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…

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…

[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.