Robert Weiner - IR Michael Gianoni - President and CEO Anthony Boor - CFO and SVP, Finance & Administration.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc. Matthew Kempler - Sidoti & Company Peter Wahlstrom - Morningstar.

Greetings. Welcome to Blackbaud's First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Robert Weiner. Thank you, Mr. Weiner you may begin..

Good morning, everyone. Thank you for joining us today for Blackbaud's 2014 First Quarter Conference Call. Today we will review our first quarter financial and operational results for 2014 and provide commentary on our progress toward achieving our goals for the full year of 2014.

Joining me on the call today are Mike Gianoni, Blackbaud's President and CEO; and Tony Boor, Blackbaud's Senior Vice President and CFO. Mike and Tony will make prepared comments and then we will open up the call for your questions. Please note that our comments 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 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 financial measures are more representative of how we internally measure the business.

However non-GAAP financial measures should not be considered in isolation from, or as a substitution for GAAP measures. A reconciliation of GAAP and non-GAAP results is available in the press release we issued last night, which is available on our website at www.blackbaud.com.

Now looking at the IR calendar, our team will be presenting at the 2014 Jefferies Technology Media and Telecom Conference on May 6th and hosting one-on-one Investor Meetings on May 7th at the conference in Miami.

We will also be presenting at the Evercore Vertical Cloud Symposium in New York in June, as well as meeting with investors in Boston and the Mid-Atlantic Region also in June. Please call our investor relations line if you are interested in meeting with management in one of these locations.

I am now pleased to turn the call over to Blackbaud's President and CEO, Mike Gianoni..

Thanks, Rob. Good morning, everyone. Thank you for joining our call today to report on our progress in the first quarter of 2014. I would like to begin by saying we had a solid performance in the first quarter. Revenue was $127.6 million, an increase of 10.4% over the first quarter of 2013.

Non-GAAP organic revenue growth was 6.9% for the first quarter of last year. Non-GAAP operating income was $19.9 million, with non-GAAP net income of $11.1 million to non-GAAP diluted earnings per share of $0.24. We ended the quarter with $32.6 million in cash and generated cash flow from operations of $13.3 million.

This is strong start to the year driven by a better than expected performance in several business areas including Analytics, International and Payment Solutions. Tony will provide more detail about our first quarter financial performance a little later during this call.

I’d like to talk about some of the things I have been focused on since I arrived in mid-January. I’ll provide a status report on where we are today, discuss some of our activities, and comment on our outlook for the balance of 2014. I feel more excited to be a part of Blackbaud than I was back when I last commented on our fourth quarter call.

I gained a greater understanding of and appreciation for our business and enthused by the team of talented people we have here at the company.

I am more excited because we are now clearly focused on creating momentum in our business, our culture and our financial performance like [heeding] opportunities to improve our platform focused on increased customer adoption and satisfaction with products innovation, product roadmap clarity and integration in operating efficiencies, while we will also deliver increasing value to shareholders, employees and business partners.

Over the last three months I have been actively engaged in the business, submerging myself in our product portfolio, engineering, operations and really all of the enterprise wide management and functions. We have had separate strategy sessions with two distinct leadership teams.

First, our global management team which are the top 50 of our senior leaders from all functional areas of the company. And then second, with our executive leadership team, components of our most senior leaders.

These sessions were very energizing with our team highly engaged and thoughtful, producing a road map to improved performance which ware now implementing throughout the company. In the past three months, I visited many customers both in the U.S.

and abroad from small to large to hear what they have to say, get some feedback, get to know their businesses and thoughts about their direction and service needs as well as trends in the NPA market place. I conducted press views to establish a presence and voice in some of our key operating markets.

Additionally Tony, Rob and I have been out to meet with investors, both in personal meeting and conference sessions. Overall it’s been a very productive beginning for me at Blackbaud. We are just getting started and I see many significant opportunities ahead of us. In 2014, you will hear about our four primarily objectives.

I’d like to spend a few minutes to update you on each of the four. Number one, organic revenue growth, we achieved organic first quarter revenue growth of 6.9% when compared to non-GAAP year-over-year revenue.

We anticipate driving increased organic revenue growth by increasing our Payment Solutions at a higher rate than our base business focusing on the trend of conversion to online and mobile solutions, also by integrating Payments and Analytics into our CRM and online platforms on an enterprise-wide level.

And lastly, incrementally, investing more than $8 million this year split between expansion of our sales force and the customer retention charges for the overall company. Number two, product optimization, a key priority this year.

We are focused on most prudently allocating our resources to highest growth and most profitable and strategic product solutions and we are incrementally investing more than $2.4 million in 2014 that go into these proceeds.

We have some important milestone days; Our Investor Day on September 12th in New York and BBCON our annual customer conference on October 6th through 8th which we are driving towards to provide greater clarity and updates in the areas I just mentioned.

Number three, transformation at a recurring revenue company, along with our product optimization efforts to accelerate our transformation from licensing-based revenue model to a recurring revenue, cloud-based model we also are transitioning our operations.

We are incrementally investing to better operationalize the company to enable cloud-based functionality.

While I have made significant progress transitioning to a predominately recurring revenue model which now represents nearly 74% of total revenue in the first quarter of this year we are transitioning of product and customer support functions to cloud environment as well. And number four, increased operating efficiencies.

We began investing the planned $5 million plus to drive future operating efficiencies that we talked about on our 2013 fourth quarter call. We expect to gain operating leverage as this year progresses which will somewhat mitigated by the investments we are making.

We expect to fill even deployment of the incremental investments over the next two quarters with the incremental operating events and tailing off in our fourth quarter. I’d now like to wrap-up my comments by highlighting what I mentioned on last quarter that I feel more strongly about this now than I did three months ago.

We are very well positioned to continue to deliver market leading customer solutions that best serve the evolving need and multi-delivery channel used in the NPA marketplace; to increase our competitive advantages in product and service innovation and outstanding customer service; to continue improving our operating efficiency and increase our profitably and to generate accelerating organic growth in our business by delivering a balance approach of these objectives guided by a vigorous process to evaluate capital allocation and returns.

These commitments are consistent, clear and firmly in the focus of our team as we optimize the company’s performance. You’ll see us take action that supports our focus and a driver of growth and profitability. I remain confident in our ability and our execution of these objectives to drive increasing values and returns for our shareholders.

I’ll now turn the call over to Tony to provide more detail about the first quarter performance and I’ll return with the closing comments about our outlook for the balance of 2014.

Tony?.

Thanks Mike. Good morning, everyone. Thank you for joining us today to review our 2014 first quarter performance. We had an active first quarter and expect the balance of 2014 to be very active as well. I can hear momentum building and it's exciting to be a part of that.

As Mike said, we had a solid start to the year with the team driving growth and profitability at a rate slightly higher than previously expected. Our first quarter performance puts the company on track to achieve our 2014 financial goals. We will provide an update on our goals during the year if an update is warranted.

Now let’s turn to the first quarter performance. We delivered revenue of $127.6, million, an increase of 10.4% over the first quarter 2013. Organic growth was 6.9%, when compared to non-GAAP revenue for Q1 of last year.

This organic growth was driven primarily by higher than expected performance in several business areas, including Analytics, International and Payment Solutions. The growth in Payments resulted from a continued shift to online giving, the integration of our solution in to more of our platforms and the implementations for more new clients.

Our non-GAAP organic growth calculation is reflective of the gross presentation of our payments revenue during the current quarter on a GAAP basis, in the first quarter of 2013 on a non-GAAP basis for comparability process since, the Payment solutions revenue included in our previously reported first quarter 2013 results were presented on a net basis.

Also contributing to the increase in organic growth rate were increases in license and maintenance revenue. As Mike noted, our recurring revenue represented nearly 74% of total revenue in Q1.

This compares favorably to 71% as reported in last year’s first quarter which will be just under 72% on an apples-to-apples basis when you look at the Payment Solution on a gross revenue basis for both periods.

As we stated in our fourth quarter call, and I’ll remind you today we changed the presentation of our Payment Solutions revenue from recognition on a net basis to gross basis beginning in our fourth quarter of 2013.

We posted a workbook on our website detailing our reported results for 2013 and our non-GAAP results for the fourth quarter in the year ended December 31, 2013 as if we had presented these Payments revenue in the cost on a gross presentation basis and on a net presentation basis.

Please refer to the workbook for more detail about the net to gross revenue presentation change and to better understand our organic growth in 2014 as we believe it may assist with the evaluation of our performance in light of the change.

Turning to profitability, non-GAAP gross margin was 55.3%, which was below last year's first quarter and reflected the change in revenue presentation from net to gross for our Payment solution.

In addition to this accounting presentation change, our core gross margin was negatively impacted by increased investments to support our subscription revenue base and to improve long-term operational efficiency. Our gross margin would have been 58.1% if presented under the previous net recognition basis.

We generated non-GAAP operating income of $19.9 million, representing a non-GAAP operating margin of 15.6%.

The operating margin in the first quarter were lower compared to the first quarter of prior year due to investments in our sales force and customer retention personnel to drive organic growth as previously discussed, investments in personnel and hosting capabilities to support our subscription revenue base and to improve long-term operational efficiency, and the impact from our net to gross revenue recognition that reduced operating margins by 78 basis point in the quarter.

This may become more evident if the pace of growth in Payment Solutions continues to outpace the growth in our overall business.

Additionally, it's worth mentioning that our Blackbaud Giving Index which attracts overall and online giving indicates a year-over-year uptick in both categories with an online giving increase upwards of 14% through February. This upward giving trend indicates opportunities for growth in new customers in an online transaction and Payment processing.

Rounding out the P&L, our non-GAAP diluted earnings per share were $0.24 for the quarter. Now let's look at the balance sheet and cash flow statements. In the first quarter, we generated $13.3 million in cash flow from operations. Our first quarter is historically our lowest quarter for cash generation.

During the quarter we paid out $5.5 million in the form of quarterly dividend, and we amended and extended our debt agreement. Let me pause and take a minute to comment on our new debt agreement.

Our facility is $325 million in aggregate and is comprised of a 175 million senior secured term A loan and 150 million senior secured revolver with a capacity to expand the facility by an additional 200 million, subject to certain terms and conditions. This facility will mature in February of 2019.

The new facility reflects our strategies to optimize our capital structure, combining our ongoing evaluation with favorable market conditions to secure a stronger facility that provides the company with improved pricing, greater financial flexibility, reduced amortization, reduced covenant restrictions and strike a balance between term and revolver debt with a more concentrated group of investors who know the company well.

The issue was more than 60% oversubscribed. Our debt balance at the end of the first quarter of 2014 was $173.1 million, which when netted against cash on hand resulted in net debt balance of $140.6 million virtually level with our net debt at the end of 2013.

With that I’d like to turn it back over to Mike before we take your questions for some final comments about our outlook for 2014. .

Thank you, Tony. I like to wrap up our prepared remarks by commenting about our outlook and goals for 2014.

We expect revenue to be in the range of $535 million to $550 million; non-GAAP EBIT in a range of $92 million to $98 million, or 17.5% operating margin at the mid-point; non-GAAP diluted earnings per share of $1.16 to a $1.24 and to generate approximately $100 million of cash flow from operations with free cash flow remaining relatively flat compared to 2013 free cash flow of approximately $84 million.

Please remember, that our goals include the full effect of the operating investments I noted earlier which represents more than $70 million of incremental spend over the levels invested during 2013, also included is a $11 million negative swing estimated cash taxes for 2014.

We expect to leverage our investment in 2014 to generate increased growth in 2015 and 2016 when we expect GAAP operating margins to steadily increase. In summary, we are well positioned and expect to accelerate our growth while we generate strong free cash flow which includes incremental investments.

We are on track to meet our financial goals for 2014 based on our first quarter performance and we remain confident in our ability to expand our market leadership in the future. With that, Tony, Rob and I are happy to take your questions. Thank you.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question is from the line of Tom Roderick with Stifel. Please go ahead with your question..

Hey, good morning gentlemen. .

Good morning..

Mike, let me start the first question and throw it to you, you bring a pretty unique set of expertise here with respect to the Payments business in the company you talked about a bit more since you have been into board here.

Can you help us understand how you think of the Payments opportunity beyond just this whole you know net to gross change that positively impacted revenues on a short-time basis.

How do you think about you know how you can grow that business? What do you need to do to grow that business? And then maybe this is a Tony question but what happens to gross margins as you do grow that that side of business?.

Sure, happy to do that. First, we pretty pleased with our performance across the board, you happened to highlight Payments. So specifically around Payments, I think we have an opportunity in a couple of areas.

One is just we continue to add net new clients every month so, we are scaling the Payments business by adding existing clients who are signing up our Payment services. So this is sort of one area. The second are is the shift in the industry to online.

Online grew about 14% last year when the whole industry Internet giving grew little under 5% and we are positioned quite well with -- in both of those areas superficially in online as well where we pick-up Payment transaction revenue.

So it's two things it's adding more clients every month to the platform and it’s the sort of trend shift to online both of those are favorable for us..

And Tom maybe real quick on that what happens to the margin going forward is this continuous to grow and it outpaces or other lines of business.

On a gross margin basis I would expect that it would be a bit dilutive I think the thing to note though was just nature of the business when we are reporting it on a gross basis, very strong business, very good financial contribution dynamics. It requires less sales and marketing R&D and G&A typically.

So it can have a lower gross margin profile the shift and mix changes more towards Payment and subscriptions but I’d expect that it contributes a comparable operating margin at the end of the day..

Great, thank you. Let me shift my next question thinking about the goals and desires to achieve some accelerated top line growth.

It’s presumable well certainly too early to think about any positive impact from new product launches and think that way but relative to where you are starting to put your investments I think you add a little over 3.5 million this quarter maybe help us understand what that meant for you know fixed investment in sales and marketing versus new hires, and from the standpoint of productivity within the sales group, can you help us understand how general market versus enterprise fared this quarter and are you getting some better visibility in both pipeline and backlog there?.

Yeah, I’ll start on that Tom. So we are you know we have ramped-up investment this year in a few areas as we mentioned on the call and in fact on the last call.

So sales expansion is one area that’s just net new expanded sales force in the business I think there are opportunities to do that given the current product portfolio and we are executing on that well. We are also increasing headcount and capabilities around client retention.

Our current retention is quite high but as we move more and more into a cloud-based offering I want to make sure that we maintain that high retention and I think we can.

We also have product investments happening in several products across the board those are driving future road maps in some of our key products and will have more information as the year unfolds around some of the products we are quite well known for and where we are going with those products and I think we will resonate well with our clients.

So we feel pretty good about some of the initial decisions we have made in those areas and I’m referring to the product portfolio that I think will help drive future growth.

And also so those areas I think will drive future growth and then just back to sort of natural subscription growth as we have a higher percentage of our revenue in the subscription category we start to gain foothold in higher organic growth opportunities in our categories well which we feel pretty good about based on first quarter results..

And then Tom maybe just some number related to the investments. You know thus far we have seen a good return as expected on those investments in sales and marketing so, cap ratios and pipeline build and so forth its looks pretty good thus far through Q1.

So, we are fairly happy with those investments and then in the other place obviously in that 3.3 so fairly good chunk of spend is on the infrastructure investments in rolling-out a CRM across the org which we would expect should help us drive growth and the efficiency both and gain some leverage in the future..

Great, last one for me and then I’ll jump back in the queue. Tony you had talked about $17 million in incremental spend.

So you know under a quarter of that this quarter in the $3.7 million that you highlighted, how should we think about how much more of that comes on in Q2? I want to make sure I have the thinking right for linearity of the EPS and sort of corresponding operating expenses as we through the year..

Sure, as you know we are not giving quarterly guidance this year and going forward so, I can't give specifics there. I would tell you that we are fairly well on track with our expectations for the $3.3 million we spent.

I would say slightly behind in the products area with some of the investments with sales and marketing, I think we are right expected to be in the infrastructure largely where we expected to be. That said Q1 is also ramp-up period i.e.

hiring the personnel and training them and getting them on board so we wouldn’t had a full quarter of expenses necessarily across all those four initiatives. I think that’s about the amount of granularity Tom I can give you at this time..

Okay, I’ll jump back in. Thank you guys, nice job..

Thanks buddy..

Thanks..

Our next question is from the line of Matthew Kempler with Sidoti & Company. Please proceed with your question..

Thank you. So I wanted to revisit on the Payment and Analytics side.

Could you touch on what percent of Blackbaud’s customer base is currently using this product? And then maybe highlight some of the key advantages here that we have to take share from incumbents?.

Yeah. Matt so, we don’t break out the percentage of clients but I can tell you that there is a long ramp-up opportunity for us to continue to grow that business across the current client base and in fact we are bundling that on net new client deals as well. I think there is a long run way there.

And we continue to increase a number of implementing clients per period as well and so, we are picking sort of a wider base on which allowed to participate in more transactions as we implement more clients and grow that. And then secondly I’ll just reiterate the shift to online shift really should fuel that up a bit for us as well. .

And I think the shift to data right?.

Yeah. So in the Analytics space we have got a pretty high focus on sort of ramping-up our cross sell capabilities in cross sell program, with analytics into the base not unlike Payments.

Several of those product have very compelling ROI for our clients that help understand and run their business better and there was a nice uptick in that and we really increased our focus to bring those solutions to market in a more aggressive way from a cross-sell standpoint..

Okay. And then I quickly want to -- on the margins. Firstly, subscription margin obviously some investment there and some change due to the Payments in this.

But when do you think we turn the corner there to start growing that margin again what’s the long-term target?.

I think that first phase of that will be that when we get to a full year comparative on that presentation change for the Payments business. So that’s by far the largest impact or negative impact on subscription margin. So when we get to Q4 of 2014 you’ll have a full year comparative at that time going forward and on a quarterly basis.

And then secondarily, I think as these -- some of the infrastructure investments we are making is related to our cloud service offering in hosting environments and we expect two things one, is to have additional capacity there as we shift more of our products to a hosted cloud offering type of thing and secondarily could be able to gain some efficiencies through those investments, So I would you’ll see both some leverage gain as we add more subscription customers to that base of capacity and then secondarily as we start to gain some efficiencies so probably more so in the 2015 forward range and then in this year..

Okay, and on long-term target range for subscription margin?.

Unfortunately at this point we are not giving any specific expectations in our line item level..

Okay..

But I think it's something that will be a good discussion at our Investor Day..

Okay. And then just also on the services side so the services margin showed some weakness there, I know this is seasonally the weakest quarter.

But I am wondering has your long-term goal of getting back towards the 30% margin range for services has that changed all and are there any changes we are making to try to improve that and get us there?.

So on the services margin first, what’s caused the decline year-over-year three main components there one, is Q1 last year we had the benefit of some pertain consulting revenues from the Convio acquisitions that were released of ’13 that was a positive from a revenue perspective.

Secondarily, as we contained to shift our offerings to subscriptions within JMBU a lot of the services are getting bundled into those subscription offerings and therefore getting ratable recognition which is a slower recognition of the revenue and that’s having a near-term negative impact on services margin but should come back to us over the three year life as those contracts stack themselves on top of themselves over three years.

And we should see some positive good momentum then in future years. And then lastly, if you review this quarter we have plenty of backlog so we have not continued to drive more revenue and better margins. The problem that we had that issue with the mix of resources. So we didn’t have the right mix of talent and skillsets across the resource base.

And so we are not able to deliver on all of the backlog that would have expected that had some negative impact which is a short-term issue not a long-term issue..

Okay..

Mike I don't know if you want to add anything on that I think?.

Yeah, let me just add one point to Tony’s first comment around the retained services from Convio that hit in the first quarter of 2013 those revenue change because of how that worked with little or now cost so, the quarter-to-quarter comparisons are little challenged based on that one times event as well..

Okay, thank you..

Sure..

(Operator Instructions). Our next question is from the line of Peter Wahlstrom of Morningstar. Please proceed with your question..

Hi, good morning. Thanks very much for taking my question. Actually just staying on the ECBU topic certainly domestic enterprise and the medium-size business has been pretty strong alongside the economic profit.

Is there a particular customer vertical that may have been behind this recent push and on the counter are there are a couple of other areas then you haven’t seen the sort of results that you have been looking for?.

Yeah, I wouldn’t say that there is any range specific issues by vertical and in fact we see some -- we got largest verticals in the ECBU business units and we see some upside opportunity in the long-run. So I don’t think that there is a specific vertical challenge here that we have experienced as you know.

So there are a couple of vertical where you know we think we can have some accelerated growth in the future?.

Yeah, you know actually from a license revenue perspective we pulled in an incremental deal into the quarter that we didn't had originally anticipated closing in Q2. So I think overall from a financial performance enterprise business performed at or above our expectations..

And Peter what was your follow-on question there?.

It’s -- I can take it offline. But one of the other items Mike from your strategy sessions what is your what was your overall impression of the competitive landscape, certainly the competition is a little bit more niche and isn't standing still.

But maybe if there is an opportunity for Blackbaud to pick-up an acquisition coming out in some of these meetings or identified some additional white space?.

Right, I think our opportunity if we look at the competitive landscape I think we are positioned, uniquely positioned well, even with the breadth of our products and the ability to not only cross sell as I mentioned by aggressively cross selling Payment Analytics, but to integrate and pre-integrate multiple solutions into our base platforms and for example a base platform might be one of our CRM products at a particular client segment integrate within analytics, integrate it online, integrate it with Payments and have sort of multi-point solution that significantly differentiates us from the competition which is typically a single point solution.

And I think we have got some nice upside heading down that path. So that would be you know a direction that we are taking in addition to aggressively cross selling in short run as well. But it's an example one thing that was pretty clear coming out of the sessions..

Okay, that’s helpful.

And last just maybe tough to actually dissect but considering that the online giving market grew roughly 14% last year, how do you compare your results in that arena relative to that benchmark?.

A bit faster than that, we cannot get into the specifics at that level of granularity but our online is our fastest, current fastest growing component of the business and I think we are doing well with the existing customer conversion to online as well as Mike talked about earlier we said on our prepared remarks that addition of new customers are back to base.

I think one of the keys to note today from that online in our Payments and usages we do not yet sell a standalone Payments platform into the market. So all these sales to customers are back to existing customers and new customer that are also buying in CRM or other solution to take advantage of Payments business.

So we would expect in the future hopefully to have a standalone solution that we can sell to net new customer that don’t necessarily have to have one of our CRMs..

Okay, thank you very much..

You bet..

You are welcome..

Thank you. At this time I’ll turn the floor back over to Mr. Gianoni for additional comments..

Okay, thanks operator. I’d like to conclude our call by saying we are highly focused company. We are very engaged team; we are committed to successful execution of our strategies and look forward to reporting on our progress on these objectives in the future. Thanks everyone for your participation..

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