Blackbaud, Inc. (BLKB) Q4 2007 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Blackbaud Fourth Quarter 2007 Earnings Conference Call. Today’s conference call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions. Now at this time, it is my pleasure to turn the conference over to Tim Williams, Chief Financial Officer of Blackbaud.

Thank you very much. Good afternoon, everyone. Thank you for joining us today to review our fourth quarter and full year 2007 results. With me on the call today is Marc Chardon, President and Chief Executive Officer. Marc and I will make a few prepared remarks and then we will open up the call for questions. Please note that our remarks today contain forward-looking statements. These statements are based solely on present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent annual report on Form 10-K and the risk factors contained therein, as well as our periodic reports under the Securities Act of 1934 for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements. Also please note that a webcast of today’s call will be available in the Investor Relations section of our website. With that, let me turn the call over to Marc and I will be back a little bit later to give you some further details regarding our financials.

Thank you, Tim, and my thanks to all of you on the phones for joining us today. We were quite pleased with the company’s financial results in the fourth quarter and the full year 2007, both of which were above the high end of our expectations. Even more important, we achieved what we said we would accomplish in the execution of our growth initiatives, including our Enterprise CRM; direct marketing and Internet offerings; the integration of the Target companies and eTapestry acquisitions; and the continued growth of our international business. Each of these areas remains a key component of our growth strategy in 2008 and beyond. Interest in our overall solutions remains high, and we believe non-profit organizations are continuing to look to technology as a means to improve their operational efficiency and their ability to raise funds. We believe our overall market opportunity remains largely under-penetrated as evidenced by the majority of our larger transactions going to brand new customers, combined with the fact that we have just begun to serve the low end of the market with our eTapestry office. Now let me return to the details of our fourth quarter performance. Total revenue of $70 million grew 42% on a year-over-year basis and exceeded the high end of our guidance. License revenue came in at $9.9 million, up 21% year-over-year. This is the highest rate year-over-year growth in nearly three years. It was better than we anticipated. Keep in mind, the impact of a small number of large deals can influence the percentage growth in license revenue on any given quarter given the size of the number. But this variability typically has little impact on the overall revenue and profitability of Blackbaud. Our fourth quarter subscription revenue grew 160% year-over-year to $8 million, and it remained the highest growth portion of our business. For the past two quarters, subscription revenue has been more than 80% of the run rate of our license revenue. We believe that it’s reasonable to predict that in our quarterly subscription revenue the run rate could exceed that of the license revenue at some point during the second half of 2008. This increasing shift of subscription revenue sources is very important and a positive evolution of Blackbaud’s business model over the past 12 to 18 months and it will continue. Finally, our non-GAAP operating income of $17.3 million grew 24% year-over-year and was comfortably ahead of our guidance for the quarter. From a cash flow perspective, we generated $62.9 million in cash from operations during 2007, which is more than 1.5 times the level of our reported non-GAAP net income. We also ended the year debt free using our strong cash flow to pay down all the remaining debt associated with the Target companies and eTapestry acquisitions. A major highlight of the fourth quarter was progress with our Blackbaud Enterprise CRM offering. As I have said before, this solution was built on our .Net web-based platform. It’s our next generation offering and it addresses the multi-channel fund raising needs of the largest non-profits, many of whom have significant distributed operations. Our goal in 2007 was to identify and secure a handful of early adopter customers, with a goal of gaining reference accounts in key verticals to help us grow this segment of our business more rapidly in the years ahead. In a relatively short period of time since we introduced this solution, we have seen significant market interest from very large organizations. And I am pleased to share with you that our first Enterprise CRM customer went live in the fourth quarter. This was a large state university consortium that began using our solution at six of their campuses during that quarter and we expect three more campuses to go live in this current quarter. In addition, our Enterprise CRM offering was selected by three additional customers during the fourth quarter, including The University of Iowa Foundation, Jews for Jesus, which is a large international mission organization, and also by a large non-profit healthcare organization. Two of the three customers also purchased our direct marketing solution along with the Blackbaud eCRM. The eCRM deals that we closed in the fourth quarter are significant for a couple of reasons. First, when combined with the previous Enterprise CRM early adopter customers that we’d signed in education, and the human and social services sectors, we now have flagship customers in each of our four key vertical segments. While Blackbaud has industry-leading domain expertise, having Enterprise CRM wins in each of our target markets is important from a customer reference perspective and we look to bring these solutions to market more broadly now. Second, given that our Enterprise CRM offering is targeted at meeting the needs of the largest non-profit organizations, the deal sizes are quite substantial. For example, the total contract value for each of the three deals closed during the fourth quarter, including software, consulting and other services but excluding maintenance, was over $1 million with one over $2 million and another quite close to that level. And the third, while these deals are fewer in number and much larger than Blackbaud’s traditional ASP, we are trying to structure the agreements to be either subscription based or to have another form of multi-period payment terms. Two out of the three deals that we’ve signed during the fourth quarter had terms that deferred license revenue. This obviously means less upfront revenue, but more important it leads to improved visibility and less quarter-to-quarter volatility tied to the impact of these larger transactions. Finally as a reminder, we are six months into our development efforts to integrate Target’s Team Approach, current and committed capabilities with our eCRM offering. Team Approach is the recognized leader in the high volume direct marketing segment of the non-profit market and we believe that the integration of that functionality into our eCRM offering will enable Blackbaud to address a much wider set of mission critical processes for this important segment high end of the market. The integration of this functionality is on track for Q2 delivery and we are actively working with two customers interested in piloting that enhanced solution. In addition to our progress in the Enterprise CRM and direct marketing space, we are pleased with the continued growth in our other new solutions, which include Net Community, Patron Edge, our family in Analytics offerings, as well as our recently acquired Target Software and eTapestry solutions. Net Community was the largest contributor to this category by a good margin in 2007. And during the fourth quarter, it continued to have the highest growth with well over 60% year-over-year increase. Net Community’s growth has been driven by the increasing use of the Internet by non-profit organizations to drive communications with their constituency. As successful as we’ve been in 2007, our market opportunity for Net Community was essentially limited to our base of over 12,000 Raiser’s Edge customers. Although, we have also had success selling this solution along with our new customers, certain amount of that. I am pleased to share with you that we recently won our first customer for the soon to be released decoupled version of our Net Community offering. That was code named Scorpio. That’s the version that does not require the Raiser’s Edge. This customer uses Target Software’s Team Approach direct marketing solution and they were on a competitive Internet solution in the past to drive their online fund raising and community building activities. We are excited about the growth opportunity for Net Community both to our existing customer base and even more so as we dramatically expand our addressable market to include Team Approach in non-Raiser’s Edge customers. To bring even greater focus to the big opportunity we see during the fourth quarter, we created a new Internet business unit which brings together the Blackbaud Net Community and NetSolutions offerings with their related professional services, posting and customer support teams to ensure we are best serving the unique needs of our online community building customers. This business unit is being headed by Blackbaud’s former CIO and reports directly to me. The formation of this business unit is a reflection of the success we had to date and of the large opportunity we still see ahead. Two other new solutions that I would like to highlight are our Analytics solutions and our Student Information Systems. Beginning with Analytics, the combination of Target Analytics and Blackbaud’s Analytics continues to go very well. We believe we have got a differentiated value proposition in the market space and it’s an area that strengthens our overall domain expertise and the strategic value we can bring to non-profits. The combined business had approximately $25 million in revenue during 2007, more than doubling the Analytics revenue generated in 2006. We are also very pleased with the results of our Student Information System that was launched in May of 2007. Our SIS application manages student data for smaller colleges and trade schools. We ended the year with 21 SIS deals in the education market, 14 going to existing Blackbaud clients and 7 going to new clients that previously had no other Blackbaud solutions. The average deal size for SIS has been greater than the company average and it’s another example of Blackbaud developing new solutions to both further broaden our customer base and to maximize our addressable market opportunity. As important as our new growth initiatives are, the majority of our largest deals and our customers still come from our suite of core solutions, which includes our flagship Raiser’s Edge offering, Financial Edge and Education Edge. RE continues to be the core driver of our larger deals and new customer growth on a quarter-to-quarter basis. As evidenced by the fact that RE was the primary factor and over half of our software deals that were greater than $50,000 in the fourth quarter. RE had a particularly strong fourth quarter and on a full year basis, it grew solidly in the mid-double digit range. In Q4, three quarters of our top 12 software deals were driven by RE and in another one of our largest deals in the company’s history, we signed an agreement with the University of Nebraska Foundation to license and implement RE along with Financial Edge, NetCommunity and our direct marketing solution. Not withstanding the solid year-over-year growth in RE sales, the significant growth in our other solutions, particularly our new offerings, resulted in Raiser’s Edge representing less than 50% of our new sales for the first time since it became the company’s flagship offering. Looking at our other core solutions, Financial Edge had the highest growth for the third quarter in a row and was a factor in approximately 40% of our larger software transactions this quarter. Also our education solutions continued to deliver solid growth. Now if we look at our average deals size across all of our new and core solutions for the full year 2007, it was the first time in the company’s history that we reached the $50,000 mark. This is more than double the average deal size when Blackbaud went public several years ago. While we highlighted the couple of the larger eCRM deals earlier, it’s just as important to note that we continued to see strong growth in a number of large transactions involving our core solutions such as the University of Nebraska deal that I mentioned above. Specifically on a full year basis, the number of software deals over $50,000 grew 40% when compared with 2006 and the number of deals with a total contract value of over $100,000 grew by over 50%. Looking at the makeup of these deals, it’s also quite encouraging from a long-term perspective. Similar to last quarter, if we look at our top 50 transactions in the quarter, just over half of them came from brand new customers. All the rest came from sales to existing customers. This mix shows a significant opportunity present with our 19,000 customer installed base, in addition to the fact there remains a large under-penetrated market opportunity. As we entered 2007, we said we are going to increase our focus on the addressable market opportunity in the international marketplace. This is of particular interest to me given my background and my work experience prior to Blackbaud, combined with a relatively low level of Blackbaud’s business in terms of percentage of our business done internationally. We are pleased with the progress we made in this area during 2007 as well, as our international business grew 35% on a year-over-year basis and this is essentially all organic growth as both Target and eTapestry and had little to no international presence prior to our acquisition of them. This growth was strong across each of our three key regions: Canada, Europe and Asia Pacific. Our international business represented nearly 15% of our total revenue in the fourth quarter and we believe there remains a huge long-term opportunity to more than double our international revenue as a percentage of our overall business. In reflecting on this opportunity, it is important to remember that the new Infinity platform on which eCRM and BBDMs, or Direct Marketing, were built, will now allow us to develop multi language versions of our products. This is not really practical for previous versions of the Raiser’s Edge, Financial Edge and other Blackbaud solutions. Another significant event this quarter was the hiring of a VP of International Business Development to further bring focus and to help us identify and pursue some very specific international growth opportunities. In summary, we are pleased with the continued strength of the company’s financial performance. Interest remains high across our solutions from our flagship Raiser’s Edge solution to our most recent Enterprise CRM offering. As we look to 2008, our areas of focus will be consistent with the themes that we have been discussing this quarter and in previous quarters. We will turn up our go-to-market activity in the Enterprise CRM area; meet our product deliverables in the direct marketing space; maximize our opportunity in the Internet space; grow our on-demand and subscription based business with customers ranging from smaller customers served by eTapestry to our traditional customers and up to the world’s largest non-profit organizations. We will continue our progress internationally and also we will continue to see an increase in productivity in our entire organization, which made some tremendous strides during 2007 that I am quite proud of and thankful for. With that, let me turn it back over to Tim so he can provide some more details on the financials.

Thanks, Marc. I will provide some details on the fourth quarter operating results then update our guidance and finish with a very quick review of our capital management program. First, let’s start with some highlights from the income statement. As you heard earlier, total revenue came in at $70 million, which was up 42% on a year-over-year basis and that also represent a 23% organic growth. The $70 million was above the high end of our $66.5 to $68.5 million guidance range for the quarter. License revenue was $9.9 million, an increase of 21% year-over-year and $300,000 above the high end of our guidance range for the quarter. As a reminder, the growth in this revenue component is all organic as both eTapestry and Target contribute virtually nothing in our software licensing revenue. In addition, it’s also worth noting that license revenue growth was not solely influenced by the four large deals that Marc alluded to earlier. In fact, one of the deals involves multi-period payment terms which will result in the license revenue recognition being spread over 12 quarters, and for another deal because of the terms of the agreement, no revenue including services revenue will be recognized until the second half of 2008. We were pleased with the strong growth in licensing revenue during the quarter in addition to the continued growth in our subscription based revenue. Subscription revenue was $8 million in the fourth quarter, an increase of 160% on a year-over-year basis. Subscription revenue continues to represent the fastest growing portion of our business and it increased to 11% of our total revenue in the fourth quarter up from 6% in the year-ago period. Even without the contribution from Target and eTapestry, subscription revenue would have increased by approximately 38% on a year-over-year basis in the fourth quarter. On the services side, revenue came in at $24.5 million, an increase of 65%. It’s worth noting that the seasonal sequential decline of 7% in services revenue from Q3 to Q4 was the smallest sequential decline we have seen in Q4 since going public over three years ago. Maintenance revenue came in at $25 million, an increase of 18% on a year-over-year basis. On a purely organic basis, growth in services and maintenance would have been 34% and 15% respectively. We continue to enjoy good maintenance renewal rates in the mid 90s range, which is a testament to our customer satisfaction and the strength of our technology. Turning now to gross profit, we generated $45.4 million in non-GAAP gross profit in the quarter representing a gross margin of 65%. This is below the 70% level in the year ago quarter; 2 percentage points of this decline are due solely to the inclusion of Target’s results. In addition, on a year-over-year basis, services revenue increased by 5 points as a percent of our total revenue and services of course as you know has the lowest gross margin of our revenue sources. It is worth noting however, that for this quarter our services margin was actually up on a year-over-year basis for the first time during 2007 and this was a result of improved utilization of our resources following the aggressive hiring and significantly improved retention that we discussed in recent quarters. Finally our gross profit on maintenance also declined compared with last year, as some of our new solutions, which have grown so rapidly are more complex and therefore require higher levels of customer support than our core offerings. We believe that incremental improvements in gross margin will be the primary source of overall margin expansion over the long term. Looking at our operating expenses for the quarter, total non-GAAP operating expenses were $28.1 million or 40% of revenue. This is a slight improvement from 41% in the prior year and in line with last quarter. Non-GAAP operating income was $17.3 million, above our guidance of $15.4 to $16.3 million and grew 24% on a year-over-year basis. From a margin perspective, our non-GAAP operating margin of 25% was a few points below the 28% level in the year-ago period principally due to the impact of acquisitions made during 2007. The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP net income of $10.5 million and non-GAAP diluted earnings per share of $0.23 based on diluted shares outstanding of $45.2 million. Non-GAAP EPS grew 15% year-over-year and was $0.01 above the high end of our guidance range of $0.21 to $0.22. As a reminder, we fully taxed our non-GAAP EPS amounts, even though the company’s cash tax rate is much lower, because of both our deferred tax asset and other tax benefits associated with this year’s business acquisitions. The point here, as I emphasize repeatedly, is that EPS, even on a non-GAAP basis, does not reflect the ongoing cash earning power of the business. As we have noted before, we focus on non-GAAP results because we believe that certain non-cash items such as stock-based comp and amortization of intangibles arising from business combinations provide the best indicator of the health of our overall business and the level of efficiency in our operating infrastructure. That said, we appreciate that investors also need to understand our results on a GAAP basis. So, we have provided a full tabular reconciliation of these GAAP results and non-GAAP results as part of our earnings release. In summary then, the reported GAAP net income for the fourth quarter was $9 million compared with $8.5 million in the fourth quarter last year, and our GAAP diluted earnings per share were $0.20 compared with $0.19 in the prior year. I would now like to provide a summary view of our 2007 results. Total revenue was $257 million, an increase of 34% compared with 2006. On an organic basis, revenue growth was 20%. License revenue increased 16% to $37.6 million, which was a substantial improvement over the annual growth rate of 8% reported during 2006. Subscriptions increased to 139% to $25.4 million. Services revenue increased 49% to $91.4 million and maintenance increased 17% to $94.6 million compared to the full year 2006. Turning now to profitability, non-GAAP income from operations was $62.8 million during 2007, representing a non-GAAP operating margin of approximately 24.5%. We remain confident in our long-term target of 27% to 28% non-GAAP operating margin and of our expectation of making modest incremental progress toward that goal while we continue to invest in our growth initiatives. Non-GAAP net income was $37.8 million in 2007 leading to non-GAAP diluted earnings per share of $0.84. Looking at the full year profitability on a GAAP basis, net income was $31.7 million or $0.71 per share compared with $30.2 million or $0.68 per share in 2006. Again, as we have said before, the principle difference between GAAP and non-GAAP results is non-cash stock-based compensation and non-cash amortization of intangibles associated with acquisitions. Let me now turn to cash flow in the balance sheet. We ended the quarter with $14.8 million in cash. Full year cash from operations was $62.9 million. If you normalize the year-over-year comparisons for the one-time tax payment associated with the Target acquisition and the fact that we were a tax payer in 2007, but received a refund in 2006, our full year 2007 cash from operations would have increased approximately 15% on a year-over-year basis. This is slightly more than our year-over-year growth in non-GAAP income from operations. At the end of the quarter, the company’s deferred tax asset that I just alluded to had a balance of $54 million. As a reminder, this asset adds roughly $8 million to our cash flow on an annual basis and it will continue to do so through 2014. Also in 2008, a similar tax benefit generated from the Target acquisition will benefit annual cash flow in the amount of approximately $1.5 million and this will continue until 2023. In terms of the uses of cash, we used approximately $11.5 million of our cash in the quarter to reduce debt that arose in connection with our 2007 M&A activity, and for all of 2007, we paid down a total of $50 million in debt used in connection with these acquisitions with our strong cash flow and as Marc noted earlier, we ended the year with no debt outstanding. Accounts receivable at the end of the quarter were $44.7 million, an increase from $41.6 million at the end of the prior quarter and our overall DSO remained in the mid 40s. Total deferred revenue came in at $96.1 million down approximately $600,000 sequentially, and up approximately 25% compared with the end of Q4 last year. Let me now turn to our guidance beginning with the full year 2008. Today, we are reiterating our full year revenue guidance of $295 to $305 million that we provided at our Analyst Day a couple of months ago. These numbers represent growth of 15% to 19% on a year-over-year basis. To provide you with some direction on the mix of our revenue, from a high level perspective, we expect license revenue to represent something in the low teens as a percent of our total revenue and we currently expect subscription revenue to come in at approximately 90% to 95% of our license revenue for the year. We expect non-GAAP operating income of $73 to $76 million or growth rate of approximately 16% to 20%, and year-over-year margin improvement of around 50 basis points, and non-GAAP diluted earnings per share of $0.98 to $1.02. It is worth reiterating from our last call and from Mark’s color commentary earlier that our Enterprise CRM deals tend to be much larger than Blackbaud’s historical deals. And it is our goal to structure these in ways that allow ratable revenue recognition wherever appropriate. As such, these deals will have less of an upfront impact compared to the majority of our license transactions. You will also note that moving forward, we are only going to be providing specific guidance on total revenue. The reason for this is that our business has evolved dramatically over the last couple of years and as we enter 2008, it is appropriate that our guidance matches this. For example, in the two most recent quarters, our subscription revenue was approximately 80% of our license revenue. And our current expectation is that at some point in the second half of this year, subscription revenue will actually surpass license revenue, other things being equal. As such, we have provided some general parameters for license and subscription mix. But an over focus on license revenue given our current business mix is not appropriate in our view and it actually ignores the highest growth component of our business. That said let’s now look at the first quarter in our guidance for the quarter. We currently expect to generate total revenue in the range of $68 to $70 million, which would represent a growth rate of 23% to 27% or 25% at the midpoint of the range. We also expect non-GAAP operating income of $14.2 to $14.8 million, growth of 22% to 28% or a midpoint of approximately 25%, and non-GAAP diluted EPS of $0.19 to $0.20. Let me now finish with a very quick update on our capital management program. The first component of that program is our dividend and today, we announced that our Board of Directors has authorized an increase in the annual dividend of $0.40 per share, an increase of just under 18% from the $0.34 per share paid in 2007. Also today, we declared our first quarter dividend of $0.10 per share payable on March 14 to stockholders of record on February 28. The second element of our capital management program is our share repurchase program. During the quarter, we did not repurchase any shares. As you might have surmised from my comments previously, we used our available cash this quarter for debt reduction. However, we remain fully committed to using our cash for share buybacks, to enhance stockholder value if and as we deem appropriate. In summary, the fourth quarter was very strong. We are encouraged by the high level of performance that our organization achieved. Market demand remains good. We have significantly expanded our market opportunity, and we continue to make progress against our key growth initiatives. With that, let me turn it over to the operator to begin the Q&A session.

Our first question will come from Phil Rueppel - Wachovia Securities.

It sounds like you are making progress on the eCRM front. Could you outline what the milestones or some of the initiatives that you need to do to scale that business in terms of building out the support infrastructure? How you are going to organize sales? And what kind of sales training needs to happen to really start to ramp that business? And along those lines, as you enter ’08, have you made any major restructuring in the sales organization in terms of territories, quotas, product specialization, et cetera? Thanks.

We have not changed the sales structure at all. The majority of the training for the Enterprise part of sales force, which I will remind you is less than 25% of the sales reps, was already done last year. So, essentially any rep who would be selling the eCRM product set of the Direct Marketing product set knows the product and knows how to qualify. We are not expecting to expand the sales organization significantly in terms of head count next year. It will be more growth through productivity. And the key change really that you need in order to continue to grow and scale the business is to increase the size and throughput of the professional services organization, and their ability to continue to implement. So, we have a plan for continuing to shift resources and grow resources in the professional services space to cover that.

And our next question will come from John Neff - William Blair.

Congratulations on a great year. I was wondering, if you could give us a little color on the economic sensitivity of your end market, just some things I’ve been reading lately, talking about some of the number of non-profit organizations and particularly in certain sectors, talking about more difficulty fund raising, particularly small ticket fund raising. I was wondering if that has an impact on Target and your Direct Marketing efforts. Also even on the large gift side, reports about delayed gifts, spread out gifts, things of that nature. And I was just wondering if you could give us a sense of anticipated sensitivity to these kinds of things as we move forward into 2008.

Our customer base tends to have fiscal years that end in June and December. About half of them are December. We had a very strong December quarter, and people have been talking about the economic factors and social factors at a macroeconomic level in the press, but we don’t hear it from our customer base at this point. What typically has happened over the past 40-plus years is that the amount of donations that happen rise every year, personal donations, and that’s relatively insulated from both economic upturn and downturn. Times are tough. The need is higher. People do put more effort into fund raising when times are tough, because both the need is higher, and people may have a little less in their pocketbooks. But it turns out that most people don’t actually like to give less in a year than they gave the year before. And so, there have been 40-plus years of monotonic increases in personal donations. We have seen essentially no impact in terms of people making their decisions in the very largest accounts, because typically they are very predicated on the cycle and their capital fund raising cycles. So, if they are between capital campaigns and they are planning on putting a new system in, they seem to be still quite intent on doing it at the schedule that they have chosen, because they have to start their next capital campaign. And the smaller organizations are continuing to see a sustained effort. So, our guidance takes into consideration the factors that are available to us, and of course, I suppose if things really went bad, things might look different at some point in time but to me, today, we don’t see any impact of the macroeconomic factors on the sector we serve.

Okay. Thank you. The dedicated Internet business unit, I was wondering if you could discuss some of the initiatives you are thinking about there. Also is there any interest in Blackbaud creating some sort of a branded giving portal, à la Network for Good or JustGive, GuideStar or Google?

You never say never in this business. But our first business is to serve customers who are raising funds through portals like that, as well as directly to their direct marketed, Internet marketed and cultivated fund raising sources. So, we would typically think about that starting to how do we help other organizations use tools like JustGive or Facebook or MySpace or others. So, from that perspective, that’s the answer to that half of the question. In terms of what the Internet business unit will be doing differently, the first thing is they are going to have the team that focuses on selling the Net Community offerings to the non-Raiser’s Edge installed base. The second thing they will be doing is putting together a higher level service bureau offering that will provide people who use the Internet as a primary channel or as a significant channel for fund raising to be able to outsource some of that to us, and not fund raising per se, but the management of the infrastructure, very similar to what the DMS part of Target does when they do service bureau support for segmentation and fund raising activities in the large direct marketing organizations. So, those are the two primary differences.

Our next question is from Trey Coupan - Banc of America Securities.

Back to the eCRM business, I was wondering if you could give us your thoughts on what do you expect the deal volume to be heading into ‘08. Are you expecting to see three or four customers a quarter? It just seems like it might be difficult to gauge timing? I just wanted to hear your thoughts on that.

The number of eCRM deals we could have in a quarter can vary from one to three or four as you’ve surmised. It is quite a variable decision process because typically the sales cycle can be literally up to a year and the budgeting parameters are all often also associated with customers’ buying cycle. Every one of these customers has professional IT organization or professional purchasing organization, and the pressure of trying to sell versus the pressure of what the buying cycle looks like, is what really mandates that. You are not going to see double-digits in a quarter and it’s really a handful is what we are targeting and if we come out of the year having done two to three per quarter on average, I’ll be feeling like we’ve had the year of 2008 that I’m looking for.

Okay, great. Thank you. Finally just in terms of your acquisition strategy; ‘07 has been a busy year. What should we expect for ‘08? Are you still looking to be acquisitive? Or are you going to take some time before you start going out and looking again?

We’ve acquired companies for three reasons in the past. One was smaller organizations that we are moving out of the business and wanted their customers moved over to a sustainable platform. And if one of those comes up, that’s the kind of thing we know how to do pretty well and we’d do it. There are not a lot of them out there. We have occasionally bought pieces of technology and if that is required, we’ll do it. In terms of major acquisitions like in the past year, we have made I think pretty much our make versus buy decisions. Never say never, but we pretty much made our make versus buy decisions for the sectors we will serve for the next couple of years. The one area where I don’t really know the answer to your question, yet, sitting here is what the International Business Development VP will come back with as he continues to look at some of the other countries around the world. I do think at some point in time, there is a reasonable chance that we do some M&A activity to increase our international footprint.

Our next question will come from Adam Holt - JP Morgan. Nitin Doke – JP Morgan: This is Nitin Doke for Adam. Congratulations on the quarter. O:

I think that probably I should start by saying as it has been the case in the past, we don’t comment on or try to give guidance on specific margin levels by line items, Nitin, as you know. So, I’m not going to get very specific here. What I would say is that, all that said, is that what we would expect some improvement in our services margin this year relative to last. We talked a good bit over the last year about the significant amount of hiring that we did; the improvement in our retention rates and the need to ramp those resources up as we move through the year. And I think that we feel very good about where we are with our staff levels right now. We feel like we are virtually at a fully staffed level as we moved into the new year, and we would expect to see some improvement in those services margins but I would not suggest to you that we would get back to the pre-2007 levels. That said, again, as I have already indicated, we would expect to see some improvement. Nitin Doke – JP Morgan: Great. And one quick follow up. You talked about the Enterprise CRM deals being spread over multiple quarters. You talked about one deal having a 12 quarter term. I was wondering if that is typical and if any license revenue shows up in the deferred revenue line.

What I would say to you is that to-date in eCRM, we have done five deals. Three of which have revenue spread out over beyond an upfront license. It’s difficult to say what’s typical yet. Our goal is for the larger transactions to try to spread out that license revenue as appropriate when we can, but it’s difficult to say what’s typical at this point. With respect to this fourth quarter, we had one deal, which involved multi-period payment terms. In another deal, we actually are being required as part of the terms of the agreement to deliver a future version of the eCRM product. So, not only is the license revenue there deferred, the services revenue will be as well. We wouldn’t expect that to be typical of what we see in the future. Although, we could have another one of those that could pop-up before we finish the first half of 2008. That’s about all I can tell you at this stage.

Our next question is from Tom Roderick - Thomas Weisel Partners.

Tim, I was hoping you could just walk us through the margin impact of the eCRM deals. You are doing more now than you had anticipated you might do at this point in the game. And so, you have got some pretty big sales efforts driving through some bigger deals. Did these deals put a little pressure on the margins in the near term, and then at what point longer term did they come back to the corporate average or even become accretive to the margin structure?

Tom, I would say that since these are early adopters, as you would expect, there is some margin impact, but I wouldn’t take that too far. I think the bigger impact for us as an organization is not isolated to eCRM deals versus some other particular offering we’ve had. Across the board, last year, we made a significant effort to hire additional resources. That had an impact on our services business. We have discussed that. I think in response to an earlier question, I indicated we are going to be looking for modest improvement as we move through this year. And the eCRM deals are baked into our thinking around that. So, I don’t really think about eCRM in that context, absent to the extent to which some of these might be recognized over several quarters.

Remember that the eCRM deals are going to have a very high service content and whether it is a Raiser’s Edge deal or eCRM deal, the service profile on how that service content is delivered and built for will over time look quite similar. So, you are really talking about the deferral of somewhere between a couple of $100,000 and maybe $0.5 million of software per deal, not the deferral of full contract value. So, most of the contract value happens in a similar way, once we get into an operating rhythm here.

Good point. One brief follow up from me here, just want to touch on Scorpio. I guess it will be out soon. You have already signed your first customer. Can you just give a little flavor for what the pent-up demand is out there for a Net Community platform that is not tied to the Raiser’s Edge? How big is that market opportunity for you?

It is at least as large as our current market opportunity for Net Community; there are many more non-profits that do not have the Raiser’s Edge than do. And so, you take a look at that market and it is literally in the tens of thousands of customers. And as we consider taking that same platform and taking it down market there are hundreds of thousands of small customers who want and desire web presence, too. It’s a similar profile to the overall universe of customers that we serve. Some of them have been served by some existing Internet providers today, and many of them are not really thinking of them yet as fundraising but really have calling card web presences or informational web presences but not building community with that.

Our next question is from Ross Macmillan - Jefferies.

Thanks and congrats on the quarter from me as well. I just wanted to be clear on these eCRM deals as you do them, it sounds like that the contract structures are kind of flexible. But from the standpoint you can talk to it, are you actually billing for software that’s going to get delivered in future quarters? Are we seeing that hit the balance sheet on the deferred line yet, or is the billing coming depending on when the customer wants to actually deploy, so some of that is actually not even on the balance sheet yet? Thanks.

Ross, the only deal in which we’ve actually promised a delivery a future version was the one contract I mentioned that has a specific requirement under the terms that we deliver a future version. In that particular case, obviously no revenues have been recognized. We will be billing that customer for services as they are performed, and we actually will be billing for the software. And that will show-up in deferred revenue, but I don’t think there is a sizable impact, at the end of the year in deferred revenue, but it will show up as we move through 2008. In the case of the other deal that’s going to be recognized over 12 quarters, that is going to show up in deferred revenue as those payments actually get billed. But my sense is, it’s not going to sit in deferred revenue for very long because we will be billing it on a quarterly basis, so, virtually moving into revenue at that time.

So, it’s fair to say that these are still somewhat flexible; there is no hard and fast rule as to how these deals are getting structured?

I think that the very first ones were a little bit like that. But the terms for what we are calling the smart license, which is that 12 quarter deferred or ratable payment set of terms, that is a license that we have defined, other companies in the industry use a very similar license. I would see us doing really three things in general, once we get a little bit further into this, and by little bit, I don’t mean very far; either a 12 quarter deferred ratable license model like that or an upfront fully paid-up license or a subscription. I expect to sell our first subscription eCRM deal some time in the year where subscription means they don’t actually own the license. And so, those are the three things I expect to see, and I don’t think that we need to have a lot of flexibility around that over time. The one case that is out of that, is that there is a specific need for some functionality to be in a future version before the customer believes that they have fully accepted what we sold them, and that’s the reason for revenue recognition, why that one turned out that way, that’s the exception not the rule, by far the exception.

Makes sense. And then, just on the license as a percentage of the ‘08 guidance, it looks like if I took either 13 or 14% of total revenues, the growth rate would be a little bit lower than what we saw in ‘07. Is that just reflective of this change in terms of the expectation eCRM will become a bigger part of the mix and therefore more of the deferral of the license, is that fair?

There is a small amount of deferral in license because of the ratable license, when you shift from paid up to ratable payments. But there is also remember that subscription revenue is growing and so we are delivering more software added value through subscription and you really should be looking at the total of the sales of the two of them together to think about the value of the software intellectual property that we deliver.

Makes sense. And then very last one, just on services. You obviously hired aggressively last year ahead of the start of the eCRM rollout. You also said, I think, you got one customer live. I presume that just now is going to be growing at a more steady state as you basically bring on new implementation staff to build the new deals and new implementations is that fair?

We actually are pretty much in a good situation right now to mostly run the deals that we have in hand, with the team that we have starting at the beginning of the year. Actually the hiring went the way we thought, the problem really was that − it was a good problem to have − attrition went way down in the professional services organization last year. So, we started this year, however, with about the right team of people, plus or minus a handful of specialized people to do the business that we’ve lined up and sold at this point. And here is where you will some growth during the year but you won’t see very much; they will be shifting their resources, and these are long-term projects; they are very, very predictable in terms of when the work gets done.

We will next go to Bob Stimson - WR Hambrecht.

Going back to 2002 forward, you have been putting up some pretty good growth numbers, and I am just curious, what is the overall growth rate of the industry in your mind? Or do you believe, maybe you are gaining share vis-à-vis BSR or maybe you could talk about some of the wins and where the new Greenfield opportunities are, or were they displacements?

As you know there is no separate consulting industry body or whatever that tells us about the industry growth are. Our best estimate is that the growth is mid- or upper single digits in terms of how fast the IT solutions portion of this business is growing. So, yes, we do believe we are taking share. We clearly have been successful against BSR in the higher education space. We clearly continue to get new customers in the mid and low market from people who use Excel or Access databases, as well as some generic products or nothing, and customers who have been using some other competitors’ product in the fund raising space and Student Information Systems. So, there is a fair amount for us Greenfield, because we are offering things that we didn’t offer before, Student Information System, the higher end, the eCRM is a very high end. Some of the customers of Target and eCRM together can allow us to cover. So, those are Greenfield for us, but they are typically people who were doing something in the past.

Thanks Mark. Tim, real quick, I am just trying to reconcile a little bit on your Q1 guidance, $68 to $70 million maybe my numbers are wrong, but what’s your operating margin assumption on the $68 to $70 million. And then, when you are making that “lower assumption” is the bulk of it just sales and marketing?

I think what we said, which would be factored into our guidance...

You can just give me how you feel right now.

When we were talking about the quarter, what we said was that we expected non-GAAP operating income of $14.2 to $14.8. And so, that’s 22% to 28%. I think it’s a margin roughly comparable with what you saw in the first quarter, last year. And that is our margin assumption. That said, as you also heard me say, we are anticipating margin improvement throughout the year and our guidance for the full year anticipates somewhere in the range of around 50 basis points of margin improvement, year-over-year. That’s in line with what we talked about last year, when we talked to you about the third quarter results. We told you we are expecting to see some margin improvement in that range. And so, all I can tell you is that we are looking for more of that in the second half of the year and maybe even some in the second quarter, but it won’t be in first quarter.

Okay. And this is just a weird question but do you believe that the accounting model shifting to more of a deferred revenue, if you were comparing apples-to-apples, would your margins be closer to historical levels or is it still just the function of the acquisitions flowing through and building up your product ramp? Or is accounting really underestimating your operating margin potential?

First of all, I would say that with respect to the accounting model, I don’t think the accounting model has a huge impact in what’s happening to our margin. I think that what’s happening to our margin is more a function of the mix of our revenue; more revenue is coming from our services. We are going to improve our service margin, but it’s still a heavier mix. I think what you are seeing in maintenance, you are seeing a modest decline in our maintenance margin, this is driven by the fact that more of our maintenance, more of our support activities are being driven by our newer solutions which are more complex, require more people to support them. And so, that’s offset by other factors where we think we can get some efficiency. And we have talked about the need to spend more from an R&D perspective, that’s baked into our thinking here too. So, it’s a variety of factors, the point is as we move through the year, we think we can enhance and improve our margins modestly. As I said around 50 basis points, and I would add, finally as I’ve said before, where our margins are today, they are still world-class margins for what it is we do. And so, we are not apologizing for that in any way.

Thanks, a lot. And that was very helpful.

And we have time for one final question. That is from Alan Cooke - Merrill Lynch.

You said long-term you expect to get to 27% to 28%. How do you define long-term, is that a couple of years, three years, five years; what are your expectations there?

It’s certainly not 2008, as we’ve already said. It’s probably beyond 2009 too, Alan. But I am just not going to put a specific time table on it. Our goal consistently has been, we are going to make incremental modest improvement as we see fit, while we continue to invest in our business.

And with that, I will turn the call to Tim Williams for closing comments.

All I can say is thank you for your continued support and interest in the company. And we look forward to talking with you in the weeks ahead. Thank you very much.