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Blackboard, Inc. (BBBB)

Q1 2007 Earnings Call

May 2, 2007 4:30 pm ET

Executives

Michael Stanton - VP of IR

Michael Chasen - President & CEO

Mike Beach - CFO

Matthew Small - SVP of Legal, General Counsel & Secretary

Analysts

Amy Junker - Robert W. Baird

Tom Roderick - Thomas Weisel Partners

Allan Cook - Merrill Lynch

Trace Urdan - Signal Hill

Brandon Dobell - Credit Suisse

Kirsten Edwards - ThinkEquity Partners

Michael Nemeroff - Wedbush Morgan Securities

Brad Mook - Boenning & Scattergood

Howard Block - Banc of America Securities

Bennett Notman - Davenport & Co.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 Blackboard Inc. Earnings Conference Call. My name is Lisa, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference (Operator Instructions).

I would now like to turn the presentation over to Mr. Michael Stanton, Vice President of Investor Relations. Please proceed, sir.

Michael Stanton

Thank you Lisa. Hello and thank you for joining us today for Blackboard's first quarter 2007 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, and such other risks as described in the Risk Factor 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.

Few administrative notes related to some of the metrics we will provide today. First we will provide non-GAAP adjusted net income 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 other non-GAAP measures used by other companies.

Blackboard believes that the presentation of these non-GAAP financial measures provide 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 earnings press release, which is available on our company’s website. Second administrative note relates to our contract value, which we will also be discussing today.

Our contract value represents the annualized recurring ratable revenue, under existing contracts with clients, in effect at the end of the quarter without 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 management believes it is a useful tool for investors to evaluate our current operating performance.

Finally, we have once again provided supplemental information related to licenses, contract value, on the Investor Center Section of our website at investor.blackboard.com. The document in question is titled, Q1, 2007 Blackboard Metrics. 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?

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Michael Chasen

Thanks, Michael. Good afternoon, everyone. Let me start with an overview of the agenda for today's call. First, we will give you a summary of our performance for the quarter ended March 31st, 2007. We will cover our financial results and some of the major contributors to our business performance. I will then turn the call over to Mike Beach, our CFO, to take us through a more detailed review of the financials. And finally, we will close with your questions at the end of the call.

So lets begin. We started the year with an excellent first quarter. Our core business in U.S. higher education performed very well in the quarter and internationally our team did a great job of closing important deals in Japan, the United Kingdom and the Netherlands. Our ASP hosting business, also performed well as we had many existing clients expand their hosting relationships.

Among the financial highlights, in the first quarter we increased revenues year-over-year by 47% to $55.3 million and generated net income of $1.9 million and earnings per diluted shares of $0.07. We had $5.2 million in non-GAAP adjusted net income and non-GAAP adjusted net income per share of $0.18.

As investors, it is important to know that Blackboard's business model is primarily driven by first, our ability to renew our large subscribers base of clients, which provides the great operating leverage inherent in our business. Second our ability to expand our existing client relationships, growing their subscription value overtime by addressing more and more of their emerging new learning needs, and third, our ability to add new clients subscribers across the education spectrum, here in the United States and around the world.

In terms of executing against our strategy, we had great success in expanding existing and establishing new relationships with a wide range of different institutions. A few examples of deals in the U.S. higher education marketing include, Hampton University in Virginia who expanded their relationship with Blackboard by adding the Blackboard Community System. Hampton’s intent is to use the product to expand its web-based services outside the classroom for its 6,000 students.

One of our new clients in the quarter was the Northeast Mississippi Community College, who has licensed the entire Enterprise Blackboard Learning System, the Blackboard Community System and ASP hosting. The Madonna University, a private four-year school in Michigan.

Madonna licensed the enterprise Blackboard Learning System to; serve more than 4000 students enrolled in both their graduate and undergraduate programs. North Orange County Community college district in California upgraded to the Enterprise Platform Learning System in our ASP hosting service to begin expanding their e-learning offerings to their 33000 students.

And finally, I am very pleased to announce that we signed our first four license fees of Blackboard Outcome System during the quarter. Centenary College, Seton Hall University, Shaw University and the University of Texas at Brownsville all expanded their relationship with Blackboard by licensing the Blackboard Outcome System.

On the international front Littleborough City Learning Center in the United Kingdom licensed the Blackboard Learning System, the Blackboard Community System and the Blackboard Content System.

Also we are pleased to welcome Oxford Brooks University as a new client. Oxford Brooks, which serves more than 18,000 students, marks another major University in the United Kingdom to license the Enterprise Platform Learning System products.

Lastly Leiden University one of Europe’s top University and the oldest University in The Netherland has selected our ASP hosting offering. This was the largest of seven European ASP deals our teams closed in the quarter and demonstrates the growing success we've had with our new data center in Amsterdam.

Leiden has been Blackboard client since 1999 and opted for Blackboard ASP services is part of its drive to provide anytime, anywhere access to the University’s 17,000 students and 4,000 staff across 9 campuses.

In K-12 I would like to highlight a couple of deals including the Clarke County School district in Nevada. Clark County with more than 280,000 students and 14,000 faculty license the Blackboard learning system, the Blackboard Community System and the Blackboard content system. While the initial license is only for a few thousand students, this was a great win for us as Clark County is the 5th largest school district in the country.

Another new K-12 client in the first quarter was the Riverside Unified School District in California with 42,000 students, which licensed the Blackboard Learning System. Again, these are just a few client examples, from the first quarter, but they are represented of the traction and trends we are seeing in our business so far in 2007.

Moving on to licenses. We ended the first quarter with the total of 3,560 Enterprise category licenses. Breaking out these licenses, we had 2,208 licenses in the Blackboard Learning System Enterprise; 680 licenses of the Blackboard Community System; 310 licenses of the Blackboard Content System, 4 licenses of the Blackboard Outcomes System and 420 licenses of the Blackboard Transaction System.

In terms of the Blackboard Learning System Basic product, we ended the quarter with 1,230 licenses. The total number of licenses at the end of the first quarter was 4,790. Also we finished the first quarter with 458 ASP hosting units.

As per contract value we’ve finish the quarter with an annualized contract value of $168 million, representing approximately a 19% growth year-over-year. This resulted in average contract value per licenses of approximately $35,000. The growth of contract value reflects the strong licenses we had in the first quarter.

Our total headcount at the end of the first quarter was 782 people and was comprised of the following. We had 171 people in sales; 64 in marketing and business development; 149 in product development; 146 in support, ASP hosting and production; 125 in professional services; and 127 in operations.

In closing, I want to provide an update on our ongoing product development and other strategic initiatives. And everyone should know by now our product development team has been working to ensure the availability of all the Academic Suite products to our entire client base.

Specifically, these means that the Blackboard Content System, the Blackboard Community System and the Blackboard Outcomes System will be inoperable with the WebCT code base of the Backward Learning System products. The product development team is on-track to deliver all three products in mid-2007.

Investors can expect the first sign of cross selling to be visible in the second half of this year, but any financial impact will likely be minimal into 2008. Also I want to highlight the February launch of Blackboard Scholar.

Blackboard Scholar is the first to the series of web properties; it’s part of the Blackboard beyond initiatives that take advantage of the fact that Blackboard has thousands of universities and million of users interacting on our application on a daily basis.

Scholars look to connect this global user community together to take advantage of the powerful connections among and between the social networks that apply in institutions. Specifically scholars innovated social book marketing web service aim to connecting faculties and students and enhancing teaching and learning.

This new tool enables millions of Blackboard users to connect on a regular basis across institutions and share resources. I think this is a very exciting initiative and want to increases the value proposition is a Blackboard Academic Suite for our client base. Finally, I want to thank and congratulate the entire Blackboard team on a terrific first quarter.

With that I am please to hand it over to Mike Beach our CFO to detail our financial results and provides you with our financial guidance. Mike?

Mike Beach

Thanks Michael. I will organize today’s review around the income statement, the balance sheet and cash flow and close with the outlook and guidance for the second quarter and full year of 2007. Revenues for the first quarter 2007 were $55.3 million, up 47% from the same quarter last year.

The increase in revenue was driven by continued growth in the annual licensing of our enterprise level products to clients and an increase demand for ASP hosting. Additionally, we were pleased with service revenues in the quarter, which were ahead of our expectations.

Product revenue for the quarter were $15 million, representing an increase of 51% over the same quarter last year. Professional service revenue for the quarter were $5.3 million, which represents an increase of 17% over the prior year. In terms of revenue characterization we also break out our revenue by the nature of the revenue streams, which include ratable recurring, ratable nonrecurring, and other revenues.

For the quarter, ratable recurring revenues increased 57% to $42.7 million, as compared to $27.1 million in the same quarter last year. Ratable nonrecurring revenues increased 13% to $5.1 million as compared to $4.5 million in the same quarter last year. And other revenues increase 23% to $7.5 million as compared with $6.1 million in the same quarter last year.

Moving on to gross profit, our gross profit for the first quarter excluding stock-based compensation and an amortization of acquired technology was $40.1 million as compared to $26.5 million in the same quarter a year ago representing an increase to 51%. For the quarter our gross margin was 72.5%.

Total operating expenses excluding the cost of revenues, stock-based compensation and amortization acquired intangibles were $28.8 million, representing an increase of 24% as compared to the $23.3 million in the same quarter last year. These expenses were generally in line with our expectations. For the quarter we incurred stock-based compensation expense of $2.2 million and amortization acquired intangibles were $5.4 million.

During the quarter we prepaid $5 million of our long-term debt. As a result of this prepayment, we incurred approximately $140,000 of interest expense resulting from the acceleration of amortized debt issuance costs.

Our net income was $1.9 million in a quarter, resulting a net income per diluted share of $0.07. Adding back the amortization of acquired intangibles, and the associated tax impact results in non-GAAP adjusted net income of $5.2 million or non-GAAP adjusted net income of $0.18 per diluted share.

In terms of the balance sheet, we closed the quarter with $25.9 million in cash and cash equivalents. We'll continue to use this use excess available cash balances to reduce our outstanding term loan, which was $19.4 million at the end of the first quarter.

Cash receivables increased to $40.6 million at the end of the quarter from $26.3 million for the same quarter last year. Current deferred revenues increased to $96.1 million at the end of the first quarter up 42% from the $67.7 million at the end of the first quarter last year.

Current deferred revenues related to recurring products totaled $82.4 million compared to $56.1 million to the same quarter of last year representing a 47% increase. Cash flow provided by operations totaled $891,000 for the quarter and finally capital expenditures were $2.4 million for the first quarter of 2007.

Moving on to our guidance. The second quarter of 2007 we expect revenue of $58 million to $59 million, amortization of required intangibles of $5.5 million. Net income of $2.5 million to $3 million resulting in net income per diluted share of 8 to $0.10, which is based on the estimated 29.7 million shares and an effective tax rate of 41.5%.

And non-GAAP adjusted net income, which excludes the amortization required intangibles and the associated tax impact of 5.8 to $6.3 million resulting in non-GAAP adjusted net income per diluted share of $0.19 to $0.21 based on an estimated 29.7 million shares and an effective tax rate of 40.5%.

For the full year 2007 we expect revenue of $233 million to $236 million, stock-based compensation expense of $12 million.

Amortization of acquired intangibles of $22 million, net income of $10.6 million to $12.1 million resulting in net income per diluted share of $0.36 to $0.41, which is based on an estimated 29.9 million shares and an effective tax rate of 41.5%.

And non-GAAP adjusted net income, which excludes the amortization of acquired intangibles and the associated tax impact of $23.9 million to $25.4 million resulting in non-GAAP adjusted net income per diluted share of $0.80 to $0.85 based on estimated 29.9 million shares and an effective tax rate of 40.5%.

One important item that investor should consider relating to our guidance is that amortization acquired intangibles has increased by approximately $600,000 for the year. Primarily as a result of a technology acquisition we made during the quarter. This increase will negatively impact our GAAP net income but obviously not have an impact on our non-GAAP adjusted net income.

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

Michael Stanton

Thanks, Mike. Before we take your question just allow me to quickly share some information on where Blackboard management will be delivering corporate presentations to the financial community in the coming weeks.

Number of our coming conferences beginning with the Robert W. Baird growth conference May 9 in Chicago. Followed by the Wedbush Morgan growth conference in New York on May 16th. The Banc of Americas Small Mid cap conference in Boston on May 17th and finally the SG Cowen Technology conference on June 1st.

That concludes our prepared remarks. But actually before we get to Q&A we can just ask everyone to just ask one or two questions and then get back in the queue just so everybody gets a fair shake in moving through Q&A, I’d appreciate it. Operator, we’re ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Amy Junker with Robert Baird. Please proceed.

Amy Junker - Robert W. Baird

Good afternoon, everyone. Just a couple of quick questions on the ongoing loss with Desire2Learn, can you give us an update on kind of where we are now and what the next data point might be there?

Matthew Small

Sure. This is Matthew Small, Blackboard’s General Counsel. We are in the discovery phase of litigation with Desire2Learn. The next meaningful point in the case will be our Markman Hearing in July where the Board determines the scope of the claim and we’ve been scheduled for trial in February of 2008.

Amy Junker - Robert W. Baird

Great. Thanks. And somewhat related the Patent Pledge that you talked about last quarter. Have you noticed any positive impact since you signed that, can you share any anecdotes maybe customers who are perhaps more willing to renew or sign up with you as a result of that Pledge?

Matthew Small

Well, the patent suite itself really had no material impact on sales to client. However, we’ve received an outpouring of some of the support from the community related to the Pledge. A lot of people have said very, very nice things about it. And overall, I think it was very well received not only by our client base but by the overall academic computing industry in general and the open source community.

Amy Junker - Robert W. Baird

Thanks. I’ll jump back in queue.

Operator

The next question comes from the line of Tom Roderick with Thomas Weisel. Please proceed.

Tom Roderick - Thomas Weisel Partners

Hi, guys good afternoon.

Mike Beach

Hi, Tom.

Tom Roderick - Thomas Weisel Partners

I wanted to just to briefly touch on the outcome system. I know it’s still early in the game, but you’ve had a handful of early success. And I was hoping you could just share some of your experiences to the early phase of the sales process. Can you talk a little bit about what ASP’s are looking like, what sort of metrics are able to drive into the outcome system for your customers and how they’re currently using that product right now?

Michael Chasen

Sure. And you have to understand we just also released the outcome system in Q1 and it is a product that we believe has a slightly longer sales cycle than the other products in the academic, so because of the primarily dealing with either the President or the progo side of university.

The outcome system really offer its institutions an incredible opportunity to do detailed data analysis and really data mining of all the e-learning information they have been collecting over the last several years and can help institutions with everything from reporting to their accreditation process.

The first year, the interest we’ve had from a lot of institutions during the official launch has been very strong and I think we have a good pipeline going forward.

Mike Beach

Yeah, as far as ASP’s the sales that we’re seeing so far, it’s obviously tier pricing so it’s based of the size of institution, but pricing has been around $100,000 a year.

Tom Roderick - Thomas Weisel Partners

Okay, great. And maybe just switching gears here. Michael you indicated that the cross sales approach in WebCT install base, likely to start here in the second half of ’07, is that a little bit delayed relative to how you spoke about it before or is that kind of still right on time?

And if there is any delay, what’s driving that? And then just last piece of that would be are we starting to see some leverage within the sales group as far as no longer having duplication of geographic sales efforts? Thanks.

Michael Chasen

Sure, no actually that was really just reconfirming what we've been saying the whole time that the products were generally on track to be delivered in the second half of the year and that there were on target to hit those goals. As far as the leverage in the sales force I think, yes, we have certainly started realizing some of that already in 2007 by the fact that we continue to excel in achieving or meeting our goals while at the same time getting rid of the duplicated by sales positions.

Tom Roderick - Thomas Weisel Partners

That’s great. Thanks guys.

Operator

The next question comes from the line of Allan Cook with Merrill Lynch. Please proceed.

Allan Cook - Merrill Lynch

Hi, this is Allan. I notice that your deferred revenues were down -- they are usually down from Q4 to Q1 but in this quarter the current deferred revenues were down by $21.9 million versus $7.3 million last year, which presumably had an impact in your cash flows, can you tell us little bit more about that what happen there?

Mike Beach

Last year Q1 we acquired WebCT at the end of February. So the acquisition deferred revenue would have offset the decrease in the prior period.

Allan Cook - Merrill Lynch

Okay.

Michael Chasen

I think it’s the impact to the acquisition on that trend.

Allan Cook - Merrill Lynch

Okay. And then with regards to your basic customers, can you tell us little bit more about how the up-sell is going for them to the enterprise licenses?

Michael Chasen

I think the up-sell is going very well, I mean as our clients have achieved different levels of success at there institution, they realize that they truly need an enterprise system if they want to deliver on scalable integrated E-Learning solutions to the campuses.

So we're continuing to see increasing trend in campuses that want to move up from the basic product to the enterprise product, and that also has an effect on our hosting as well, as more clients are moving up from basic to enterprise product. We're seeing greater interest in our expanded hosting options as well.

Mike Beach

And the up-sell rate we experience in the quarter was consistent with what we saw last year -- for the full year, which was positive in our mind.

Allan Cook - Merrill Lynch

Okay, great. Thank you very much.

Operator

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

Trace Urdan - Signal Hill

Hi, good afternoon. I wanted to ask first of all with the outcomes sales, where those customers that you had work with during the product development stage?

Michael Chasen

One of the four was.

Trace Urdan - Signal Hill

Okay. So, and then, how would you characterize sort of stage of implementation for those four customers at this point?

Michael Chasen

It were in the first phases, it's very early, I mean, most of the customer are buying at the tail end of quarter.

Trace Urdan - Signal Hill

Right.

Michael Chasen

They were early in the process.

Trace Urdan - Signal Hill

But that one was working with you in development are they sort of further along in the process there or that necessarily?

Michael Chasen

Yeah, a bit, but I think it's early in the implementation process for all the clients.

Trace Urdan - Signal Hill

Okay. And then the other question I had was to this issue of the, sort of WebCT versions of the alternative products. Are you at the stage now where you sort of got data products that you are able to show to some of the WebCT customers, is there any of that kind of work going on or is it still too early for that?

Michael Chasen

We've been working hands-in-hands with the number of clients throughout the development process, so certainly we are far along in the development cycle.

Trace Urdan - Signal Hill

Okay. And I didn't -- I understood your prolong and development cycle. I was more interested in sort of getting some flavor of the folks the WebCT customers that you’ve been working with sort of, how they responded to the products where, are they sort of running exactly in line with what you saw with your Blackboard customer base when you roll this products out, are there any sort of twicks or aspect of their interest in the programs that may be differs it all?

Michael Chasen

No. I think in general the institutions actually are behaving the same across both of the install bases. So really what we focus on integration is simply getting the Blackboard Community System, Blackboard Content System, Blackboard Outcome System to work on top of the WebCT code basis.

So certainly for a while we’ve been able to see the products and what they do really overdoing just making sure that backend integration of the products work. So there is not really changes from feature and functionality perspective, simply from a implementation perspective.

Mike Beach

And I think as you look at just a relationship between WebCT clients and up selling clearly moving from basis enterprise they’ve been consistent with the overall Blackboard trends last year it was around 10% or 11% of the basic customers upgrading the enterprise.

And we’ve also experienced here fairly recently is a lot of the more significant WebCT customers choosing to go to Blackboard hosting offering, which we have seen a trend over the last several months really pick up there.

Trace Urdan - Signal Hill

Is that sort of a simpler way for them to transition to Blackboard platform?

Mike Beach

No, not necessarily. It's hosting their existing application, but they are making a decisions there.

Trace Urdan - Signal Hill

I see. Okay. I misunderstood. And then the last question I just wanted to ask was about scholar. Obviously it’s an enhancement to the platform is there any other sort of behavior that introducing that feature, do you think might in general in the part of your clients is it, likely to make them sort of want to upgrade sooner or faster or use the system more frequently or more widely in the campuses? Or is it just sort of something that they want and you are responding to the need?

Michael Chasen

Well I think its really about retention of our current clients continuing to show them the advantage of being part of the blackboard network. You have to realize that many of our clients that are installing our E-Learning products are doing so often in our Ireland’s where they are just paying the real courses online and limiting it to their own user community.

Look like what’s scholar does in all the different web properties we talk about coming out of the Blackboard beyond initiative, its starting to connect together with thousands of institutions and millions of students that right now kind of acting in their own just e-Learning Ireland and we think if there is an advantage to helping and working with the colleges, universities to connect them together.

Certainly we believe help make our applications even more sticky on a campus and at the same time open up other future ancillary opportunities to Blackboard as the company.

Trace Urdan - Signal Hill

Great. Thank you, I’ll let you move on.

Operator

Your next question comes from the line of Brandon Dobell with Credit Suisse. Please proceed.

Brandon Dobell - Credit Suisse

Hi, thanks guys, couple of quick ones. Stock comp and CapEx expectations for ‘07 guidance? Mike could you just update up there.

Mike Beach

Stock comp for the year may be $12 million.

Brandon Dobell - Credit Suisse

Okay.

Mike Beach

And what was -- I missed the second.

Brandon Dobell - Credit Suisse

Sorry, CapEx, CapEx spending.

Mike Beach

CapEx is still 8% of revenues.

Brandon Dobell - Credit Suisse

Okay. And kind of a broader question about the sales force kind of a 170 people or so, and if you break those into a bigger buckets of direct versus inside, U.S. versus foreign markets and if you think about the growth in those different buckets where should we expect you to add some people in regard to next 12 months or so?

Mike Beach

Well, let me try to tapping that at a little bit of a higher level. We certainly, the way that our sales force is organized, we have a number of direct quota bearing sales reps, and they work hand in hand with the account management team who really focuses on renewals and maintaining the client relationships.

We ended the quarter with 69 quota bearing sales reps. I really -- we don’t divide that down into the individual markets, but we do have dedicated teams focused on the U.S. higher education market, the international market, the K-12 base as well the corporate government and core profit market base.

Each of those teams has quota bearing sales reps as well account managers. Its not really just a hunt or gather mentality, our quota bearing sales reps focused on either bringing new clients to the table or up-selling existing clients and the account managers work on maintaining client relationship and making sure the renewals come in.

Brandon Dobell - Credit Suisse

Okay. Any change to how you think about the international markets and the direct sales force versus reseller arrangements?

Mike Beach

We, basically try to go direct to where we can, but certainly depending on the stage of the development of the different markets as well as the different culture of government aspects, and some markets has been beneficial for us to utilize the reseller program through the acquisitions of WebCT we gained a number of resellers that we’ve been having some pretty strong success with so far, enabling us to continue penetrating those areas.

So, no real change from what we have reported on earlier. But we continue to expect to see growth across our sales force probably about 10% over the year.

Brandon Dobell - Credit Suisse

Okay. Great. Thanks.

Operator

The next question comes from the line of Kirsten Edwards with ThinkEquity. Please proceed.

Kirsten Edwards - ThinkEquity Partners

Hi. This is actually Ryan in for Kirsten. Do you happen to have the international revenue for the quarter?

Mike Beach

Yes. Bear with me, one second. International revenue is about $12 million or for the quarter.

Kirsten Edwards - ThinkEquity Partners

Then are you seeing any strong growth in any particular country?

Mike Beach

I think, we continue to have strong growth in the larger markets where we’ve got at presence, the U.K. predominantly. In Netherlands, we’ve had strong sales.

Kirsten Edwards - ThinkEquity Partners

Okay, thanks and then also renewal, do you have the renewal rates for the quarter?

Mike Beach

The renewal rates were -- was inline with kind of the guidance we gave at the beginning of the year or the prior year historic averages. We don’t give a quaint on a quarterly basis, we just threw that up at year-end, so it’s consistent with what we’ve experienced historically.

Kirsten Edwards - ThinkEquity Partners

Great, thanks. I’ll pass it on.

Mike Beach

One other item on the CapEx number that was asked earlier. It’s really, really going to be in high 7% range now with the increase in our revenue guidance. So, it hasn’t changed to an 8% that we gave originally on the original guidance, but now we have taken revenue up it’s probably in the more, more in the high 7% range. Just wanted to clarify that.

Operator

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

Michael Nemeroff - Wedbush Morgan Securities

Hi, guys.

Michael Chasen

Hello.

Michael Nemeroff - Wedbush Morgan Securities

Michael Chasen, question for you. Between the International and K-3, 12 markets, which of those do you see as the biggest near term opportunity over the next 12 months? And how, I guess, this goes to Mike Beach, how are you allocating resources to both of those opportunities both -- looking at that both on a near term basis as well as long term?

Michael Chasen

You have to understand that when we talk International you’re really grouping all of the different market together to just one bucket. So, certainly on a global basis there are some countries that are just as far ahead on the spectrum as we are here in the states and some of that are much further behind.

So, it will hard to really group all of that together. When we look at the K-12, we do see that as a huge opportunity because as we talked about in the past there is over 17,000 high school districts, over 120,000 high school, you know, really just beginning to penetrate that market.

In general right now the International revenue was certainly more a larger piece of the overall revenue. And then K-12 contributes just based on where the different markets fall in their maturity. But we think in the long run they are actually both agrees in very strong opportunities for us.

Michael Nemeroff - Wedbush Morgan Securities

And then if you can comment on -- I jumped on little bit late. Did you talk about the conversion of the basic customers, enterprise customers and how that’s progressing?

Michael Chasen

We did comment on that in the call, it continues to be inline with what we’d experienced historically. Although, we had continue to see a lot of interest from our basic clients as they upgrade the enterprise and one of the other additional piece of information is the just the increase interest we’ve been seeing in our ASP hosting among those clients as they upgrade. So, again historically running in 10% to 11% range will be inline with what we continue to experience.

Michael Nemeroff - Wedbush Morgan Securities

Okay. And then one for Mike Beach, as you guys continue to pay down the debt, can you give us an idea of what you expect the interest income or expense line to look going forward?

Mike Beach

Well, I think we have -- hold on one second, let me just look at my analysis. So, we don’t expect to pay down any debt in second quarter, so its really going to be pay down later in the year. So, we’d given guidance on the cash flow that gets to a free cash flow number in high 30s, low 40s.

If you think that we would -- if we paid off the cash that would be the additional cash on-hand. And I don’t know what the interest rates will be at that time, but obviously we drive interest income off of that net value.

Michael Nemeroff - Wedbush Morgan Securities

And then just last one. Now that you have mentioned the free cash flow guidance, given the strong operating cash flow this quarter, is there any update to that or is the high 30s, low 40’s still the target for the year?

Mike Beach

I think the cash flow guidance we gave in the first -- last call is same to that.

Michael Nemeroff - Wedbush Morgan Securities

Okay, great. Thank you.

Operator

The next question comes from the line of Brad Mook with Boenning & Scatter. Please proceed.

Brad Mook - Boenning & Scattergood

Thank you. You guys signaled out ASP hosting as a demand driver, I think you mentioned at the head of the call that you’re selling 7 European ASP deals, is that right?

Michael Chasen

Yes.

Brad Mook - Boenning & Scattergood

Okay. And I saw the unit count picked up three sequentially. So, is that -- does the unit count you list in the supplemental, is that going live?

Michael Chasen

Yes. So, there is a timing difference between when the customer goes live and when they have signed the contract.

Brad Mook - Boenning & Scattergood

Okay. And then the new ASP deals, is that skew to Europe, can you give us some number on the U.S. side?

Mike Beach

We don’t have that in front us.

Michael Chasen

One of the things that we just were higher than the cost or there was just the number of existing clients that took this opportunity to continue to expand their E-Learning programs to upgrade an increase the services that we are offering through our ASP hosting, so throughout the year as well.

Mike Beach

I think if you look domestically we were very successful on selling additional ASP services to the existing customers base. And in international we picked up a lot of new clients would be a general way to characterize the quarter.

Brad Mook - Boenning & Scattergood

Okay. Fair enough. Thanks.

Operator

(Operator Instructions) The next question comes from the line of Howard Block with Banc of America Securities. Please proceed.

Howard Block - Banc of America Securities

Thank you operator. Good afternoon and congratulations on the quarter guys.

Michael Chasen

Thank you, Howard.

Mike Beach

Thank you.

Howard Block - Banc of America Securities

First question is on the cross-selling, I know you said everything is on schedule. But then you also said that there would be some second half evidence or evidence in the second half. I was wondering if you could just elaborate on maybe the type of the evidence and maybe the magnitude of evidence and if there’s further timing will it be 3Q, 4Q or once if we look at your metric table come the October release of your 3Q earnings would be, maybe see some acceleration in CV beyond the norm or licenses or type of licenses something like that?

Mike Beach

Howard, I think you have to realize that certainly while we have been talking about this with the client base from a while, the real sales cycle won't start until these products surround and the clients can't get their hands around then just because of some of the general open issues of when will be levered and then at that point we have to really begin the sales cycle get the products in front of the clients and into their budget.

So, when we’re talking about, we’ll see some evidence, we really mean in ’07 anecdotally will be able to tell a little bit of detailed around the attraction that we are expecting to see certainly talking about some early adopters. But when you combine that with our revenue recognition certainly we don’t expect to see any real contribution to revenue until 2008 and just through the natural part of our, lets call roughly six month sales cycle.

The real sales opportunity licenses will be showed until 2008. But we just mean anecdotally we’ll have some early adopters and some early wins that we will be share to with everybody at that time.

Michael Chasen

And how are clearly, the early adopters and the success we are having you’ll see in the license call in the contract value to the extent that they are success in the second half of the year.

Mike Beach

We are talking sort of nominal account in terms of licenses.

Michael Chasen

We don’t currently expect significant contribution during that first account.

Howard Block - Banc of America Securities

Okay. So, that’s good, I just wanted the said expectation. Secondly just in terms of looking sort of the 1Q, ’07 versus 1Q, ’06we are still little bit annoy that 1Q, ’06 with sort of stub quarter for WebCT I think and some integration cost.

Did you get the chance may be that just sort of give us on pro forma EBIT expansion or some sort of pro forma comparison or what how 1Q ’07 profitability would have compared with 1Q, ’06 have not been any annoy?

Michael Chasen

It’s difficult to do because the differences in the business models WebCT had perpetual licenses in those months that obviously drive different profitability to it’s from an apples-to-apples perspective I don’t have that information.

Howard Block - Banc of America Securities

Okay. Then lastly in terms of the contract value growth in the quarter, sort of on a year-over-year basis I think it was about $27 million. Could you may be offer that order of magnitude by, was it new customers, biggest contributor growth or same clients/new product or same clients/expanded product line meaning you are going from basic enterprises. Just some color in growth in contract value if you disaggregate across some of those key drivers?

Mike Beach

Its all of this, but really driven by expansion, the cross sales and ASP.

Howard Block - Banc of America Securities

Okay. So it would mostly be same client with new product is number one in the order of magnitude?

Mike Beach

Yes.

Michael Chasen

Sure in general, Howard I mean next fall something that we had talked about on the call like giving the guidance for the year in just general trends that we had experienced for a while we see more short-term revenue opportunity coming from expanding the relationships of the existing clients or certainly more of our license kind growth, i.e. new client growth comes more so from the emerging markets but those are a little bit lower priced deals because they are not necessarily buying the multiple enterprise licenses and they are getting started with us or maybe even purchasing our basic product.

Howard Block - Banc of America Securities

But even if I wanted to just a bundle that a little bit further, so with the same clients though, is it new products with same or just basics with enterprise migration or the same if larger?

Mike Beach

It’s really both. I don’t know how to break those two out from a percentage perspective it’s really driven by both of those.

Howard Block - Banc of America Securities

Okay, great. Thank you.

Michael Chasen

Thanks Howard.

Operator

Your next question comes from the line of Bennett Notman with Davenport & Company. Please proceed.

Bennett Notman - Davenport & Co.

Thank you. Actually my questions have been asked and answered. Thank you.

Operator

The next question is a follow up from the line of Amy Junker with Robert Baird. Please proceed.

Amy Junker - Robert W. Baird

Hi, thanks. Just a quick follow up on the total number of licenses in the quarter. If you look at it on a sequential basis, it looks like you have 68 fewer basic licenses, but only 28 more on enterprise licenses on the learning system. Is there any sort of timing issue we should be aware of or did you actually see some of those customers walk away?

Michael Chasen

Well, certainly there are a number of things that affect that. One is that occasionally when institutions upgrade to an enterprise license they may actually have more than one basic license with at their campus. So it’s really subsuming. Its actually two basic licenses replacing with one enterprise license.

In addition, usually when we’re talking about our renewal rate, the majority of the drops are coming from the basic clients, which are our lowered price clients that may not have as deep penetration with the learning system. So I think those are the two big influence of that number.

Amy Junker - Robert W. Baird

Great, that’s all I have. Thanks.

Operator

The next question comes from the line of Allan Cook with Merrill Lynch. Please proceed.

Allan Cook - Merrill Lynch

Hi, just one follow up question with regards to the G&A expense. Since the ops are fairly significant and I was wondering if you could tell us if there’s anything that --is there anything significant there?

Mike Beach

It’s not significant I can't -- can you give me some sense as to what you’re comparing it to?

Allan Cook - Merrill Lynch

Well, I’m comparing it from Q1 of last year to Q1 of this year and also the percentage of revenues.

Mike Beach

So, Q1 of last year didn’t have WebCT in the balance for the entire quarter.

Allan Cook - Merrill Lynch

Okay.

Mike Beach

So, that’s going to be the driver.

Allan Cook - Merrill Lynch

All right, thank you.

Mike Beach

Sure.

Operator

(Operator Instructions) There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Michael Stanton.

Michael Stanton

Thanks Lisa. Everybody thank you very much. I appreciate the questions and I will talk to you next quarter at North Center. Take care.

Operator

Thank you for your participant in today's conference, this concludes the presentation. You may now disconnect. Good day.

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