Blackboard Inc. 2008 Acquisition of NTI Group Call Transcript

Jan.14.08 | About: Blackboard Inc. (BBBB)

Blackboard Inc. (NASDAQ:BBBB)

2008 Acquisition of NTI Group Call

January 14, 2008 8:00 am ET

Executives

Michael Stanton – Vice President Investor Relations

Michael Chasen - President and CEO

Michael Beach - Chief Financial Officer

Analysts

Tom Roderick – Thomas Weisel Partners

Michael Nemeroff – Wedbush

Amy Junker – Baird

[Amara Blanca] - SunTrust

Bennett Notman – Davenport

Trace Urdan – Signal Hill

Operator

Good day ladies and gentlemen and welcome to the Blackboard NTI Acquisition Conference Call. [Operator Instructions] I would like to now turn the call over to your host for today Mr. Michael Stanton, Vice President of Investor Relations.

Michael Stanton

Thank you for joining us today for Blackboard’s Conference Call to discuss our acquisition of the NTI Group. We have provided a presentation on this transaction on our website at www.investor.blackboard.com that we will be going through in a moment.

I’d like to remind everyone that except for historical information presented the matters discussed today may contain forward looking statements as outlined here on slide number two. 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.

Additionally we will reference certain non-GAAP, adjusted net income and non-GAAP adjusted net income per share figures on this call and we have provided our definition of these measures here on slide three. We will also refer to our contract value on today’s call which 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 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.

On today’s call are Michael Chasen, President and CEO and Michael Beach, Chief Financial Officer. At this time I’d like to turn the call over to Michael Chasen.

Michael Chasen

Hello everyone and thank you for taking the time for joining us this morning. We will try to move quickly through the scheduled presentation deck and then open up the call for your questions. Today’s agenda is laid out on slide four. First I want to take some time to tell you about NTI, the reasons behind the transaction and then share with you some of the details on how we plan to integrate NTI’s products within Blackboard’s existing technology. I will then hand the call over to Mike Beach our CFO to take you through some of our preliminary financial information on both the fourth quarter and our initial stand alone guidance for 2008 as well as the financial benefits of the transaction. We will then close with your questions.

With that let’s move to slide six. As most of your know when I co-founded Blackboard in 1997 we were working with a handful of colleges providing them with the basic level course management systems software to help them put their courses online. Today we have grown to a company that provides the enterprise technology that institutions use to improve all aspects of both academic life and the broader student experience.

Blackboard’s technology helps higher education, K-12, professional, corporate and government organizations to extend learning online, facilitate secure student commerce and access and enable effective communication for their entire organization. I am proud to say that each day thousands of institutions and millions of students use Blackboard around the world.

Moving to slide seven, our acquisition of the NTI Group is consistent with our mission and one that we are very enthusiastic about. We are here today because we are announcing Blackboard’s planned acquisition of the NTI Group, a leading provider of mass messaging and notifications for educational and government organizations via voice, text, email and SMS to an array of devices. As I will detail this is a tremendous acquisition on all fronts as it will greatly benefit our clients, employees and shareholders.

We are acquiring NTI for $182 million in cash and stock subject to certain adjustments. The purchase price will be paid $132 million in cash and $50 million in Blackboard common stock. NTI has the potential to earn an additional $17 million in stock based on attainment of aggressive financial targets over the two years following the close of the acquisition. The transaction was approved by both companies Board of Directors. Finally, while we have reach agreement on all material terms, completion of the merger is subject to customary closing conditions and government approval. We expect the transaction to close in the first quarter of 2008.

With these details in mind let’s dive into the rationale behind this acquisition on slide eight. First, as online learning continues to grow and more institutions utilize the internet to connect with traditional and virtual students it is becoming increasingly important to have the capability to deliver mass communications with large populations of users across an array of technical devices. Second, it has become imperative that academic institutions have the ability to quickly and effectively communicate with their entire campus constituency in the wake of a range of school and campus tragedies, severe weather and other safety concerns.

Third, institutions are focusing on mobile-centric strategies and looking to tightly integrate their learning environments with cell phones and PDA’s. By augmenting Blackboard’s existing product offerings with NTI’s messaging and notification technology Blackboard has the most comprehensive enterprise technology offerings for the education markets addressing the key IT priorities including content, community, commerce and now notification.

When I say the key IT priorities I am referring to the fact that for the past five or six years course management software, content management software and portal software have been among the five most important IT budget priorities among CIO’s at US colleges and universities according to the campus computing project. An annual survey of technology trends in higher education. More recently over the past two years or so mass communications technology has emerged as one of those important priorities.

There are a number of significant benefits from this transaction which are outlined on slide nine. First, we intend to offer this as a new stand alone Blackboard product and intend to incorporate it into both the Blackboard Academic Suite and Blackboard Commerce Suite to provide a more compelling and complete solution to the markets we serve. Blackboard now joins the fast growing alert and notification market forecasted by the Yankee Group to grow an estimated $1.2 billion by 2011, representing a five year compounded average annual growth rate of more than 30%.

Second, the acquisition provides Blackboard with more than 1,200 senior level relationships in the US K-12 market. NTI’s relationships are with district superintendents and other key decision makers. These relationships will open up new opportunities for Blackboard as we continue to introduce new K-12 features to our Academic Suite and help accelerate our overall growth in this market.

Third, Blackboard’s existing US higher education client base of nearly 2,000 clients represents a significant cross sell opportunity for NTI’s products. Higher education is facing urgency and pressure to deploy effective notification and communication systems and Blackboard can now address this opportunity and integrate it with other mission critical campus technologies.

Fourth, NTI senior leadership team has significant education technology experience and they will be a strong addition to our management team. This is a tremendous group of people and I could not be happier to welcome them to Blackboard.

Finally, the transaction is expected to be slightly accretive to earnings on a non-GAAP adjusted basis excluding the impact of purchase accounting under deferred revenues and merger related costs and dilutive on a GAAP and non-GAAP reported basis in fiscal year 2008. We also expect this acquisition to be material accretive in 2009 on a non-GAAP basis and dilutive on a GAAP basis. Michael Beach, our CFO will provide additional details on the financial benefits of this transaction a little later.

Moving to slide 10, NTI is a recognized leader in the US K-12 mass notification market. Key institutions such as the Los Angles Unified Public Schools, Houston Independent School District and Miami-Dade County Public Schools are only a handful of the over 1,200 contracted clients using this product in K-12. In the K-12 market NTI Connect-ED offering is utilized primarily for safety communications, parent outreach and attendance management and reporting.

NTI also has a very fast growing presence in the US higher education market. The University of Georgia system, Yale University, Princeton University, Georgetown University and Notre Dame are just a few examples of the 130 institutions with which NTI currently works. The usage drivers in higher education are a bit different than the K-12 market though no less critical. In higher education the Connect-ED system is typically used for emergency communication, enrollment management, alumni relationship management and interdepartmental communications.

Outside of the education market NTI also has fast growing practices in the municipal and state government, corporate and military markets. As you can see here on slide 11, in terms of business model NTI’s model is very similar to Blackboard’s. Like Blackboard, NTI has an annual subscription business model. The company has experienced very strong renewal rates with greater than 95% retention over the past three years. I think this demonstrates both the quality and reliability of the product as well as the critical importance of the technology to institutions.

NTI recognizes its revenue ratably which gives the company large deferred revenues that lead to strong visibility and predictability especially when coupled with high retention rates. We expect these characteristics to enhance our combined visibility. NTI was profitable in 2007 and is on a trajectory to expand its profitability in the years to come. The model also has very strong cash flow characteristics as NTI collects cash up front when a new deal is signed.

As I said, NTI is a very fast growing company in a high growth market segment. Revenue was approximately $30 million in 2007 which represents annual growth in excess of 50%. I think this is an excellent compliment to Blackboard’s current growth prospects. Finally, NTI ended 2007 with approximately $39 million in contract value which we view as a key driver valuation in this transaction and I think should give you a good indication of what the business can do in the coming year.

Despite the fact that both NTI and Blackboard each have been focusing on the education market for many years there are surprisingly little client overlap. Slide 12 highlights the breakout of both Blackboard’s and NTI’s respective client bases across each of the markets we serve. In the US higher education Blackboard works with nearly 2,000 institutions while NTI has only 130 colleges and university clients. We believe that we can effectively cross-sell NTI’s Connect-ED product into our existing install base of clients.

In US K-12 NTI counts more than 1,200 schools and districts as clients which compares to just over 400 K-12 clients for Blackboard. Also notable is that there are fewer than 100 K-12 clients that we share in common. We believe that NTI’s broad footprint in the US K-12 market will benefit us moving forward as we continue to enhance our Blackboard Academic Suite product to better penetrate the K-12 opportunity. Finally, both companies have a growing number of government and corporate clients we believe that our combined offerings will make us more relevant in these markets.

Before I talk about NTI’s products, sales process and positioning I think it is important for everyone to understand and appreciate the unmatched enterprise technology NTI has built. As we have outlined on slide 14, NTI offers a comprehensive system for message delivery, reporting and tracking. The solutions offered on a fully hosted ASP architecture that provides the capability to deploy quickly with no infrastructure build out by the client. This product was built as a software as a service platform from the ground up. Software updates and maintenance are done in a centralized way and all clients benefit simultaneously.

NTI’s technology has a unique competitive advantage due to the proprietary algorithms for message routing and throttling combined with telecoms capacity to send more than two million one minute voice and message calls per hour. In terms of reliability, NTI’s offering achieve 99.99% uptime in 2007, resulting in the successful delivery of more than 205 million voice calls in the last 12 months. The company’s technology easily integrates with existing back end systems and databases. Finally, this technology is something that we will be able to easily integrate with our existing Blackboard Academic Suite and Blackboard Commerce Suite products.

Following the closing the acquisition of NTI we will bring to market our next product, Blackboard Connect which can be seen on slide 15. Blackboard Connect will be Blackboards new messaging and notification platform. This product will be a mission critical enterprise communication solution which provides institutions with voice, wireless, PDA, e-mail, text/SMS capabilities, enabling institutions to schedule, send and track personalized messages to millions of users in minutes across a spectrum of handheld devices such as computers, cell phones and PDA’s. It also allows institutions to provide broad emergency messaging quickly and tailored communications to improve enrollment management and academic performance and alumni relations.

Given the strong momentum NTI has we intend to maintain their current sales force and supplement them with Blackboard’s own direct sales force. The Blackboard sales force will be introduced and trained on the NTI products this week as we expect our sales teams to be able to begin identifying and closing cross-selling opportunities quickly. From an integration planning standpoint we have already spent a considerable amount of time working together to identify sales opportunities.

Slide 16 showcases how Blackboard Connect will not only continue to be offered as a stand alone solution with specific editions for our various market verticals but will also become an integrated part of the Blackboard Academic and Blackboard Commerce Suites as an additional product add on.

Slide 17 gives you a sense of how an administrator might use the product. To use the Blackboard Connect system an individual simply needs to sit down in front of a computer, although the entire process can be done over the phone as well. The person selects who they want the mass message to go to, whether it is an entire campus, just a department or the emergency team, then they select how they want the message delivered, a voice mail, text converted to voice, SMS, e-mail, etcetera.

As student and faculty are increasingly reliant on cell phone and other mobile technologies we believe NTI technology will provide Blackboard with the ability to extend the classroom to the student in a low cost efficient manner as well as to facilitate rapid communications among students and faculty. With the click of a button the message can be distributed to millions in just minutes.

Slide 18 demonstrates how we may integrate Blackboard Connect with the Blackboard Academic Suite. This screenshot illustrates how a superintendent or president might send a district or campus wide message to the entire student body, a single department, the parents of all absent students or some other subset.

Slide 19 details how we envision integrating the Blackboard Connect technology as the classroom level. Here we are empowering the teacher to be able to reach out to their entire class or subset of the class and communicate directly with them.

Slide 20 highlights the mapping and location functionality of the Blackboard Connect. Here you can select where on a map or in the vicinity you want to direct a message and the system will contact everyone in that specific area.

Now that I have covered the rationale behind the transaction and described how the technology works let me hand it over to our CFO, Mike Beach to discuss Blackboard’s financial guidance and some of the financial benefits of the NTI acquisition.

Michael Beach

We are now on slide 22. I’ll begin by providing updated financial guidance for the fourth quarter of 2007 as well as some preliminary metrics and highlights from that quarter. I will also provide additional information regarding our initial expectations for 2008. Finally I will close with some financial highlights of the NTI acquisition.

Moving to slide 23, our updated guidance for the fourth quarter is for revenue of $62 to $63 million. Amortization of acquired intangibles of approximately $5.8 million, net income of $3.4 to $3.9 million resulting in net income per diluted share of $.11 to $.13 which is based on an estimated 30.4 million diluted shares and an affective tax rate of 41.5%. I do want to call out that the company’s net income will include approximately $1.3 million or $.04 per share of additional expense in the quarter which is attributable to $1 million of non-recurring merger related expenses and $300,000 of additional amortization expense.

Non-GAAP adjusted net income, excluding the amortization of acquired intangibles and the associated tax impact of $6.9 to $7.4 million resulting in non-GAAP adjusted net income per diluted share of $.23 to $.25 which is based on estimated 30.4 million diluted shares and an affective tax rate of 40.5%. The company’s non-GAAP net income will include approximately $1 million or $.03 per share of non-recurring merger related expenses.

Finally, we expect cash flow from operations in excess of $25 million for the quarter. For the year this will put us in excess of $64 million in cash flow from operations which is significantly better than the guidance we provided at the beginning of the year.

Moving to slide 24, based on our early look at the fourth quarter we are pleased with the results. In particular I point out that we added a net new 38 Blackboard Learning System enterprise licenses in the fourth quarter. As you compare these results to the prior year I would remind you that more than 50 of our 2006 fourth quarter Enterprise Learning System additions were from a single client upgrading its entire University system. We are pleased with the growth we saw in Enterprise license sales in this quarter.

Also worth noting on this slide we added three new Blackboard Outcome Systems to finish the year with 24 licenses of the product. Again, this was a tremendous result with this new product which exceeded our original expectations. We ended the fourth quarter with contract value of approximately $198 million up 21% year over year. I am also pleased to report that we expect the 2007 retention rate to be 92% which is slightly higher than last year.

In terms of some other highlights in the fourth quarter, I would point out the signing of a three year agreement which expands our nationwide e-learning agreement with 40 institutions in the Netherlands. We also signed a new partnership to develop Sony [inaudible] technology for the Blackboard transaction system hardware offering.

Finally we completed a small acquisition of a long time OEM technology partner at the end of the fourth quarter. This transaction will further augment the back end technology of our existing Blackboard Content System and is a technology that we intend to incorporate into our broader Academic Suite. I also want to point out that this transaction had the affect of raising contract value growth rate from 19% to 21%.

In addition to updating our guidance for the fourth quarter 2007 we are also providing our initial thoughts for the full year 2008 here on slide 25. To be clear all of these expectations exclude the NTI transaction. For the full year 2008 we currently anticipate revenue of $278 to $284 million, stock based compensation expense of approximately $17 million and interest income of approximately $3 million. We expect our operating margins, which we define as EBITA excluding stock based compensation I want to reinforce some important points that we made on the third quarter earnings call.

In November we outlined plans to reinvest in specific areas of our business to drive higher top line growth and provided some preliminary thoughts on our 2008 operating margin. As a results of these investments we are providing operating margin guidance of 22% in 2008. We will provide more detailed guidance on our year end conference call which is schedule for February 5th.

Before I hand the call back to Michael I want to close with some of the key financial highlights of the NTI acquisition. As we stated we believe that NTI is an excellent compliment to Blackboard’s existing business. NTI is a very high quality, high growth business, the company closed 2007 with approximately $30 million in revenue representing greater than 50% growth over 2006. While the company’s growth rate will be tempered as the business gets larger we expect that NTI will enhance our revenue growth profile over the coming years.

As we mentioned NTI was profitable in 2007 and is poised to expand that profitability. The transaction will increase long term cash flow generation and have a materially positive impact on our 2008 cash flow. Finally the deal as we mentioned will be accretive to non-GAAP adjusted earnings in 2008. Though this is excluding purchase accounting adjustments and non-recurring merger related costs. On a GAAP and non-GAAP reported basis which will include the impact of purchase accounting and non-recurring merger related costs this transaction will be dilutive to earnings in 2008.

At this point we expect the write down of deferred revenues under purchase accounting will be in the range of $10 to $12 million and that the non-recurring merger related costs will be in the range of $3 to $5 million in 2008. I want to stress that the write down of deferred revenues under purchase accounting will not have a cash impact. Again, we will update these figures following the close of the transaction.

With that I will turn the call back to Michael for his closing remarks.

Michael Chasen

In closing I am very excited about this transaction. As I said at the outset of the call NTI is an excellent company and represents a tremendous opportunity for Blackboard to enhance our mission critical product offerings. We focused this call on just the short list of the strategic benefits of the merger that we think will allow us to deliver strong shareholder results in the coming years. As a combined company we will have a client base of nearly 4,900 schools, colleges, universities as well as government organizations and corporations.

As a combined company we will enhance our position as the top rated proven provider of mission critical education technology systems and as a combined company we will have an even stronger annual subscription based recurring revenue model with strong top line growth growing cash flows and excellent visibility. The integration teams are already working together, in fact, tomorrow is the kick off of Blackboard’s global sales and service meeting we will have over 300 people attending and where we plan to introduce NTI products to our sales force. We are very excited about the combination of these two great companies and what we believe we can do together.

That concludes our prepared remarks, thank you for your time today. Operator, we are ready for questions.

Question & Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tom Roderick from Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

I wanted to get a little bit more on what’s driving the growth for NTI. You are picking up a company here with some really nice growth and I guess if we look at maybe some catalyst last year in the industry it certainly seemed like the unfortunate incident at Virginia Tech played a role in notification and alerts being in higher demand. Can you talk a little bit about that specific incident and any other catalyst that drove the growth rate here for NTI in ’07 and then maybe speak to how sustainable you think that growth rate can be in ’08?

Michael Chasen

Certainly there were a lot of events over the last two years that have really influence the strong demand that we’ve seen for this type of product in the marketplace. I want to expand upon some of the things that you had mentioned because it certainly goes beyond the fact that there have been a number of campus security incidents and tragedies, and severe weather that has really caused schools to really feel this type of technology is required.

In addition to that we are just starting to see increased demand from institutions that need to be able to have more broad communication capabilities to stay in touch with all of their students. Even just as they are putting more and more of their educational institution online. Also another driving factor is many of the schools are starting to incorporate more mobile-centric technologies and need improved outreach communications for the various PDA’s and other devices that exist on campus. I think it’s actually all of those things that are contributing to the high demand that NTI has seen and we expect to continue to see over the next several years.

Tom Roderick – Thomas Weisel Partners

A question for you on the financials the operating margin assumption of performance basis is 22% and I want to make sure I’m including and excluding the right items on an apples to apples basis. By my analysis on Q4 it would seem like where the year shakes out this year is right around 23% operating margin give or take a little bit. How does the 22% give or take to your prior guidance that operating margins would be flattish to slightly up for 2008.

Michael Beach

I think that 22% to 23% for the year is what we would expect. The 22% for next year obviously it reflects the investments we discussed previously. Also the small technology acquisition that we did in the fourth quarter will have a write down of deferred revenues of a couple million dollars which obviously is going to impact the operating margin in 2008, I think that bridges the gap.

Tom Roderick – Thomas Weisel Partners

So let me make sure I’m just clear on this. The revenue guidance for next year is for, it is inclusive of the write down, the operating margin guidance itself does not necessarily include the full impact of NTI?

Michael Beach

The revenue guidance and the operating margin both exclude NTI. We did do a small technology acquisition during the fourth quarter, that acquisition will have a small write down of deferred revenues which obviously has a slight impact in our operating margins. Our operating margin of 22% reflects the investments that we previously discussed plus a small impact from the deferred revenue adjustments which is slightly less than 1% impact on the margin.

Operator

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

Michael Nemeroff – Wedbush

Just a follow up on Tom’s questions, the operating margin do you know on a basis point level how much this small technology acquisition what you think is going to impact 2008 operating margin?

Michael Beach

Less than 100 basis points.

Michael Nemeroff – Wedbush

Less than 100 basis points. How much revenue was that small OEM technology partner? How much did it contribute in Q4 to revenue?

Michael Beach

The Q4 guidance we gave basically contemplates Blackboard’s stand alone. The range that we set with some slight upside from that transaction but we wouldn’t expect it to be material in the fourth quarter.

Michael Nemeroff – Wedbush

Could you talk about the pricing for the NTI Group products and how long are the contracts, are they typically one year, similar to Blackboard’s current contract durations?

Michael Chasen

The pricing for that technology is a per year user pricing it’s a couple of dollars per user. Typically they do a three year contract. As we said in the call they have very high renewal rates.

Operator

Your next question comes from the line of Amy Junker from Baird.

Amy Junker – Baird

Just a question on I guess what type of due diligence you’ve done with your existing customer base when looking at this product to see just how critical this function is, particularly with the post secondary since NTI’s customer base is smaller there?

Michael Chasen

We are very fortunate because we have an existing relationship with so many institutions in the US education market. This was something that was beyond just the opportunity for us to due diligence with our client base. This is something that we know they have been talking about for a while, really over the last year. We spoke with a number of institutions that have had this very high on their priority list. Specifically even it was written about in the campus computing study that came out this year is one of the top priorities now on the desk of campus CIO’s. Obviously we were familiar with this because a lot of them had already been talking with us about their need for incorporating this type of technology on their campus.

Amy Junker – Baird

Is there any exposure at this, I’m sorry if I missed this if you commented on it, internationally or can you talk about what you think the opportunity is to take this abroad if it isn’t already?

Michael Chasen

Certainly I think that the trends that we see happening here in the US markets very quickly then translate overseas and we do think there is an international opportunity. But in the short term what we are really focused on is getting this technology in the hands of our existing clients and getting that rolled out here in the states first and then we’ll start to look into and expand upon the international opportunities for it.

Operator

Your next question comes from the line of [Amara Blanca] from SunTrust.

[Amara Blanca] – SunTrust

I just wanted to get an update on how you guys feel about the Web CT install base. Is this acquisition of NTI reflective of a better stability or level of comfort with some of the issues of those customers as a base in the past?

Michael Chasen

We certainly have seen an increase comfort level with the clients that are using the Web CT technology as we’ve continued to make improvements to their core product and really addressing the outstanding issues and bugs that were in the system. Over the last year we’ve now addressed really 100’s of outstanding issues and we believe that with the release of our most recent service pack the product has a very good and high level quality and stability.

Certainly this then gives us the opportunity to be able to engage in conversations with them about expanding the relationship we have with them and offering them these other technologies. I certainly think that this is another opportunity for us to be sitting down with the campuses using either Blackboard or Web CT technology and talking to them about mass messaging and notification and how it can be part of their technology infrastructure.

[Amara Blanca] - SunTrust

In terms of the K-12 market, how quickly do you guys possibly see a revenue synergies coming from, what kind of time frame are we looking at here?

Michael Chasen

One of the reasons we were so excited about combining with NTI was the number of high level relationships they had established in the K-12 market space. They reach over 1,200 K-12 districts or schools and is very little overlap. Certainly it will take time to get our Academic Suite technology in front of those new relationships but we are looking forward to being able to take advantage of the strong client relationships that NTI had to let them know about this great technology and the improvements that we are making as we continue to focus on the K-12 space.

[Amara Blanca] - SunTrust

In terms of the business model you had mentioned that it was a subscription based business model. You had spoken in the past about investing a lot in the hosting infrastructure for 2008. Is it possible to leverage NTI’s infrastructure to hopefully come back some of that investment, how is that going to work or is there no change?

Michael Chasen

When we talked about expanding our investment in our hosting infrastructure really it was about building out capacities over seas, specifically in Australia as we really feel the need to have in region dedicated hosting centers. So that doesn’t really help us address that investment. Certainly over the long haul there could be better economies to scale as they also have a hosted product and we are not successfully setting up hosted centers in multiple countries.

Operator

Your next question comes from the line of Bennett Notman from Davenport.

Bennett Notman – Davenport

Most of my questions have been answered but just quickly could you talk a little bit about how long you think it will take to get your sales force sort of fully literate on this and sort of up-selling into your existing higher education customer base. I would imagine this is a fairly easy sell on not that much extra leg work for the customer so it may be a relatively quick option. Let me get your take on that.

Michael Chasen

I think that initial assessment of yours is correct. A couple comments, this is a technology that is a fully hosted technology, what that means is its actually even easier for an institution to be able to deploy, they don’t need to set up their own servers or make any specific hardware investment so they can be up and running in a very quick amount of time. Also it is very easy for the client to understand, it is something that has been on the front page and the CIO’s priority list of the last year or so. Understand a lot of our sales force has already been talking to institution about this type of technology or talking with the CIO’s or system administrator about expanding their system with improved mass messaging and communications technology.

We believe we will be able to quickly train our sales force and really have them up and running by Q2 with this as part of their sales bag.

Bennett Notman – Davenport

What is NTI’s share in this market and what percentage of your target customer base already has some sort of solution in place for this?

Michael Chasen

As we said NTI currently has relationships with just over 130 colleges and universities compared to in the US higher education market compared to Blackboard is right around 2,000. So obviously we think there is a huge opportunity for us to reach out to our existing install base and offer this technology to them. In the K-12 space while they do have relationships with just over 1,200 districts it’s really out of 15,000 districts or 120,000 high schools. I think NTI is certainly really one of the leaders in this space specifically because they’ve been focusing on the education market and we believe that by combining the relationships that we have at higher ed along with our additional relationships in K-12 we’re really going to be able get much deeper penetration with our products offerings.

Bennett Notman – Davenport

I know this is kind of tough to answer but if you looked at your 2,000 higher ed institutions most of them are already committed to some solution in this market or are they still in evaluation phase, I’m sure it’s all over the place. If you could just characterize this the best you can?

Michael Chasen

It is all over the place, the majority of the institutions have not really committed to any type of comparative technology. Certainly institutions have e-mail capabilities or they may have partial system that lets them send out SMS messages but as this really becomes the requirement for institutions to be able to reach out to their entire constituency over voice, text, e-mail and SMS combined they’re going to need this type of solution and that’s what we now can deliver.

Bennett Notman – Davenport

Last question, back the envelope map make it look like its roughly $20,000 per year per customer for these guys is that about what you think it would translate to into your higher ed market or am I a little high or low on those estimates?

Michael Chasen

It’s probably a little bit hard to comment exactly again because it’s a per user pricing and really the size of the institutions range so greatly. I wouldn’t want to comment to what an average sale might look like but what we are excited about the model the fact that it’s very similar to Blackboard, it’s a per user pricing, it continues to scale and the high renewal rates give us not only the recurring revenue but strong visibility in the long term.

Operator

Your next question comes from Trace Urdan from Signal Hill.

Trace Urdan – Signal Hill

Are any level of the NTI sales being done through tele-sales or is this all feet on the street?

Michael Chasen

It’s substantially feet on the street.

Trace Urdan – Signal Hill

Did you tell us what size sales force they had currently?

Michael Chasen

They currently have 15 individuals in sales.

Trace Urdan – Signal Hill

Are they either dedicated either to K-12 or higher ed or are they just geographically.

Michael Chasen

They are dedicated by market.

Trace Urdan – Signal Hill

I’m just trying to figure out sort of what the 1,200 K-12 sales, how many sales people they’ve had out there making those.

Michael Chasen

The bulk of their sales force is in K-12, approximately 10 of the sales reps are there and they have I believe three in higher ed right now and are growing that by a couple in the very near term.

Trace Urdan – Signal Hill

Have the sales typically been made at the district level in K-12?

Michael Chasen

Yes.

Trace Urdan – Signal Hill

Is there anything meaningfully different about the government business, in other words is it focused on a small number of contracts, is it profitability of the government business, is it any different from the rest of their business?

Michael Chasen

The profitability is similar to the rest of the business. I think similarly to what we’ve been experiencing with our Academic Suite software as these decisions are being made higher and higher up the chain and decision are being made for not only just a single campus or maybe even a consortia or for example last year the Mississippi State deal they are seeing those same type of trends on the notifications and messaging side where there are increasingly dealing with people higher and higher up into either the city or state governments who may be looking to make a decision across either multiple campuses or within a government agency or across a specific municipality.

Trace Urdan – Signal Hill

Did you say what the capex was in the quarter or can you say?

Michael Beach

No, we didn’t provide that, we will provide that on the February 5th call.

Operator

You have a follow up question from the line of Michael Nemeroff from Wedbush.

Michael Nemeroff – Wedbush

Just a quick follow up, just to be perfectly clear. Excluding the OEM partner acquisition that you made would the pro-forma operating margin for 2008 be in line with the modest improvement that you guys talked about on last quarters call or would it be below the 2007 level.

Michael Beach

It would be in line with what we previously stated.

Operator

Your final follow up question comes from the line of Tom Roderick from Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

You’ve had some good questions on the NTI business model; I just want to ask one follow up here to make sure I understand the revenue recognition policy. It seems like they’ve got a very similar model in that the majority of revenues would be recognized ratably. Is there any component of this on net side that is not fully ratable? Meaning if your customers over there a lot of bundles they have purchased or things of that nature do they buy more bundles or a simply all you can eat arrangement based on the number of seats they have out there?

Michael Beach

All their revenue is ratable, recurring, all their sales even though they do three year deals customers pay them annually and they recognize that amount which is based off the number of users ratably over the next 12 months consistent which is how Blackboard does.

Michael Nemeroff – Wedbush

Do they have any meaningful component of professional services that we should be aware of?

Michael Beach

No.

Operator

At this time I’m showing you have no further questions. I’d like to now turn the call back over to Mr. Michael Stanton.

Michael Stanton

We just want to close by saying that we are obviously very excited about this transaction we think it’s a great complimentary fit in terms of technology and certainly long term enhances our own strong operating model. With that we will close the call.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation.

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