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Blackboard Inc. (NASDAQ:BBBB)

Q3 2009 Earnings Call

November 3, 2009; 4:30 pm ET

Executives

Michael Chasen - President & Chief Executive Officer

Mike Beach - Chief Financial Officer

Michael Stanton - Senior Vice President

Analysts

Michael Nemeroff - Wedbush Morgan Securities

Terry Tillman - Raymond James

Tom Roderick - Thomas Weisel Partners

Jeff Lee - Signal Hill

Amy Junker - Robert W. Baird

Brandon Dobell - William Blair & Co.

Richard Baldry - Canaccord Adams

Mitesh - Banc of America/Merrill Lynch

Operator

Good gay ladies and gentlemen and welcome to the Blackboard’s third quarter 2009 quarter earnings call. My name is Chris and I will be the operator for today. At this time, all participants are in a listen-only mode. We’ll conduct a question-and-answer session towards the ends of the conference. (Operator Instructions)

I’d now like to turn the call over to Mr. Michael Stanton, Senior Vice President of Blackboard Incorporated; please proceed.

Michael Stanton

Thanks Chris. Hello and thank you for joining us today for Blackboard’s third quarter 2009 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-Q 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 notes related to some of the metrics we’ll provide today. First we will non-GAAP adjusted net income, which excludes the amortization of intangibles, stock based comp and non-cash interest expense all net of taxes on a non-GAAP adjusted net income per share.

As additional information regarding our operational results, the measures are not in accordance with nor an alternative for GAAP and maybe 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.

A reconciliation of GAAP and non-GAAP metrics has been provided in today’s press earnings release. The second administrative note relates to our contract value which we’ll also discuss today. Our contract value represents the annualize recurring ratable revenue under exciting contracts with clients in effect at the end of the quarter with regard 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 we do believe it is a useful tool for investors to evaluate our current operating performance. We once again provided supplemental information related with licenses and contract value of our website www.investor.blackboard.com. The document is tilled Blackboard metrics Q3, 2009. On today’s call are Michael Chasen, President and CEO; and Mike Beach, our Chief Financial Officer.

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

Michael Chasen

Thanks, Michael. Hello you everyone and thank you for joining us today. I am pleased with our financial performance in the third quarter. Our revenue grew by 18% to $98.4 million, which exceeded the high end of our guidance. This over performance was driven largely by strong professional service and continued strengthen demand for managed hosting.

From an earnings perspective our non-GAAP adjusted net income was $13.3 million or $0.40 per diluted share, which was a penny above our high end guidance. The business environment during the quarter continued to stabilize and we were pleased with the renewal in our core business. Although Blackboard connects continue to renewal challenges primarily due to pricing pressure.

As we said last quarter, our clients are experiencing a more stable budget environment than they have as compared to the previous four quarters. As a result, we are experiencing growing sales pipe lines in many parts of the business, but have yet to see the sales cycle short in materially. The key focus for our global sales team is pipe conversion and returning close rates to more historic levels.

Turning to some of the details in the third quarter, a few examples of deals in the US higher education market include South Orange County Community College license the Blackboard learning system for its students and faculty. Florida A&M University and Louisiana Community and technical college system upgraded to the enterprise Blackboard learning system and license Blackboard managed hosting further implementation.

We had a number of large deals for the Blackboard transaction system, including Grambling State University. Finally, we had a number of new sales of our Blackboard mobile offering to both existing and new clients, including Brighton University, University of Arkansas Fayetteville, and the University of Washington.

On the international sales front, King Faisal University and King Saud University in Saudi Arabia license the Blackboard Learning System to better serve and expand the e-learning goals of their three colleges. In Puerto Rico, The National College of Puerto Rico upgraded to the enterprise Blackboard Learning System while the University of Puerto Rico added Blackboard connect to provide mass notification for administrators, faculty and students.

Lastly, Inter-American University in Puerto Rico and Delft University of Technology in the Netherlands were the first two international clients to license Blackboard mobile. In K-12 sales, I would like it highlight a couple of deals including Omaha Public Schools. It became a new Blackboard client in licensing the Blackboard Learning System for their 46,000 students in 80 schools.

Newark Public Schools, Queen Anne’s County Public School and Santa Monica-Malibu Unified School District., our licenses Blackboard to provide mass notification services to students, faculty and parents. Our Professional Education Team once again had a great quarter from the new sales standpoint, which several large new clients wins, including the Central Intelligence Agency University and the Joint Special Operations University and the National Intelligence University.

Moving on to licenses, we ended the quarter with a total of 7,590 enterprise category licenses. Breaking out these licenses, we had 2,843 licenses of the enterprise Blackboard Learning System; 960 licenses at the Blackboard Community System, which now includes Blackboard mobile. 592 licenses as a Blackboard Content System, 35 licenses of the Blackboard Outcomes System, 466 licenses of the Blackboard Transaction System and 2,694 licenses of the Blackboard Connect offering, in terms of the Blackboard Learning System basic product, we ended the quarter with 562 licenses.

The total number of licenses including basic licenses at the end of quarter was 8,152. In terms of our Management Hosting Business, we finished the quarter with 834 hosted clients this represents a 16% increase year-over-year. For the year, we are very pleased with the continued success of our Managed Hosting Business and believe the clients will continue adopt Hosting giving its proven reliability and cost effectiveness.

As for contract value, we finished the quarter with an annualized contract value of $325.3 million, which represents an increase of 13% over the year ago period. We are pleased with the gross across the majority of our business. However, Blackboard Connect remains somewhat of a challenge that is the most expose to current budget pressures that said, Blackboard Connect continues to be a strategic part of our solutions offering and we have made efforts to improve the overall margin structure of this business and will continue to seek improvements in the coming quarters.

Our total headcount at the end of the third quarter was 1,172 employees. We ended the quarter with 248 people in sales, 87 in marketing and business development, 266 in product development, 249 in support, Managed Hosting and production, 136 in professional services and 186 in operations.

Looking ahead, we are excited about the opportunities across our businesses, including Blackboard mobile, which expands our total addressable market and based on the early client wins is meeting a very real need for institutions to have a mobile strategy. Currently, there are nearly 50 institutions, who are already live in the Apple App Store and we would encourage those of you with an iPhone or iTouch to download.

The iStanford or Duke mobile has to get a better sense of the valuable services we are providing institutions. While the current revenue stream from Blackboard mobile is in its infancy, we believe that the long term total addressable market from Mobile Education Solutions is more than $100 million annually and will grow as the category matures.

With that, I’m pleased to hand it over to our CFO, Mike Beach, who will detail our financial results and provide you with financial guidance for the remainder of the year. Mike.

Mike Beach

Thanks, Michael. I’ll organize today’s financial review. We’re on the income statement, the balance sheet and cash flow and close with a outlook and guidance for fourth quarter and full year of 2009. Revenues for the third quarter of 2009 were $98.4 million, up 18% from the same quarter last year. Product revenues for the quarter were $87.9 million, representing an increase of 18% over the same period last year.

Professional service revenues for the quarter were $10.5 million, representing an increase of 20% over the prior year. In terms of revenue characterization, we also breakout our revenue by the nature of the revenue streams, which include ratable recurring, ratable non-recurring and all the revenues.

For the quarter ratable recurring revenues increased 21% to $79.2 million, as compared to the same quarter of 2008. Ratable non-recurring revenues increased 6% to $6.8 million as compared to the same quarter of 2008. Other revenues increased 12% to $12.4 million dollars as compared to the same quarter of 2008.

Moving on to gross profits, our gross profit for the 3rd quarter including stock based compensation and amortization of acquired intangibles was $69.5 million dollars as compared to $58.7 million in the same quarter year ago representing an increase of 18% and for the quarter our gross margin was 71%.

Total operating expenses excluding the costs of revenues, stock based compensation and the amortization required intangibles were $47.2 million representing an increase of 7% as compared to $43.9 million in the same quarter last year. For the quarter incurred stock based compensation expense of $4 million and amortization of acquired intangibles of $9.3 million.

GAAP net income was $4.3 million in the quarter, resulting in net income per diluted share of $0.13. Non-GAAP adjusted net income was $13.3 million or $0.40 per diluted share. In terms of the balance sheet, we closed the quarter with $132 million in cash and cash equivalents.

Net accounts receivables decreased to $93 million at the end of the quarter, down from a $102.5 million for the same quarter last year, primarily due to strong collections. Total deferred revenues increased to $207 million at the end of the third quarter up 8% from $191.5 million at the end of the third quarter last year.

Cash flow provided by operations totaled $76 million for the third quarter, which is a record for us and represents a 26% increase compared to the third quarter last year. Capital expenditures were $3 million in the third quarter of 2009 and free cash flow, which excludes capital expenditures, was $73 million.

Moving on to guidance, for the fourth quarter of 2009, we expect revenue of $96.7 million to $99.7 million. Stock based compensation expense of approximately $4 million, amortization of intangibles of approximately $9.3 million. GAAP net income of $4.2 million to $6.4 million, GAAP net income per diluted share $0.12 to $0.19, which is based on an estimate $13.7 million diluted shares and effective tax rate of 28%.

Non-GAAP adjusted net income of $13.3 million to $15.5 million and non-GAAP adjusted net income per diluted share of $0.40 to $0.46 based on an estimated $37.3 million diluted shares and effective tax rates of approximately 35%. As a reminder, we experienced seasonality during the fourth quarter in our professional services as schools are in session and accordingly, less likely to utilize our services.

For the full year of 2009, we expect revenues of $373.6 million to $376.6 million. Stock based compensation expense of $16 million, amortization of intangibles of approximately $35 million. GAAP net income of $4.4 million to $6.5 million dollars, GAAP net income per diluted share of $0.13 to $0.20, which is based on estimated $32.5 million diluted shares and estimated tax rate of approximately 28%.

Non-GAAP adjusted net income of $44.1 million to $46.3 million dollars. Non-GAAP adjusted net income per diluted share of $1.34 to $1.41 based on estimated $32.8 million diluted shares and estimated effective tax rate of approximately 38%.

We are raising our guidance for cash flow from operations to $95 million to $105 million and expect free cash flow of approximately $80 million to $90 million in 2009. Cash flow year-to-date has been better than our initial projections due to strong cash collections and careful expense management. Given the macroeconomic environment, we’re very pleased with collections this year.

As a reminder, we will pay minimal cash taxes this year, but expect to see our cash tax rate increase to a more normalized level in 2010. We’ll provide more detailed guidance on our February call, but we currently expect cash flows from operations generally be flat year-over-year due to the associated tax headwinds.

Finally, as we look ought our pro forma EBITDA excluding stock based compensation margins in 2009, we have outperformed throughout the year and now expect to end the year at approximately 23% for the full year. We continue to believe that in the coming year we will see at least 50 to 100 basis points of margin expansion.

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

Michael Stanton

Thanks Mike. Just want everyone know, we’ll be at several upcoming investor conferences in a few different cities before the end of the year. So we look forward to seeing everyone during our travels. We’re actually calling you in today from Denver, so I should be seeing in investors tomorrow in Denver.

Operator, that concludes our prepared remarks and we’re happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Nemeroff - Wedbush Morgan Securities.

Michael Nemeroff - Wedbush Morgan Securities

One for Mike Chasen and then one for Mike Beach, if I may; Mike, if you could just maybe give us an update on what’s going on internationally, if Mike Beach can maybe tell us what the international growth was in the quarter and then if you could tell us what regions you’re most excited about over the next 12 months. Then for Mike Beach, I know the annual contract value was about 12.5%, 13%. Could you maybe breakout what the ANGEL contribution is and give us the organic growth rate on that?

Michael Chasen

Michael, this is Michael Chasen. So right now our international growth rate in the quarter was about 14%, 15%. When we’re looking at the international opportunity and we continue to see pipelines building across many of our emerging markets. For example, we think Latin America is a key opportunity.

Just this past quarter we had a User’s conference, where we had a not only a lot of good attendance, but a lot of good momentum of institutions that were looking to how to take the next step with their e-Learning Technology. Just two weeks ago, we had our User’s conference in China that we’re also continuing to see a still very early stage for the market, a lot of good momentum and good signs that showed. There might be some real opportunity for longer term.

So we’re excited across a number of both large and small markets, but the thing what I can tell you kind of grouping it all together, there certainly is a global focus on education from the different governments and significant investments that are being made not dissimilar to the focus and investments we’re seeing here in the U.S. Let me actually hand it over to Michael Stanton to talk more about the stimulus piece.

Michael Stanton

In terms of the stimulus, the dollars continue to be focus primarily on back filling state budget cuts. Ahead in 2010, I think when the grant money starts to flow. We continue to believe that we’re very well positioned for those opportunities, but it’s a little bit early at this stage of the game to give with any certainty, what we expect to impact might be and then what was the second part of your question, Michael?

Michael Nemeroff - Wedbush Morgan Securities

It was for Mike Beach, it was about the organic contract value growth rate during the quarter?

Mike Beach

As you know, we don’t break that out given the fact that the ANGEL clients basically have been merged in with the Blackboard clients and some of them have moved to Blackboard’s product and vice versa. So it’s hard to calculate that, but the contract value growth without them included in the number would not be meaningfully different.

Michael Nemeroff - Wedbush Morgan Securities

Then could you just tell us whether that acquisition performed up to your expectations during the quarter?

Mike Beach

I think we’re very pleased with ANGEL acquisition, the contribution from a top line is inline with what our expectations are and I think we’re slightly ahead of the game as it relates to the expense synergies that we have been expected.

Michael Chasen

I think even more important in that I think we’re also happy with the client satisfaction is, with related to the ANGEL installed base and the relationships that we’ve been building with the ANGEL clients, as well as again just some of the performance and some of the ANGEL team member such as Ray Henderson, that have now come on board, the Blackboard Executive team. So I think when you encompass all the different aspects of the acquisition, we’re very pleased with things are to-date.

Operator

Your next question comes from Terry Tillman - Raymond James.

Terry Tillman - Raymond James

Just two questions, first I guess, if you guys can provide an update on version 9, just anything anecdotally from the field in term of either helping you, competitively with win rates and/or just related to existing customers maybe when they’re renewing and they’re looking at it. Then second part of that first question is just where you do you stand if last quarter is about 200 customers that have moved, where do you stand now?

Michael Chasen

Certainly we continue to be very excited about the Release 9 of our e-Learning System and just to remind everyone, over the past two years, we’ve been talking about the development of a next generation platform for teaching and learning, which starts with Release 9, but then will continue on for the next couple of releases until our full vision of what a true next generation teaching and learning platform looks like.

So it certainly not only we’re very excited by the early results and feedback we’ve got in Release 9, but I can tell you that our clients are certainly excited about the path and vision that we’ve laid out for them. I don’t have at my fingerprints the number of clients that has converted over specifically, but I can tell you it’s certainly up significantly. We have seen adoption increasing, although really the summertime and December are the times in which we usually see the most clients upgrading.

Eventually all of our clients will be on Release 9 as part of the natural upgrade process and it’s included as part of their subscription and as well it offers so many benefits such as great web to our technology, new social learning, features and functionality, as well as Release 9 is the first release that starts to encompass both Blackboard and WebCT functionality. So we’re certainly happy with some of the early feedback, but again too early to tell on sort of the other aspects of the questions you asked.

Terry Tillman - Raymond James

I guess just my follow-up is related to Blackboard mobile and then as you said it’s early there, but anything early in terms of either what you’ve seen so far? What you expect in terms of relative deal size compared to either maybe Blackboard learn or your other product lines and have you done anything to really try to stimulate that business like carving out a sales force? Thanks.

Michael Chasen

Let me have Mike Beach comment on the subscription value, but then I’ll give you additional insight on what we’re seeing on the market.

Mike Beach

For the early adopting pricing we’ve been adopting pricing between kind of $20 and $30,000 in U.S. higher Ed and I think we’re generally trying to high end of that range overall fairly pleased with the pricing at higher Ed that we’ve got early out of the gate.

Michael Chasen

Right now as we mentioned on the call earlier, we have about total of 50 clients that are now live in the Apple iPhone App Store and we are getting just a significant amount of momentum and excitement from clients that realize that they need to have a clear mobile strategy and that Blackboard can play a key part in helping them deliver that strategy.

I think in ways that quite frankly, allows school either hadn’t thought about or weren’t sure they were going to be able to do and then it certainly a benefit because we already have great relationships with number of these schools with either our Blackboard Learn System or Blackboard Transact or Blackboard Connect and as we look to move more and more of that functionality on to mobile devices as well.

We’re helping the schools out in numerous ways with their overall mobile strategies. So we think that there’s a lot of good momentum there and a lot of excitement that’s been building and we have a strong pipeline there.

Mike Beach

As you think about the numbers, there’s 50 clients include a few that we acquired at the time of the transaction and then some in K-12. So the pricing for the 50 is going to be average on less than 20 to 30, but in higher Ed, what we seen since the acquisition is that being kind of the target range.

Operator

Your next question comes from Tom Roderick - Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

Looking at the license count here, we saw a big jump in the second quarter on the hosting licenses and then that sort of flattened out this quarter. Is there anything to be learned from the GAAP in the two quarters in terms of why hosting would have flattened out in this quarter, was there more aggressive push by your sale force in the second quarter? Is there more demand with budget uncertainty, just can you give us a trend line as far as what’s going on with the hosting business and where we should think about that going from here?

Michael Chasen

We have a couple of factors that are influencing that. First of all, you just have to remember the overall size pool of the renewals in the quarter certainly affects it. A lot of our sales of hosting are going back also to existing hosting clients and find them additional capacity or disk space or band width.

So a lot of the growth we’ve seen there has been more of the same store sales. Also there are different times of the year whether clients are more likely to upgrade to our hosting. They might be more likely to do it during downtime with the school, with the summer or even the December months. So certainly seasonality plays into it as well.

Although what I can tell you anecdotally is that we continue see a very strong demand for the hosting. I think that’s in an important part of really all schools. Learning strategy is, because if they want to really run these systems at the high level of reliability and support in scalability, they need to have a professionally hosted, which is the exact time of service that are ASP hosting group provides.

Mike Beach

It’s also important to keep in mind that Q3 is our largest renewal quarter. So although hosted clients continue to have very high retention rates, the clients that we would lose would be concentrated in this quarter just like the same trend for all of our licenses in Q3.

Tom Roderick - Thomas Weisel Partners

In looking at the cash flows, you had a huge quarter this quarter and then I guess if I can add everything up for the year and work backwards into Q4, the full year guidance. It looks like you’re thinking somewhere in the ballpark of $5 million to $16 million for the fourth quarter in terms of cash flow from operations, which would be below your typical Q4 level of kind of last few years anyway in the low 20s. Is there a reason to think this might just be kind of a conservative look at it or where this someone time impact in terms of collections and deferred that would have been pushed into this quarter?

Michael Stanton

It’s really driven by kind of a cash flow during the year. I mean, we have collected in Q2 and Q3 receivables far more quickly than we have in the past. So you look we’re actually entering Q4 with lower receivables than we did last year, because we’ve collected the cash faster than we would have if we trended the same way in 2008. So that’s really what’s driving it. If you look at last year I believe in the fourth quarter we generated a little under $20 million from cash from Ops and we entered the quarter at about $10 million on receivables.

Tom Roderick - Thomas Weisel Partners

Mike Beach, can you just give the numbers on ratable recurring, non-recurring and other that you gave earlier on the call?

Mike Beach

Ratable recurring, $79.2 million; ratable non-recurring, $6.8 million; and other revenues of $12.4 million.

Operator

Your next question comes from Jeff Lee - Signal Hill.

Jeff Lee - Signal Hill

First question, you guys have some pretty nice jumps in the Community and Contents System licenses in the quarter and just a little background, where did the strength come from there?

Michael Chasen

I think that as schools are starting to put together their planning for next year. They’re taking a harder look at the technology overall and looking to get the systems in place prior to the New Year. At the same time, we did get a benefit from the ANGEL acquisition with being able to get the fact that they had similar type of product like e-portfolio, which kind of fits into our Content System license, so that included in the count. Also as we said the Community license is also includes some of the strong initial licensing we’ve had in the mobile product line. So all of those things I think came together certainly to give us some good strong license unit counts.

Jeff Lee - Signal Hill

Then last quarter you’d mentioned that you pulled forward some professional services revenue for the second half, yet the line was still pretty strong this quarter. So are we going to see it sort of significantly weaker next quarter?

Michael Stanton

I mean I think we believe that in Q4, service revenues are going to be continued to be strong. We’ve been cautious, the start of the year given the macro economy. However, our service team has done an excellent job of selling and delivering services. So I would expect service revenue to be up a meaningful amount over kind of what we had in Q4 of last year.

Jeff Lee - Signal Hill

Then just last question, Moodle is seems to be slowing picking up steam. I think sort of every quarter goes by we hear a little bit more about it. How would you characterize the competition out there and sort of how the competitive landscape has evolved over the last two years or so?

Michael Stanton

Certainly, we continue to see a competitive environment out there both on Moodle and Sakai and other new entrance in sort of the market space, but we think that the schools that are really serious about their e-Learning programs recognize that they need to partner with a leading company that can provide them, not only the base technology.

Also the support and services to make sure that their program is not only up and running 24/7, but as their program gross. They have the experience to help them with the infrastructure and the software to make sure that their program can succeed.

So I think what you’re hearing overall is just continued focus in the e-Learning market space, which now I think people are primarily talking about both obviously Blackboard and Moodle are two of the larger players, but we continue to see a lot of growth and opportunity within our installed base and with potential new accounts as well for our solution.

Operator

Your next question comes from Amy Junker - Robert W. Baird.

Amy Junker - Robert W. Baird

Can we just start perhaps with the ANGEL integration and maybe can you touch on for the customers that came from ANGEL, who have been up for renewal. Are they renewing at the same kind of 90% plus rate or is it too early to tell at this point?

Michael Stanton

I would say the ANGEL clients are renewing at a rate higher than kind of what they’ve historically experienced.

Amy Junker - Robert W. Baird

Inline with what you guys have seen historically?

Michael Stanton

Yes.

Amy Junker - Robert W. Baird

You had previously said that, I think a couple of quarters ago that thought you anticipated at least I think $0.10 of accretion to 2010 and I think that was to the adjusted EPS number. Should we still be thinking about that way or is that number moved on your opinion?

Michael Stanton

Nothing is changed. We are on target possibly, slightly ahead of target.

Amy Junker - Robert W. Baird

Then Just, Mike Beach, if you can touch on the deferred revenues that was up only 8% this quarter year-over-year. Is that tied into some of these timing issues you talked about with maybe the receivables and I imagine we’d have to see that reaccelerate next year as we get to flat, if you’re anticipating flat cash flow from operations in 2010. Is that right?

Mike Beach

So I think you’ve got some comparability issues as you look at the growth rate there. One is you’ve got the deferred revenue add backs for ANGEL and you’ve got the fact that in the numbers in Q3 of last year. If you recall, we had the large New Mexico deal. So we got a large up front prepayment that went into deferred revenue for both the license and for services that was basically kind nominally we had a large amount of deferred revenue related to that amount.

So I think as you look at contract value growth kind of 13% for the quarter that bridges you part of the gap there and the rest of that is going to be we always have difference in the general timing of invoices, which is going to impact deferred revenues as well as changes in deferred revenues related to our non-ratable recurring that can drive those numbers.

Amy Junker - Robert W. Baird

Then last question, I’ll turn it over. I know the last couple of quarters you’ve talked about some good success you’ve seen in the ProEd business. Is that continuing at this point and I’m curious if that’s being driven by anything specific that you’ve done, have you beefed up the sales force or is there any in kind of the end market. Why do you think that’s going better? Thanks.

Michael Chasen

Q3 is certainly a big government sales quarter. So we did see a lot of strong momentum there. We are putting some extra focus from sales and marketing perspective there because we do think there’s some good opportunity, but we also recognize that when we take a look at the overall focus of the education market that’s a relatively small piece of our business.

Michael Stanton

Amy, the only thing I would add is that from some of the new clients in that space, some of the sort of Intelligence University type clients, which behave just like higher Ed institutions. Actually one of them came over from open source and made a pretty significant investment. So I think that speaks volumes in terms of where we could be competitively.

Operator

Your next question comes from Brandon Dobell - William Blair & Co.

Brandon Dobell - William Blair & Co.

Just a couple of quick ones, as you look across at the difference sector, K-12 versus postsecondary and with postsecondary your domestic versus international. Any major variances in the renewal rates you guys are seeing by this type of customer these days? A related question since the international business continues to tic along pretty nicely, anyway to differences in terms of kind of average initial deal size or what those new customers are initially picking up with you guys?

Michael Stanton

On the renewal side, no meaningful difference and I have the trends of renewals. Mike in his prepared remarks talked about connecting a little less than what it has been historically. Everything else is trending kind of generally inline with where they have been historically.

Michael Chasen

In certainly each of the different markets have new answers to the size of new sales deals whether they’re starting with just for example, the learning system, where they’re right away to learning system at adding the community and the content module. I’m not talking just about the mobile module. So it’s really hard to group it all together.

Certainly the different markets we focus in have different average subscription values for the new clients that come on Board, but even that might differ depending on what types of programs and products the client is looking at as well as globally where they’re looking located, which is why when we given average number that ends up being kind of grid detach or for what the average in our subscription value would be fall in our clients.

Brandon Dobell - William Blair & Co.

Then final question, if you would characterize the expansions that you’re seeing either at renewal or kind of mid year expansions in the postsecondary space broadly, how would those expansions look relative to this time last year or at some point, I’m just trying to gauge the willingness of your customers that maybe just have the enterprise system only to step up into a module or two or three modules. Do you see any movement there out of the way or is it pretty status quo a bit of last year or say?

Michael Chasen

There was pretty status quo compared to last year. We don’t see any meaningful change. Again some earlier excitement certainly around our new mobile strategy, but nothing that’s really going to translate to immediate short term revenues, but otherwise I think relatively the same.

Operator

Your next question comes from Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

Could you talk a little about the pricing environment? I think you talked about being able to pass along some price increase on an annual basis, where you’re still seeing that? Then maybe talk about the churn in the Learning System on enterprise level, it looked like the total number is up about two sequentially, which is one of the lower numbers we’ve seen, whether there’s any significant change on the churn on that license line? Thanks.

Mike Beach

On the churn front, no meaningful difference and enterprise license turnover what we’ve experienced in the past and clearly, the up to two licenses always like to be up more than that, but you have to keep in mind the fact that it is kind of the heavy renewal quarter. So in that quarter, all of the drops are going to be concentrated in the quarter, whereas we sell throughout the year on your pricing question. We’ve just gone through our heavy renewal quarter with a price increase that’s averaged 4% to 5% and we’re pleased with where the retention rates ended up for that period.

Let me restate also just, what Mike was saying in that first comment. So Q3 really is the quarter, where the majority of our renewals come in. So I mean that’s also where the majority of the majority of the drops are, but yet we sell even throughout the year although clients sink their renewal to the third quarter time period, so up to is actually a lot of additional new sales, but all of our drops occurring within that same quarter.

Operator

Your final question comes from Mitesh - Banc of America/Merrill Lynch.

Mitesh - Banc of America/Merrill Lynch

Two quick questions, first thing if I look at the professional services margin it’s about 48%, second time in the row. I was wondering what’s really driving that and going forward, are we going to see the same kind of margin structure in 2010 as well and the fourth quarter?

Michael Stanton

So a couple of things driving the margins, one is high utilization, higher than what we kind of expected going into the quarter. We also have used some outsourcing in certain areas and taking advantage of kind of some benefits from a pricing perspective there. We’ve got our service team has come up with some new offerings, things that affect price that are higher margin than what we have historically had.

Now, having said all that, I think the margins are on the high end of kind of where we realistically can kind of maintain them. I think these are great margins, I think longer term, they will be down a bit, particularly as utilization reaches a more normal level, just been really pleased with services the last two quarters and it shows in the top line and in the margins.

Mitesh - Banc of America/Merrill Lynch

So we should not think about that level of margins going forward?

Michael Stanton

No.

Mitesh - Banc of America/Merrill Lynch

Second question is terms of your 2010 cash flow growth, if you did not have this single digit cash going converging more GAAP tax rate, what would the cash flow growth have been?

Michael Stanton

As it relates to 2010?

Mitesh - Banc of America/Merrill Lynch

Yes.

Michael Stanton

We’ll obviously provide greater guidance on the 2010 numbers in our February call, but I think you should think about our cash flow growing inline with our earnings or EBITDA growth that should be cash flow will grow inline with that potentially a little bit faster given the fact that we recognize revenues ratably and take expenses...

Mitesh - Banc of America/Merrill Lynch

In terms of if you could put some bad dollars and cents parameters surrounding that, what would the point impact be for the tax rate?

Michael Stanton

For 2010?

Mitesh - Banc of America/Merrill Lynch

Yes.

Michael Stanton

We’ll provide more detail on February call related to 2010 guidance.

Michael Chasen

I think we’re saying sort of cash taxes at 30s maybe.

Michael Stanton

Low to mid 30s is kind what have we’re thinking right now.

Mitesh - Banc of America/Merrill Lynch

One final housekeeping; is it possible to breakout the ANGEL licensees in this quarter?

Michael Stanton

We’ve historically combined the licensees, we provide them at the time of the initial acquisition and then they’re combined because we’ve got clients who are running ANGEL licenses buying Blackboard licenses, Blackboard licenses buying ANGEL licenses; it’s hard to say who’s an ANGEL or Blackboard client at this point.

Mitesh - Banc of America/Merrill Lynch

Have you seen on up tick in churn, in ANGEL or has it been tracking us for plan or...?

Michael Stanton

No, ANGEL retention rates are in consistent with plan and consistent with Blackboard’s historic experience.

Operator

(Operator Instructions) There are no further questions at this time.

Michael Chasen

Thanks, everybody. We’ll talk to you next quarter. Thank you, Chris.

Operator

This concludes today’s presentation. You may now disconnect. Have a good day.

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Source: Blackboard Inc.Q3 2009 Earnings Call Transcript
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