approach somewhere near 80% of our total revenue. Like maintenance is probably going to be approaching 10% or so of total. And then services somewhere approaching 10% of revenue, services and software as we exit '18. So it's becoming a bigger and bigger piece of the base, so we have to keep adding, obviously, resources to keep up with the size of that base. We are seeing a positive impact of the layering of subscriptions. This year, we'll be getting into year 3, I think, of the NXT rollout. So that'll be positive, along with the continued nice uplift we're seeing on the migration of the folks from RE and FE over to NXT. Overall, I feel good about it on the right. Mike, anything you can think about that I didn't hit on?

Yes. Just to add, Tom, that we're now getting close to 90% of our revenues, reoccurring revenue, which is driving, as you saw, pretty good cash flow improvements. And from a sales productivity standpoint, I'll just add that, and I had this in some of my prepared remarks, we now are in, what I would describe is, a common sales model across the whole company, common operating model, common metrics, comp plans, which are really subscription-driven MRR, ARR, comp plans across the board, common sales management programs as well. We're doing common things, like onboarding and training and product certifications for all of our folks, including the new hires, which actually makes the new hire process a lot more efficient. And then with the growing breadth of the product line, there is more products in their bag, if you will. So more to sell, which turns into higher ASPs, and ultimately, better solutions for our customers. So that sales program that we've been building on for a couple of years is really coming to fruition operationally.

I think the last piece you had mentioned, Tom, was on the sunset products. So each year, those are getting smaller. Those have high churn rates as we've spoken about before. And we're migrating those customers actively, so that base and that drag is becoming smaller each year. That said, as we actually go to turn off some of those products, you will take some kind of onetime bigger hits on churn and lost revenue when we actually shut those products off because there will be some number of customers that will be orphaned, and we will not move them to one of our go-forward products.

Yes. And just to add to that a little bit, is that set of sunset products, a number of customers and revenue as a percentage of total is getting really small. And we've maintained our customer retention at 93% throughout all of that. And it's almost largely behind us now as well.

Yes.

Excellent. A quick follow-up for you, Tony, just in terms of the margin and EPS guide for this year. Appreciate that you're still getting your hands around 606 and give us full retrospect of that I guess in Q1. Other companies, we've seen, it's not an exhaustive list, but it seems like the range of the positive tax margin has been kind of in the 1% to 2% ballpark. Is that kind of the right way we have to think about the ballpark? In which case, the -- kind of the implied apples to apples margins would be flat to down here? Or how would you think about encouraging us to view the margin guidance relative to 2017 on an apples-to-apples basis with 606?

Yes. Sure, Tom. You're going to have a challenge ahead of you. All of you guys who are trying to dig through all the accounting changes coupled with the tax reform. I feel for you. It's tough enough getting through one company, I can imagine trying to do 20. But 606, for us, depending on who you're looking at will look a lot less material for a couple of reasons. We have very -- and currently anticipate, we haven't finished all the work. Obviously, we won't have final numbers until the end of Q1 when that's all audited and dusted. But we expect very little revenue impact as a result of the change, although we should have some geographic impact. We're removing some things between the line items, revenue line items on the P&L. The biggest impact we've spoken about before, and as I've said in my prepared comments, is going to be with deferred commissions. We had, historically, always deferred commissions. The 606 rules will say that we should defer more commissions and more costs, so payroll and benefits-related costs associated with the variable comp as well as some of the management layers, et cetera, that we wouldn't have. But our increase in the amount we defer is going to be -- I don't want to give an exact amount, but probably 10% to 20% more, not 100% more. So there's a lot of companies that were deferring no variable comp. So we were already deferring a significant amount. That amount will go up. We were already using a 3-year life that will now go to a 5-year life, although it still has some acceleration in it based upon when the revenue is earned. So I think our impact compared to what you may see from some other folks will be quite a bit less impactful. We have -- our estimate, we've included, is somewhere between 30 to 50 basis point impact on operating margin for 2018. I think the key to keep in mind when you look at our overall operating margin is that we're also making some fairly significant investments in workforce and facility optimization strategy that we're rolling out. We've added capacity here in Charleston with our new headquarters. We expect the benefits of that to be fairly significant over the next few years, both to our overall margin structure and to our employee base. But again, some investments up front -- much likely due to the back-office and some other things that we'll pay some dividends over the future years. That impact on those investments is closer to 100 basis points negative impact on the year for '18.

And we'll take our next question from Justin Furby with William Blair.

I guess maybe to start on the customer count that you shared, Mike, in your comments. That's a pretty big increase to 40,000. Did you change your methodology? Or did you -- is it the interpretation that you added 5,000 or 6,000 net new customers? And then can you talk about your mix that you saw in terms of new bookings from new customers versus cross-sell? And have you started to see that shifting over this year? And I've got one quick follow-up for Mike as well.

Yes. Sure. We did not change our methodology. That number includes organic growth and some with a couple of the M&A adds that we did. It's just customer growth. And we have really started, a while back now, 18 months ago, as I've mentioned before, to have sales teams that are solely focused on net new customers where if you go back 3, 4 years, we were predominantly focused on cross-sell. So we've increased that sales headcount in footprint in both cross-sell because there's a lot more to cross-sell and in focusing on net new customers. And so those sales investments we've talked about going up 10% last -- 2 years ago and 9% last year is really focused on both cross-selling and net new. But just to reiterate, did not change the methodology and it's just customer growth. But that previous number, though, we hadn't updated it for 2 years probably, so we're going to update that now every year because we get asked about it a lot by you guys. And we'll just update that every year going forward.

Okay. So the old number wasn't updated. So when you reported the number, it was still stale. Is that fair, like you're at the end of '16?

Well, the old number was only -- it was 2 years old. It wasn't updated annually.

Yes. Okay. Okay. Okay. And then just -- actually, for -- Tony, for you. What's your assumption on JustGiving growth in your guidance for '18? Do you expect it to have similar growth as what it was at when you acquired it as a [sound] business? Do you expect it to accelerate?

Yes, Justin. We're not guiding specific to that. But it's tracking right in line with our expectations when we acquired it. And so I'd say that's -- growth rate similar to what we saw.

Yes. Right.

We'll take our next question from Rob Oliver with Baird.

So I guess a follow-up on Justin's question about kind of the platform sale here. Clearly, you guys have done a great job integrating WhippleHill in becoming a real platform in the education space. Just curious, in the absence of metrics, just maybe get a flavor for how that's progressing among the nonprofits and a little more color around that cross-sell. Maybe Mike -- maybe some color on some of the core deals you closed. And then just as a follow-up, I know you guys had talked about over the past 1.5 years moving salespeople out into the field. What impact that's had, if at all, in sales productivity and on broadening out that platform sale of your products?

Yes. Sure. So, yes, from a platform standpoint -- first of all, we need to back up a little bit. So structurally in the company, we're organized around vertical markets. The front end of the business is organized around multiple vertical markets that we serve. And again, the back end of the business, if you will, are now consolidated centers of excellence that support the front end of the business. The strategy of the company has been to continue to round out the portfolio in these vertical markets to either organically build or drive road maps or make near adjacency acquisitions to round out those vertical portfolios. It's a win-win scenario for us and our customers. Just -- you asked about the education space, for example, there are lots of situations where we're displacing 5, 6, 7, 8 vendors that are all stand-alone solutions with our single cloud platform. We've also done one heck of a job driving innovation. Almost our entire portfolio now has the SKY user experience as the user experience. So whether it's a product that we've organically built and transitioned to the cloud, like Raiser's Edge NXT or a company that we bought, like WhippleHill, 4.5 years ago, it's the same user experience, it's the same business intelligence and reporting engine. And so this integration is a powerful platform integration. And our plan is to continue to do that across the verticals that we serve by either organically building new on our SKY platform or near adjacency acquisitions. Your second question around sales. Yes, we continue to focus on field sales close to the customer, building teams and also whatever is required to support sales close to the customer, like sales engineers. In some cases, customer support personnel in market closer to the major markets and closer to the customer. That just continues. So we predominantly hire in our larger offices, like Charleston or Austin, entry-level folks that might be on the phone sales for 12 or 18 months, then they get spun out to a field position or we hire net new in the field. That is also closely tied to our facility strategy that I mentioned in my prepared remarks and Tony mentioned, too, which is, as you know, we don't own facilities. We rent. So we're flipping from one landlord to another. And we mentioned this WeWork company because it's just a ton of flexibility from an opportunity standpoint in actually reducing our overall costs in the long run in facilities, but just having a ton of flexibility to open more offices or smaller offices in more markets. But because of the way that model works with that landlord. So that's closely tied to the field sales platform.

And we'll take our next question from Rishi Jaluria with D.A. Davidson.

I guess first on JustGiving. Do you think about integrating the asset and leveraging your scale in the U.S.? I mean, we saw that the leader in the space in the United States at least GoFundMe dropped its 5% platform fee for personnel campaigns. Do you think this move has any impact on your JustGiving strategy? Do you expect to follow suit? And then I have one follow-up.

Yes. Most of our revenue in JustGiving is not in that space, right? But what we are doing is we're integrating JustGiving with all of our middle and back-office platforms. So it will be a Blackbaud customer-friendly platform because the integration will -- does drive reduced operating spends and operating workflows for our entire customer base. So we see that as a really great opportunity. It's being received quite well, and we're executing on the integration of the business. It hasn't been a part of Blackbaud all that long, but we're doing what we normally do now is integrate back-office, integrate sales, integrate go-to markets and then integrate the actual app and the platform as well. So it's a -- I think a great acquisition for us, north of 20 million registered consumers. So it's underway from an integration and go-to-market standpoint and on plan.

Okay. Great. That's helpful. And then I understand that we'll be seeing subscription and maintenance bucketed together from now on. But how should we be thinking about migrations in 2018, especially relative to what we saw in the past couple of years?

Yes. I mean, they're broadly together because we're now a reoccurring revenue model. I mean, it's close to 90%. And so we, frankly, had executed arguably better than originally planned back from 2014 to today, given the transition has actually shrunk services a little faster than we thought to the positive. Because now we're dominantly a reoccurring revenue model. So, yes, we'll continue to make those migrations for maintenance over to our cloud solutions, mostly with Raiser's Edge NXT and Financial Edge NXT. And that will just continue. It's gone extremely well. We have one product that we offer as a license, which is our Enterprise CRM product. But many customers are now taking that in a subscription model as well. So the maintenance migrations will continue. And it's all executing to plan. And the market adoption of these cloud solutions, I mentioned one customer up in Canada, who's a CEO, who basically logs into Raiser's Edge NXT every day. The model difference for the user is that significant where that institution, a year ago, they had a database administrator that was probably the only user on the system. Now, it's being used by a lot of folks, including the CEO. It transitions the business, it really drives a digital transformation, which is what we're really focused on in the space. So, yes, the maintenance will continue to transition over -- year-over-year. And the good thing, what we've shown in the last 4 years, is we've maintained customer retention at 93%. So that transition is healthy and executed well.

And I think, Rishi, the -- we talked about it. I spoke to -- we expect maintenance to be approaching 10% or less of the total by the time we exit '18 as well. So it's getting to be such a small number that it's much, much less meaningful.

Yes.

And we'll take our next question from Kevin Liu with FBR.

Just as a follow-up on that maintenance question. Getting to the 10% for the year is -- kind of suggests a higher rate of decline this year. Are you seeing a more acceleration in terms of your base getting over to NXT a little bit quicker? Or perhaps just talk a little bit about the trends there and how they're benefiting on the subscription line.

Yes. I'd say, Kevin, it's on par with what we anticipated. This is a multiyear, pre-long transition. And so it's going as planned. And the only reason it's pretty long is we still have some build out to do in the NXT line. It's not complete. We have some customers with some third-party integrations that we keep knocking down. The little bit of road map functionality that needs to be complete and close some gaps. So it's not quite ready for everybody to go, which we knew, so we have the normal early adopters go faster, more complex customers take a little bit longer, which is normal in any kind of transition like this. The really cool thing, though, is that those products and all of our SKY-enabled products, we're able to put functionality into production every 2 weeks or every 3 weeks. So the pace of innovation is really fast, which means our ability to close those gaps is really fast and the bar is low to go faster, given the architecture. But having said that, we have some gaps still to close to keep moving the rest of the maintenance-paying customers over to the new cloud solutions.

And a couple of other things to keep in mind, Kev, we expected this to be a bit of a bell curve as would be most migrations. And I think we're into that ramped curve portion of the bell now that we're 3 years in to what we thought would be a 5- to 7-year total cycle. Two other big pieces to consider when you think about us approaching 10% exiting 2018, not for the full year, but exiting, would be that CRM is now moving to a subscription model, as Mike said, on a big portion of units. So we're not growing maintenance on the CRM side as we would have expected when we walked into this aspirational goal back in '14. And then thirdly, subscriptions is growing at a very fast rate comparatively. So you've got a shrinking maintenance line. You've got CRM go into a subscription model that wasn't originally anticipated and subscriptions growing very nicely internally, organically as well as we continue to add subscription acquisitions to the total. So it all makes a lot of sense.

That's helpful color. And then just a quick one on the tax rate for this year. You mentioned some tax planning that had gone on coming out of '17. I'm curious if the 20% includes anything that's more onetime-ish in nature or it's a good long-term rate to use for Blackbaud.

No. I'm surprised somebody else hadn't asked that. Kevin, it's a good question. So we've got an interesting situation on the tax side of things. We have had such good appreciation in our stock price over the last 2 or 3 years that, as you know, for GAAP purposes, creates a permanent tax difference because for book you record the stock price of the grant date for tax purposes, you're taking it at the vesting date. And so as the stock appreciating, we end up with a permanent tax difference now under the rules. And our GAAP tax rate has actually been well below the federal 35% rate. It's actually been well below the 21 -- new 21% rate, so we've not been paying at that rate on a GAAP basis. In 2017, we originally expected -- going into the year when we set guidance that we'd pay $10 million to $15 million in cash taxes. With this cash tax planning project we kicked off late in the year, really as a result of and in advance of the potential tax reform resulted in us being able to reduce our cash taxes paid substantially. And so between that permanent difference with our 40-plus percent stock appreciation and our tax planning, we actually paid in -- only just a little bit north of $4 million in cash taxes in '17. Now that's not substantially higher than what we paid in the last few years because we had NOLs and credits and various other things. So we really have not paid a lot in cash taxes over the last 5 or 6 years. So little impact there. But going into '18, with tax reform and more so our cash tax planning, we expect to pay no federal cash taxes in '18, and that's going to carry into '19. The other interesting piece to keep in mind for us and this goes to your rate reduction is with the acceleration of some of these cash deductions in advance of this rate change that protected more R&D credit, which we can carry forward dollar-for-dollar. And it's not impacted by our rate reduction as many people would see on some of their carryforward NOLs and deductions and tax assets. And so that's a dollar-for-dollar credit. And that's part of what will allow us to have that reduced from 21% down to 20% rate in the future. It's not onetime. It's just that we have R&D credits that will reduce our rate below that kind of statutory rate.

And we'll take our next question from Brian Peterson with Raymond James.

So Mike, I appreciate the color on tax reform. And I understand that nobody has a crystal ball on what that impact will be on Giving overall. But I'm curious, when you talk to your customers, how are they handling this? Because you could make the case that, one, they want -- might want to hold off on IT investments, given that they want to see how this transpires or they could take the bull by the horn and invest more. So I'm just curious, in your customer and prospect conversations, what are they saying about tax reform?

Yes. They're actually saying invest more because they are highly interested in not just what we're doing, but they read about other industries around other industries driving a digital transformation in their operation, which is what we're focused on. I mean, it's one of the key reasons why, to my earlier answer of an earlier question, we keep building up vertical market portfolios because now we're driving digital transformation not just in fundraising, but in the operations side of our customers. And so this digital transformation, what's happening with our customers is they're getting a fast ROI in their investments on our platforms. So it's not a situation where they see their expenses going up with us. We're actually reducing operating expense and increasing their revenue through our cloud platforms. And we've got lots of outside firms, like Forrester and others that have built business cases and white papers that explain that -- some of those are on our website, by the way. So this digital transformation that's happening in every industry, including ours, needs a high level of interest for our customers. And in fact, there's a whole bunch of conversations I've had with customers on just how to go faster to take out operating costs through advanced cloud solutions.

Got it. And just maybe on one of the Enterprise CRM. I appreciate that, that doesn't get as much press as the NXT migration. But I'm curious, how many of the subscription customers for CRM are new customers versus migrations? And is there anything that you can say on the economics of those relationships, appreciating that there's obviously some difference in maintenance and services intensity with CRM?

Yes. I'd say that the adoption of -- of a subscription model with an Enterprise CRM is mostly with new customers. Some of the existing ones are interested or have moved. So it's again -- it's a maintenance to subscription move. But a lot of the ones that are on-prem -- historically, existing customers made that decision because they are really large enterprises, and they just want that platform in their data centers. But for the most part, I'd say, if you'd look at the trend on Enterprise CRM to subscription, it's mostly the net new guys that's driving subscription there.

And we'll take our next question from Kirk Materne with Evercore ISI.

I guess -- first, Mike, for you. I know there's a lot of moving pieces on the income statement for you all. But when we think about just sales productivity heading into 2018, is this another year of investment for you all? Or is this a year where, on a margin basis, you should actually start to see, on an overall net basis, some positive returns from the investments you made over the last couple of years? I'm just trying to get a sense on where we are in sort of the investment versus return cycle on the sales and marketing front.

Yes. I'd say the best way to think about that is, it's been a balance for us making headcount investments and driving existing team productivity. The big change, though, is, and I mentioned this in an earlier answer and in my prepared remarks, the big change, though, is that the common sales operating model is now really in place arguably for the first time across the whole sales team, which means less change in sales, which means common training, onboarding, product certification, comp plans, manager training, manager metrics, is really all in place now, which is the biggest change. But from an investment standpoint, we'll continue to monitor the uptick in productivity and the ability to add headcount where we think it makes sense. So I would say that, that side is more of a balanced side of the operating side is now a common operating model in sales.

Okay. That's helpful. And then maybe Tony, for you. I realize you guys are still sort of piecing through all the moving parts of 606. But one of the tenets I believe of that change is that companies that have subscription revenue are now going to have start providing more insight into their backlog. And I was just curious about how you're thinking about that. If you're thinking about offering up any kind of annual recurring revenue statistic to go along with that now that you guys are so much more recurring in nature. I would just -- any thoughts you might have on that subject, I'd be interested in.

Yes. I think, Kirk, we're going to probably try and take a minimalistic approach when we roll this out as it appears that most companies are until we know how the SEC and all the governing bodies are going to come out on this thing. It's really hard to decipher, like the disaggregation rules and how we need to disclose, what pieces. You'll see more information again on the backlog, booked-not-billed kind of stuff and roll off expectations for revenues that are on the balance sheet, those kind of things. That's with certainty. How much incremental disclosure. I think it's going to be something that's going to materialize over several quarters, would be my expectation. I think everybody's adopted. I would expect the SEC to come back in the FASB and to -- than to push on folks to try and get a little more alignment because I think you're going to see a lot of noise, frankly, across companies with alignment happening over the next several quarters, is my expectation. Again, we'll have some incremental disclosure. We are going to one segment as a result of all the operating changes we've made in the business and all those centralization and COEs in shared service centers that we've done. So that will take a little bit away, but we would expect to provide some of that similar revenue information for the market groups, et cetera, in our disaggregated revenue disclosure. So you'll see more, but probably not as much as you guys would hope to see for most companies would be my expectation.

Okay. And I guess just maybe a quick follow-up on that. I mean, is there anything within your backlog that would be -- meaning with services go into your backlog number. I'm just -- we're going to get it, so we're going to end up asking the question, I guess, either way. But I mean, is there anything that would be misleading about that backlog number that it wouldn't necessarily be a good number kind of to at least think about in the context of your organic growth?

No. I think it's the same think we've had with our deferreds, frankly. You're just getting a bigger picture, so you're getting the total contractual value versus what we billed and put on the balance sheet a year in advance typically. We're still going to have a big piece of our business. You'll have services that are kind of onetime in nature so they're not going to tie to the 3-year, so you wouldn't have a booked-not-billed component to that because it'd be billed potentially upfront. You'd have the payments business and usage. And we have a more transactional business when we added Smart Tuition, and now JustGiving. And so I think the difficulty is correlating. Even if we give more on booked-not-billed, et cetera, and deferred still correlating that to what our revenue will be, it's still going to be a bit tough because we still have such big moving pieces that are not recorded to the balance sheet because they're transactional in nature.

And we'll take our next question from Ryan MacDonald, Dougherty & Company.

Can you talk a little bit about M&A strategy? I guess when we look back into sort of 2015 and with the Smart Tuition and MicroEdge acquisitions, those being larger acquisitions, and you kind of took 2016 as sort of a digestion period, now looking back into 2017 with 2 fairly sizable acquisitions. I guess as you look out to this year, should we expect more of a -- another digestion phase with those acquisitions? Or do you expect to kind of continue with that M&A strategy when you see some opportunistic areas or subsegments to invest in?

Yes. Sure. I would say that the strategy continues and it hasn't changed. The -- and it doesn't really necessarily include, as you've mentioned, the digestion period. It's just these acquisitions have to be just a great fit for us. We look at a lot of them. A lot of them were not a great fit for a lot of reasons. So they need to be TAM-expanding near adjacencies in markets we currently serve that creates a stronger vertical cloud platform. So I would expect more of the same as you've seen in the last several years. It's the same strategy. We have a 4-point strategy that I updated you on the -- in my prepared remarks. And the company strategy remains intact, including our thinking and approach with these acquisitions.

Yes. And then just one quick follow-up. When you're looking at sort of NXT adoption and sort of the integration of some applications, obviously, we've now gotten sort of an updated penetration into the TAM for payments. When you look at the analytics side, obviously, not as much and maybe not as such large of a market opportunity as the payments longer term. But can you talk about what sort of trends you're seeing with the adoption of the analytics and maybe some of the customer feedback you're getting with that solution?

Yes. I'd say that the analytics are a significant strategic add that we provide now for our customers. It's a decent size and growing product line for us. It drives a heck of a lot of innovation. And the approach that we've taken is these analytics are custom-built full solutions by vertical or by subject matter type, meaning a fun-fundraising-type analytics or higher ed or health-care-type analytics. And they're fully embedded into our core solutions, which makes our core solutions have more value for the customer and, frankly, stickier for the customers as well. So it is a very strategic investment and growing part of our business and adds a lot of value. And it's also a very good competitive differentiator for us.

And we'll take our next question from Pat Walravens with JMP Securities.

This is Mat Spencer on for Pat. Could you please highlight a particular geography or vertical or product that did well in Q4? And maybe point to one with some room for improvement?

Yes. We don't break out our products. We don't have a geography or, I'll say it this way, a vertical market or a particular product or 2 that dominates the revenue of the company. It's a pretty balanced footprint revenue-wise in our verticals and across our product portfolio. So we don't get granular in that because it's -- it wouldn't be meaningful for you guys anyway. So -- but in general, our cloud solutions across the board, which is basically our whole product portfolio, are doing quite well. Good organic growth, good new customer adds, good cross-sell in all the verticals sort of across the board.

Great. And I guess another question will be, how do you think about the growth rate of this business over a multiyear time frame? And similarly, how do you think about adding to your quota-carrying Salesforce in 2018 and beyond?

Sure. Well, we have -- you -- you've seen our guidance for year. So that's how we're thinking about this year from a growth standpoint, which we think is pretty healthy. The business now is again -- we'll be ending up this year about 90% reoccurring revenue. In the last 2 years -- 2 years ago, we added 10% of the sales headcount. Last year, we added 9% to headcount. We break out the total headcount once a year, every year at this time. And again, we anticipate driving productivity from the much larger sales team that we've invested in over the last several years, so productivity there. And then opportunistically adding headcount to either verticals or teams where we see high productivity and high opportunity. So it will be a continued balanced approach as we've done in the past.

And Mat, one of the things to keep in mind on the sales headcount, it depends also on what we do from an acquisition perspective. In many cases, we'll get a nice opportunity from headcount from an acquisition that we will put some of our -- other solutions in their bag and get some nice synergies on that front. So it's always a balance between actual new adds versus what we gain through acquisition.

Right.

And we'll take our next question from Mark Schappel with Benchmark.

Mike, just one question here. Regarding the recently expanded partnership with Microsoft that was discussed at length last quarter. I was wondering if you could just provide some more details around what that partnership entails. More specifically, it's my understanding you're doing some joint development work with the company. And I was curious if that meant you will be contributing some nonprofit functionality to their dynamics applications.

Yes. What we're actually doing is, we are doing some joint development. We're doing some work around joint go-to-market. And it's tailored to a particular geographic area where they might have partners or they may go direct or vice versa for us. So there's a lot going on related to more detailed planning and execution with them. From a product development standpoint, there's a lot of things that we're looking at. We're integrating our platforms with dynamics, with Office 365. And so they'll be better synergy and operating workflows for our customers. They clearly see us as a deep vertical partner in the space where their platforms are much more horizontal platforms. And there's a lot of connections here, too. So even with platforms, like RE NXT and our other platforms that are cloud platforms, we're deploying them more and more in Azure globally. And so they sort of pick up consumption revenue on the back end, if you will, through that model. So there's a lot of combinations here that, I think, will be really interesting for us as we continue to get granular and really drive the execution part of this. We are really excited about this partnership, and they are clearly as well.

And we'll take our next question from Rodney Nelson with Morningstar.

Just a quick one. To follow on the sales headcount thread. I think, Mike, you mentioned earlier that, obviously, the time to value with this new headcount when carrying subscription-based products is obviously a little bit longer, just given the revenue recognition on those products. But just to be clear, the -- sort of the ramping period is -- are you still seeing that being relatively the same as it has been historically where headcount is actually getting to the market and prospecting and sort of the same time horizon? Or perhaps even faster with some of these new initiatives that you've installed?

Yes. So yes. I haven't seen that change. And so for us, it's faster for more entry-level folks selling cloud solutions at the lower end or add-on solutions, which are much smaller dollar kind of add-on solutions to existing customers and a longer ramp for folks selling very large enterprise solutions. But given the fact that we predominantly sell subscriptions now, it's actually easier consumption model for our customers from a budgeting standpoint because there isn't a onetime large invoice that they're going to get, right? It's over time. And so it's an easier buy for customers having predominantly subscription pricing models for us as well.

Great. And just one quick follow-up. And related to kind of shifting to a consolidated income statement on the top line. Any plans to introduce new performance metrics or guidance around the subscription business? Obviously, you guys are updated on the customer account number now. But any plans to sort of expand the metrics that we can be looking at on a go-forward basis to evaluate that business?

Yes. We don't have plans. I mean, what -- to Tony's earlier point, we're looking at the accounting changes and what's going to be best practices there and -- so that'll flush itself out throughout the course of this year and next couple of quarters, anyway. And we look at providing the -- what's required there and adding some metrics to give you guys some more insights. And we like to, frankly, just balance the metrics that we break out to what's most important that we think is most helpful for us and for you.

And this concludes today's question-and-answer session. At this time, we'll turn the call back over to Mike for any closing remarks.

Okay. Thanks, operator. I'll just close the call by saying that we're really pleased with the progress we made in 2017 on our strategic objectives and very optimistic for 2018. We look forward to updating you on progress in the next call. And thanks, everyone, for calling in today.

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