Jagtar Narula - Vice President, Investor Relations and Business Planning Michael P. Gianoni - President, Chief Executive Officer & Director Anthony W. Boor - CFO, CAO, Executive VP-Finance & Administration.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc. John Christopher Rizzuto - SunTrust Robinson Humphrey, Inc. Stan Berenshteyn - Sidoti & Co. LLC Kevin Liu - B. Riley & Co. LLC Peter C. Wahlstrom - Morningstar Research.

Please stand by. We're about to begin. Good day, and welcome to the Blackbaud 2015 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jagtar Narula, Vice President of Investor Relations. Please go ahead, sir..

The Wells Fargo 2015 Technology, Media & Telecom Conference on November 11 in New York City, and the Stifel Midwest One-on-One Conference on November 12 in Chicago. We will be hosting one-on-one meetings with management at these conferences, so please contact Investor Relations if you are interested in meeting with us at one of these upcoming events.

Please also note that our 2015 Investor Day will be held on December 3 in New York City. There will also be a live online webcast of the event. We have sent invitations for the event to shareholders, research analysts and potential investors that we have met over the course of the year.

If you would like to attend the event but not received an RSVP, please contact Blackbaud Investor Relations. I am now pleased to turn the call over to Blackbaud's President and CEO, Mike Gianoni..

Thank you, Jagtar. Good morning, everyone, and greetings from our Austin, Texas office. Earlier this week, we hosted our 16th annual user conference bbcon here in Austin. This is our largest conference on record with roughly 2,500 individuals in attendance.

This year, for the first time, bbcon included not only non-profit clients, but foundations and corporate clients as well. Our foundation and corporate attendees were able to visit dual events for non-profits and foundations, further connecting our growing ecosystem of non-profits, foundations and technology partners.

Several exciting announcements were made this year at bbcon that I will share with you later on the call. I would like to start with third quarter performance.

We continued to expand our market leadership position, further integrated and added to our strong solution portfolio, and continued shaping the business to one driven by recurring subscription revenue. Tony will provide more detail about our third quarter financial performance a little later during this call as I'll cover the highlights.

As usual, I would like to provide a Q3 update on the status of our five growth strategies that we outlined at our Investor Day last September, and then end the call with a comment on our outlook for the balance of 2015. So, let's begin with a review of our five growth strategies.

The first of our five strategies is accelerating organic revenue growth with an annual goal of 6% to 10% on a constant currency basis. In the third quarter, we achieved non-GAAP organic revenue growth of 3.5% versus last year and 5.5% on a constant currency basis.

On a year-to-date basis, our non-GAAP organic revenue growth is 5.8%, or 7.4% when normalized for foreign currency. We fully expect to achieve our stated annual goal. Also, organic subscription revenue growth for the quarter, an important metric for us, was 12%. Tony will discuss growth factors in more detail.

Our growth strategy is centered on innovation, quality and integration of our broad solution portfolio. We continue to be pleased with the impact that the strategy is having on our revenue growth; and as mentioned, fully expect to meet our 2015 organic revenue growth target of 6% to 10% on a constant currency basis.

Last quarter, I talked about the positive client reaction and rapid adoption of Blackbaud CRM 4.0, the latest version of our Enterprise platform. We're pleased to announce this quarter that the University of London selected the Blackbaud CRM solution to help them grow alumni relations and development activities.

University of London needed a solution that could manage the complexity of working with their federated colleges, and our platform was a perfect fit. In addition, our adoption trend continued through the third quarter with roughly 90% of Blackbaud CRM clients now using one of the two most recent versions.

We anticipate that this transition of clients off the prior versions will allow us to redeploy engineering resources to developing new innovations that will continue to drive revenue growth. Now, let's turn to our second strategy, which is accelerating our move to the cloud.

This quarter, our non-GAAP organic subscriptions revenue grew 12%, and we've made several announcements relative to our growth in the cloud. So I'd like to spend a little extra time here in providing an update. First, we announced a key partnership this quarter that strengthens our ability to meet clients' needs in the cloud.

We selected Microsoft to be a key technology partner providing a cloud infrastructure as a service to supplement our current environment. In fact, Raiser's Edge is live in Australia with a number of new features powered by Microsoft Azure.

The partnership with Microsoft will allow us to continue offering high availability in the cloud for our clients, reduce our investment needs, enable us to focus on solution innovation and quality. We believe this is a win for our clients and for the company.

Next, I would like to turn to the ongoing progress of our newest cloud-based solutions, both of which became generally available in the third quarter. Raiser's Edge NXT was released for general availability in July, and Financial Edge NXT in September.

We continue to be pleased with early sales and adoption progress, selling roughly 1,000 units of Raiser's Edge NXT and 400 units of Financial Edge NXT to a mix of new and existing clients, indicating solid early progress for both solutions.

We're working hard to ensure all of those new NXT clients are live quickly, and with a high-quality implementation experience. We currently have over 800 NXT clients live that are a mix of North American and international non-profits.

To showcase the advantages of these solutions, we are continuing to hold road shows across the country to share the vision of NXT, the new user experience, the roadmap going forward, and the estimated return on investment for our clients.

These events have been very successful, have really helped grow our pipeline; in many cases, have accelerated opportunities already in the pipeline. Next, I'd like to spend a couple of minutes talking about a few of the announcements we made this week at bbcon regarding both our cloud-based solutions and our capabilities.

Let me start with announcements specifically around Raiser's Edge NXT. As a reminder, this is a completely rebuilt solution on a new platform using advanced microservices architecture that's enabled us to deploy new features and functionality in high velocity, while maintaining high quality along the way.

A unique aspect of Raiser's Edge NXT is that we are tailoring the user experience for specific roles at nonprofit organizations. For example, the Fundraiser role, targeted at core non-profit fundraising professionals, was live with the general availability launch of Raiser's Edge NXT in July.

The role-based view is a significant development versus our predecessor solution, which was generally run by a database specialist that built and ran reports for all the professionals within our non-profit clients. At bbcon, we announced the release of the Executive Director role.

Now, if you're the Executive Director of a charity, your user experience will be customized to include everything you need to do your job well. This includes dashboards, reporting, workflow planning and much more.

We also announced this week that we have deployed a new business intelligence capability with Raiser's Edge NXT and Financial Edge NXT called Nonprofit Intelligence.

This is a significant functionality enhancement that allows our clients to better visualize, understand and act on their key data, and integrates Raiser's Edge NXT and Financial NXT data into a single view. We also announced that this capability will be available soon for our Luminate solution clients.

We believe our capabilities around data analytics and business intelligence will significantly enhance fund raising outcomes for our clients and extend the competitive advantage of our solutions. What's exciting is that Raiser's Edge NXT has only been in the market a few short months, and we have already deployed significant new functionality.

Our entirely new software architecture allows us to move in a very high velocity. Next, I'd like to discuss a couple of additional announcements we made at bbcon related to our cloud strategy and capabilities.

Our goal as a company is to create modern, open and seamlessly integrated experience across our cloud solution portfolio and the complementary solutions offered by our partners. To that end, we've made several important announcements towards achieving this goal.

To start, we are branding the Blackbaud cloud as Blackbaud SKY, which includes infrastructure processes and pre-integrated services to deliver total solutions, all within the most secure, scalable and highest performing cloud available.

The Blackbaud SKY platform, which started with NXT, become our standard platform across our cloud solution portfolio, and will support the ecosystem of partners, developers and clients. We also recognized the need for a single user experience across our solutions to drive learnability and adoption.

So as part of Blackbaud SKY, we have announced the launch of a product-agnostic new user interface trademarked as SKY UX, which is intended to create a consistent, always monitoring user experience. SKY UX is now being used as the standard UI development platform across our solutions. But this new user interface does not stop at our solutions.

In fact, we will also make SKY UX available to our partners as an open source development resource. Our second announcement is the new open integration platform we're trademarking SKY API.

With SKY API, Blackbaud clients, partners and other application developers will have access to industry standard open APIs in a comprehensive set of resources, which allow them to customize, integrate or extend functionality of Blackbaud solutions, thus creating and driving additional value across our platforms.

Over time, we will also empower the developer community with full SDKs, or Software Development Kits, to make the process even easier.

The SKY API includes industry standard APIs based on Representational State Transfer or REST APIs, which is the architecture of the Internet; multi-tenant architecture, where appropriate; and open source where best used. Our SKY API for NXT will be in early adopter phase in 2016, with others to follow.

The program is already in the technical preview phase in preparation for general release next year. And our SKY UX technical preview with partners will begin later this year. In addition to Raiser's Edge NXT, which uses the SKY UX, we announced at bbcon, two brand new cloud products using this platform.

This means that we are creating a common look and feel across all our products, and our partners can as well. Blackbaud's solutions were once closed, and difficult to expand and integrate with. Now, they are available on modern cloud technology that scale a high velocity and open using standards such as REST that I mentioned earlier.

Another example is within our analytic solutions. We have been using Hadoop technology, which is a leading open source software framework for distributed storage and processing of large data sets using commodity cloud services. Many of these capabilities are here today, and we are accelerating our move in this direction.

It's a journey that really never ends. Now, let me turn to our third strategy, the expansion of our total addressable market, or TAM. As we communicated previously, our strategy is to expand our TAM through tuck-in and strategic acquisitions.

We executed this strategy last year with the acquisitions of WhippleHill and MicroEdge, and again, last month, by completing the acquisition of Smart Tuition, which we initially announced in August. Smart Tuition is a leading cloud solution provider in the K-12 private schools and parents, with student tuition and financial aid management solutions.

The acquisition further extends our K-12 private school offerings by adding Smart Tuition's innovative solutions to our existing K-12 portfolio, and expand our TAM in that market by several hundred million dollars, which we will address at our upcoming Investor Day.

Our existing solutions help schools manage fund raising, financials and specific programs such as admissions and student information. With the addition of Tuition, which accounts for the vast majority of K-12 private school revenue, Blackbaud now as a full range of solutions for the sub vertical.

The advantage for schools is that they now have one trusted vendor with an integrated solution suite instead of multiple point solutions. We acquired Smart Tuition for a net purchase price of $187.8 million in cash. The valuation was in line with the multiples of the recent acquisition we have made.

We expect the acquisition to be accretive to our non-GAAP EPS, as well as to revenue growth and margins. The acquisition structure also allowed a full step-up in tax basis for cash taxes. We'll provide greater detail on cash and P&L tax impacts after our initial purchase accounting work is complete.

Our fourth strategy is to continue the optimization of our back-office systems and infrastructure. This initiative is progressing well with the majority of our internal systems infrastructure investments largely completed last year, and has shifted focus toward optimizing our processes.

I am pleased to report that the two major infrastructural investment underway in 2015 are largely done. Last month, we introduced the new HR platform, which will eliminate five systems with one best-of-breed cloud solution, servicing the entire organization.

We've also launched the new financial reporting system, now improved efficiency and scalability, making the integration of acquisitions like Smart Tuition much faster and easier. Additionally, we continue to invest in our cloud production infrastructure, and the Microsoft alliance is one example of this.

Our final strategic area of focus is a three-year margin improvement plan. Our long-term aspirational goal calls for a non-GAAP operating margin of 20.5% to 23.5% by the time we exit 2017. This is a 300-basis-point to 600-basis-point improvement from our baseline of 17.5%, which was the midpoint of our original 2014 guidance.

In the third quarter, we achieved a non-GAAP operating margin of 19.1%, which represents a 50-basis-point improvement over the same quarter in 2014. On a year-to-date basis, our operating margin improvement now stands at 120 basis points over the prior year, and 160 basis points over our 17.5% baseline.

We're seeing early leverage gains from our investments are somewhat offset by headwinds from recognizing time-based license revenue over a subscription period instead of receiving upfront revenue from perpetual licenses, as well as foreign currency impacts. We expect to continue to see operating leverage improvements across our business over time.

Overall, I am pleased with our progress in the quarter, and we'll continue to maintain focus and execute on our five-point growth strategy. Before I turn the call over to Tony, I want to communicate an organizational change.

On October 6, we announced the Brad Holman, the President of our International Business, has decided to leave Blackbaud for personal reasons. Brad helped grow this business into a integral part of our company. We thank him for his work and wish him well.

We've transitioned responsibility to Jerome Moisan, who has led the Blackbaud European business out of London for the last four years. Brad will be staying with us through the end of the year to assist with the transition of responsibilities. Now, I'll turn the call over to Tony to provide more detail about the third quarter performance.

Tony?.

Thanks, Mike. Good morning, everyone. Thank you for joining us today to review our 2015 third quarter performance. We had a solid quarter and have strong continued momentum as we head into the final quarter of the year. We delivered non-GAAP revenue of $159.9 million, an increase of 9.4% over the third quarter of 2014.

Non-GAAP organic growth was 3.5% when compared to non-GAAP revenue for the third quarter of last year. Excluding the impact of currency movements, the organic growth rate was 5.5% when compared to the same period last year.

We had some client events, which show up in our subscription line, move from Q3 to Q2, and some services deals move from Q3 to Q4. But overall, the Q3 organic subscription revenue growth at 12%, we feel good about the quarter and the year. Our recurring revenue represented approximately 75% of total revenue in the quarter.

This compares favorably to approximately 72% as reported in last year's third quarter. The growth in our recurring revenue is fueled by our subscription revenue, which now accounts for 50.9% of total revenue and is favorable when compared to 46.4% reported last year.

Our non-GAAP gross margin was 59.2%, which compares favorably to our non-GAAP gross margin of 57.9% in last year's third quarter. The improvement was driven by improved margins in subscriptions, services and maintenance.

Moving down the income statement, we generated non-GAAP operating income of $30.6 million, representing a non-GAAP operating margin of 19.1%. Adjusted EBITDA was $36.6 million with non-GAAP net income of $17.7 million, and non-GAAP diluted earnings per share of $0.38.

On the capital structure side of the business, in July, we exercised on the accordion feature of our 2014 credit facility and increased our revolving debt capacity by an additional $100 million.

The Smart Tuition acquisition was completed after the third quarter on October 2, and was financed with cash on hand and borrowings under our existing credit facility with an aggregate cash outlay of $187.8 million. At the end of the third quarter, our debt to EBITDA ratio, using our bank calculations, was 1.8 times.

After financing the acquisition of Smart Tuition, our debt to EBITDA ratio was still below three times. In summary, we executed well against our strategic plan. We are ramping performance as a result of our investments targeted towards sales, retention, innovation, and quality, as well as the expansion of our addressable market.

We continue to execute on our capital deployment strategy to maintain a strong balance sheet, return capital to shareholders, and create growth and scalability. With that, I'll hand the call back over to Mike..

Thanks, Tony. I want to get to your questions, so I'll quickly summarize our performance and our outlook for the remainder of 2015. Our performance to-date reflects the impact of execution against our strategy.

Organic revenue growth reflects our investments in the business, our shift to subscription-based revenues, and innovation and integration of our solutions. The acquisition of Smart Tuition and general availability of our NXT solutions fits squarely into this strategy.

Also, I can't stress enough that the announcements we made at our client conference this week around our cloud environment we call Blackbaud SKY, and the announcement of our SKY UX and SKY API capabilities being made available to clients, developers and partners as open source, including the fact that our NXT solutions and other products now use these capabilities, is a strategic next step for Blackbaud.

We also maintain focus on efficiency and profitability. Our year-to-date improvement in non-GAAP operating margin for the prior year reflects the results of these efforts. And while we are pleased with the progress we have shown, we're not done. And we believe there is room for continued improvement. Now, turning to our full year outlook.

We are updating our 2015 guidance to reflect our solid year-to-date results and to include the impact of the Smart Tuition acquisition, which closed on October 2, 2015. The updated guidance includes non-GAAP revenue of $645 million to $653 million; non-GAAP operating income of $120 million to $124 million. Non-GAAP operating margin of 18.6% to 19%.

Non-GAAP diluted earnings per share, $1.48 to $1.54, and cash flow from operations of $115 million to $119 million. We are very pleased with the progress we've made as a company and our expectations for the year.

We started the year with revenue guidance of $635 million at the midpoint, and now, we are currently estimating $649 million at the midpoint. Likewise, our operating income guidance increased from $150 million at the midpoint to our current guidance of $122 million at the midpoint.

This represents a 70 basis point increase in operating margin at the midpoint of guidance. We believe this positive momentum represents our focused effort in revenue growth and operating margins. With that, I would like to open up the line to your questions..

And we will take our first question from Tom Roderick of Stifel..

Hey, gentlemen. Good morning. I wanted to start my first question here just talking a little bit about the Smart Tuition acquisition and make sure we are all on the same page.

Can you just sort of break down what's – how we ought to think about the revenue impact to the guidance that you've issued for the full year? So what should we expect to get out of this for the fourth quarter, and what might that look like on an annual operating basis? And then, I guess, the second part of that question is, and thinking of Smart now as part of the broader K-12 picture, what does that K-12 operating unit sort of look like these days? I don't know if you can share scale or anything else you can talk about K-12 now that you are wrapping WhippleHill together with Smart.

Thanks..

Yeah. Thanks, Tom. Real quick, if I could. I wanted to make one correction to our prepared comments. We erroneously referenced our prior guidance on non-GAAP diluted EPS. I want to make sure everybody was clear on that. Our updated guidance is diluted EPS on non-GAAP basis of $1.48 to $1.52, which is reflected correctly in the press release.

We just referenced our old guidance in the prepared comments. So, Tom, on the revenue impact, we didn't give anything specific on the Q4 impact. I would say for 2016, we would estimate that revenue to be somewhere in the $40 million to $50 million range, so we are still doing some preliminary work on integration and planning and synergies.

But we expect kind of an annual run rate for 2016 between $40 million and $50 million for Smart. And maybe, Mike, if you want to talk a little bit about the K-12....

Yeah, sure. That'd be great. Hey, Tom. So from a K-12 unit standpoint, as you know, we don't break that out, but synergistically, not a lot of overlapping clients between Smart and us. They've got a small percentage of a large addressable market. So there is really great synergy because it's a clear TAM expansion for us at the same target market.

So we are really excited about the add from a distribution standpoint, and we will be integrating a part of the WhippleHill platform directly with the Smart Tuition platform as well to make the experience for the clients more seamless than it is today..

Got it. Great. So – yeah, I'll make my own assumption then, I guess, as to what Smart might impact the fourth quarter by, but even if I just take a quarter of that annual run rate, I guess the temptation would have been to look at the number for this quarter and say, well, 5.5% organic growth, that's maybe a little bit of a slowdown.

But even if I stripped Smart then out of the guidance for the fourth quarter, looks like you are guiding to a pretty nice acceleration in the business, maybe 8%, 9% organic at constant currency for the fourth quarter.

So, I guess, the follow-on question there is, can you talk a little bit more about some of the bookings trends you saw on the quarter that are giving you confidence to guide to acceleration, particularly as you've now launched NXT and you're seeing adoption on that, what can you talk about, bookings, customer adoption, what customers are telling you out there?.

Sure. I'll start just from a booking standpoint, we are very pleased with NXT. We talked a lot about NXT at our user conference this week. So we are really pleased with the entirety of the program from bookings to live clients to the reception in the marketplace, the impact the platform's having with our customers and the quality of delivery.

So the whole program, in general, we're very, very pleased with. We are also pleased with our year-to-date results and sort of the guidance for the whole year. This year, I think, is really solid.

We had some movement a little bit in Q3 that was – we talked about in the prepared remarks on some subscription revenue that kind of showed up in Q2 from a comparable period standpoint, a little bit of services that – is moving into Q4.

But all-in-all, from a yearly guidance standpoint, which we focus on – excuse me, I am losing my voice, I think, from the conference. We are very pleased with the year-to-date results and kind of what it looks like for the yearly guidance as well..

Yeah. And I think, Tom, on the full year guidance front, organic revenue basis on the full year and at constant currency basis, we are expecting to be somewhere between 7.5% to 8% at the midpoint versus last year. We probably finished up at 7.1%.

So a year of transition moving to the cloud for some of our very large core legacy business and still seeing acceleration on an organic basis, we are very happy with where we are..

Wonderful. Thank you, guys. I appreciate the hard work. I'll jump back in queue..

Thanks, buddy..

We go next to John Rizzuto of SunTrust Robinson Humphrey..

Hi. Good morning, everyone. Mike, I wanted to ask you a little bit about the architecture as now, it seems you're ready to go. It looks like everything's on a new architecture, you've got it set up, you're going to Azure, and really, a new phase in that, if you will.

As we look at it now, away from what we are calling cloud or hosting, if you could characterize people on the old architecture moving to this new architecture, what the benefits of that might bring for the customers, as well as for Blackbaud from a business standpoint, as well as how long that transition may take..

Sure. Yes, happy to do that, John. So I'll use NXT as an example, a representative example of which – what's going to happen across the company. So the NXT platform, we did – you could think of what we did in sort of two pieces, one was focused on that mid-market Raiser's Edge transition to the cloud.

And at the same time, we have developed and now used across R&D and announced with Blackbaud SKY, a whole new set of tools and capabilities that are product-agnostic, but will be used across the whole portfolio. So some quick benefits. We're live with about a thousand NXT clients roughly since July.

The architecture allows us to develop and deploy in a very high velocity. I mean, I'll give you a quick example.

Two weeks ago, I was with a customer on a Wednesday, and we were talking about the new capabilities that they would like to see as far as complex list building in their business, and two days before, we'd released the capability in the platform that they had seen and not yet used.

And so we're releasing things that just show up in the platform on a weekly, monthly basis now because we can, where in the past, that RE environment was on a version release that took 18 months to 24 months. It's happening constantly now; I mean, so small to large releases to show up in the cloud.

So the benefit for us is high velocity innovation, and the benefit for clients is the lack of requirement to adopt the new version because capabilities just show up. So that's sort of – that's significant benefits for us and the customer. We're also able to deploy in a much higher quality environment as well, which has happened with NXT.

So that's moving across – that ability is moving across the whole portfolio..

Got it. And you talked about the new APIs, and obviously, it gives Blackbaud a first time opportunity to create a ecosystem around the platform.

What – toward getting partners involved, getting third parties on the ecosystem or helping them building those – and extending the Blackbaud platform, how do you think that will progress over, let's say, the next 12 months?.

Yeah, I think that – so that's a great question. And the Blackbaud SKY announcement to me, I said this in the prepared remarks, and for the company is a major strategic change for us in a very positive way. So the Blackbaud Partner Marketplace has actually come a long way in the last 18 months, and this will, I believe, accelerate that.

So the API – SKY API, as we announced, for the first time are available with industry – open industry standards, which is the REST architecture. That's a big deal because you can hire people that know those tools, and partners have REST API developers. And this will be open source so they can use that. We're also providing the SKY UX.

So the products they build will have the same look and feel as our products, which is much better for customers. So in the long run, the Blackbaud SKY capabilities will accelerate the ecosystem for partners and for our clients as well..

Okay. And with the – just finally on – and I guess, this will have the – thank you for giving us, by the way, the characterization of what Smart can be for next year, it's very helpful.

But with the Smart Tuition, as you reached out and you start looking at their customer base, what you have been able to do thus far, what have you learned about the Smart Tuition customer base and what you have seen that is – may have maintained your confidence level, increased your confidence level, and just characterize – again, only a month, but just characterize now that you have been able to get involved as the owner of the company, if you will..

Sure. Yeah, John, as I mentioned, I believe this is a fantastic fit in the K-12 space for us, which is a very large addressable market in which we do not have a large share of.

There is not a lot of overlap between our current K-12 customers and the Smart base, yet the requirement is there for both our existing K-12 solutions when you combine WhippleHill and the NXT line to the Smart Tuition clients, and then the Smart Tuition capabilities for our existing customers. So I think there is a lot of interesting upside here.

And also, again, we will be integrating the Smart platform with our K-12 existing cloud solutions, which makes the usage for the client base much more seamless. I think there is really interesting upside for us with this, and it's been solidified with the ownership in the last month and as we dig in more..

All right, great. Well, thank you, guys. I'll let somebody else ask some questions..

Thanks, John..

Thank you..

And we go next to Stan Berenshteyn of Sidoti & Company..

Great. Thank you for taking my questions. Just to start off, we saw some tepid expansion in deferred revenue in the third quarter on a sequential basis.

Is that primarily a function of seasonality or are there some other drivers happening there?.

Yeah, Stan, this is Tony. Our deferred revenue, and I think we have spoken about this before, it's a difficult proposition, we do not provide a lot of clarity on it. Q2 is typically, from a renewal and billing perspective, our highest quarter from a seasonality perspective, and so you'll see some ramp in Q2.

As we transition also to the cloud with the NXT products, we are offering today, some discounts to migration customers trying to accelerate. Those folks moved to the cloud.

And when they sign an NXT contract, there is going to be some movement in deferreds because we are going to give them a credit for their prior maintenance deferreds that would have been on the balance sheet, and then re-record this new NXT deferral for the billing.

And then the third piece, it has caused some volatility the last couple of years as that we've done several acquisitions and, of course, the write-off of the deferreds related to acquisitions and the rebuild. But there is – so there is quite a bit of, say, bit noise in our deferred at this point.

We feel really good when you look at the underlying business and the growth in NXT sales. That's why we gave those units. But it is a little tough for you to model, I think, because of all of those three things..

Got it. Got it. And to shift gears a bit, kind of a hypothetical question for you guys.

As analytics are becoming relied upon by – to make business decisions, do you see an opportunity for Blackbaud to provide a kind of a premium consulting service that can essentially help clients make actionable decisions with their data, I guess, beyond just having analytics simply provide clients with KPI dashboards?.

Yeah, we are doing a lot with analytics, Stan. So we announced the new product at bbcon called Nonprofit Intelligence, which is really more a reporting capability. That's a net-new capability for us, but with the ability to create dashboards with an aggregated view of the results of analytics.

And so the product line continues to expand, and our ability to drive intelligent reporting and analytics, which is our – not the same thing, but associated.

Then from a consulting standpoint – excuse me, our view is – and we do consulting a bit today around analytics, but our focus is drive – to drive easy-to-use, intuitive dashboards with cloud-based analytics and reporting solutions.

So it serves up the result easy for customers, which is more around driving subscription growth through cloud delivery than consulting services..

Got you..

And, Stan, I think we can take that. When we get a chance, we can show you some of the new capabilities in NXT that we shared with our customers at bbcon.

It's really compelling where we're using analytics – and this will be in all of our products, what we showed a lot of with NXT, where we're using analytics embedded in the solutions to drive strategies and actions. And so based upon it, the feedback from analytics, it may say that you have a high wealth individual that you need to follow up with.

So they actually create tasks within the product for the individuals in the organization based upon the analytics and the analysis that's kicked out. So there are some really neat feature and functionality that's showing up within the product itself to drive strategies and approach..

And let me just add that at our conference, bbcon, I mentioned earlier on this call about our ability to have a high velocity environment and add features weekly and monthly. We also at – announced just four months after general availability, three major increase in capabilities as well. So we announced the Nonprofit Intelligence.

We also announced the Executive Director role. So, in fact, we put functionality out weekly and monthly, but four months after going live, a very major release, that went over quite well with our clients at bbcon..

Great. Thank you. Looking forward to seeing the product demos, and I guess I'll jump back in the queue..

Thanks, Stan..

Thank you..

And from B. Riley & Company, we go next to Kevin Liu..

Hi, good morning.

First question, just on the NXT bookings that you've already secured, can you talk a little bit about to what extent those are already contributing to your subscription revenue line, and then whether all of the customers booked are fully reflected in your deferreds?.

Kev, this is Tony. So the NXT bookings, anything that would have been billed, we typically would sign a three-year agreement with an NXT customer.

During the transition period, if they were a migration customer, you would obviously have, as I said earlier in the commentary, have a reversal of the prior bookings, and then you would bill them typically a year in advance.

And so you would reflect that in deferred, assuming they have been – they've signed a contract and then billed, which would happen in most cases. If they were a new customer, there would be no reversal and you would have a booking of typically that one year in advance with annual billings from that point forward.

The revenue side gets a little more complex, so if they are a new customer, they would have gotten – prior to general release, they would have gotten access to the old version in a hosted environment.

So they would have gotten 7.93 or 7.94 version of Raiser's Edge or Financial Edge in a hosted environment with the rights to NXT when they are ready to convert in general market availability.

So today, though, in today's market, now that both are released, they would move straight to that new NXT, and we'd spread that revenue over the 36-month contract ratably..

Got it.

And in terms of the 1,400 customers booked already, can you give us a sense for what percentage of those are new versus existing? And then how should we think about the impact on maintenance assuming there are a fair amount of existing customers that are transitioning? Should we assume that it kind of peeks out here and starts to decline slowly over time? Or would you still expect to grow that line in the out year?.

Yeah, we have not – we've chosen not to give any specific guidance. The only thing we've given thus far is that we have over 1,000 customers live. So the transition from purchase to go live has progressed really well. So we are very comfortable with how that's going.

We've not given the mix of new versus migration customers, but as you would expect, that typically is going to shift – going to be weighted a bit more towards our existing base in migrations, and it would be new just based on our historical trends. Overall, we feel good about the mix.

It's so tough to predict, which is why we gave such a large range on our anticipated aspirational growth, because we just weren't certain how fast people were going to move to the new NXT platform. I would expect a bit of that normal kind of bell curve, which we are just in that early ramp.

So I would expect we will see – especially with the positive feedback we just saw at bbcon and the rate at which we are rolling out new feature and functionality, I'd expect we will see kind of a ramp for a period of time. I'm not saying that entire transition period is going to be multiple years in the making.

We've not determined when and if we would start trying to take a more aggressive approach on getting people moved over. So I'd look at it as a multi-year transition, and that we're still in that ramp phase from a migration perspective. I just don't know how wide that bell curve will ultimately be..

I'll just add, this is Mike – and, Kevin, this is Mike. I'll just add that we are happy with net new client sales in that mix as well..

Great. And then just in – within the prepared remarks, I think there was a reference to some services work that had slipped from Q3 into Q4.

Can you quantify how much that was, whether it was a little bit broad-based amongst the customer set or is this tied to a specific large engagement?.

Yeah that was – as you know, the only product we still sell in our license model is our CRM product to the enterprise base at the high end of the market, and we just had some deals that moved, and that's typical of that license. And there is a fairly long-term sale cycles, long-life sale cycles, and so that was not unusual.

But it was services largely associated with enterprise level engagements..

Got it. And just one last one in terms of the new kind of platform announcements that you have made. I'm curious how we should think about that once it actually comes to market next year.

Is that something you're looking at solely from the perspective adding value to the customer and your partner ecosystem, so they can extend the functionality where there's existing products? Or do you expect to monetize that platform in some way?.

Yeah, so you're referring to the Blackbaud SKY announcement?.

Yeah..

Excuse me, yeah, it's – it will happen in all of the ways that you said. So there will be some monetization of that. But I think that the most strategic component is just the acceleration of our ability to go faster from a development and engineering standpoint with us and partners and clients.

So it's really about driving the whole industry forward with an open development environment that we are going to share. We will monetize some of that in different ways, but the key thing is the ability to drive sort of ecosystem and innovation across the board inside and outside of our four walls..

All right. Great. Thank you for taking the questions..

You're welcome..

Thanks, Kevin..

Our next question comes from Peter Wahlstrom of Morningstar Investment Research..

Good morning, guys. Thanks for taking my question..

Good morning, Peter..

So, just as a follow-up, can you maybe give us a sense as to what is the level of CapEx or maybe there is additional OpEx following either Smart Tuition or the Microsoft cloud partnership kind of Blackbaud SKY? Does that essentially reset the level of spending or introduce another variable, which impacts the trajectory of your mid range margin or cash flow goals?.

Sure. It's an intersecting dynamic with the move to the cloud onto the – so I would expect that you will see – because we still keep a fairly good amount in-house from an infrastructure perspective. But I would expect CapEx kind of on a run rate to decline a bit on that front.

What we are seeing for CapEx that's also increased that rate is that as we move to more and more innovation on these new products and platforms, there is a larger percentage of that R&D that is capitalizable. And so we have seen growth in CapEx related to capitalized software R&D costs as well, Peter.

So I would expect with the fact that we are moving more of our R&D spend towards true innovation of new solutions, that at least for the foreseeable future, we'll see some increase in CapEx there that I'll expect to see some offset because we're moving to the cloud for some of our back – hosting infrastructure..

Okay.

And then shifting really quickly to NXT and some of the new clients that have signed on, whether they had existing Blackbaud relationships or are new to the firm, can you provide maybe a little bit more detail or sense of how many of these customers are opting for the good kind of package versus the better and best? And how quickly then they are able to kind of migrate up the functionality level, even though I understand that even the good level has more functionality today?.

Yeah, the good – there's a good, better, best. And RE, sort of the classic or the – let's call it the vintage RE to the – even the good, there's a very significant difference in functionality in the entry level RE NXT. Many clients are opting up higher than the entry level given the value-add that they see with things like analytics.

So we are pleased with where they are opting to because they see the value-add for their business. And there is a pretty significant uptick in capability, again, at the entry level..

Okay.

And just to confirm, there's really no incremental cost to Blackbaud for the customers switching on those additional modules or adding that functionality, is that correct?.

There will be some hosting infrastructure costs associated with those, right, because if they are turning on multiple products versus a typical Raiser's Edge, we would, say, have some hosting expense.

And then on the analytics side, because there is embedded analytics depending on which package they choose, there could be some variable analytics-related costs as well..

Okay. Thank you very much..

You bet..

We'll take a follow-up question now from Tom Roderick of Stifel..

Hey, Mike, I wanted to follow up just on a couple of topics you discussed early, but particularly the Nonprofit Intelligence product. I guess from my perspective, that looked like a meaningful step forward in what you guys are offering for the analytics package here.

And I think I understand properly that NXT customers automatically get payments in analytics included in that, but given that NPI is sort of a premium offering for the analytics side, I am curious if that is something that you can charge for right out of the gates when that's – when that becomes generally available.

And maybe that sort of fit into the context of your good, better, best discussion, but we'd love to hear how you think that can possibly impact the ability of your customers to buy more products..

Sure. Yeah. The NP Intelligence is a significant announcement for the RE and FE customer base. It is not a additional fee, but it's basically a replacement of reporting capabilities that where relatively inferior from a go forward standpoint. So it is a modern cloud capability around reporting.

It's not analytics, but it's a reporting capability that aggregates the results of analytics and other data. Excuse me. The other key thing, Tom, that I'll mention, which we also announced at bbcon, is that the Intelligence is a capability given our new architecture.

We're going to deploy the same NP Intelligence capability in our Luminate platform as well. So we're able to now share capabilities across platforms. And if you recall, Luminate was a key online product, which came with the Convio acquisition years ago.

And so we are able to better leverage engineering resources by deploying modern cloud capabilities across the portfolio, and we announced that at bbcon as well..

Great. And, Tony, real quick one for you, just so we're all on the same page here with Smart.

Can you remind us what the interest rate is you are paying on the credit revolver for – that you are drawing down the fund, the Smart acquisition, or in other words, how much we ought to be modeling in for interest expense for the coming year and in addition to what we previously were modeling?.

Yeah, so that will change a little bit, Tom, just because we – the incremental borrowings were removed in the pricing grid. And we'll have to obviously see what rates do, what the Fed does, but we are still running at something south of 3%, on an attractive rate, with our hedges and everything built in.

So – and that will move a little bit as we pay back down, et cetera. So still a very, very – especially when you tax effect it, very cost effective means of funding the acquisitions..

Got it.

So probably incremental, say, $4 million or $5 million in interest expense, but not much more than that?.

Yeah. And depending on how much cash we generate and how quickly we can pay it down..

Yeah, good point. Okay. Thank you, guys, appreciate it..

Sure..

Thanks, buddy..

Thanks..

And we'll take a follow-up from John Rizzuto of SunTrust Robinson Humphrey..

Hi, thanks for the follow-up. Tony, a little bit about the model. So when you gave guidance for Q4, you held out a GPS – or EPS guidance, rather, pretty much where you've had it, just what to think about there.

And then as we look forward for as much as you can characterize in all due respect, because you've just gotten Smart Tuition, where there might be synergy points as far as from operating – the operating model that we may or may not be able to get from Smart Tuition as it start to absorb the company more fully?.

Sure, John. So, yeah, the dilutive EPS because we were still wrestling a bit with where interest was going to – and rates were going to go. We narrowed that range. We did take up operating income, as you know, and operating margin. So we feel really good on the year.

If you go back and look at our original guidance that we gave kind of end of the year, yeah, we were in the range of non-GAAP operating margin of 17.9% to 18.3%, with the midpoint 18.1%. And with this revised guidance inclusive of Smart, we are saying $120 million to $124 million, or 18.6% to 19%. And that's before constant currency.

So I think on a constant currency basis, full year operating margins are somewhere in that 19% to 19.1%, at the midpoint, which is great when you think we set the baseline at Investor Day last year at 17.5%.

So with inclusive of Smart, we're looking at a 150 basis point to 160 basis point improvement already just a year in to our strategic initiative. So we feel really good about that. Synergies on Smart, that's something we're working through now. Obviously, we did a lot of due diligence, we had some ideas about what we think we can deliver.

Back office-wise, there will be some synergies rolled over or right into that, the infrastructure that we discussed that we've invested in over the last couple of years. So they'll get that parental advantage, as Mike likes to call it, that moving on to all of our CRM and financial platforms, et cetera.

So we're – the team is actually working on that integration as we speak. So we get some cost synergies there from a back office perspective. I think the biggest synergies are probably more so there on the revenue side with this acquisition. To Mike's point, not a lot of overlap with our existing base and theirs.

And so we see really good cross sell opportunities on back to our base and then to their existing base. So I think this one, because it is a smaller operation, will probably see more revenue synergies than cost synergies..

Great. And so as much as you can, can you just give us a little breakdown on the Smart Tuition revenue line? I mean, what are they charging, I'm not sure.

What is subscription fees, what are all license – I don't know if it's 100% license, 100% subscription, based to that nature, services and such?.

Yes, you will see all of that, I think, coming through subscription revenue. There are no license there. And then I'd suggest maybe, because there's a whole slew of different fees, probably the best thing would be to look at Smart's website to get a sense of how that's offered, because there is quite a dynamic of different services that are offered..

Right. It's based – it's a cloud model..

Okay..

Okay, perfect. All right. Thanks, guys..

Thanks, guys..

And this concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to management for any additional or closing remarks..

Thanks, operator. I'd like to just close by saying, everyone, our most recent quarter and year-to-date performance, we feel, has been very strong. The business is gaining momentum. Excuse me. We are well positioned to achieve our guidance this year and longer-term aspirational goals.

Also, I'll mention, I hope everyone takes the opportunity to join the executive team and me in December 3 for Investor Day. We will be webcasting the live event held at the NASDAQ building in New York City. And please contact Investor Relations if you are interested in attending. Thanks, everyone. Have a good day..

And this does conclude today's presentation. Thank you, all, for your participation..