Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the BlackBaud Second Quarter 2009 Earnings Conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we'll open up to question and answer session. Instructions will be provided at that time for you to queue up for questions. I'd now like to turn the conference over to Mr. Tim Williams, Chief Financial Officer of Blackbaud. Please go ahead.

Thank you very much. Good afternoon everyone. Thank you for joining us today to review our second quarter 2009 results. With me on the call is Marc Chardon, President and Chief Executive Officer. Marc and I have prepared remarks and then we'll open up the call little bit later for questions. Please note 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 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 for today's call will be available on the Investor Relation section of our website. With that I'd like to turn the call over to Marc and I'll come back a little bit later to give some further details regarding our financials. Marc?

Thank you, Tim, and my thanks to all of you on the call for joining us today to review our second quarter 2009 financial results. While the economic environment remains challenging, Blackbaud's worldwide organization executed at a very high level, and as a result, delivered second quarter revenue and profitability that were consistent with or above the high end of our guidance ranges. At the same time, as I'll discuss in a moment, we continue to make solid progress expanding on our market leadership position and online fundraising solutions. Our demand for these solutions does not always translate into upfront licensing revenue since they are increasingly being sold on subscription basis but continues to make improvement in our position and this segment is very encouraging, especially when combined with the progress of our other growth initiatives. In a moment, Tim will cover the financials in detail. So let's take a look at the highlights. Our total non-GAAP revenue of approximately $77.2 million was consistent with our guidance. This represents growth of approximately 7% over the year-ago period and was a sequential increase of 76... from $76 million last quarter. The combination of inline revenue and continued tight control of expenses enabled Blackbaud to once again, deliver operating profitability that was above the high end of our guidance. Moreover, at the half way point of 2009, the company's non-GAAP operating margin of 20% is right on track with our full year target. We believe this is a significant accomplishment particularly when you consider the investments that we continue to make in our growth initiatives and the challenging economic environment which we operate in. Looking at the make up of our revenue, subscriptions remained the highest growth component of revenue in the second quarter, both on a year-over-year and sequential basis. In…

Thanks Marc. Let me begin by providing details on our second quarter operating results followed by our guidance for the third quarter and wrapping up with a very quick review of our capital management program. First, let me start with the income statement. GAAP revenue came in at 76.4 million and after adding that 800,000 for the second quarter impact of the purchase accounting write-down associated with Kintera's deferred revenue, you get to non-GAAP revenue of 77.2 million. This represented an increase of approximately 7% compared to the second quarter of 2008. We estimate the Blackbuad's second quarter total revenue, excluding the contribution from Kintera, would have decreased approximately 6% on a year-over-year basis and would have been down about 4% on a constant currency basis. This is in line with a decline of approximately 3% that we highlighted last quarter. Obviously, this year-over-year movement is well below our long-term target of low to mid-teens growth and we believe this principally the consequence of the difficult economic environment impacting our end market and to a lesser degree, the short-term impact related to the increasing shift in our business to more subscription-based transactions. Looking at the details of our total revenue, non GAAP subscription revenue was 17.9 million, an increase of 99% on a year-over-year basis. It increased to 23% of our total revenue in the second quarter, up from 12% in the year-ago period. Even without the contribution from Kintera, subscription revenue would have increased by approximately 29% on a year-over-year basis. License revenue was 5.8 million in the second quarter compared to 9.6 million in the year-ago quarter. The decline in license revenue is a result of two factors. First, this is the revenue line that is most directly impacted by delays in the timing of deals because of…

Thank you. (Operator Instructions). And we'll take our first question from Tom Roderick with Thomas Weisel Partners.

Hey guys this is Chris Crowe (ph) sitting in for Tom. Good job on the figures. Hey, guys, how are you?

Good.

Excellent. Good job on the expense side of the equation, especially given your tone it sounded like things are kind of going sideways a little bit. So I do have a question though on the budget setting process, you mentioned that... Marc mentioned that at the quarter, some people just decide to use it or lose it on the budgets. For fiscal year '10 on the budget setting plans, are you seeing anything there that would reasonably, that maybe, you could get grasp of what their IT spending trends for fiscal year '10 for the people that ended their fiscal year in June and how is that plan to work?

Everybody is being quite cautious, as I think we've said before, I think the non-profit sector does some what lag the economic environment and organizations, whether they have increased fund raising so far this year or decreased, are facing increased demands. So, they're being very judicious in how much money they can afford to put into IT. Falling into a couple of categories, there are those organization that have decided to not last long enough but they need to increase recourses and that's a minority of organization and so they increased their investment in IT and I think that a majority of them are under very tight budgetary constraints. For that reason I said I don't foresee that as timing for an increase in the purchasing environment in the near future.

Okay Thank you very much and then I guess on the NetCommunity Grow product you guys mentioned that there was a strong point during the quarter. Sorry if I missed the press release or something on this but is there something that you guys actively tried to market during the quarter or is this something that was just a higher degree of interest in the environment?

We did market but obviously we market in those areas that are read by non-profit organizations. One telling factor was that of the sales of Grow in the quarter comes at 44 sales, almost half of them came from customer initiated leaves so the marketing did seem to be striking home. I think that, when people get a broader understanding, the Blackbaud's provide a simple, easy to implement entry level fundraising, online fundraising solution that they have been interested in coming directly to us. And so, that was very encouraging. So, it was in response... it was customer driven, mostly customer driven response to a modest amount on marketing and in non-profit specific channels.

Great, and then, I was wondering lastly, if you guys could provide some color on the average selling prices and maybe the core or eMarket. Are you seeing, I wouldn't necessarily count it, so just wouldn't say that cannibalization's the right word but, but are you seeing like, decline as far as Raiser's Edge, I would assume from your license sales that this might be the case, but is RE like dropping quite significantly relative to what you would had expected and just more like kind of short run small budget investments.

I would say that in general, we're not seeing a substantial change in our ASP. It's perhaps down a bit but it's not a significant change in terms of the overall ASP. Our issue is really more of units than it is ASP, Chris.

Okay, great. Thanks guys.

And you will be answering a question from Phil Rueppel with Wells Fargo.

Phil?

I'm sorry. We have Phil on the line now.

Can you hear me now?

Yeah, we can.

Sorry about that. This is Priya Simon (ph) for Phil. Just following up on the earlier question, what impact does the layoffs in the non-profit sector having on your business? You talk about units. How, especially on the renewals, what impact are you seeing?

I'm having a hard time hearing. You said the impact of something on the non-profit and second what is that impact?

Can you hear me better now? I'm sorry about that. In terms of the layoffs on the non-profit business, you talked about units in your previous question so just curious on that.

Well, there have been layouts in many sectors around the world and non-profit world is not exempt. It doesn't appear to me, I mean we don't have the statistical data, but it doesn't appear to me that there's a significant sort of connection between our customers and whether or not they're going to buy and or whether or not they renew in the last. So, we've not seen any particular. But we haven't seen no particular increase in organizations going bankrupt and that you can see that in our maintenance renewal rates which remain the same as they were during healthier economic times and I think that some organizations lay offs and credit planning altogether and some organizations, they were unrelated.

Okay. And following up on the comments you made during the prepared remarks. Do you think you've seen a bottom in your business especially as related to new licenses?

Well from a new license prospective, remember that you need to look at subscription and new licenses together and there's one question which is what the mix looks like in the future and we will probably have subscriptions growing faster than licenses even when a recovery occurs. So you'll just see the subscription growth rate higher than license growth rate over time. I do not think that we've necessarily seen the beginning of a recovery. To paraphrase Winston Churchill, we may have seen the end of the decline.

Okay, and one more. Can you give a little more color on your expense controls in terms of... you mentioned it's forward but add a little more color would be helpful?

Would you like me to talk a little bit about were those expense savings have come from?

Yes, that would be helpful.

Yeah, okay. Well, when you talk about this and I think we tried to make this soon enough in our previous calls that the savings have come from across the entire organization. It's been a really significant effort by every member of the management team. And so, we feel really god about that. In addition to that, we've been getting the saving from a variety of different areas and so that big part of the roughly 20 million or so in savings that we're not talking about relative to where we started the year; roughly probably 30% of that is related to payroll and benefit and part of that is we did not give any increases at all to the entire organization, normal salary adjustments. But more importantly, I think we've done a very solid job of managing our attrition in replacement hiring, so that we've been able to achieve significant savings there without having to do an across the board, headcount reduction. In addition to that, unfortunately, we haven't been able to pay as higher commissions that we might have been paying if sales were performing a lot better. That reduction in commission was directly related to our mobile revenue. It's probably somewhere in the $3.5 million range, in addition because our performance is not quite well as we had hoped it would be when we entered the year, we were generating some savings against our bonus plans. We've also saved a substantial amount of dollars in travel, and probably somewhere in the neighborhood around 5 million, part of that would otherwise have been built to customers and we incurred it if there's a sizeable portion of just travel related expense that close to our various categories in the P&L and we're achieving savings there. So, I think you get a sense, they're in a whole variety of places, but, it's been in across the board everybody, the entire team.

Okay, if I could squeeze in just one last one. Could you talk about your performance in eTapestry? Did you see how it is sequentially year-over-year?

eTapestry continues to do well and especially in terms of units. It's very close to its plan which makes it somewhat of a bright point in the context of the corporation from the user's perspective. Units tend to be somewhat less. The ASP has gone down in the sense that there are fewer set of large eTapestry deals then we've had in the past. So, in general were very, very pleased with the results that we're seeing in terms of sort of unit momentum. And we're actually reinvesting a little bit and additional new generation because we think their potential for some incremental improvement there.

All right. Thank you.

And I would just add that in addition to the comments Marc was making about the sales side, I would also tell you that we did have a nice little bit of growth on the revenue side as well, as you would expect with the subscription of our model.

All right. Thank you.

Thank you.

Thank you. Moving on, we'll take a question from Stuart Abbey (ph) with JP Morgan.

Yeah, thanks. Hi guys. Couple of questions. First, you mentioned the renewal rates being still in mid-90s. Was that just on the maintenance? Can you talk to what you seen on the subscription side of the house as well?

Yeah, the maintenance renewals... let me just go through this just a little bit. Our maintenance renewals are in the mid-90s. When you look at subscription renewals, you have to kind of break it down in pieces. If you look at our internet solutions, direct marketing solutions, and hosting, our renewal rates are very much in the same range as our traditional maintenance renewal rates. When you go to work Analytics solutions, which is a variety of different offerings that we provided to the market that are used by different customers for different purposes. The renewal rates there, that traditionally been in the mid-80s to mid-90s and in general, we're seeing the same thing at the present time. Finally, with respect to the Sphere offering, which we got in the Kintera acquisition, I think, as Marc pointed out, we've seen a significant improvement in the renewal rates there which is something that we expected when we made the acquisition and we've been very pleased with what we've seen there. So a good improvement there.

Okay. And on that last one, Kintera specifically. You looked at the kind of, the cost structure that you acquired; the business that you acquired. Can you just talk to, how much of the savings that you're experiencing now is just giving better efficiency out of that asset in particular?

Well, I wouldn't say that, I think that the way I would position is to say that, we're sort of at the point where we expect it to be with Kintera in terms of their cost structure. We're not done; we haven't achieved all of the cost synergies that we can achieve. But I would say that in general terms, our cost structure is about where we expected it to be at the time we made the acquisition.

And we did have the cost savings built into the 2009 final meet that gave our initial numbers of 265. So, that included a couple of million dollars of cost savings in engineering and included cost savings in data centers and public company costs. None of those are included in the improvements that we've made this year. They were already baked into the initial plan.

Okay. And then last question. If you look at the competitive landscape, so you mentioned there are organizations that, you're right, they feel like they have to move now to move to the next generation of how they interact with the donors et cetera. But I have to imagine that the number of opportunities is smaller, given the environment. I would imagine that means that the competition for those is even higher. Can you talk to the competitive landscape, like type of organizations as well as size of organization, both from some of the dedicated guys in the space versus what you might be seeing use of, like, a salesforce.com or even any talks of anybody else moving into this space.

Well, if you could look at the largest organizations, we have a very, very high win rate. The cycle enterprise year-end product is simply unmatched. There's nothing like it, in the market place today. So, when you look at the special sector of people like the higher and the very big high-end organizations or the very big healthcare organization, the very big chapter-based organizations, we are... we're doing very, very well. And so, in that space actually an impairment of growth actually, we're seeing growth at this point. If you look in the core markets, what you see is, as you say, somewhat lower amount of opportunity, although the opportunities are not that much lower than in past years. The real change is that in most sectors, and eventually all sectors of mid size, being no decisions after looking is the part that's increased. So, if you had 100 opportunities, then no decisions in the path for 40 or so percent, they might be 50 or 60% there, depending on the sector. So, yes, there is in some sense more competition for the remaining parts and, yes, we represent the largest, the safest, the most financially secure and the highest customer satisfaction vendor essentially in the market in those segments. And so the win rates that we are experiencing once there is a decision made, the percentage of those cases that we win is going up regularly quarter-by-quarter here. And we are very pleased that the improvement in the win rate and I believe that's an acknowledgement for the quality of the organization, the quality of the customer satisfaction. And also I believe that in times like these you may need to make sure you invest with someone who is going to see you through the hard times.

Got it. Thank you.

Okay.

Thank you. Moving on, we'll take a question from John Neff with William Blair.

Hey guys, thank you.

Hey, John.

Just kind of a core profit non-profit kind of question, but core profits in a recessionary environment they go justified technology investment to improve efficiencies. I think you eluded to this before so I think I know what the answer will be, but can NPOs do this or is it less likely to do it to go for technology driven efficiency out of concern for maintaining services?

The answer is, both occur. The larger the organization, the more likely it is that they have an industrial budget and a professional IT organization that knows how to evaluate sort of the difference between capital and operating expense. And in the mid-size organizations that truly depends on whether or not there's someone in the organization who has a clear understanding of how an investment in the new fundraising system can bring them results in the time of horizon of the downturn. And so, that's part of like you see some of our areas the kind of uptick, for example, on Grow, which is a subscription-based offering and a lower end entry point, they believe they can get a return faster by doing that than aiming for an upfront fee and doing a more complete and full featured website for example. And so, you do see some decisions that are driven in the financial decision towards a periodic payment versus an upfront payment. But that typically again depends on whether someone has a firm belief that spending money now will get more people taken care of during a period of increased demand.

Assuming that this listening post project survey that came out recently found that mid-sized NPOs seem to be feeling... they're feeling the most severe effects of the recession. Is that kind of consistent? I mean, you used the expression but, in recent quarters, your sales have been sort of marked down sort of, in eTapestry is fairly strong. eCRM fairly strong and then it has been a core solutions sort of in the mid point. Would the survey results sort of collaborate what's going on with your sales in terms of the pattern there?

It sound to me like a pretty fair assumption. We don't have any specific details from any third party market experts other than the kind of things that you read but to me, yes, that sounds like a very fair assumption. I think middle sized organizations are feeling the squeeze.

And then, historically the non-profit sector, employment has increased during the past recession unlike the core profit sector. Probably haven't seen a statistics on that but is that any anecdotal sense on whether that has been true so far during this downturn and whether yes or no, was that showing up in your maintenance renewals, your training? In other words, are people signing up? Are you seeing much degradation in terms of the number of people being renewed at contract time et cetera?

Well, two things. First, when you look at quarter-on-quarter unemployment in the non-profit sector many of these studies include volunteers and so those sectors where demand is going up and is visible in the local community, say, banks, you see a dramatic increase in the number of people who come out to help and the amount of work that goes in. So it's very hard to know what the, quote-unquote, paid versus unpaid employment figures are and what they mean. We've seen it all over the board. So that's a primary distinction so that may. And Tim has a comment.

Yeah, I would also add remarks just on your comment about training. It certainly isn't showing up in training. I mean we're not... a training business is down year-over-year. It represent a lower percentage of our total services revenue. We are seeing people just stay away from training. So I'm not sure that's an indicator of whether or not there are fewer or less people. And now on top, but it's certainly wouldn't support that there was an increase. And in terms of maintenance, we have seen clearly that if you look year-over-year, there probably are a higher number of customers who are deciding they want one less feat of a particular product on their maintenance program. But in general when you add that all up it's still not that significant in terms of our overall percentage of renewal, John.

That's helpful. And then sort of speaking of renewals, Tim, you've just giving the importance of the eTapestry renewal rates to combat the risk of cannibalization with some of the core solutions. How are those holding up?

Yeah. They actually went up just slightly this last quarter. But I mean when you talk in terms of pointing the way, when you're in the mid-90s already, the few tens of when or I think long-term but they're gone, they've been trending up slightly. People are not changing horses in the middle of the stream.

That's great. Thank you, guys.

Thanks John.

Thanks John.

Thank you. (Operator Instructions). And we'll move on to Ross Macmillan with Jefferies.

Hey, Ross.

Hey Tim, hey Marc. Three separate questions. First one, services were up sequentially I think for the first time in three quarters. I don't know, I came on a little late. So you may have talked to that but could you just talk... speak about that a little bit. Second one, the 5 to 10 million of additional cost savings, is it more the same and I guess specifically we're not making any headcount cuts here I presume. And then I have a follow up. Thanks.

Taking the first one, which is, no, we are not making headcount cuts into do that 5 to $10 million other than management of attrition. But there is no generalized headcount reduction.

And in terms of Services, Ross, I would merely characterize what we've seen sequentially in Services is I think you know that our first quarter is tend to be not a particularly strong quarter from a Services standpoint. In any event normally first quarter and fourth quarter are little bit weaker. And so I think all you're really seeing in the sequential movement in Services is something more related to seasonality than anything else.

But I just told that point, you know, you're obviously getting a lot of services around the eCRM deal, so I think is it fair for me to assume that the connection between services and license fee's historically is breaking down here and because of the different licensing arrangements under eCRM?

Well, I think that's true and I would also point to the fact that, a point as we've said, the increase in the number of subscription offerings that we're doing, is affecting us as well. So, it is eCRM and certainly it is having an impact but also the subscription revenue as well where there's a period of deferral before you can even begin sort of recognizing the services you have to wait until the Software as a service product is deployed and then has made a recognition over the remaining life of the contract.

Yeah.

So, all of these are factors that enter in.

Great. And then my follow up was I think you mentioned you're starting to see some mid-tier interest for eCRM. Does that have any implications on how you're thinking about development of RE8? Thanks.

Yes. So, when I say mid, I was talking large mid. I mean the kind of project that would have been the biggest RE8 project of the past. It's sort of the mid-sized eCRM project, big projects that are in the highest six figures. So, I would say that there's very little in what's happening in the high-mid market eCRM. That is a direct influence or impact on The Raiser's Edge development path and they're very different markets in the sense that 8 is really about sort of smaller organization, that smaller organization where people typically were more half than there are people and still at the lower end of eCRM, they're typically more people for roll than there are rolls. So it's a difference between a professional tool and an enterprise platform or an enterprise application. And they are going on quite separately and independently.

That's very clear, thanks. Good job on the costs.

Thank you, sir.

Thank you. We have a follow up from Stuart Abbey (ph) with JP Morgan.

Yeah, thanks. I'm back. As I was figuring out first time I gave all the questions I could. On the commentary about managing the attrition, can you give us what the total headcount was at the end of this quarter versus the last quarter?

It's basically, without getting in the finer point, it's basically a flat headcount.

The flat headcount has a tendency to mask two different trends. There's down in a period of attrition in most areas of the company in there is up in R&D. And there is up in services in the UK where we have two large eCRM deals and there is a small amount of up in sales in a couple of other geographies. So, there are puts and takes in that number and that's a zero.

Any important thing, and also remember, Sterling, is when we started the year and we were looking at our cost structure of around $265 million that cost structure clearly contemplated that we would have some additional headcount being added normally in the second quarter. And so, part of what you've got to balance through all of these pieces, the attrition where we have to add as and where we're not need throughput.

Okay, that makes sense. And have you guys disclosed when... what the timeline is on Raiser's Edge 8?

No. One thing I've said is that it would be the first integrated generation 8 solution for the core market. It would be in limited release by the end of this calendar year and would be in general release in the first half of next year and it would be an arts and culture solutions that would include components of Raiser's Edge and that's the only specific thing that I said.

I just think about that platform. Is there any ideas around what that might actually do for your services revenue because it seems like, well, I'm sure some of your customers are or your customers might be the part of their maintenance program, it still seem like because of the integration, the implementation of it would drive with quite a bit of service revenue opportunity?

The upgrade services? You mean upgrading of the existing installed base or do you mean new sales or what?

No, the existing customers. The existing customers that are on seven and below where they want to you to actually come in. how would you upgrade to 8, perhaps, everything from migrating data and just implementing the system?

In the past, as we we've gone from one version to another there has been an increase in service revenue associated with that. Some organizations elect to do it pretty own much on their and some organizations, many organizations elect to spend some amount of money on services. So, I think you can expect to see, over the next couple of years, after the generation 8 products come out, some services associated with the migration that maybe offset by the generation 8 products being task products which may sort of spread other services out in the future years. So, I'm not calling ahead of time which of those two factors is a bigger one.

Okay. Alright, thank you guys.

Thanks.

Thank you, sir.

Thank you. And gentlemen, there appears to be no further questions at this time.

All right. Well, at this point, we want to thank everybody for participating on the call and look forward to chatting with those of you who have follow up questions in the days and weeks ahead. Thank you very much.

Thank you very much. Have a good evening. Bye-bye now.

Thank you. And ladies and gentlemen that does conclude today's conference.