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Blackboard Inc. (NASDAQ:BBBB)

Q1 2009 Earnings Call Transcript

May 6, 2009 4:30 pm ET

Executives

Michael Stanton – SVP of IR

Michael Chasen – President and CEO

Mike Beach – CFO

Analysts

Amy Junker – Robert W. Baird

Trace Urdan – Signal Hill

Michael Nemeroff – Wedbush

Tom Roderick – Thomas Weisel Partners

Terry Tillman – Raymond James

Bryan McGrath – Credit Suisse

Brandon Dobell – William Blair

Operator

Ladies and gentlemen, welcome to the Blackboard’s First Quarter 2009 Conference Call.

I would like to now introduce your host for call, Mr. Michael Stanton, Senior Vice President of Investor Relations. Mr. Stanton, please proceed.

Michael Stanton

Thanks, Katie. Hello and thank you for joining us today for Blackboard's first quarter conference call. I’d like to remind everyone that except for historical information presented, the matters discussed today may contain forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and are subject to a number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements.

Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are delays in product development, undetected software errors, competitive pressures, technical difficulties, market acceptance, availability of technical personnel, changes in client requirements, risks of international operations, general economic conditions, the integration of ANGEL Learning and such other risks as described in the risk factors section of Blackboard's most recent Form 10-K on file with the SEC.

Blackboard undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.

A few administrative notes related to some of the metrics we will provide today. First, we will provide non-GAAP adjusted net income, which excludes the amortization of acquired intangibles, stock-based compensation and non-cash interest expense, all net of taxes and non-GAAP adjusted net income per share on this call, as additional information regarding our operating results. The measures are not in accordance with nor an alternative for GAAP and may be different from the other non-GAAP measures used by other companies.

Blackboard believes that the presentation of these non-GAAP financial measures provides useful information regarding additional financial and business trends relating to the company's financial condition and results of operations. Reconciliation of GAAP and non-GAAP has been provided in today's earnings press release, which is available on the website at blackboard.com.

The second administrative note relates to our contract value, which we will also discuss today. Contract value represents the annualized recurring ratable revenue under existing contracts with clients in effect at the end of the quarter without regards to the remaining duration or renewal of such agreements. This is not intended by management for the estimation of or as a proxy for future revenue to be recognized, but management believes it is a useful tool for investors to evaluate our current operating performance. We have once again provided supplemental information related to licenses and contract value on the Investor Center section of the website at investor.blackboard.com. The document is titled Q1 2009 Blackboard Metrics.

Third, I would like to point out that all 2008 quarterly results have been adjusted to reflect the adoption of FASB, APB 14-1 related to our outstanding convertible debt. And finally, we are providing slides today outlining the discussion of our acquisition of ANGEL Learning as well as our updated 2009 financial guidance.

On today's call are Michael Chasen, President and CEO; Mike Beach, our Chief Financial Officer.

At this time, I will turn the call over to Michael Chasen. Michael?

Michael Chasen

Thanks, Michael. Hello everyone and thank you for joining us today. For today’s call, I’m going to take everyone through some of our first quarter operational highlights. Once we’ve covered our first quarter, I will also discuss the details of today’s exciting news regarding our acquisition of ANGEL Learning, Inc. I will then hand the call over to our CFO, Mike Beach to discuss the quarterly financials and close with our updated financial guidance for 2009, which will reflect the impact of the acquisition of ANGEL Learning.

Our financial results in the first quarter reflect a strong start to the year. Our revenue grew year-over-year by 26% to $86.4 million, which is at the top end of our guidance and our product revenue grew 27%. From an earnings perspective, I was very pleased with our non-GAAP adjusted net income of $8.6 million or non-GAAP adjusted earnings per diluted of $0.27.

The first quarter was a good quarter in both our international markets and in our professional education business, which serves for profit higher education as well as government entity. Additionally, we had a good success once again in Managed Hosting sales. These areas contributed to the strong revenue performance that we saw on this quarter.

As we have mentioned on prior calls, we are continuing to experience pressures in some areas of our business given the economic environment. Two of the more challenging areas in the quarter were selling e-learning professional services and our Blackboard Connect product.

For professional services, our client appetite for new service engagements has been slightly below our expectations and we are cautious on the outlook. With respect to Blackboard Connect sales, we have experienced higher than anticipated budget pressure and increased competition from low-price providers.

We are working to address the Blackboard Connect challenges through new offerings. But we now anticipate a slightly lower revenue contribution from Blackboard Connect in 2009. Both of these sales dynamics are reflected in the updated guidance our CFO, Mike Beach will provide shortly.

Turning to some of the details in the first quarter, a few examples of deals in US higher education includes, Mid-Plains College which became a new client licensing the Blackboard Learning System. Cuyahoga Community College in Cleveland, Ohio expanded a few learning program by adopting the Blackboard Community System and the Blackboard Content System. And Webster University upgraded to the latest version of the Blackboard Learning System and also moved to Blackboard’s Managed Hosting offering.

Moving on to some of our international deals, Polytechnic University of Puerto Rico upgraded the Enterprise Blackboard Learning System. In Mexico, the Universidad Autonoma de Baja California became the latest client to license the Blackboard Outcomes System. And in Japan, where we continue to see strong traction, Rikkyo University licensed the Blackboard Learning System, the Blackboard Community System and the Blackboard Content System.

In K-12, I would like to highlight two deals including, Florida State University Schools who became a new client licensing the Blackboard Learning System and the Blackboard Community System. And lastly, Walnut Valley Unified School District added the Blackboard Community System to expand their e-learning offering across the district.

Moving on to licenses, we ended the quarter with a total of 6,836 enterprise category licenses. Breaking out these licenses, we had 2,393 licenses of the Enterprise Blackboard Learning System, 877 licenses of the Blackboard Community System, 510 licenses of the Blackboard Content System, 33 licenses of the Blackboard Outcomes System, 451 licenses of the Blackboard Transaction System, and 2,572 licenses of the Blackboard Connect offering.

In terms of the Blackboard Learning System basic product, we ended the quarter with 699 licenses. The total number of licenses including basic licenses at the end of the quarter was 7,535. In terms of our Managed Hosting business, we finished the quarter with 639 hosted clients which represents a 21% increase over the same period one year ago. We are very pleased with the continued success of our Managed Hosting business and believe that clients will continue to adopt Hosting given its proven reliability and cost effectiveness.

As for contract value, we finished the quarter with an annualized contract value of $287 million, which represents an increase of 18% over a year ago period. Our total headcount at the end of the first quarter was 1,108 employees. We ended the quarter with 253 people in sales, 96 in marketing and business development, 239 in product development, 205 in support, ASP hosting and production, 132 in professional services, and 173 in operations.

Now before I hand the call over to our CFO, Mike Beach I would like to spend a few minutes discussing today’s acquisition of ANGEL Learning. We will now start to follow the slides as Michael Stanton referenced earlier.

Let’s start off with a brief review of the transaction detail which are outlined on slide four of our presentation. Blackboard is acquiring ANGEL Learning, a leading provider of e-learning applications to academic institutions. The acquisition price is approximately $95 million. The consideration will be approximately $80 million in cash and $15 million in stock. ANGEL’s trailing 12 months revenue was approximately $22 million and they’re all profitable. This transaction has been approved by both company’s Board of Directors and we would expect closing in the upcoming days.

Moving on to slide five, ANGEL is a privately held company based in Indianapolis, Indiana with approximately a 130 employees and was founded in 2000 as a spin out of the University of Indiana. ANGEL has established itself over the past nine years as one of the best learning management provider within the US education industry.

In terms of product and service offerings, the ANGEL product portfolio includes the ANGEL Learning Management System and ANGEL ePortfolio as well as ANGEL Managed Hosting. All of ANGEL’s products are offered on an annual subscription basis with one to three year license terms. Additionally, ANGEL also provides consulting and training services.

In terms of clients as you can see on slide six, ANGEL has established its excellent reputation across US higher education and for profit education, as well as a growing presence in K-12. ANGEL’s clients include top higher education institutions such as Fairfield University, Michigan State University and Penn State University.

The company has a very strong presence in the community college market where it serves Miami-Dade Community College, one of the largest two-year schools in the country, as well as a significant number of community colleges in the suiting system.

ANGEL also enjoys an excellent reputation serving a growing number of for profit institution, like the San Joaquin Valley College in Grand Canyon University. Finally, the company has also been successful with the range of K-12 school districts like the Frederick County Public Schools and Orange County Department of Education.

Moving on to slide six, Blackboard’s acquisition of ANGEL will provide many client, industry and financial benefits, including one, a combined global client base of more than 5,800 K-12 schools, colleges, universities, government organizations, and corporations which creates the largest community focused on e-learning; two, a broader unified platform for brining together the best ideas, innovations, features and practices in e-learning today; three, the addition of ANGEL’s industry leading e-learning technology expertise, including specialization on Microsoft .Net Platform and Microsoft technology; four, expertise in creating a client first support culture that translate it into consistently excellent experiences for ANGEL clients that we can now add to our ever-improving client support capability we’re building here at Blackboard; and five, increased revenue, profitability and cash flow. As Mike Beach, our CFO will highlight, we should benefit from operating efficiencies and there is a potential for revenue synergy in future as well.

On a pro forma basis, this transaction will add about a $0.01 to non-GAAP earnings in 2009 and be meaningful accretive to non-GAAP earnings in 2010. On a GAAP and non-GAAP basis, the transaction is dilutive in 2009 due to purchase accounting and merger costs as Mike Beach, our CFO will detail out.

I will now turn the call over to Mike Beach, our CFO, to cover our financials and some additional background on ANGEL and our future guidance. Mike?

Mike Beach

Thanks, Michael. I have organized today’s quarterly financial review around the income statement, the balance sheet and cash flow, and then discuss some of the financial details of ANGEL Learning, and our updated 2009 guidance.

Revenue for the first quarter of 2009 was $86.4 million, up 26% from last year. Product revenue for the quarter was $80.1 million, representing an increase of 27% over the same quarter of 2008. Professional service revenue for the quarter was $6.3 million, which represents an increase of 18% over the prior year.

In terms of revenue characterization, we also break out our revenues by the nature of the revenue streams, which include ratable recurring, ratable non-recurring and other revenues. For the quarter, ratable recurring revenues increased 31% to $71.6 million as compared to $54.6 million in the same quarter of 2008. We’re very pleased with our ratable recurring growth which was largely driven by our continued success with Managed Hosting.

Ratable non-recurring revenues increased 12% to $6.2 million as compared to $5.5 million in the same quarter of 2008. Other revenues increased 4% to $8.6 million as compared to $8.4 million in the same quarter of 2008.

Moving on to gross profit, our gross profit for the first quarter excluding stock-based compensation and the amortization of acquired intangibles was $60.6 million as compared to $47.9 million in the same quarter a year ago, representing an increase of 27%. For the quarter, our gross margin was 70% excluding stock-based compensation and the amortization of acquired intangibles.

Total operating expenses excluding the cost of revenues, stock-based compensation and the amortization of acquired intangibles were $44.7 million, representing an increase of 12% as compared to $40 million in the same quarter last year. For the quarter, we incurred stock-based compensation expense of $4 million and amortization of acquired intangibles was $8.6 million. Our GAAP net loss was $37,000 in the quarter, resulting in net loss per basic share of zero cents. Non-GAAP adjusted net income was $8.6 million or $0.27 per diluted share.

In terms of balance sheet, we closed the quarter with $142.8 million in cash and short-term investments. Accounts receivable were $56.5 million at the end of the quarter. Total deferred revenues increased to $145.2 million, up 24% from $117.4 million from the year-ago period. Current deferred revenues totaled $139.9 million at the end of the first quarter compared to $114.9 million at the end of the first quarter 2008, representing an increase of 22%.

Moving to cash flow, cash flow provided by operations was strong totaling $4.4 million in the first quarter. We’re very pleased with cash collections we experienced during the quarter. Capital expenditures were $5.3 million in the first quarter. As Michael mentioned, our financial guidance for the second quarter and the full-year 2009 will reflect the inclusion of ANGEL Learning.

Moving to slide nine, our guidance for the second quarter of 2009, we expect revenues of $87.5 million to $90.5 million; stock-based compensation expense of approximately $4.3 million; amortization of acquired intangibles of approximately $8 million; GAAP net loss of $1.9 million to breakeven; GAAP net loss per basic share of $0.06 to GAAP net income per diluted share of zero cents, which is based on an estimated 32 million basic shares and 32.5 million diluted shares respectively; and an estimated effective tax rate of approximately 38.5%. Non-GAAP adjusted net income of $6.5 to $8.4 million and non-GAAP adjusted net income per diluted share of $0.20 to $0.26 based on an estimated 32.5 million diluted shares and an estimated effective tax of 38.5%.

For the full-year 2009, we expect revenue of $365.5 million to $374.5 million; stock-based compensation expense of approximately $16.6 million; amortization acquired intangibles of approximately $35.5 million; GAAP net income of $3.9 million to $9.4 million; GAAP net income per diluted share of $0.12 to $0.29, which is based on an estimated 32.7 million diluted shares; and an estimated effective tax rate of approximately 38.5%.

Non-GAAP adjusted net income of $39.6 million to $45.1 million. Non-GAAP adjusted net income per diluted share of $1.21 to $1.38, based on an estimated 32.7 million diluted shares and an estimated effective tax rate of approximately 38.5%. We expect cash flow from operations of $85 million to $95 million and capital expenditures of approximately 5% to 6% of total revenue.

On slide ten, we have provided some additional detail on the impact of ANGEL Learning on our updated financial guidance. This information – the information provided is based on the midpoint of the financial guidance I just provided. Blackboard expects to recognize approximately $7 million in GAAP revenue from ANGEL during the remainder of this year. We currently estimate that we will write down a total of $6 million in deferred revenues as a result of purchase accounting. For the second quarter and full-year 2009, we estimate the write down to be $2 million and $5 million respectively.

At the midpoint of our guidance, Blackboard expects the transaction to be dilutive for the full-year 2009 on a GAAP basis by approximately $0.28 per diluted share and on an adjusted non-GAAP basis by approximately $0.14 per diluted share. The non-GAAP dilution is the result of the write down of deferred revenues and non-recurring merger related costs and the GAAP dilution is impacted by these items as well as the increased amortization expense.

We currently estimate a total of $4 million in non-recurring merger cost. For the second quarter and full-year 2009, we estimate merger cost to be $2 million and $3 million respectively. Additionally, we estimate a total of $40 million in identified intangibles which will be amortized over three to five years. We estimate amortization expense in 2009 will increase by $7.4 million as a result of the ANGEL acquisition.

We do not expect the acquisition of ANGEL to have a material impact on cash flow in 2009 as its positive cash flow will be offset by non-recurring merger costs. Looking to 2010, we would expect the ANGEL revenue stream to experience very modest growth, but to contribute at least $0.10 to our non-GAAP earnings.

Before I turn the call over to Q&A, I want to highlight that if you look at the Blackboard business excluding the impact of the ANGEL acquisition, our midpoint guidance will reflect approximately a 200 basis-point EBITDA excluding stock-based compensation, its margin expansion over last year.

We are focused on managing the bottom line and our model continues to deliver material operating leverage, which will only be enhanced over time by the acquisition of ANGEL Learning.

This concludes the discussion of Blackboard’s financials. Now let me hand it back to Michael Stanton for closing. Michael?

Michael Stanton

Thanks, Mike. We will be on the road seeing investors in New York and Boston in the remainder of this week. We also plan to be at several upcoming investor conferences later this month including the Bear Growth Stock Conference and the Cowen and Company TMT Conference at the end of May. That concludes our formal comments.

Operator, we are ready to begin Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Amy Junker from Robert W. Baird. Please proceed.

Amy Junker – Robert W. Baird

Hi, thanks. Can you survey by talking maybe a little bit more about ANGEL’s product? Are you going to continue to support that similar to what you did for the WebCT acquisition? Are you looking to encourage the ANGEL customers to switchover to Blackboard?

Michael Chasen

Sure. Thank you. That’s a good question. In fact, shortly following the closing of the acquisition, we will be coming out with the next version of ANGEL’s product 7.4 and certainly there will be a continued upgrade and support of that going forward.

As part of our longer-term product strategy, we do think that there is the opportunity to once again take some of the best features and functionality of the ANGEL product and put into our longer-term product strategy with the Blackboard product. So that is something that we’re going to start to dive into planning, but that’s a much longer-term process.

Amy Junker – Robert W. Baird

Okay, great. And can you also talk about just the price point for their product? And are we right in assuming it’s fairly similar to your Enterprise Learning System?

Michael Chasen

Yes, I mean, their pricing is going to be generally in line with ours. Slightly less license fee hosting approximately at the exact same price, so no material difference.

Amy Junker – Robert W. Baird

Great. I will pass it on. Let someone else takeover. Thanks.

Operator

Your next question comes from the line of Trace Urdan from Signal Hill. Please proceed.

Trace Urdan – Signal Hill

Hi good afternoon. I wonder if you could talk specifically about the transaction systems and Blackboard Connect license sales in the quarter, because it was a little unusual to see them sequentially lower. And I know the economy is tough right now, but I wondered if you could maybe just give some insights into what might have been going on there?

Michael Chasen

Sure. Actually the Blackboard transact line of business is doing well. We had a good number of sales in the quarter, they’re just more some low dollar sales, but that was relatively in line with our expectation. Certainly, we are starting to see a little bit of slowdown with regards to Blackboard Connect, just in factors of the overall economy combined with some newer, lower price competition that we are seeing I think yielded some lower unit sales and lower renewals than we had hoped for in the quarter. We are making some adjustments to our packaging as well as our pricing to try to directly – to direct that and we’re hopeful that that should address the challenge that we are seeing.

Mike Beach

Yes. Trace, on the transaction system, it was low dollar and the timing of when we identify drops in that business actually is looking good this year.

Trace Urdan – Signal Hill

Okay. So nothing to really read into that the nominal numbers there. Can you guys tell me sort of what you are thinking about stimulus – potential stimulus dollars as you look out to the year. Was it three months further along? A lot of states have received their funds. And do you guys have a sort of a firm review about where you might or might not be a beneficiary of that spending?

Michael Stanton

Yes, Trace, this is Michael Stanton. The stimulus funds have really just started to flow in the last matter of weeks. I think May 1 was the beginning of Title 2 defunding and maybe a week or so before that some of the other education specific funds. I would say that up until this point, it’s been disruptive and had more of a freezing effect than anything else. So now that the money is finally starting to move, it’s maybe more encouraging, but I don’t think we have yet enough experience to see things start to move other than ironically in transact.

Transact has clearly benefited in just a handful of instances where I’ve heard specific anecdotes of some of these shovel ready projects that it moved forward. So these are deals that over the last six to nine months had been in the pipeline, had stalled and have now quickly jumped to the head to the line. So transact is the one immediate area that that we are seeing some movement.

The other interesting dynamic that we’re experiencing as a company, we are definitely having higher level dialogs I would say in the last three – two, three months we have spoken to almost half a dozen of governors and senior state education leaders, members of state legislatures. So the ideas and interest around standardization of – around reporting related to education technology remains front and center and is really I think the sweet spot of this administration.

Trace Urdan – Signal Hill

But fair to say you guys are still not counting on anything specific in terms of the guidance that you’re looking at.

Michael Stanton

That’s absolutely correct.

Trace Urdan – Signal Hill

Okay, great. Thanks. I will let you move on.

Operator

Your next question comes from the line of Michael Nemeroff from Wedbush. Please proceed.

Michael Nemeroff – Wedbush

Just following up on the previous question, so you’re talking about the higher level discussions. So with that, would it be fair to say that we should start to see a more significant ramp in the number of outcomes sales starting in 2010?

Michael Chasen

Michael, I don’t know that it was necessarily translate outcomes. We had I think one or two outcome sales in the quarter, I think Chapman University and then maybe an institution in Mexico were the two, if I am recalling them right, maybe at the end of the Q1 and beginning of Q2.

So those remain long sales cycles. But I think that the outcomes is like analytics and reporting definitely is the potential catalyst or is certainly of high level of interest to those conversation, but it remains to be seen. I mean I think outcomes is going to be successful at the individual college university level hopefully and then ultimately at the system level.

I had also comment just in the House Education Committee last week, talking about state standards. And now I mean every state has different states standards, they had a hearing last week to talk about unifying and uniformed deployment of the same state standards. So again that leads and supports from a long-term basis.

Michael Nemeroff – Wedbush

And then just on ANGEL Learning, how many of their customers were former Blackboard customers and if you actually add back some of the customers that you lost over the last couple of quarters? What do you think the renewal rates would have looked like over the last couple of quarters? Would it have added couple of hundred basis points to that renewal rate?

Michael Chasen

Those were certainly good questions, but I don’t think we have all that data right in front of us. Certainly some of ANGEL’s clients were previous Blackboard clients, so that is certainly true that the clients move around in this industry. But I don’t think we have any exact number on that in front of us.

Michael Nemeroff – Wedbush

Okay. And just one last one on the connect business, there was obviously a little bit of a step down in the number of total licenses, is there any seasonality to the renewals now that you talked about pricing from lower price competitors impacting that business? How much of the step down in the total absolute number of licenses was related to the economy or budgetary constraints and how much of it was do you think from competitors? And I will pass it. Thank you.

Michael Chasen

I think right now it’s a little hard for us to do the math to figure out the breakdown between all those influencing factors. I do think they’re all influencing factors, so I think we’ve saw a number of items play into the sales of connect in Q1, including all of the things that you identified.

Operator

Your next question comes from the line of Tom Roderick from Thomas Weisel Partners. Please proceed.

Tom Roderick – Thomas Weisel Partners

Good afternoon. I was hoping if you can just again on the topic of renewal rates and if you can repeat what you’re seeing for renewals rates and customers that they come up for subscription renewals here in Q1? Now also on the enterprise side, are you still able to push through or affect some pricing increases like you’ve historically seen on those renewals? How are customers treating the traditional price increase these days?

Michael Chasen

Yes. So the renewal rates were in line with what we’ve historically experienced during the quarter, in line with last year. On the price increase, yes, we have done a price increase kind of a consistent with what we’ve done in the last couple of years across the Blackboard product line and expect to realize it in a matter similar to what we have in the past.

Tom Roderick – Thomas Weisel Partners

Okay. And then just sort of piggybacking on some of the earlier questions, but the prospects here of the fiscal stimulus, it sounds like you’re not interested at all and kind of incorporating that into your guidance this year which makes sense. But as you talk to your customers, particularly some of the state institutions that have already announced budget cuts at the education level, are they treating those budget cuts a little less severely now under the prospect that there will be physical stimulus next year? Are they anticipating that relief? And did that help your sales cycles shrink or improve a little bit?

Michael Stanton

Tom, it’s really on a state-to-state basis, but I would say generally yes. They are positively impacting individual state budgets; they do tend to look at them slightly differently state to state. So again I think that it should have a net positive impact, but I think until we see signs, tangible signs across the board other than the handful that I mentioned on the transact side, we are going to be cautious about the impact. I think that it’s going to be a resource, those funds, we’ve educated the sales teams and K-12 and Higher Ed. I think that they will continue to orient decision makers to the availability and use of those funds for both renewals as well as new sales.

Tom Roderick – Thomas Weisel Partners

Okay. Last quick question from me just unclear on the guidance for the revenue midpoint of $370 million, that is a GAAP revenue number, is that correct? So if we look at the impact of ANGEL, it’s $7 million GAAP and it would be $12 million excluding the deferred revenue write down for just over half of the year for ANGEL, is that correct?

Michael Chasen

That is correct. $370 million is the midpoint for GAAP.

Tom Roderick – Thomas Weisel Partners

Okay, thank you.

Operator

Your next question comes from the line of Terry Tillman from Raymond James. Please proceed.

Terry Tillman – Raymond James

Hi, good afternoon, gentlemen. Thanks for taking my questions. First question just relates to – I think Michael earlier you’ve been talking about the areas that were strong in the quarter, I think international, Higher Ed, and then professional education. You mentioned Higher Ed professional services is weak, but how is actually the new contract business for US Higher Ed? Are you seeing some incremental weakness there? Is that stable or how does that look in the quarter and how does that look near term?

Michael Chasen

Yes I think certainly when we take a look at how the overall economy is expecting education I think that is affecting all the sectors. So I would say that there is a little bit of weakness across all of the different education sectors. Now in particular the reason I highlighted in the services because that is something that is often in quarter sale and implementation whereas the schools are either waiting for stimulus dollars or worried about budget, that’s an area that they immediately cutback and it’s not as mission critical. For example as our software is.

So usually we expect to see any economic slowdown, more so in the services side than hitting the product side. Now that being said, certainly even though I think that we had good sales in the quarter, but we are looking at – seeing some challenges in some certain areas of the business, we feel very good about hostings, which we had a nice uptick in the quarter. I think just goes to show that on the product side as more and more institutions are achieving higher levels (inaudible) product, they’re looking for Blackboard to be able to host and run in because it’s going to be on their institutional capability.

Terry Tillman – Raymond James

Okay. Well then – and then Michael just my other questions just relates to – you guys articulated a bunch of themes and reasons why ANGEL is an interesting company. But it seems like you got a lot on your plate. I mean you just released a major new product, major rewrite of the user interface, you guys see how that works in the market, still trying to shore up WebCT and hope for some opportunities in that installed base and now you have the government stimulus opportunity. I mean this seems like in a pretty meaningful additional thing on the plate, how do you manage to call these things at one time?

Michael Chasen

Let me try tackling that with different points that I want to make. Well first of all, we learned a lot going through the WebCT acquisition and we’re really able to pull out a lot of best practices from that. So we think that even though that acquisition went well, this is the opportunity to take some of the lessons learned there and apply them to the ANGEL acquisition. So I think we are better prepared to manage the process.

The second thing and this is actually a much smaller acquisition than WebCT and not only it’s a smaller acquisition or a much larger company. So back we did WebCT which was probably three times in size from a client perspective, we were half a size of a company. Now – so relatively speaking, even though this is an important acquisition, this isn’t too much for us to swallow at the same time.

The last point is and the real reason behind all this is because the opportunity in front of us. And then when you look at everything from the focus to the Obama administration, stimulus package, the global focus in education and wanting to make sure that countries are able to educate their people to be competitive in a global environment and right now Blackboard even though we maybe a leader, we are just a very small piece of the overall spending education. There is so much opportunity in front of us. We want to make sure we’re executing all of the key areas, take advantage of this opportunity and one of them is M&A and one of them is acquiring great companies like ANGLE and adding them to the bench strength that we have here at Blackboard.

Operator

Your next question comes from the line of Bryan McGrath from Credit Suisse. Please proceed.

Bryan McGrath – Credit Suisse

Hi guys. I just got a few more follow-ups on the ANGEL kind of more specifically. Can you give us anymore information what kind of margins ANGEL is running, I mean albeit gross margin or operating margin preferably, maybe the mix between subscription and service revenue? And then just generally how often did you see ANGEL in new deals – new competitive deals?

Mike Beach

Okay so from a margin perspective, gross margins, I think – the way to think about it post acquisition, this will help our gross margins down a bit, so it’s slightly higher than Blackboard’s. Operating margins are going to be less, although we think there is a significant operating efficiency so we can extract. So it will help our operating margins long-term. The business that is modestly profitable at the last year.

Michael Chasen

As far as when – it is certainly and this space is a competitive space and we do occasionally run into ANGEL in different sales scenario, so we do see them in the marketplace. But I don’t have any exact numbers of how often we’ve competed against them. But they are seller (inaudible) system provider.

Bryan McGrath – Credit Suisse

Okay, guys maybe one quick follow up, can you give us an idea of the – obviously hosting was pretty strong in the quarter and you mentioned that connect was slightly weak. But if you netted those two out, would you think – are they kind of neutral or is it still maybe slightly positive with strong hosting?

Mike Beach

Yes. If you look at the quarter, I mean we are pleased with the quarterly results. I think the revenue was slightly above our range, so clearly the – and the overall performance was mainly in ratable recurring revenues, which is where we wanted to be. We did have a little slight benefit on the service revenue side in some parts of the business were slightly higher than what we expected, but really just nice overall performance in the quarter in ratable recurring revenues really driven by learned and in particular learned hosting.

Michael Chasen

Yes. And then just to focus on first points that Mike was elaborating on. Look, we came in above our – the guidance we gave in revenues, I think things certainly evened off to the positive, but it does make us want to be more cautious on a go-forward basis.

Mike Beach

Yes the comments on connect and then on professional services obviously related to what we are seeing in the market from the sales perspective which would really impact the rest of the year.

Bryan McGrath – Credit Suisse

Got it. Thank you.

Operator

(Operator instructions) Your next question comes from the line of Brandon Dobell from William Blair.

Brandon Dobell – William Blair

Thanks. Guys going to slide five for a second about ANGEL, two questions on the financials. Any sense of how much that LTM revenue growth was as of March? And then you usually see contracts by a little bit above current quarter revenue just given how the business will work? Is there a non-recurring part of the ANGEL business that explains that delta or how should we think about looking at ANGEL relative what WebCT looked like on the perpetual versus recurring basis?

Mike Beach

Yes, so, they obviously have a service component. I think they gave them like 80-20. 80% (inaudible) and 20% services is the right way to think about them. I think the revenues are up over the prior year. But really the difference between contract value and revenue is going to be kind of a service component.

Brandon Dobell – William Blair

Okay.

Mike Beach

And there are virtually no perpetuals. They have got a handful perpetuals early in the life of the company, much like Blackboard did. But almost all the customers are annual licenses.

Brandon Dobell – William Blair

Okay. And then going back to comments you made about the connect business in terms of taking a look at packaging and pricing, anymore color there in terms of what you’re doing to get people over some of those issues from a macro perspective? Is it real discounting? Is it just more change in terms? Those kinds of things would be helpful.

Michael Chasen

To give you an example, one of the things that we started to do is offer an emergency-only service. Right now this type of application is really mission critical to schools, because they have to have it. But our offering was something that was a little bit of a premium offering where they could have do everything from emergency communications to general community outreach to attendant. And we were charging I think a good price for that combined bundled offering.

What we’re doing is we’re unbundling a little bit, so make it easier for institution to during a tougher economic times. Want to make sure that we have the emergency capability, but maybe want to wait to upgrade to the community outreach at some point in the future. And we think that that will help address some of the short-term challenges that we’ve seen in the marketplace with regards to budgeting.

Mike Beach

Yes and when you think of the economics, obviously it’s lower price, so it’s lower revenue, but the emergency only offering is going to come with substantially lesser usage. So you get a margin benefit for a new customer buying emergency only over kind of the standard offering that we provide.

Brandon Dobell – William Blair

Okay. And final question, Mike how you’re thinking about DSOs or receivables in terms of your cash flow estimates for this year? Are you building any extension of DSOs based on the macro or and I guess are you happy so far with how your collection efforts are going specifically in K-12 so far?

Mike Beach

Yes, so – and we talked in Q4 about there are some concerns on the timing of collection and things have lengthened. I think if you look at DSOs in Q1, they’re probably around the lowest that we’ve ever had as a company, so collections actually in Q1 were very good, much better than I would have actually expected.

As we look at cash flow for the year that we’re basically looking at this based off kind of kind of a normal cash flow – from a normal cash flow perspective based off kind of historic trends, we’ve had that cash flow quarter in Q4, a great one in Q1. I think it’s going to normalize that kind of normal trends when you look at who our customers are and how they’re actually paying particularly now that they’ve got stimulus dollars.

Brandon Dobell – William Blair

Okay. Great, thanks, guys.

Operator

At this time, I’m showing you have no further questions. I would like to hand the call back over to management for closing remarks.

Michael Stanton

Thank you, Katie. And thank you all for your participation today. We’ll look forward to seeing you on the road or at one of the upcoming investor conferences. Talk to you next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.

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Source: Blackboard Inc. Q1 2009 Earnings Call Transcript
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