Blackbaud, Inc. (BLKB) Q2 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Blackbaud Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tony Boor, Chief Financial Officer. Thank you. Mr. Boor, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us today to review our second quarter 2012 results. With me on the call is Marc Chardon, our President and Chief Executive Officer. We both have prepared remarks, and then we'll open up the call for your 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 could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent quarterly report on Form 10-Q, our most recent annual report on Form 10-K and the risk factors contained therein, as well as our periodic reports filed under the Securities Act of 1934 for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements. Also please note that a webcast of today's call will be available on the Investor Relations section of our website. During this call, we will be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business. A reconciliation of GAAP and non-GAAP results is available in the press release we issued today, which is available on our website at blackbaud.com. With that, let me turn it over to Marc to review our high-level financial performance and business highlights. Then I'll come back at the end to provide greater details of the second quarter results, as well as guidance for the third quarter and full year 2012. Marc?

Thank you, Tony, and thanks to all of you today for joining us on the call this afternoon to review our second quarter results. On a standalone basis, Blackbaud delivered revenue and profitability that were consistent with our guidance, which was solid performance in view of the more challenging macroeconomic environment. During the second quarter, we also made significant progress integrating Convio. As we look ahead, there are certainly challenges that we must face, but we remain very excited about our combined company's position in the market, the positive impact that Convio will have on our financial model. We have significantly increased the size of our business, targeting the fastest-growing segment of the nonprofit market -- online fundraising. And we've done so with what is clearly the industry's best-in-class solution. Blackbaud is now well positioned to deliver a best-of-both-worlds-offering to nonprofit organizations, the most comprehensive CRM and online fundraising solutions. In addition, Blackbaud has been evolving to a subscription-based model over the recent years, and the addition of Convio has dramatically accelerated this process. Let me provide a summary-level review of our second quarter results. We generated consolidated non-GAAP revenue of $113.7 million and non-GAAP operating income of $19.3 million. On an apples-to-apples basis, relative to our guidance, we reported standalone Blackbaud revenue of $99.6 million, which was consistent with our guidance range of $99 million to $102 million. For the first time in our history, subscription revenue was the largest component of our overall revenue. Clearly Convio's revenue made a meaningful contribution. And complementing that, standalone Blackbaud subscription revenue remained the fastest-growing area of our business, with 15% year-over-year growth. Similar to last quarter, our subscription base units outnumbered perpetual license units by a ratio of over 5:1 as we saw strong demand for our subscription-based offerings, including hosted versions of our classic products, the Raiser's Edge and the Financial Edge. From a profitability perspective, we generated standalone non-GAAP operating income of $17.1 million for the second quarter, which was generally consistent with our guidance range of $15.5 million to $17 million. From a macro perspective, we've shared a view in recent quarters that while the market environment was not robust, it was stable to slightly improving. This was due in large part to the rebound in charitable contributions, which provided more comfort for nonprofit organizations to move forward with technology investments. The stable to improving trend in giving did not continue in the second quarter, however. Our Blackbaud Charitable Giving Index increased by only 1.6% year-over-year for the first 3 months ended June 2012, and our upwardly revised forecast for the month of May was an increase of only 0.7% year-over-year. This is down from peak growth rates in the low to mid-teens range in the fall of 2011, and many sectors such as Cause and Cure, Human Services, Arts and Cultural and International have actually seen giving decline on a year-over-year basis in recent months. We do not view the current market environment as comparable to what we saw in 2008 and 2009, but the slowdown in charitable giving, combined with greater economic uncertainty on a global basis, did create a more challenging market environment on the margin during the second quarter. At the same time, it's important to note that our pipeline of opportunities remains quite solid across each of our business units: Enterprise, General Markets and International. We're very focused on doing everything we can to position Blackbaud to gain share in what we see as a $16.5 billion global market opportunity for delivering technology solutions to the nonprofit industry. We believe that roughly half of this market opportunity is in what we characterize as the Enterprise segment of the market. A majority of the largest and most sophisticated nonprofit organizations in the world are still running their core operations on legacy systems that are decades old and need replacing. We closed 2 CRM deals during the second quarter: Dignity Health and a large disease-focused organization. And we had large CRM deal that closed very early in the third quarter. The number of new CRM wins was lighter than in recent quarters, though we've always said that this figure could be lumpy given that we're dealing with a limited number of sizable transactions. We achieved several major CRM implementation milestones during the second quarter and another early in Q3. The University of Michigan, which is a marquee account and the largest implementation in our history, went into production during Q2. We had one of our early adopter customers for CRM go live and stopped running their legacy system in June. We had another early adopter CRM customer complete the final phase of their implementation in the June quarter, including the conversion of 10 separate source systems into an already live instance of Blackbaud CRM. The completion of this data conversion is the first step required to roll out CRM to over 400 users across their territories. I'm pleased to share that we're now in production with each of the handful of early adopter CRM customers that received concessions in Q4 2011, those that had particularly challenging implementations with new or unique functional requirements. This represents an important achievement, though there's still some work ahead of us in this area. We are providing a heightened level of post deployment support given the scope of these launches, and in one situation, the customers are spreading their go-live events for several different chapters over the course of several quarters. The last go-live that I've wanted to highlight is the American Bible Society, who went into production on Blackbaud CRM last week. This is particularly meaningful because it represents our first conversion from PIDI to Blackbaud CRM. As we look ahead, we have a strong pipeline of CRM opportunities, and we believe we're well positioned to continue gaining market share in this large market opportunity. Our General Markets Business Unit delivered a solid performance for the quarter. The GMBU has been the largest driver of Blackbaud standalone subscription business on a historical basis, and that continued during the second quarter. We continued to see a growing portion of GMBU sales migrate to subscription-base offerings, which is a positive for our business, though it does stretch out the timing for recognizing services revenue. We're pleased that our International business generated positive growth in sales for both the second quarter and the first half of the year. We continue to see our leadership changes and an increased focus as having a positive impact on our execution. At the same time, from a short-term perspective, we're facing the same European economic headwinds as other companies. Longer-term, there's no change in our view that the International market should grow meaningfully as a percentage of Blackbaud's business, and we'll continue to invest in that region. Let me turn to our progress on the Convio acquisition. From a high-level point of view, we are on track implementing our integration plan. This has been a significant undertaking as we are not running Convio as a separate division. The Convio team has been truly integrated into Blackbaud from day one, and the level of detail and work put in to make it successful has been extraordinary. We set for ourselves 30, 60 and 90-day integration plans following the close of our acquisition, and we've successfully met each of our primary objectives. One of our initial priorities was the organizational design for our combined operations. After less than 2 months of work, as planned, we started off the second half of the year with the integration and realignment of our combined sales and professional service organizations complete. During the second quarter, we also brought together our product and technology teams, and they have been hard at work analyzing our product portfolio, speaking with customers of Blackbaud and Convio, and putting together our future product roadmap designed to serve not only current customers but the larger market. The first phases of the roadmap will be rolled out to customers in the market in the third quarter. We're confident that we have the best of both worlds -- world-class capabilities in both CRM and online fundraising -- and we feel very good about the quality of our work, the rigor of our analysis and the direction we plan on taking. It will take time to both communicate and execute on our integrated product strategy, but we are confident that it would be well received by the market based on the positive feedback we have been receiving thus far from customers and prospects. There are a number of factors that we've taken into consideration as we integrate the operations of Blackbaud and Convio and create a set of consolidated operating and financial plans. Let me walk through some of the key details and assumptions behind our plans. First, for the full year 2012, we expect the traditional Blackbaud subscription, maintenance and license revenue to be generally consistent with how we were looking at our business at the time of our last earnings call. However, we expect our services revenue to be well below where we've previously expected. This is due in part to the recognition of services revenue being stretched out, either over larger and longer implementations or due to being bundled with subscriptions and recognized ratably. Second, Convio's near-term contribution to Blackbaud's financial performance will be lower than their standalone trajectory would have otherwise suggested due to the fact that the elongated rate regulatory approval process impacted their sale cycles as customers waited to see if Convio would or would not be acquired and what their product roadmap would be. Third, we plan to maintain investments in our growth initiatives. We just brought on board the largest acquisition in the history of the company, and we have an opportunity to bring together our solutions and deliver a unique and powerful value proposition that we believe will help us to gain significant share in a $16.5 billion global market. As such, it's important that we invest to take advantage of this opportunity. At the same time, we're focused on leveraging our combined scale and realizing operating synergies as quickly as possible. To that end, while we will only realize a portion of the benefit in 2012, we have taken actions that we expect will yield $9 million to $10 million in annualized cost savings by the end of 2012. Tony will provide further details on our guidance in a moment, but from a summary perspective, we're targeting consolidated non-GAAP revenue in the range of $460 million to $465 million for the full year 2012, along with non-GAAP operating income in the range of $72 million to $75 million or a 16% non-GAAP operating margin. From a long-term perspective, we've never felt better about our value proposition, breadth of functionality and competitive differentiation. We remain very confident in our ability to meet our long-term objective of consistent low to mid-teens revenue growth. In addition, we believe we can drive the company to a 20% combined company non-GAAP operating margin by as early as next year, with the potential for further margin expansion over time. We believe that with our acquisition of Convio, we have the opportunity to grow our company, generate more significant profitability and cash flow and move to a revenue model that is increasingly based on recurring revenue. With that, let me turn it over to Tony to review our financial details and results and guidance in more detail. Tony?

Thanks, Marc. Let me now review our consolidated second quarter results, including the stub period contribution of just under 2 months from Convio. On a go-forward basis, we will be reporting revenue purely on a consolidated basis. However, I will provide a summary view on the performance of standalone Blackbaud for the second quarter in order to provide comparability to our previously issued guidance. Total combined company non-GAAP revenue for the second quarter was $113.7 million, an increase of 21% on a year-over-year basis. Standalone Blackbaud total revenue for the quarter was $99.6 million, which was consistent with our guidance of $99 million to $102 million, and represented 6% year-over-year growth. Subscription revenue was $40.8 million, a 58% increase from the second quarter of 2011. The addition of Convio helped drive subscription revenue to more than 35% of our second quarter total revenue, representing the single largest contributor to our overall revenue for the quarter and highlighting the dramatic evolution of our business model over the last several years. On a standalone basis, Blackbaud subscription revenue was $29.7 million, representing a solid year-over-year increase of 15%. Maintenance revenue of $33.9 million for the second quarter was up 4% on a year-over-year basis. When combined with our subscription revenue, our total non-GAAP recurring revenue was $74.7 million for the second quarter or an annualized run rate of approximately $300 million and nearly 2/3 of our total revenue. License revenue in the second quarter was $4.5 million, down 11% year-over-year. The combination of license revenue being at a small absolute level and the relatively large deal sizes and long sale cycles can add volatility to our license revenue line and lead to variability in quarterly comparisons. For example, the largest CRM deal we were targeting for the quarter closed shortly after the end of the second quarter. Our reported license revenue for the second quarter would have actually been up on a year-over-year basis at a close during 2Q. Professional services revenue was $32.4 million, a 14% increase year-over-year with a significant majority of a year-over-year growth due to the addition of Convio in the quarter. On a standalone basis, services revenue grew 4% on a year-over-year basis and 23% sequentially. We're making good progress on finalizing the work relative to a handful of early adopter CRM implementations that we discussed a few quarters ago. This should benefit our services revenue and margin performance in the second half of the year. However, as Marc noted, our services business is facing other headwinds that we believe will hold back services revenue growth in the second half of the year. As I turn to our second quarter profitability, please note that the revenue percentages and margins cited will be based on our consolidated non-GAAP revenue and our non-GAAP expenses. On that basis, non-GAAP gross margin was 60% compared to 61% in the second quarter of 2011. We expect some improvement in our gross margin in the second half of 2012 due in part to continued progress on early adopter CRM deployments that I just mentioned. Consolidated non-GAAP operating income was $19.3 million, which represents a non-GAAP operating margin of 17%. On a standalone basis, Blackbaud's non-GAAP operating income was $17.1 million, which is generally consistent with our guidance of $15.5 million to $17 million. Our consolidated non-GAAP diluted earnings per share were $0.24 for the quarter. As a reminder, our standalone Blackbaud non-GAAP EPS guidance was $0.21 to $0.23. Turning to the balance sheet and cash flow. We ended the second quarter with $21.2 million in cash and equivalents, a decrease from $46 million at the end of last quarter due to using a portion of our cash balance as part of the overall consideration for the Convio acquisition. Our balance sheet also reflects the $216 million we drew down from our credit facility to pay for the acquisition of Convio. I'd like to finish by providing greater detail on our updated full year 2012 financial outlook. Our previous guidance was for the full year 2012 revenue of $410 million to $420 million. Our updated non-GAAP revenue guidance is $460 million to $465 million after adding back the deferred revenue write-down of Convio that we estimate at approximately $6 million. Our consolidated non-GAAP revenue guidance takes several factors into consideration. Moving forward, it will be difficult to break out performance for standalone Blackbaud versus Convio because we have already integrated our sales organizations and go-to-market approach. We've integrated our product teams and are working on a combined company product roadmap. That said, in rough terms, we now expect core Blackbaud revenue to be several million below the low-end of what we were initially targeting for 2012. Specifically, our services revenue expectation is now approximately $10 million to $13 million less than our prior guidance assumed. At the Enterprise level, average deal size has grown significantly during the first half 2012, and total services engagements have also been larger than in the past. However, the revenue is being recognized over a longer period of time due to the length of time associated with these larger deployments. At the General Markets level, our mix of business continues to shift towards subscription offerings. And as a result, we have more services revenue that is being deferred and recognized ratably over the life of the contract. Lastly, we believe there is an element of overall macro environment having an impact, which Marc described earlier. Another consideration is that we estimate Convio's 2012 stub period revenue contribution at approximately $5 million to $7 million lower than their standalone trajectory may have otherwise suggested at the time we announced the transaction. The delayed regulatory approval process impacted Convio's ability to grow their monthly recurring revenue run rate prior to joining Blackbaud and also delayed the rollout of our integrated product strategy. We will shortly be rolling out this strategy, which is a necessary step to improving sales productivity related to several of our combined company solutions. Finally, while the macro environment entering Q3 is more uncertain than recent quarters, we do continue to have a strong sales pipeline across each of our business units: Enterprise, General Markets and International. We do not plan on providing revenue mix guidance moving forward, but given this is the first time we are bringing together Blackbaud and Convio, we'll provide an extra level of disclosure on a one-time basis. For the full year 2012, we expect our total non-GAAP revenue mix to approximate the following: subscription revenue at approximately 35%, maintenance and services revenue both at approximately 29%, license revenue at 5%, and other revenue at 2%. From a profitability perspective, we initially provided guidance for standalone Blackbaud to generate non-GAAP operating income of between $82 million and $84 million or a 20% non-GAAP operating margin along with non-GAAP EPS of $1.12 to $1.15. We are now forecasting non-GAAP operating income of $72 million to $75 million, which will equate to a combined company non-GAAP operating margin of approximately 16% and non-GAAP EPS of $0.90 to $0.94. There are several factors taken into consideration within the profitability expectations. First, the reduction in our services revenue expectations for 2012 has a meaningful impact on bottom line profitability and does the lower -- as does the lower initial revenue contribution from Convio. Second, as it relates to expenses, we do plan to maintain investments in our business, as Marc noted earlier. At the same time, we're highly focused on realizing synergies from our combined company. We expect to exit 2012 with an annualized cost reduction of $9 million to $10 million, though only $4 million will be achieved during 2012 as a result of when the acquisition closed and the time it takes for actions to translate into results. And we fully expect to realize greater benefits as we focus on additional synergies made possible by our increased scale. However, such benefits are not expected to be realized until the 2013 timeframe. Finally, below the operating line, we expect to have interest expense of approximately $5.5 million for the year, including $4 million in the second half of 2012 related to the debt incurred to finance the Convio acquisition. As it relates to the third quarter, this will be the first full quarter of reporting results on a consolidated basis. We currently expect non-GAAP revenue in the range of $125 million to $128 million, non-GAAP operating income of $18 million to $20 million, interest expense of approximately $2 million and non-GAAP EPS of $0.22 to $0.24. We are not providing guidance beyond 2012 at this time, but there are a few items that are worth mentioning at this point. We continue to believe that we can accelerate revenue growth to the low to mid-teens range on a sustained basis longer term. This a level that we have achieved prior to the economic slowdown, and we have increased the size of our business targeted at the fastest-growing segment of the market with the acquisition of Convio. From a profitability perspective, we believe that we have an opportunity to return to 20% non-GAAP operating margins during 2013 as we realize the benefits from integrating our operations during 2012. Just based on realizing a full year of the $9 million to $10 million in cost savings would get our non-GAAP operating margin into the 18% plus range to start off next year. And as I mentioned, we believe there are meaningful additional opportunities to realize synergies. In addition, there's no change to our view that we have room to scale margins beyond 20% over time. To summarize, the second half of 2012 will be a transition period as we set the stage for realizing greater synergies in our business in 2013 and beyond from both a revenue and cost perspective. We believe our efforts this year will enable Blackbaud to move to quickly improve to a combined company non-GAAP operating margin of 20%. We also believe our investments in the business will further strengthen our market leadership position and ability to gain share in a $16.5 billion market opportunity. We feel very strong about all the reasons we move forward with the acquisition of Convio and believe successful execution of our plans will put us in a position to create significant shareholder value. With that, were happy to take your questions.

[Operator Instructions] Our first question comes from the line of Tom Roderick with Stifel, Nicolaus.

So I gather it's a little bit early to talk in a detailed fashion about the product roadmap, but I know you're going to get to your customers on that here in the end of next month or 2. But at a high-level, I'm curious if you can help us think about the overlaps, particularly in the online segment of the market between the BBNC product and Sphere and now with Convio. As you march towards the rapidly growing online market, how would you encourage us to think about what product wins out over time, what architecture wins out over time and what period we should think about that happening in?

Well, it's a bit early to go into the details, specifically. Obviously, at the high-end of the market, we have acquired a very important offering in the Luminate online offering. And so you would expect to see the Luminate Online offering be a leading offering in the Enterprise space, that's the easiest and most obvious. There are very important features in BB CRM, for the Blackbaud CRM product, that includes an online functionality. And that functionality includes events as well. So you'll have, for some period of time, 2 sets of offerings because there are 2 different sets of needs and there are 2 different sets of customer types. What you'll see when we bring the information out to the market is that some of the features that are required by customers on one of the other side will get moved from one platform to another. And over time, you'll see -- eventually see migration. That will not be a short-term sort of process, Tom. And in the mid-market, we all just have to wait, I'm afraid, to see what comes out of it because there are quite a few different kinds of online properties there and there's also some online features and functionality that are just about to come to market that will help us talk through the migration plan. So it's really pretty much second half of this quarter when we'll be talking about it with customers. And you can expect us to give you full details in the next call or when we visit with you after the announcements have been made public.

Okay. And Tony, looking at the numbers and some of the revenue push outs for this year, so let me hit kind of 2 of the items just briefly. So on the services side, $10 million to $13 million less this year, but that seems to be more timing than the actual total aggregate number. Can you just walk us through a little bit more detail as to what sort of impacts that timing? Do you need more implementation heads? How you do sort of shorten that cycle? And does that -- does the bulk of that revenue effectively just flow into 2013 now in the services side?

Yes, Tom. So 2 large impacts, one being on the CRM side of the business, and we've seen a different mix this year than what we had originally planned. So we're seeing fewer but larger CRM deals, and those typically, as we've seen, have a longer implementation time period. And so I don't think we have a head issue. We have ample professional service heads in the organization. But we have fewer larger deals, and they've got a larger implementation timeline. So those revenues obviously are going to get pushed as those timeless gets pushed out. Then on the mid-market side of the business, that's more so things get recognized ratably over a typical 3-year life instead of as the implementation would've been done under a perpetual deal.

And just to give you an idea, a large implementation typically is driven by the customer's ability to manage through the process and the steps that -- the bigger implementation, the more steps. And so if you were to think something like $50,000 to $100,000 of services per contract happening every month, if the contract is $500,000 of services, it might be a year to a 15-month contract. If it's a $1 million services, it might be 2 to 2.5. And if it's a $3 million or $4 million, it might be a 2 or a 3 or maybe even more year project. So doubling contracts services side may mean that things don't happen in '13 as they -- even in the Enterprise space, that some of what might have happened in '13 get pushed out into '14 and so on.

And then some of the investments that we're continuing to make are how -- in efforts to bring CRM down market, make it more affordable for some of the smaller enterprises. And so that's one of the places we're continuing to spin the bit as to hopefully to bring in more smaller deals here in the future.

[Operator Instructions] Our next question comes from the line of Ross MacMillan with Jefferies.

I also just want to ask on that services line. Just want to be absolutely clear that there's no change in the way that you recognize services aside from the fact that with the subscription contract you recognized ratably and then we also have the separate issue of the longer deployments, but I just want to make sure that none of this is a recognition change. It's just that you're expecting now more of that mid-market license to come through with subscription licenses.

; That's correct.

Great. And I had a question on taxes actually for Tony. Can you just remind us of your expectations for the tax rate for the combined entity? And then, historically, Blackbaud has obviously had a benefit on cash taxes. Could you help us maybe understand what you think the cash tax rate might look like for the combined entity?

Yes. So we're going to be in a little bit odd shape this year, Ross, because of some of the nondeductible expenses that we're incurring related to the acquisitions. So that's going to drive us up a bit from a tax rate perspective. And then I think the second thing that we have is the government has not extended the R&D credits, obviously, yet as well, so we're taking a bit of a double hit from a cash tax perspective this year. I don't know if you look at the balance sheet, but we had some accounting treatment noise on the balance sheet on the deferreds. But we still have all the legacy Blackbaud deferred assets. And we still think that we'll benefit from about $13 million of NOLs that we acquired with Convio -- benefit by $13 million of cash on the NOLs we acquired from Convio. Though we haven't recorded a big deferred tax liability as a result of the intangibles for book purposes, so that's masking some of that. From a cash tax perspective, we expect for 2012, unless something changes from an R&D credit extension perspective, we think we'll be slightly above 20%, which is quite a bit higher than where we've been historically. If the R&D credit gets extended, that rate's probably going to drop down to the high teens. And then I would expect we're kind in the high-teens rate in '13 and beyond. It would be where I would guess, assuming R&D credit comes back. That's a little bit higher than where we've been historically.

But that's the function of the larger profit base, I guess?

Yes, and we've had some one-off different adjustments for tax purposes over the last 2 or 3 years that's helped get us into a single digit or a low double-digit in a couple of times.

Okay. And then I wondered if you could just give an update on -- it sounds like once you get the product roadmap out there, it's going to have a -- it's going to act as a catalyst, if you will, for the sales organizations as well because it's going to become clear for everybody both the customer and yourselves. A, is that a correct assumption? And b, just from a timing perspective as we think about for example this quarter, when do we think we'll get back clarity and when will the sales force be really able to fully engage?

Well, there are 2 parts to that. We've given the first indication to the sales force of how they should handle individual sort of categories of opportunity in the pipeline. So what do you sell to a customer who has no Blackbaud CRM and is looking for online if you're an Enterprise sales rep? Well the answer is Luminate Online. So most of the sales situations, sales reps got training in the middle of July that anticipates the results of the roadmap, not every detail and certainly, not anything about Sunset or migration strategies but for new in-pipeline opportunities. So I think that you can expect to see some improvement in the part of the market that got some freeze or a slowdown in the quarter that we're in and then some layer. And I will remind, however, that most of the things that slowed down are subscription base or ratably recognized, so you won't necessarily see an immediate or huge upward tick in revenue based on bookings that might come from that, however. I think it's relatively clear, in terms of the rest of the information should be in market by the end of the quarter. And certainly, we plan on making a very clear and significant statement of it at the Blackbaud conference, which happens at the very end of September and the beginning of October.

That's helpful. And then one last one, you commented although you're not guiding for fiscal '13 clearly but you commented that it was possible that you could see more than the full realization of the run rate synergies at the end of this year and perhaps getting up to closer towards the 20% non-GAAP operating margin next year. Is that a total function of revenue growth or do you think you have got ample opportunity that the operating margin target for next year is something that's in your control and that 20% is at least a very approachable number?

I believe 20% is a very approachable number. There are a number of things that we have to spend this year that we don't have to spend next year in order to bring the companies together. I mean, it a silly an example, but we paid for 2 conferences but we're going to have one. So there's stuff like that we have to do and extra sales kickoff that we didn't otherwise have to have. And frankly, also, the clarity in organization that will come from being clear about both roadmap and the customer allocations will over time mean that we can cover more accounts with fewer products and fewer people. I don't mean to say we're going to reduce people per se. I just mean that more accounts per sales rep happen when you have a larger portfolio of offerings. And it's easier to cover more accounts when you have fewer clearer portfolio.

And I think, Ross, from an exit run rate perspective, with the $9 million to $10 million that we have identified, I would almost say in the bag at this point, we'll exit the year at about an 18% to an 18.5% run rate. So we're well on our way back to that 20% before identifying any other opportunities in the coming months.

Our next question comes from the line of Sterling Auty with JPMorgan.

Saket here for Sterling. Most of my questions have been answered, but I just had a few quick modeling ones. So first, how much the lower organic revenue guidance is coming from the more challenging environment versus timing of services contracts?

So I think when we look it at a combined company, we certainly know that we -- the expectations of where we are on the Convio side, whether that's timing of the deal, getting approval or what, we're $5 million to $7 million short of where we thought we would be there. On the Blackbaud legacy side, as we said, $10 million to $13 million is from the services side. There's certainly -- at least we get some sense that there's some impact of the softening of the market. It's hard to put our fingers on what that is. But I would put more of it on the lengthening or the recognition on the services side and the Convio. Marc, I don't know if you have anything.

Yes. It is rather hard to separate the Convio softness or whatever freeze happened because of the deal from the market. I would say that the smaller the organization, the more sort of caution and lengthening in sale cycle we're seeing. And so today, I wouldn't characterize it as having lost things. I'd characterize it as it's taking a little bit longer for us to get through sale cycles. That's consistent with nervous customers. And so, if someone's nervous because they don't know what the roadmap is or nervous because of the economy, it's very hard to tell those things apart. That lengthening of cycles is a meaningful part of the $10 million to $13 million. It's not 10%. It's probably some number larger than 10%. And it shows up both in the mid-market as well as sort of smaller Enterprise deals being also somewhat harder to close or taking longer to close.

Great. That's helpful. Maybe just a follow-up on the environment, I believe June is the fiscal year for some of your nonprofit customers. As you've talked to them just about budgeting for next year, and it sounds like the June quarter was a little bit challenging for software overall, do think that some of them have embedded more conservative spending plans for the next fiscal year?

I haven't talked with them personally, so I don't really have a lot of detail about that. [ph] Often times you don't necessarily get a direct correspondence between sort of budgeting processes and decision cycles because usually, the budget for spending with us has been determined especially in larger accounts, some time back as opposed to in the coming budgets. So we've not seen any meaningful shift in budget loss, so no fundings in our sale cycles. And that would be where I'd see that, and I don't have any personal information from accounts or any anecdotal information talking about budget changes. I just know that people are concerned about what fundraising will look like and that things are slowing down. And so people are paying a little more attention in the sales cycle.

Our next question comes from the line of Matthew Kempler with Sidoti & Company.

So I just wanted to step back on the standalone business side. After several quarters of low double-digit organic revenue growth, we've seen the last 3 quarters at kind of the mid to high-single digits. Can you review, kind of from your view, what are the key items that's been holding us back from achieving those targets? Is it purely the macro or is there something else in the shift to subscription, or are there other pieces at play?

So Matt, I think right now from a guidance perspective on our legacy business, standalone Blackbaud business, I would say that the only place that we've really made any adjustments to our previous expectations was on the services business. So I think as we look at the subscription and maintenance and license lines of our P&L, those are still balancing out kind of right where we would have been expected them to be for the year. So this combined company guidance that we just gave, when you think of it from a standalone perspective, is, I would say, solely isolated to the services line. And as we spoke with a question just a minute ago, I think that services shortfall on this year is largely isolated to 2 things. Macro environment is tough to put a finger on yet today. Certainly more volatile and down a bit. But that longer life on bigger CRM deals, that mix is quite a bit different than what we had planned for the year. And so that's deferring that revenue out further on the CRM deals. And then in mid-market, we're seeing a faster switch over to subscription on some of the legacy products than what we originally anticipated and thus getting that ratable recognition over 3 years. I would say on that legacy side of the Blackbaud business, that is the largest driver by far.

Okay. And then circling back on the sales side, so we've integrated beyond [ph] the sales and marketing organizations. Has there any change in the structure and how the sales teams are addressing the market? Any change -- any major changes in the compensation plans?

We've not made dramatic changes in the sales coverage type models. So the Enterprise organization is still broken down by sort of very large strategic accounts and then by vertical. And then sort of mid-market accounts are broken -- mid-market Enterprise accounts broken down by vertical. The General Markets Business sales models have really not changed at all, coverage models. We have made a modest shift in commissions structure to sort of bridge the gap between the Convio model and the Blackbaud model at the Enterprise, which gives more credit for recurring revenue and it gives somewhat less compensation for services. Now before you say, "Is that the cause of the services reduction?" That's only just been announced in July, so the change in services mix inside of our business was happening well before that shift. Certainly, people are still compensated on services, and I expect services will continue to grow in the way that we've described. But we are focusing on shifting the model and increasingly recurring revenue portion of our business. And as such, we've made it somewhat more attractive for the large account sales teams to push for accounts to either upsell and/or to bring on new solutions that have an ongoing revenue stream.

Okay. And then just 2 quick model questions. Amortization of intangibles, I think you may have given already, but what should be the run rate going forward for that line item?

So I have that here somewhere. And we haven't put together a specific on just amortization. So I'll give you depreciation and amortization because we don't normally break that out. But I knew that it -- you would need it. So we'll do this over the long-term. But now we're currently estimating purchase price allocation that will have depreciation and amortization expense of roughly $30 million in 2012. And we expect depreciation and amortization to go up 25% to 30% next year. And we still got to nail down some of our purchase accounting. As a matter fact, the team and I have been on a couple of calls this week working on that, so we still have some moving pieces on the final purchase accounting that could affect the finite-lived intangibles.

Okay. And then roughly what kind of restructuring charges, integration charges, should we expect through the end of this year, and are any of those cash?

I can tell you what we had on a GAAP basis. In the first half, we haven't given a guidance, and weren't planning to at this point on anything for the second half. Deal costs in the first half of the year was $6.4 million. Integration costs at about $3 million.

Mr. Chardon, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Well, I'd just like to thank everybody for joining us today on the call, and I hope to see and/or talk with you in the near future. So thank you very much, and talk to you soon.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.