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Blackboard, Inc. (NASDAQ:BBBB)

Q2 2007 Earnings Call

July 31, 2007 4:30 pm ET

Executives

Michael Stanton - VP of IR

Michael Chasen - President & CEO

Mike Beach - CFO

Analysts

Amy Junker - Robert Baird

Michael Nemeroff - Wedbush Morgan Securities

Tom Roderick - Thomas Weisel Partners

Jeff Lee - Signal Hill

Kash Rangan - Merrill Lynch

Liam Mahony - ThinkEquity

Presentation

Operator

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

At this time I would like to turn the call over to your host for today, Mr. Michael Stanton. Please proceed, sir.

Michael Stanton

Thank you. Hello and thank you for joining us today for Blackboard's second 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, and such other risks as described in the Risk Factor 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. Just a 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 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 earnings press release, which is available on the company’s website. The second administrative note relates to our contract value, which we will also provide today. As a reminder, our 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.

Finally, we’ve once again provided supplemental information related to our licenses and contract value on the Investor Center Section of our website at investor.blackboard.com. The document is titled Q2, 2007 Blackboard Metrics. On today's call are Michael Chasen, President and CEO, and Mike Beach, our Chief Financial Officer.

At this time, I would like to 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’ll give you a summary of our performance for the quarter ended June 30, 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 our CFO, Mike Beach 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 let’s begin.

The second quarter of 2007 was a strong quarter across the board for Blackboard. In particular, in our emerging markets, our international team was very successful around the globe in adding new business, and the K12 team did a fantastic job winning a number of competitive deals. Across all of the markets we served, we once again experienced great traction with our ASP hosting business as institutions look to us to manage their e-learning technology.

Among the financial highlights in the second quarter, we increased revenue year-over-year by 36% to $59.4 million and generated net income of $3.4 million and earnings per diluted share of $0.12. We had $6.8 million in non-GAAP adjusted net income and non-GAAP adjusted net income per share of $0.23. All of these results were ahead of expectation and put us on track for another great year.

As a reminder, Blackboard’s business models were primarily driven by first, our ability to renew our large subscriber base of clients, which provides a 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 e-Learning needs, and third, our ability to add new clients subscribers across the education spectrum, here in the United States and around the world.

This quarter, we had success in both expanding existing relationships and establishing new ones with a wide range of different institutions. A few examples of deals in the U.S. higher education market include, Bethune-Cookman College in Florida, which licensed the Blackboard learning system to expand their disconcerting services for their 3,000 students. Bowie State University in Maryland and Clark College in Washington DC each licensed the Blackboard Community System during the second quarter. All schools intend to use the Blackboard Community Systems to better communicate and interact with their growing student bodies. Fairleigh Dickinson University in New Jersey, which licensed the Blackboard Academic Suite, including the Blackboard Outcome System and our ASP hosting service to serve its more than 8,300 students.

And finally, the Mississippi Community College System, which also licensed the fully hosted implementation of the Blackboard Academic Suite including the Blackboard Outcome System for its 65,000 students across the 15 college system. This is a fantastic multi-year commitment by Governor Haley Barbour and the community college leaders in Mississippi to invest in the states education technology.

On the international front, the University College Cork in Ireland upgraded to the enterprise Blackboard Learning System. Also, we are pleased to welcome the University of Trinidad and Tobago as a new client. UTT marks another major University in the Caribbean to license the enterprise Blackboard Learning System product.

Lastly, the University of Leeds has licensed the Blackboard Learning System, the Blackboard Community System, and the Blackboard Content System, which will provide anytime anywhere e-Learning access for the university's 33,000 students and 7,300 staff across nine campuses.

In K-12, I would like to highlight a couple of deal including the Lawrenceville School in New Jersey, which became our very first K-12 clients to license the Blackboard Outcome System. Lawrenceville is interested in using the Blackboard Academic Suite to understand and close the achievement gap with universities and body, assess the value of professional development and provide the data they need for strategic planning and the intensive reaccreditation processes.

A new K-12 plan in the second quarter was North Carolina Virtual Public Schools, which licensed the Blackboard Learning System and contracted with us for ASP hosting offering. This was a great competitive win for us and as further evidence of our leadership position in the virtual school of market.

Finally, Clear Creek Independent School District in Texas was a significant up sellers we added the Blackboard Community System and the Blackboard Content System significant amount of training to professional services.

In addition, these two new licenses Clear Creek it tends to allow their Blackboard offering to nearly half of the 30,000 total students in the district. Again, these are just a few client examples, from the second quarter, but they are representative of the traction and trends we are seeing in our business so far in 2007.

Moving on to licenses. We ended the second quarter with the total of 3,756 Enterprise category licenses. Breaking down these licenses, we had 2,258 licenses of the Blackboard Learning System Enterprise, 673 licenses of the Blackboard Community System; 352 licenses of the Blackboard Content System, 23 licenses of the Blackboard Portfolio System, 21 licenses of the Blackboard Outcome System, and 429 licenses of the Blackboard Transaction System.

Everyone should know here that we are breaking out license figure for a new offering the Blackboard Portfolio System. This product offers e-portfolio capabilities for students and likely content management tool. The product is priced anywhere from $15,000 to $35,000 per year depending on the institution size, and is only inoperable with the WebCT code base of the Backward Learning System product.

In terms of the Blackboard Learning System basic product, we ended the quarter with 1,165 licenses. The total number of licenses at the end of the second quarter was 4,921.

In addition to our success and growing total licenses, we finish the second quarter with 500 ASP hosting units. As per contract value, we finished the quarter within annualized contract value of $1076 million representing approximately 19% growth year-over-year. This resulted in average contact value per license of approximately $36,000. The growth of contract value reflects the strong license in hosting sales that we have been experiencing.

Our total headcount at the end of the second quarter was 800 people, and was comprised of the following. We had 174 people in sales, 67 people in marketing and business development; 147 people in product development; 150 people in support, ASP hosting and production; a 127 people in professional services; and a 135 people in operations.

Now before I hand the call over to our CFO, Mike Beach I want to provide an update on some of our ongoing initiatives. As we recently announced, our product development team successfully delivered on the time-table we set forth a year ago to make the Blackboard Content System, the Blackboard Community System and the Blackboard Outcomes System inoperable with the WebCT code base of the Backward Learning System products.

The products were launched in early July at Blackboard World 2007, our global user’s conference. As we have stated in the past we believe that from the WebCT clients have the same cordial content and assessment technology needs as legacy Blackboard clients. As a consequence, we expect that these products provide an opportunity to continue to expand our client relationships.

Additionally, our sales force is well prepared to bring these products to market and the timing of our users conference was ideal from a launch perspective. We continue to expect the sales associated with the newly available products will be modest in the first couple of quarters, but investor should expect to be provided with additional details as we progress.

I also want to comment on the initial success we've to date in selling the Blackboard Outcome System. The industry is showing not just a good appetite for this offering, but the diversity of interest is very important. Just to remind everyone, of the 21 licenses we have sold this year we have a mix of large and small public and private college, and university, community colleges and of course our very first K-12 institution.

These institutions are choosing to work with Blackboard for a number of different reasons, but the comments we see -- that we’ve seen are, one, a tremendous desire for institutions to work with a single vendor that can provide a full suite of academic products and services. Two, an increasing need for institutions to be able to detail long-term strategic e-Learning planning and to be able to manage their own institution’s growth. And third, a significant need for institutions to manage the accreditation process and mitigate risk.

The flexibility and comprehensiveness of our platform is exactly why it is being adopted by a diverse group of institutions that may have different missions and objective to share a common commitment to improving institutional effectiveness.

With that, I am please to hand it over to our CFO, Mike Beach, to give detail around our financial results and provide you with our financial guidance for the remainder of the year.

Mike Beach

Thanks Michael. I will organize today’s financial 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 second quarter of 2007 were $59.4 million, up 36% 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 increased demand for ASP hosting. Product revenues for the quarter were $52.3 million, representing an increase of 41% over the same quarter last year. Professional service revenue for the quarter were $7.1 million, which represents an increase of 8% over the prior year.

In terms of revenue mix, while our product revenue came in slightly above expectations, we were slightly below our expectations as it relates to service revenue.

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 to 47% to $44.6 million, as compared to $30.5 million in the same quarter last year. Ratable non-recurring revenues increased 17%, to $5.7 million, as compared to $4.7 million in the same quarter last year. Other revenues increased 10% to $9.1 million, as compared to the $8.4 million in the same quarter last year.

Moving on to gross profit, our gross profit for the second quarter, excluding stock-based compensation and amortization of acquired technology was $43.6 million, as compared to $29.6 million in the same quarter a year ago, representing an increase to 47%. For the quarter our gross margin was 73%.

Total operating expenses excluding the cost of revenues, stock-based compensation and amortization of acquired intangibles were $29.5 million, representing a decrease of 3%, as compared to the $30.3 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 $3 million and amortization of acquired intangibles of $5.5 million.

During the quarter we repaid the outstanding balance of our acquisition debt which was approximately $19.4 million with the proceeds of our convertible debt offering which was completed in mid June. As a result of this repayment, we incurred approximately $600,000 of interest expense resulting from the acceleration of amortized debt issuance costs. The increased interest expense was offset by a favorable non-cash currency translation gain of approximately $870,000 in the quarter.

Our net income was $3.4 million in the quarter, resulting in a net income per diluted share of $0.12. Adding back the amortization of acquired intangibles, and the associated tax impact results in non-GAAP adjusted net income of $6.8 million or non-GAAP adjusted net income of $0.23 per diluted share.

In terms of the balance sheet, we closed the quarter with $169.5 million in cash and cash equivalents. The increase in cash was a result of the company's convertible debt offering where the company receives net proceeds of approximately $140 million after paying off the acquisitions debt and related fees.

Accounts receivable increased to $64.7 million at the end of the quarter up from $57.1 million for the same quarter last year. Current deferred revenues increased to $105.3 million at the end of the second quarter up 12% from the $93.8 million at the end of the second quarter last year. Current deferred revenues related to recurring products totaled $89.3 million compared to $80.6 million for the same quarter of last year, representing an increase of approximately 11%.

An important note for investors on an internal policy and process change that impacts the comparability of our deferred revenue balances. Beginning in the second quarter of 2007, the company implemented a new policy requiring all renewing clients the issue purchase orders in advance in invoicing. We implemented this process improvement to gain greater visibility into client renewals and we expect just to have a positive impact of cash collections in the future. However this change results in approximately $19 million of invoicing, shifting from the last few weeks of the second quarter to the first few weeks of the third quarter. It's important for investors to take this change into account when comparing Blackboard's deferred revenues and account receivable balances with prior period.

Moving on to cash flow. Cash flow provided by operations totaled $484,000 for the second quarter. Finally, capital expenditures were $4.7 million in the second quarter of 2007.

Moving on to guidance. For the third quarter of 2007, we expect revenues of $60 million of $60 to $61 million. Amortization of acquired intangibles at $5.5 million. Net income of $2.7 to $3.2 million resulting in net income per diluted share of $0.09 to $0.11 based on an estimated $30.2 million shares and an effective tax rate of 41.5%.

And non-GAAP adjusted net income which excludes amortization acquired intangible and the associated tax impact of $6 million to $6.5 million resulting in non-GAAP adjusted net income per diluted share of $0.20 to $0.22 based on estimated $30.2 million shares and an effective tax rate of 40.5%.

For the full year 2007, we expect revenues of $235 million to $237 million. Stock based compensation expense of $12 million. Amortization of acquired intangible of $22 million. Net income of $11.8 million to $12.8 million resulting in net income per diluted share of $0.39 to $0.43 which is based on an estimated 30 million shares and an effective tax rate of 41.5%.

A non-GAAP adjusted net income, which excludes the amortization of acquired intangibles and the associated tax impact of $25 million to $26 million resulting in non-GAAP adjusted net income per diluted share of $0.83 to $0.87 based on an estimated 30 million shares at an effective tax rate of 40.5%.

A few additional comments relate to guidance that I’ve just provided. Embedded in our guidance for the third quarter’s approximately $350,000 of one-time expenses related to a few organizational changes. We have recently made a better structure of the company for continued growth and expansion.

Additionally, many of you have asked about the near-term accretion of the convertible debt offering and its impact on our guidance. The convertible debt has an interest rate of 3.25% and we are currently investing the proceeds at an average yield of approximately 5%. From a cost-flow perspective, we will benefit from this policy to spread, but we do not expect the transaction to result in any material accretion to earnings during 2007. This is due to the related debt issuance costs which are amortized as additional interest expense in a front-loaded manner resulting in a higher effective interest rate for GAAP at the beginning of the term of the loan. Now, let me hand it back to Michael Stanton for closing. Michael?

Michael Stanton

Thanks, Mike. Just one upcoming note, we’ve got an upcoming conference on the calendar at the moment. We will be at CRBC conference in New York on August 6 and we will be getting down on the road with a few folks in August and September. Other than that, that concludes our prepared remarks. Operator we are ready to go ahead and begin Q&A.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from the line of Amy Junker of Robert Baird. Please proceed ma'am.

Amy Junker - Robert Baird

Hi, everyone. Couple of quick questions. Michael, I know it’s only been a couple of weeks since the Users Conference, but I was just hoping you could share kind of what the initial feedback has been for some of the product announcements you made there, the Application Pack 2 for the formal WebCT customers safe design. And having those other products the community content now comes available to WebCT, what has your feedback been so far?

Michael Chasen

We've actually been receiving some great feedback from our clients in all three of those announcements. Certainly, these historic clients to have the WebCT code base of the Blackboard Learning System. We are very pleased to know that we've been focused and working to address the outstanding issues with the release of Application Pack 2, I think that helped to alleviate any underlying concerns they had, and in fact we are very happy to be able to move their systems in most recent release.

Clients across the board were pleased with all of the new products that we bring to market, in particular again though the WebCT, at a legacy WebCT client base we're very interested in a lot of the products that now they have potentially available to them for the first time. The Blackboard Community System, the Blackboard Content System and the Blackboard Outcomes System are three additional ways in which they can now expand their online learning environments and there is a lot of interest there. And then, I can say that across the board everyone was very pleased with the added feature of safe design, which we will talk about certainly in more detail on the next call, if there is something that happens in Q3. But built-in plagiarism detection really helps to enhance the competitive positioning of our Learning System product and I believe it helps to make a standout from the crowd and really makes the must on every college campus.

Amy Junker - Robert Baird

Thanks. I appreciate that. With respect to the professional services growth being a little slower than expected, do you have a sense of what is driving that? Does that have anything to do with the increased number of ASP hosting that's going on or am I thinking about that incorrectly?

Michael Chasen

Well, I think you have to realize that as a company, we continuously push our entire organization and let me take over the sales force -- to really focus on the recurring ratable revenue, which is primarily our products and our hosting opportunity. So, what happens there is, there may be an opportunity as our sales person is working with our client and they will direct them more towards either taking advantage of their budget by purchasing additional product or ASP hosting. So that same dollar amount then gets spread out over, in this example, a year instead of, if that was sold to services being all recognized upfront, so what you see is slightly higher products revenue that are larger decrease in services revenue even though our numbers are better overall. That combined with, I think, just a real focus of the product that we put in this past quarter and current quarter, I think, cause of services to come in slightly under what we had expected, but I think downs and no doubt is that the product in ASP are over which we think are better actual long-term trends for the company to be strong end.

Amy Junker - Robert Baird

Would you expect the growth to kind of continue at the level with what we saw in the second quarter or I think typically it's in the summer a little stronger period for you, so we might see that pick back up in the third quarter?

Michael Chasen

Yeah, I certainly will see slightly higher services in the third quarter than this quarter, but again, I think the overall trend is actually a positive one, because what you are seeing is higher recurring revenue in the product line, even though that gets spread out since it’s ratable revenue as opposed to being recognized the fund, which would otherwise be one-time services revenue.

Amy Junker - Robert Baird

Thanks, and just last question for Mike Beach, with the interest expense going forward, can you just give us some guidance of what you are anticipating for that line item now that -- convert us through, should we just take what the converters and 3.5% and -- 3.25% anything I'm missing there?

Mike Beach

Well, you have -- there is the debt issuance cost again amortized into interest expense.

Amy Junker - Robert Baird

Okay.

Mike Beach

So for the foreseeable future, it's going to be in the 5% range and we'll -- that amortization expense is front loaded. So the interest rate will decrease over time, but for the remainder of this year interest expense is going to be around 5%.

Amy Junker - Robert Baird

Okay. Great. Thank you.

Operator

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

Michael Nemeroff - Wedbush Morgan Securities

Hi, Michael.

Mike Beach

Hi there.

Michael Nemeroff - Wedbush Morgan Securities

Just following up on the previous question, you had mentioned that you see -- you expect to see a little bit of a pickup in the professional services revenue in Q3. I am just trying to reconcile why the guidance for Q3 especially on the product side is a little bit lower than I think we were looking for? Is there something that we are missing there, or is there some sort of a change in the business or something that we should be thinking about?

Mike Beach

Michael, we’ve provided the guidance, just a revenue number not broken out, obviously. So the guidance is increased for the benefit that we had in the current quarter, and then a slight increase as we are slightly more optimistic for the remainder of the year.

Michael Nemeroff - Wedbush Morgan Securities

Okay. Previously Mike, you had guided to a cash flow from operations of about $55 million and $60 million, does that still hold for the year?

Mike Beach

Yes.

Michael Nemeroff - Wedbush Morgan Securities

Okay. Of the 58 new enterprise licenses that you guys signed, how many of those were basic customers that we are upgraded?

Mike Beach

We actually don’t look at that number on a quarterly basis. We usually, at the end of the year, are looking to give a general percent of the basic clients that upgrade to the enterprise product, I would say anecdotally it’s inline which we are in the past. We haven't really seen a change in that.

Michael Chasen

Yeah Mike, the up-sell rate continues to track the historic terms -- up-sell rate 10% to 11% on an annual basis.

Michael Nemeroff - Wedbush Morgan Securities

Okay.

Michael Nemeroff - Wedbush Morgan Securities

Perfect. Thanks guys.

Operator

Your next question comes from the line of Tom Roderick. Please proceed, sir.

Tom Roderick - Thomas Weisel Partners

Hi guys, good afternoon and thanks. Brief question for -- I want to build after question that Michael just said a second ago here on -- and when I look at this quarter it just looks like a tremendous selling quarter, almost 200 new enterprise licenses and a number of new outcomes deals in there, the contract values of 19% year-over-year. So, if I look historically at the sequential ramp in the Q3 would seem to be a little bit sharp on a historical basis than what you are guiding. So, I guess the question is when you look ahead in Q3 in terms of what might be encouraging you to be perhaps a little bit more conservative, would it be just strictly on that professional services front we are looking to? You may be improve that business a little bit, do you have any concern with renewal rates as you look into Q3 or where would you sort of point to where you like to be more conservative on that approach?

Mike Beach

I think you are clearly with services not meeting expectation -- the slower expectations in the quarter. We have looked at that as a risk and been conservative formulate in the guidance for the remainder of the year.

Tom Roderick - Thomas Weisel Partners

But when you look at the core business, Mike, would it be fair to characterize as healthy if not even improving, just given the contract value and the enterprise license edition there?

Mike Beach

As we said earlier, we are pleased with the product revenue; it was above expectation and I think we are happy with where we are and looking forward to the remainder of the year.

Michael Chasen

And again I think we are taking a look at the services, just to directly answer your question. As you've noted, obviously the products revenue was higher and we just leave some of those dollars that were otherwise here marked for our services. Our sales team and our clients are actually moving towards products, which is giving us much stronger recurring and ratable revenue and a stronger position for our product in the long run, it helps to improve product margins, as the downside is of course that there is less services dollars but those services dollars you have to remember are also only one-time dollar. So, we'd rather see a move toward those products. Again, we usually are able to forecast a little bit more correct. I think we are pleasantly surprised that products was higher even though the admin services came in something lower.

Tom Roderick - Thomas Weisel Partners

Sure. Let me switch gears and focus on the Outcome System, you have the great win with the State of Mississippi. Can you talk about what else you are seeing in the pipeline in terms of state-wide initiative? Have you had discussions with folks, something that might replicate what just occurred in the State of Mississippi? And then also, if you could just again run down the list of new outcomes customers in the quarter that will be great. Thanks.

Michael Chasen

Sure. We definitely see, or are seeing a trend as there are many more state and contortion-wide initiatives, specifically around measuring assessment and accountability. So, we think that that is the trend and it’s going to continue. That being said, it is still a relatively small number. We are engaged in a handful of conversations with either a large contortions of state that are looking at viewing yields across their campuses. So, I certainly think it's trending in that way and in the right direction but it's a slow process but otherwise it does show the type, I think and represent the overall trends in the education system towards improving coordination and assessment between campuses, both in states and between them.

Tom Roderick - Thomas Weisel Partners

Okay, great.

Mike Beach

And the examples during the quarter, fairly they can send in New Jersey, Lawrenceville perhaps K-12 in New Jersey and of course the large Mississippi deal which was 15 outcome sales.

Tom Roderick - Thomas Weisel Partners

Great. Michael, brief financial question for you just what got you there, can you just run through the purchase order process change just one more time and highlight the impact on the deferred?

Mike Beach

Sure. So, just to get a little background, when we applied WebCT, one has the requirements they had on renewals were to get purchase orders. And a year having WebCT combined in our business, we noted that the significant benefit of that -- really it was seeing accelerated collections with lower cost and significant visibility into their renewals. So, we believe as -- applying this across the entire business make sense, of course, when you make that change and have significant invoicing which occurs one point in time, which in our case is the last two weeks of June, it pushes the invoicing out a couple of weeks. So, as we said earlier, about $19 million of invoicing that would have normally happened in the last couple of weeks of June and been including in deferred revenue and accounts receivable is now pushed into the first couple of weeks of July. But we believe it has the benefit from a collections and visibility perspective is significant.

Tom Roderick - Thomas Weisel Partners

Right. Thank you guys, very much appreciated.

Operator

Your next question comes from the line of Jeff Lee of Signal Hill. Please proceed, sir.

Jeff Lee - Signal Hill

Hi, good afternoon. I just want to talk a little about the Portfolio System. Could you maybe talk about how that is being received and what sort of the value proposition that institutions are getting from that? And then, what kind of adoption ramp were or sales cycle do you expect compared to other product introductions such as Outcomes System?

Michael Chasen

Sure. Now, I want to be careful, because let me really explain this product appropriately. Blackboard historically had e-portfolio capabilities built into the Blackboard Content System, which has obviously been a very successful product for us over the last several years. When we acquired WebCT under development they were building a separate e-portfolio product for use with their WebCT, CE 6 and WebCT Vista 4 client.

We completed the development on that and then released the product because we thought it made sense to finish the work that was already underway, as well as because it offered an immediate opportunity for clients using the legacy WebCT learning system code base to be able to expand their product suite. So we did bring that to market. It is only available for clients that either are on the WebCT CE 6, or Vista 4 code base, which is a smaller piece of our overall population of clients, also since its functionality that’s duplicative of the Blackboard content system, which is now available for all the CT clients as well.

We really aren't expecting significant growth in that, we really see it as more of just a small add-on that makes our overall system more valuable for those clients that are still on the WebCT learning system product. We did think that it was relevant and up to be able to break out, because we do include it in our license counts, but it’s not something that we expect to see the same type of growth we have with our other products that are available for the full suite.

Jeff Lee - Signal Hill

Okay. Great. And then on outcomes, can you maybe talk a little bit about how that’s received by a K-12? And now you’ve sort of had your first sale, how does the selling process sort of compare versus your higher-end clients?

Michael Chasen

In some ways we actually think that the Blackboard Outcome System is even more important for the K-12 space, especially as initiatives such as No Child Left Behind or other state or funding initiatives are acquiring schools, to not only their own progress and student achievements but compared to other schools either in their areas, state or district. Now, unfortunately K-3, 12 institutions are a little bit behind higher-end on the technology curve. So, of course, we expect that our first group of sales would be in the higher education space, because they are further along, from an e-Learning investment perspective. So we were extremely happy that at such an earlier stage already there was K-3, 12 institutions that have stepped up to purchase the product and recognize just how important it is for this sector.

We are speaking with other schools as well. Again, I think that the K-3, 12 market is trailing that of the higher-end market, but I believe in the long run this product will be even more important to that market space and that will be reflected in the numbers. But that’s a little bit more of a longer term reflection. Immediately, obviously the majority of growth for the [CBFM] systems continue to be in the higher education space.

Jeff Lee - Signal Hill

Great. Thanks guys.

Operator

Your next question comes from the line of Kash Rangan of Merrill Lynch. Please proceed, Sir.

Kash Rangan - Merrill Lynch

Hi, thank you very much. I am just looking to get some clarification, first half nice job and margin leverage, looks like you are starting to get the operating leverage for having integrated WebCT, but a couple of clarifications, one is on the number of enterprise licenses. If I am doing the math correct, you signed roughly 50 enterprise licenses? If that is correct, can you just comment on if that was in any way a tough comparison year-over-year versus the 76 that you signed this aim seasonality in that mathematical and then I will have my follow-up question?

Michael Chasen

Sure, is the question -- is there seasonality on a quarterly basis?

Kash Rangan - Merrill Lynch

Yeah, first -- I am getting 50 licenses, enterprise licensed to sign in Q2, compared to your earlier 76, is there any seasonality or tough comparison that’s distorting the metric because it seems to be a little bit on the lighter site than I would have expected.

Michael Chasen

Yeah, I think it’s a tough comp rate up to their acquisitions looking at the prior years. So, we look at the client account, say the enterprise license increase was comparable to what it was a year ago from Q1 to Q2. ASP was actually much higher and the average contract value per license is increasing at a rate that's greater for the period. So, we are pleased with the trends that we see in the quarter.

Kash Rangan - Merrill Lynch

Got it, and also Michael Beach a question for you, on the cash flow side you definitely reiterated your comfort in the operating cash flow and free cash flow guidance for the rest of the year. As I look at the second half of the year it looks like we are set up for a back-end loaded second half for cash flow production just like we were last year. Can you comment on -- are there any changes in your working capital situation that we should be aware of as we look at your rather second half weighted cash flow forecast?

Mike Beach

No, as in prior years, substantial of the cash for the company is going to come in the second half the year, we expect that to be in the cases here.

Kash Rangan - Merrill Lynch

Got it. So especially as you shift the new invoicing method, do you think you get visibility and so if you are real comfortable that those things translate and cash flows should help your second half then?

Mike Beach

Yeah, I think clearly, it takes us a week or two to get those additional purchase orders in, but the trends we are seeing are that even with that delay the cash flow will be positive over time. So, I think we would expect the second half of the year to generate significant cash as it has in the past.

Kash Rangan - Merrill Lynch

Great, thanks a lot. Nice quarter.

Michael Chasen

Thank you.

Operator

(Operator Instructions). Your next question comes from [Liam Mahony] of ThinkEquity. Please proceed sir.

Liam Mahony - ThinkEquity

Hi, thanks. I was hoping you could give us some update on any turnover in the sales force, how it has been trending and if there has been a significant change versus historical rates?

Mike Beach

Each quarter we of course examined our sales force to make sure that we have people that are being productive and are being able to execute on our different vertical market strategies. So of course at the end of every quarter we do a careful examination to decide where it would make sense to put our resources. Right now we are stacked according to our budget levels and are very happy with the performance of the sales force today. In fact, we actually just got back from our mid-year sales and services meeting. We have one at the GA. January, what happened to the year, we get to just make sure the entire sales force is properly aligned given the updates on the new products, get together, do markets in territory planning to talk of our company strategy. So not only are we happy with the overall facing of the sales organization, we are very excited about its position for the rest of the year. The assets that we have on board combine with obviously all the new products that we have released. And I can tell you that our sales force still has the same way and their bags are full of a good deal of additional products to be able to bring out to an ever increasing client base.

Liam Mahony - ThinkEquity

Great, thanks.

Operator

There are no more questions at this time.

Mike Beach

Great, well. Thank you all very much for your questions and we look forward to either seeing you on the road or speaking with you some time around late October early November. Take care.

Operator

This concludes today's presentation, you may now disconnect.

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Source: Blackboard Q2 2007 Earnings Call Transcript
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