Blackboard Inc.Q4 2008 Earnings Call Transcript

Blackboard Inc. (BBBB)

Q4 2007 Earnings call

February 05 2008 4:30 pm ET

Executives

Michael Stanton – VP of IR

Michael Chasen – President and CEO

Mike Beach – CFO

Analysts

Amy Junker - Robert Baird

Michael Nemeroff - Wedbush

Trace Urdan - Signal Hill

Goran - Thomas Weisel Partners

Brandon Dobell - William Blair & Company

Terry Tilman - SunTrust Robinson Humphrey

Nate Swanson - Thinkequity Partners

Bennett Notman - Davenport

Presentation

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2007 Blackboard Incorporated earnings call. (Operator Instructions).

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

Michael Stanton

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

Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: delays in product development, undetected software errors, competitive pressures, technical difficulties, market acceptance, availability of technical personnel, changes in client requirements, risks of international operations, general economic conditions, the integration of the NTI Group 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.

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, and additional information regarding our operating results. The measures are not in accordance with, or 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 methods has been provided in today’s earnings press release which is available on our website.

The second administrative note relates to our contract value, which we will also be discussing today. Our contract day represents the annualized recurring ratable revenue under existing contracts with clients, in effect at the end of the quarter, and with that regard, 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, the management believes that it is a useful tool for investors to evaluate our current operating performance.

The third administrative note relates to our recent acquisition of NTI, which we closed this as Thursday. We will provide preliminary estimates including, but not limited to the impact of certain purchase accounting adjustments and amortization expense. As we complete the final purchase accounting for the NTI transaction, these assumptions may vary materially from actual results.

Finally, we have once again provided supplemental information related to licenses, claims, and contract value on the Investor Center section of our website at investor.blackboard.com. The document is titled, Q3 2007 Blackboard Metrics. On today's call are Michael Chasen, President and CEO, Mike Beach, our Chief Financial Officer.

At this time, I'd like to turn it over to Michael Chasen. Michael?

Michael Chasen

Thank you Michael Staton and might I add Happy Birthday. Good afternoon everyone. Blackboard as a company has grown from an organization that originally sold just basic level course managements software at institutions in higher education to an organization that today, provides the enterprise technology that institutions use to improve all aspects of academic life that student experience. Blackboard technology helps higher education; K-12, corporate and government organizations to extend learning online, facilitates a career for students in commerce and access and enables effective communications to their entire organization. Each day, million of students in thousands of institutions use Blackboard as part of their academic alliance.

What I would like to do today is to talk to you about some of the numbers behind our growth and then discuss some of our opportunities for 2008. First, I will give you a summary of our performance for the quarter ended December 31st, 2007 and some of the major contributors to our results.

I will then provide an update on our operational priorities in 2008, including our recently closed acquisition of NTI. Finally, I will then turn the call over to our CFO, Mike Beach to take us through a more detailed review of the financials and guidance. And we will close with your questions at the end of the call.

We had another excellent quarter and a terrific year in 2007. In the fourth quarter, we increased revenues year-over-year by 23% to $63.2 million. Our GAAP net income was $4.2 million or $0.14 per basic and diluted share. And our non-GAAP adjusted net income was $7.7 million or $0.25 per diluted share. For the full year, we had revenue of $239.4 million, a 31% increase from a year ago. Our GAAP net income was $12.9 million resulting in GAAP net income for a basic share of $0.45 and GAAP net income per diluted share of $0.43. Our non-GAAP adjusted net income was $26.2 million or $0.87 per diluted share.

All of our results were inline or ahead of our guidance and I think that this is a tremendous accomplishment and testament to the hard work of our employees at Blackboard.

Now, as a reminder, Blackboard's business model is 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 over time by addressing more and more of their emerging technology needs. And third, our ability to add new client subscribers across the education spectrum here in the United States and around the world.

A few examples of fourth quarter deals in the US Higher Education include: Colorado State University, Colorado, which licensed the Blackboard Learning System, the Blackboard Community System and our ASP hosting offering during the quarter; Kendall College, which adopted our Blackboard Learning System and the Blackboard Content System and finally, the Kentucky Community and Technical College System was the latest US Higher Education Institution to adopt the Blackboard Outcome System.

On the international front, in England, both LewishamCollege and Newcastle College licensed the Blackboard Learning System to bring their academic institutions learning environments online. Amersham & WycombeCollege and NielsBrock College, Copenhagen are two of our newest enterprise clients in Europe to take advantage of our ASP hosting offerings. I would also note here that we ended 2007 with more than 60 international ASP clients at our Amsterdam hosting facility.

In the fourth quarter, we were pleased to have our first two international sales of the Blackboard Outcomes System to the Caribbean University and the AmericanUniversity of Sharjah in the United Arab Emirates. I think that the American University of Sharjah deal is particularly noteworthy, as it was the first Blackboard Outcomes System deal sold by an international reseller.

In K-12, I would like to highlight a couple of deals, including Jefferson County Public Schools which adopted the Blackboard Learning System, the Blackboard Community System and the Blackboard Content System. Similarly, the Mississippi Department of Education, center for professional developments, adapted the Blackboard’s learning system, the Blackboard’s Community System, the Blackboard Content System and our ASP hosting offering. This deal highlights some of the great success we’re having across all levels of education in Mississippi following our second quarter academic suite deal with the community college system.

For the year, we ended 2007 with 3,536 clients, which included 1,915 US Higher Education institutions, 932 international clients, 388 k-12 entities and 301 publishers, commercial education companies, corporations and government organizations.

Moving on to licenses, we ended the year with a total of 3,935 enterprise category licenses. Breaking down these licenses, we had 2,293 licenses of Blackboard learning system enterprise, 749 licenses with the Blackboard Community System, 431 licenses with the Blackboard Content System, 24 licenses with the Blackboard Outcomes System and 438 licenses with the Blackboard Transaction System. Investors should note that we are including both the Blackboard portfolio system in Xythos content management licenses under our Blackboard Content System adding.

In terms of the Blackboard Learning System basic product, we had 954 licenses at the year end. The total number of enterprise of basic licenses at the end of year was 4,889. In terms of our ASP hosting business, we finished the year with 522 ASP hosting clients. The Company’s up sale rate were enterprise license of Blackboard Learning System was approximately 13% in 2007. Our renewal rate, which represents the percentage of renewal dollars collected at the overall pool, targeted for renewal for the trailing four quarters was 92% which was higher than the 91% renewal rate we reported in 2006.

As for contract value, we finished the quarter with an annualized contract value of $198 million. This represents an increase of 21% over 2006. This resulted in average contract value per client of $56,000 and an average contract value per license of $40,500, both of which represent an increase of 19% from the prior year.

Our total headcount at the end of the fourth quarter was 890 people. We ended the quarter with 189 people in sales, 77 in marketing and business development, 186 in product development, a 157 in support, ASP Hosting and production, 130 in professional services and 151 in operations.

Before I turn it over to our CFO, Mike Beach, I would like to provide a few comments on some of our operational priorities in 2008 for both our organic business, as well as the integration of the NTI Group.

In November, we outlined product development plans to develop more K-12 specific functionality within our Academic Suite products, specifically, safe standards alignment and lesson planning. As a reminder the drivers of K-12 development plans are the increasing number and increasing dollar sizes of K-12 RFPs, as well an some emerging statewide education opportunities. We are aligning our development efforts closely with the current K-12 market needs and most importantly funding sources, which is in some cases, are billion of dollars per year. This development priority is now underway and will position us well in the K-12 market.

Also in product development, we talked last quarter of our plans to continue to ensure product stability for institutions on the legacy WebCT code base. We are committed to identifying and addressing issues that could affect our clients Blackboard experience.

In December, we released Service Pack 3 for former WebCT clients and we have current plans to release version 8 of the Blackboard Academic Suite this coming spring. These investments will not only pay near-term dividends through client retention, but will also greatly enhance our ability to cross-sell products to these clients over the next few years.

The final investment area I want to talk about relates to our ASP hosting business. We talked last quarter about our plans to open a new international ASP hosting facility. And I am pleased to report that we are already up and running with our new location in Australia and have our very first client. We are honored to have the curriculum council of Western Australia as our first Australian ASP client. The education environment in Australia is generating a significant amount of demand for our new facility and we expect to have great success with this new hosting center.

In terms of the NTI transaction, I am pleased to report that Blackboard closed the NTI deal last week. We are very excited about this addition to our business, and so are many of our clients.

As we mentioned on our previous call, we continue to work closely with our large and growing installed base of institutions. We witnessed several trends in the education marketplace taking place. 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 a capability to deliver mapped communication 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 concern.

Third, institutions are focusing on mobile centric strategies and looking to tightly integrate their learning environments with cell phones and PDAs. By augmenting Blackboard's existing products with NTI's messaging and notification technology, Blackboard can help institutions better these industry challenges and trends.

With NTI, Blackboard joins a fast growing alert and notification market, forecasted by Yankee Group to grow in an estimated $1.2 billion by 2011, representing a five year compounded average annual growth rate of more than 30%. With the acquisition of NTI's Connect family of product, we have added an important complimentary technology offering to our overall product portfolio. We’ve also added a significant number of new education clients, including more than 1,200 new relationships with the US K-12 market and nearly 100 new relationships with higher education. And with NTI’s technology, we believe that we can effectively deepen our relationship with the 1,900 institutions in North American higher education we currently serve, as well as attract new clients.

Finally, I said this past week, in our new LA office where the NTI team is based and I’m more certain than ever that this acquisition is a great cultural fit. Our newly acquired employees are incredibly talented and motivated and I could not be happier to welcome them to Blackboard.

Now, I will turn the call over to our CFO, Mike Beach, to cover our financial and future guidance. Mike?

Mike Beach

Thanks Michael. I organize today’s financial review around the income statement, balance sheet and cash flow, and will close with the outlook and guidance for the first quarter and full year of 2008. Revenue for the fourth quarter of 2007 was $63.2 million, up 23% from last year. The increase in revenue was driven by continued growth in the annual licensing of our enterprise level products, as well as continued strong growth from our ASP hosting business.

Product revenue for the quarter was $57.4 million, representing an increase of 23% over the same quarter last year. Professional service revenue for the quarter was $5.8 million which represents an increase of 26% 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 non-recurring and other revenues. For the quarter, ratable recurring revenues increased 24% to $49.4 million compared to $39.8 million in the same quarter of last year. Ratable non-recurring revenues increased less than 1% to $5.5 million as compared to $5.4 million in the same quarter last year.

Other revenues increased 36% to $8.4 million as compared to $6.2 million in the same quarter of last year.

Moving on to gross profit, our gross profit for the fourth quarter excluding stock based compensation and amortization of acquired technologies was $47.1 million as compared to $37.3 million in the same quarter a year ago, representing an increase of 26%. For the quarter our gross margin was 75%, excluding stock based compensation and the amortization of acquire intangibles.

Total operating expenses, excluding the cost of revenue stock based compensation and the amortization of acquired intangibles, were $31.6 million representing an increase of 12% as compared to $28.3 million in the same quarter last year. For the quarter, we incurred stock based compensation expense of $3.3 million, amortization of acquired intangibles were $5.7 million, which was approximately $300,000 higher than our original guidance, due to the acquisition of Xythos Software, Inc. in December.

During the quarter, we experienced a negative impact on earnings from currency translation losses. This relates to activity during the quarter and the pay down of certain inner company debt, which will significantly reduce the impact of translation, losses and gains in future periods. We also experienced the positive impact in net income from our tax provision, resulting from the completion of certain tax projects during the fourth quarter.

Our net income was $4.2 million in the quarter, resulting in net income per diluted share of $0.14. Adding back the amortization of acquired intangibles, net of the associated tax impact, results in non-GAAP adjusted net income of $7.7 million or non-GAAP adjusted net income of $0.25 per fully diluted share.

In terms of the balance sheet, we closed the quarter with $207 million in cash and cash equivalents. Accounts receivables increased slightly to $52.8 million at the end of the quarter, from $52.4 million for the same quarter last year. Current deferred revenues increased to $126.6 million at the end of the fourth quarter, up 7% from the $118 million at the end of the fourth quarter in 2006. Current deferred revenues related to recurring products totaled $111.9 million, compared to $102 million for the same quarter last year, representing a 10% increase.

An important reminder here for investors, similar to last quarter, our new purchase order policy resulted in approximately $7 million of invoicing shifting from the last weeks of the fourth quarter to the first weeks of the first quarter in 2008. It's important for investors to take this change into account when comparing Blackboard's deferred revenues and accounts receivable balances with prior periods.

Cash flow provided by operations totaled $29.6 million for the fourth quarter, which represents a 140% increase compared to the fourth quarter last year. We are pleased with cash flow in the quarter and continue to see the benefits of the purchase order process we implemented in the second quarter of 2007. Capital expenditures were $4.9 million in the fourth quarter.

Now, turning to the full year income statement. For the year ended December 31^st 2007, revenue was $239.4 million, an increase of 31% over 2006. Net income was $12.9 million for the full year 2007 compared to a net loss of $10.7 million for 2006. Net income per basic share was $0.45 and net income per diluted share was $0.43 compared to a net loss for basic and diluted share of $0.39 for the full year 2006.

Adding back the amortization of acquired intangibles, net of the associated tax impact resulted in non-GAAP adjusted net income of $26.2 million or non-GAAP adjusted net income of $0.87 per fully diluted share. Cash flow provided by operations totaled $69.4 million for the year, which represents a 203% increase as compared to 2006.

Moving on to guidance, for the first quarter of 2008, we expect revenue of $64 million to $66 million. Stock based compensation expense of approximately $3.9 million. Amortization of acquired intangibles of approximately $8.7 million, GAAP net loss of $5.7 million to $4.9 million resulting in a GAAP net loss per diluted share of $0.18 to $0.16 which is based on estimated 31.5 million diluted shares and an estimated effective tax rate of 39.5%.

And non-GAAP adjusted net loss or income, excluding the amortization of acquired intangibles and the associated tax impact of a range from a net loss of $500,000 to net income of $300,000, resulting in non-GAAP adjusted net loss per diluted share of $0.02 to non-GAAP adjusted net income per diluted share of $0.01 based on estimated 31.5 million diluted shares and an estimated effective tax-rate of 39.5%.

For the full year of 2008, we expect revenue of $306 million to $314 million. Stock based compensation expense of approximately $17 million, amortization of acquired intangibles of approximately $38 million, net interest expense of approximately $2.5 million. GAAP net loss of $4 million to $800,000 resulting in a GAAP net loss per diluted share of $0.12 to $0.02, which is based on estimated 32.4 million shares and an estimated effective tax-rate of 39.5%, and non-GAAP adjured net income, excluding the amortization of acquired intangibles and the associated tax impact of $18.8 million to $22 million resulting in non-GAAP adjusted net income per diluted share of $0.58 to $0.68 based on estimated $32.4 million diluted shares and an estimated effective rate of 39.5%.

It's important to recognize that our 2008 guidance includes our recent acquisition of NTI and an initial estimate of a $12 million reduction in deferred revenues to be made during purchase accounting. Our guidance also includes an estimated $13.8 million of increased amortization expense and $5 million in non-recurring merger and an integration cost.

We also want to provide you with a look of how the NTI acquisition would have affected our 2000 results on a pro forma basis, excluding purchase accounting and the non-recurring acquisition related cost. We are providing you with this information today, but we will not be doing so on a go forward basis and we will be reporting only GAAP and non-GAAP adjusted results.

With that said, if you take the midpoint of our 2008 revenue guidance as the starting point. Blackboard's pro forma revenue and non-GAAP earnings per share guidance would have been approximately $322 million for revenue and $0.95 for non-GAAP adjusted earnings per share for 2008, which shows the slight accretion that we previously discussed.

A few other comments related to guidance, we expect cash flow from operations to be between $70 million to $78 million in 2008. This guidance assumes higher cash taxes in 2007, as well as the impact of the $5 million in non-recurring merger related cost during the year. We expect that CapEx will be slightly higher than our normal range of 6% to 7% in 2008, due to one time expenditures related to the relocation of our corporate headquarters, which we originally expect to take place in 2007, which is now pushed into the beginning of 2008. We would expect CapEx to return to 6% to 7% of revenues in future years.

Finally, our 2008 financial guidance excludes any impact of the pending patent infringement suit against Desire2Learn Inc. This matter is scheduled for trial beginning later this month and we will provide informational updates as they become available.

That concludes the discussion of Blackboard’s financial. Now, let me hand it back to Michael Staton for closing. Michael?

Michael Staton

Thanks Mike. We plan to be at several upcoming investor conferences later this month, as well as into March so we look forward to spending time with investors face to face. And before I turn it back to the operator for Q&A, I’d just ask everyone that’s in queue to limit questions to a single question and a follow up and then have folks get back in queue. I know that a lot of analysts have other companies reporting today so, I want to make sure that we get through everybody’s questions in an efficient manner.

That concludes our formal comments. Operator, we’re ready to begin Q & A.

Question-and-Answer Session

Operator

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

Amy Junker - Robert Baird

Just a quick question on, I guess, if you could help quantify what percentage of your current client base are subscribers of just the basic learning system so of the total customer base that you have and I guess, maybe within the US Higher Education is what I’m looking for. And what you’re comfort level is and your ability to up sell those clients. I guess I 'm just trying to get a handle on what the real up sell opportunity is left at this point?

Mike Beach

Amy we ended the year with 954 basic customers. We don’t break that up by market, so it's 954 basic customers. When you look at that kind of up sell historically, it's ranged, about 10% of the basic customers have upgraded on an annual basis. This year, we ended the year with slightly more than that; 13% of the customers moved from basic to enterprise during 2007.

Amy Junker - Robert Baird

So that 954 actually represent the number of clients, because I thought some client might have multiple basic licenses?

Mike Beach

Well, yes --so it is possible for them to have multiple basics, but in general it's a fairly good proxy for the numbers of clients.

Amy Junker - Robert Baird

Okay. Thanks and if I could just a quick follow up, although unrelated, on the professional services. That line, that revenue really rebounded from the last couple of quarters, was that just a function of you making the decision to pay bonuses on that or commissions on that or was there something else that drove that and do you think that that level is sustainable?

Mike Beach

Yeah. So, I think it's just a matter of focus. I think we focused on it during the year and got it back inline with kind of what our expectations for services would have been for the fourth quarter as we entered 2007.

Amy Junker - Robert Baird

Okay, Great. Thanks.

Operator

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

Michael Nemeroff - Wedbush

Hi, guys. Just a couple of questions on the guidance specifically around Q1, I was curious that the guidance for Q1 was a little bit lower than what I was expecting. How much of that did the deferred or the acquisition write-down from NTI affect Q1?

Mike Beach

Yes. Michael, the NTI transaction which closed last Thursday, obviously there is only two months worth of results and it is significantly, any revenues are significantly impacted by the purchase accounting adjustments. So we don’t expect to see any material revenues in the first quarter for NTI.

Michael Nemeroff - Wedbush

Okay. So, no, really no revenues. You are going to get no revenues after the write downs from NTI in Q1?

Mike Beach

Yeah. It isn’t that nothing material.

Michael Nemeroff - Wedbush

Okay. That makes sense. And I guess how many of your existing higher rate customers have a product like NTI?

Mike Beach

A lot of clients are starting to look at it. Of course, many already have, for example an email system in place or starting to use some of the SMS messaging technology. But as far as the solution that has, that covers the multi modal functionality built into NTI meaning that you can send a voice message, an e-mail, SMS or text and you can send it in a way supported by a fully hosted solution that can reach that amount of clients in minutes. While there are about a 100, just over 130 clients have the NTI specific solution. As far as institutions they have that full range of capabilities, we think that it is still pretty much a wide open marketplace.

Michael Nemeroff - Wedbush

And then, just one quick follow up on that. I think you had mentioned, Mike Chasen that you thought the market for that product was growing at a CAGR of about 30% per year. Do you expect the revenues from NTI to grow about the same rate?

Mike Chasen

That market stat was actually from Yankee Group who predicted that that was what the market was growing at. Certainly, we think that there is a large amount of upside, because of the combination of NTI with Blackboard and just how naturally our products are going to be incorporated together and the fact that they really are not penetrated in higher [rate] where we obviously have a very strong install base. It's probably hard at this point as we just completed the merger to put some specific growth number around it, but obviously, we think that there is a lot of opportunity there.

Michael Nemeroff - Wedbush

So, you think you’re going to grow at the market rate at least?

Mike Chasen

It really would be hard for me to say at this specific point in time, but certainly we think that there are a lot of opportunities since they are barely penetrated in the higher education marketplace where we are strongest.

Michael Nemeroff - Wedbush

Okay. I will get back in queue. Thank you

Operator

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

Trace Urdan - Signal Hill

Yes, good afternoon. I’m a little struck that this acquisition is something. Effectively a software product wouldn’t kind of come with more synergies than may be there are, what if you consider walking through the cost structure of NTI a little bit and explain where the costs that are coming into your income statements are and why those are necessary in order to grow NTI and not duplicative. Are you supporting an R&D effort there? For example, are you having a dedicated sales force with NTI? Can you talk us through some of those cost items associated with NTI?

Michael Chasen

Sure, but where we think there is real opportunity, for Blackboard it is not necessarily in the area of the cost synergies. We really think that this type of opportunity is about the revenue synergy generated by connecting together the strength in the products and really the focus in the different education market. So for example, NTI has built up over 1,200 great relationships in the K-12 space, with 1,200 different superintendences in districts.

Obviously, they’ve just started to penetrate the higher ed spaces, since they have only about 130 clients there. Compared to obviously Blackboard’s strong market penetration in higher ed, we've just started to go into more deeply in K-12. So we think that by leveraging Blackboard’s higher ed relationship with NTI technology and leveraging NTI’s relationships in K-12 with Blackboard’s technology. What we are looking at is some synergistic revenue upside and so when we bring these companies together, we are not looking at it from a way to just reduce expenses, because we think that this market is really has a lot of opportunity in front of us and is just starting to build up momentum.

Trace Urdan - Signal Hill

Right, so are there license fees that you are paying that are part of the cost structure here?

Mike Beach

See Trace, when you think of the cost to sales for this business, there are telecom charges where every time messages are sent out. There are cost of sales related to that. So, that is -- we talked about it in the last call that their margins are going to be slightly less than ours in the kind of low to mid 60% range at a gross level. Other than that they have a fairly efficient cost structure. It is a software, it's a service model and it has been growing at a nice rate and we want to continue that growth.

Trace Urdan - Signal Hill

Okay.

Operator

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

Goran - Thomas Weisel Partners

Hey, guys this is Goran for Tom. So I want to wish Michael Stanton a very happy Birthday.

Michael Stanton

Thank you, Gor.

Goran - Thomas Weisel Partners

No problem.

Michael Stanton

Thank you Michael Chasen for mentioning that.

Goran - Thomas Weisel Partners

So with NTI can you talk about who are targeting within the enterprise? Who are you selling into? Say, if a person that’s going to buy a Blackboard Learning System or are you really targeting to a different person with the sale?

Michael Chasen

Yeah, I think the answer is a little bit of both. Certainly what we've seen is that the buying decision for both products have really started moving upstream and more and more we are dealing with the CIO's or the Presidents, the promos who are making either institution wide or in some cases system-wide technology decisions. And certainly the type of technology that we are offering, either of our mission critical e-learning solutions, our campus card solution or now this mass messaging and notifications solutions are all technology decisions that affect everyone on campus and therefore that’s now more and more being owned by the high level official.

That being said, when we are talking on campus, to say heads of academic computing and we are able to show them some of the benefit of using map notification and messaging as a way to reach out to all the students that are now online in their e-learning system or even though when talking to, lets say the head of facilities, the CFO about their campus card solution and talking about how they can use the NTI product to extend their campus security offering is really I guess a long winded way to say, it is certainly these decisions that will be made by the senior leadership at the institution. But it is also something that resonates with the other departments as well.

Goran - Thomas Weisel Partners

Okay. That makes sense. And just switching gears, you said that your renewal rates are now at 92%, could you perhaps talk about what your new rates would look like if you excluded non-renewing basic edition customers, would they be higher, about the same?

Michael Chasen

Well, we don’t specifically break that up, but certainly the largest amount of drops that we see across the various platforms, would be in our basic product line, as clients either use our enterprise software or have more than one product, those renewal rates go down substantially. So it would be hard for me to do the math in my head, but I can tell you that the majority of our drops are coming from our basic clients.

Goran - Thomas Weisel Partners

Yeah. Thank you very much. I will jump back in the queue.

Operator

Your next question comes from the line of Brandon Dobell with William Blair. Please proceed.

Brandon Dobell - William Blair & Company

There is a question on contract value. How are you guys going to look at NTI, given your contract value or your bookings perspective, for example was there any, would there be any impact in like the first quarter contract value and when are you guys going to report that, those results, or how should we think about it? How are guys going to report that number?

Mike Beach

Well, we will provide on it on an ongoing basis that combines contract value of NTI and Blackboard. We, obviously in the first quarter, will give inside as to what the initial impact of adding NTI would be.

Brandon Dobell - William Blair & Company

Okay

Mike Beach

But, we closed the deal on Thursday, so there is still finalization of purchasing accounting so we can kind of provide that number exactly. We talked about a $39 million number on the last call and that should be kind of a ballpark of what the additional bag.

Brandon Dobell - William Blair & Company

Okay. And then a quick one, if you look at the last couple of three quarters, excluding Xythos' portfolio, the number of contracts or content license hasn’t grown awfully a lot may be just talk a little bit about what’s going on there, how has the behavior been on renewal within content, just trying to get a sense for, why those lines are going a little bit faster given the strength in enterprise sector?

Mike Beach

Actually, we have seen strong growth in our contracts value.

Brandon Dobell - William Blair & Company

No, contents system.

Mike Beach

I’m sorry, in our Contents system, licenses. The amount of the portfolio, even what Xythos had is relatively a small amount. I think you can look back on the previous quarter and see that we have actually, I think, had a strong growth there.

Michael Chasen

Yeah. And Brandon, the other thing I noticed is that, the reason, the portfolio system ended up getting bucketed into the content system, because it is just a very similar product. So it does sort of represent, sort of the overall content system category. It's not entirely different, it's just a (inaudible) application.

Brandon Dobell - William Blair & Company

Okay, thanks

Operator

Your next question comes from the line of Terry Tilman with SunTrust Robinson Humphrey. Please proceed.

Terry Tilman - SunTrust Robinson Humphrey

Hey guys. Thanks for taking my questions. Just the first question relates to any evidence of WebCT customers starting to look at the add-on modules given in Service Pack 3 as it comes out, maybe there is better stability, are they starting to actually recreate some sales cycles around some of the add-on modules?

Michael Chasen

Yeah, and the good news is that we've now had the add-on modules available for the WebCT code base since just after the middle of the year. We do have, I think a good amount of clients, they’ve expressed interest in it and are in our sales pipeline, certainly the key item, that the getting item, in fact that’s pulling down is, making sure everybody is on a stable version of the WebCT product, even though we recently the last update which we think really gets WebCT clients where they need to be from a stability and scalability perspective.

There is always a little bit of a lag of clients getting that installed, because they wait for downtimes to install those upgrades. So, even though it's been released it's not fully out and in production with all our clients yet. So, that’s still something that needs to happen and we are hoping over the next quarter or two. And then I think that will reopen up the sales pipeline that we previously built and with that cross-selling opportunity will start to happen.

Terry Tilman - SunTrust Robinson Humphrey

Okay, thanks. And then the follow-up question just relates to Outcomes. So, clearly you had the big ramp in the second quarter of '07 and like you guys had said you are a little bit ahead of where you expected for the year, but how do we think about Outcomes may be in terms of license growth assumptions in '08? Could it still be very lumpy or could it be growing linearly through the year? Thank you.

Michael Chasen

I think what we've seen historically with Outcome Systems is that it is a little bit more lumpy and I think it appears lumpy though just, because at this point we are talking much smaller unit numbers than our other licensed products that are now in the hundreds, which therefore I think kind of naturally smoothened itself over time.

Also recognizing that the Outcome System being a higher dollar product means that there is a, often a larger or longer sale cycle. It also involves sometimes either high level or different people in institutions. So, all those things I think actually affect the timing of the product. And again though as a company while we certainly are very bullish and see a lot of opportunity going forward into 2008 in the Outcome System, we are equally focused on really just making sure we are expanding that annual subscription with our clients no matter what additional products that they want. So our sales people are pushing all of the products across the board; obviously Outcome takes a little bit longer to sell because of the extended sales cycle.

Operator

(Operator Instructions) Your next question comes from the line of Nate Swanson of Thinkequity. Please proceed.

Nate Swanson - Thinkequity Partners

Well, hi, just a question on the NTI sales force and I am wondering, how prepared are they to sell a broader suite, and I guess what kind of assumptions have we made in terms of cross-sells in your '08 guidance?

Michael Chasen

Really, on the more immediate front, we are utilizing the Blackboard higher education sales force to take the NTI product into the higher education space. So, our team, which has experience in carrying multiple products and creating various relationships at the institution level, I think its both prepared and ready to be able to help more quickly move the NTI product in to the US Higher Education space.

We are going to start leveraging the NTI relationships with their K-12 districts this year, utilizing really, I think more of the existing relationships they have to get in front of them with our products to start forming those relationships. But we will probably not going to start seeing that type of cross sell opportunity till later towards the end of the year. But I think more immediately what we will start to see is just another cross-sell opportunity and Higher Ed utilizing our existing sales force.

Nate Swanson - Thinkequity Partners

Okay. That’s helpful. And then, I guess, just on the basic license line, I am wondering shouldn’t we be thinking that will continue to kick down here over the next few quarters or does that retail floor at some point?

Michael Chasen

No. We are rarely, if at all, selling that product at this point and through our both, either price adjustments or the natural up sell rates which we just talked to have being 13%, you can expect that product to continue to slowly go away, probably at the same level that we have seen over the last several quarters.

Nate Swanson - Thinkequity Partners

Okay. Thank you.

Operator

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

Bennett Notman - Davenport

Yeah. Thanks for taking my call. And I apologize if you already covered this, I’m running a little bit late, but could you talk a little bit about the cost structure of NTI sort of the split between SG&A and R&D and Domino for the integration charges? Are they going to be pretty heavily loaded into the first quarter or to be spread out more throughout the year, just talk about them on a cost side a little bit?

Mike Beach

Yes. As it relates to that merger cost, they will be spread throughout the year. Thinking about the operating expenses that came on a consolidated basis, it's probably best to look at the G&A, sales and marketing and R&D will be a higher percent of revenue than what we experienced in 2007 during the first three quarters, primarily as a result of the merger-related expenses and the deferred revenue right down.

But when you get to the fourth quarter, you’ll see is that our sales and marketing and R&D will be pretty much in line with the fourth quarter of 2007. And G&A actually will be; we will expect to be slightly less as a percent of revenue to what we experienced in the fourth quarter 2007. So we will exit 2008 with our operating expenses being in line to slightly less than as a percent of revenue compared to how we exited 2007.

Bennett Notman - Davenport

Okay. And then it looks like is the deferred revenue hit front end loaded for NTI and in terms since they have less impact on the first quarter will be (inaudible) beyond or is it?

Mike Beach

Yeah, it will have the greatest impact kind of in the first month and then by the time you get to the twelfth month it will have virtually no impact.

Bennett Notman - Davenport

All right great. Thank you.

Mike Beach

Sure.

Operator

At this time there are no further questions in queue.

Michael Stanton

All right, Colby. Thanks very much. Everyone we look forward to seeing you out on the road and we will talk to you soon. Thank you.

Operator: Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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