Q4 2019 Earnings Call

Good day and welcome to Blackboards fourth quarter 2019 earnings call. Today's conference is being recorded I'll now turn the conference over to Mark Furlong. Please go ahead Sir.

Good morning, everyone. Thanks for joining us on Blackbaud fourth quarter and for year 2019 earnings call.

Today, We will review, our financial and operational results and provide commentary on our performance in the context of our four point growth strategy.

Joining me on the call today or might you know any blackboards president and CEO.

Tony bore blackboards executive Vice President CFO.

Well I can tell me will make prepared comments and then we will open up the line for your questions.

Please note that our comments today contain forward looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected.

Please refer to our most recent form 10 cap and the other FCC filings for more information on those risks.

We believe that a combination of both GAAP and non-GAAP measures are more representative of how we in turn we measure our business.

Unless otherwise specified we will refer.

Non-GAAP financial measures on this call.

Please note that Nongaap financial measures should not be considered an isolation from or as a substitution for GAAP measures.

A reconciliation of GAAP and non-GAAP results is available in the press release, we issued last night and a more detailed supplemental schedule is available in our presentation on our Investor Relations website.

Before I turn the call over to Mike I will briefly cover our upcoming investor engagement activity, which is available on our Investor Relations website.

During the first quarter her team will be attending the Raymond James Institutional Investor Conference in Orlando.

We will also be holding meetings with investors in Boston and New York.

With that I'll turn the call over to Mike.

Thanks Mark.

Morning, everyone.

Thanks for joining our call today.

Q4 was another solid quarter and a strong finish to the year.

We furthered our strategic initiatives positioning the company for long term success.

Thanks to the great execution by our teams across the business, we achieved our full year 20, like gene financial guidance with total revenue and earnings per share exceeding the midpoint of our guidance ranges.

Our team of over 3600 employees drive our success, we continue to strengthen our culture and modernize our approach to meet the needs of our expanding global talent and customer base.

A few weeks ago, we announced Mackie Driscoll has joined the company's executive leadership team.

Chief people officer, bringing with her more than 20 years of each our leadership experience and expertise organizational effectiveness mergers and acquisitions talent management diversity and inclusion and people development.

Most recently he spent more than 15 years I'd be N.Y. Mellon, leading global human resources with responsibility for HR strategic direction to change management.

I hear succeeding John Mistretta, who is retiring after 14 years, a black Friday.

And I'd like to thank John for his outstanding leadership and service to the company.

As usual I'll provide a few updates in the context of our fourth point growth strategy before turning it over to Tony to cover all results in more detail.

The first a bar for growth strategies, this delight customers with innovative cloud solutions.

We're driving rapid innovation with a focus on creating lasting value for over 45000 customers to the power of the market's leading purpose built integrated solution set.

A great example is the U.S. Naval Academy Alumni Association and Foundation.

Through the power of Blackbaud, CRM, Blackbaud financial aid Genex, Gi and blackboard target analytics increased fund raising revenue by over $4 million.

Proved engagement, where they're more than 60000 members and realized over a million dollars cost efficiencies.

Oh pardon me Blackbaud, they're able to realize a 143% return on investment where the payback of two and a half years.

Our market is computers, we seeking more cost effective and efficient ways to manage their organizations in achieved their missions.

And we meet that need without purpose built software solutions.

20, like gene, we continued to demonstrate our ability to rapidly innovate and address the needs of our customers across our broker markets.

As you know in October we announced a general availability of our cloud solution for fade communities.

Now serve churches and more than half of the United States, representing congregations of all different sizes and spanning more than 13 denominations. We're seeing positive momentum as more functionality continues to be released market awareness is increasing and when rates are improving.

We're also seeing momentum build a higher education vertical where blackboard powers 24 of the top 25 private U.S. colleges as ranked by Forbes our year after introducing the cloud solution for higher education, we continue to drive innovation introduce solutions, taking full advantage.

A rapid innovation modern user experience and enhanced capabilities made possible by our blackboard Sky platform.

As you know we extended our industry proven education management portfolio up market. The small scale higher education institutions, we could you need to see strong sales momentum now look forward to seeing these customers did you have to go lives in 2020.

We also recently introduced talent management capabilities as part of the cloud solution for higher education, providing institutions like University at Buffalo and University of Maryland College Park Foundation. The first online performance tracking tool for fund raising leaders managers, enabling trends.

Parents see proactive management and pure officer benchmarking.

This is a significant opportunity for blackbaud to deliver innovation with a connected car experience in the space. That's comprised predominantly of disparate legacy point software.

Blackbaud peer to peer fundraising powered by just giving continues to gain traction.

Since the U.S. launch an early 29 gene over a thousand customers have signed up to use the solution and I'll note that roughly half of these organizations, our net new customers to black thought.

These are just a few examples of the relentless focus our team has on driving value when outcomes for our customers through our solutions.

Well I thought sky our platform for innovation continues to power an unprecedented level of innovation by our engineers enables a growing ecosystem up developers.

As I mentioned on the last call there are now significantly more outside developers.

Developing on our platform then block thought engineers.

And we're providing this community.

Partner network with a tools to extend enhance blackbaud solutions.

Also in October we launched the social good startup challenge in partnership with global virtual accelerator 1 million by 1 million.

Last month, we announced 14 winners who is innovative solutions enable social good organizations to do everything from in kind gift matching donor bequests planning mobile first grassroots organizing video storytelling.

Onto your training parent ambassador recruitment.

Credit card transaction linked giving and more.

This is a growing network effect.

We're looking forward to working with these creative and diverse entrepreneurs to strengthen and expand the ecosystem of good.

I'll now turn to our second growth strategy, which to drive sales effectiveness. As you know we've been investing in sales and marketing to better address our market opportunity with a focus on adding additional sales head count.

Improving productivity and putting a greater focus on adding net new logos.

One way or equipping our growing salesforce to be more effective is by investing in the necessary technology and resources to efficiently drive an increased number of quality leads and better cover our large addressable market.

We've been growing our lead generation teams.

Which we called business development representatives to support our growing sales teams.

Simultaneously increase the productivity of our business development Representatives with implementation of a leading sales engagement technology platform, enabling our teams to generate more prospects and convert those prospects into sales opportunities.

Rendering 2020, well the optimized trade show a business development Rep Representatives to account executives and the lead generation from the team has increased substantially as a result of these changes.

We've also implemented software tools to enhance our digital footprint and drive lead generation across the company.

And for the first time ever we're taking a multi touch attribution approach to measure the effectiveness of our marketing campaigns to drive efficiency in our go to market efforts and ensure we are getting the greatest return on our marketing dollars.

This is just wanted to many examples of how we're optimizing our structure tools and processes to better address our large vertical market opportunities. We've made big strides employing the foundation to develop a highly productive and scalable operating model, which included significant organizational structure changes as we centralized.

Maybe back office functions and aligned our go to market efforts by vertical.

This transformation is now behind us putting us in a position to drive improved productivity across our vertical sales teams.

A good example is in our nonprofit vertical where operation Smile chose to partner with block thought because of our proven industry DAP customer knowledge purpose built solutions and partnership with Microsoft, but Chief Development Officer at Operation Smile said and I quote Blackbaud work closely.

With our team to come up with creative cost effective solutions. Some of the challenges we anticipated, which we found inspiring these tenants coupled with our trust and the people working directly with our teams is why we chose blackbaud.

I'll now turn about third strategy, which is Tam expansion.

The acquisition of your cause a little over a year ago positions us as a global industry leader in enterprise corporate social responsibility and employee engagement technology.

In fact, a third of the Fortune 500 companies Trust Blackbaud at their CSR technology partner and a 2019 alone your cost solutions processed over $1 billion and donations and grants, which benefited over 170000, social good organization.

Yes.

In the first year since acquisition, we fully integrated New York caused administrative functions into our global centers of excellence expanded the sales team to fuel what is already a fast growing business within the company.

Total addressable market currently stands at over $10 billion and we remain active in the evaluation of opportunities to further expand our Tam through acquisitions internal product development.

Our final strategic initiative is to focus on operational efficiency to strengthen the business and position us for long term success.

As you know we've been executing a comprehensive workplace strategy to better align our organizational objectives with our geographic footprint.

We designated Charleston, Austin, London, and Sydney, that's our hub locations and we're leveraging a more flexible off the strategy to replace an upgrade so our existing offices and expand our footprint into new locations for customer facing roles.

Most recently, we moved our London offices into a new flexible workspace.

Marking a significant milestones in the integration or Blackbaud, Europe, and just giving teams.

29 gene, we largely completed this optimization effort.

We will continue to evaluate our footprint in alignment with our global workplace strategy.

The key for US is optimizing our office utilization, improving our geographic sales coverage and enhancing our employees daily experience to improve productivity and effectiveness.

Overall, we had a strong finish at 29 team as we furthered our strategic initiatives and delivered on our full year financial guidance.

Heading into 2020, we have a positive outlook as the market remained solid and we continue to be uniquely positioned to enable digital transformation within the markets we serve.

We've made truly transformational changes across the company over the last several years as we've built a scalable operating model created a culture of innovation and better positioned ourselves to capture the large market opportunities in front of us.

A significant structural changes in the business are now behind us and we're well positioned to further differentiate ourselves as the leading cloud software company powering social good.

And deliver increased value to our customers employees and shareholders.

I'll turn the call over to Tony to cover our financial performance in greater detail before we open it up for Q1 AG Tony.

Thanks, Mike Good morning, everyone over the course of 2019, we made strategic investments to further expand our go to market model.

Dr. cloud innovation for our customers and ensure scalability in our business our fourth quarter results allowed us to deliver on our full year financial guidance and we exceeded the midpoint of our guidance ranges on both revenue and earnings per share.

Please refer to yesterday's press release, and the Investor materials posted to our web site for the full detail of our Q4 and full year financial performance today I'll focus on key highlights. So we can get to your questions.

Fourth quarter recurring revenue increased 9.8% over Q4, 2018, and 6.7% on an organic basis.

We posted solid recurring revenue growth through 2019 anticipate carrying that performance into 2020.

We continue to see a healthy shift in mix of recurring revenue as onetime services and other revenue represented only 8% of our total revenue mix during the fourth quarter and declined $3 million in the quarter, which has a 15% decline versus Q4 of 2018.

On a full year basis, we delivered 902 million in revenue, which exceeded the midpoint of our guidance and represents 6% growth over 2018 or 3.1% on an organic basis.

Recurring revenue represented 92% of total revenue, which is 260 basis points higher than 2018 and grew 5.8% on an organic basis.

We continue to focus on opportunities to further shift our bookings bookings mix towards a our and to optimize the mix of business within a our bucket.

Onetime services and other revenue represented 8% of our total revenue mix and declined nearly $18 million, which has a 20% decline versus 2018.

This decline is healthy for the long run and as expected. This was an accelerated rate of decline when compared to the 17% decline in 2018.

Also note that your caused performed inline with our expectations and we continue to be excited about that acquisition the opportunity in the space.

You are caused was excluded from our organic revenue calculations in 2019, but will be included in 2020.

Turning to profitability, our fourth quarter gross margin was 56% for the full year. Our gross margin was 59.1%, which is 870 basis point decline versus 2018.

We generated full year operating income of 152 million, representing an operating margin of 16.8%.

And diluted earnings per share of $2.24.

Strong execution on our internal initiatives enabled us to deliver on our full year guidance for operating margin and exceed the midpoint of our guidance for diluted earnings per share.

2019 was an investment year for us as we further expanded our go to market model brought new solutions to market continued our efforts to migrate our cloud infrastructure to public cloud service providers and grew our partner program, including third party implementation partners, we've been aggressively hiring in sales and we ended the year with five.

Hundred 60, direct quota carrying sales headcount, representing 8% growth versus 2018.

As I mentioned, our last call in 2019, we made the last major structural change the sales organization, we reallocated most overlay and associate account executives to first dollar quota carrying account executives as expected. This drove heightened levels of attrition within our salesforce that we expect to normalize going for the key.

He is that in 2019, we significantly improved the mix of quota carrying account execs carrying the full bag and with more than half being prospect account executives and we expect improved productivity in 2020 as we increased the time spent in territory for our sales reps and continue to execute on our sales effectiveness initiatives.

Also as Mike mentioned, we have substantially completed our facilities optimized optimization restructuring plan as part of our global work play strategy and the cumulative restructuring costs incurred today were 11.2 million.

This exceeded our estimated range of between 8.5 million, a 9.5 million largely due to operating lease right abuse asset impairment costs recorded during the fourth quarter related to our inability to sublease certain office spaces. We had previously ceased using.

These restructuring activities are expected to result in improved operating efficiencies of future annual before tax savings of between five point Onemillion and 6 million beginning in 2020.

Moving to the cash flow statement and balance sheet in Q4, regenerated 46 million in free cash flow, we continue making necessary innovation and infrastructure investments to support our cloud operations amounting to 2 million in Capex at 12 million and capitalized software development.

For the full year, we invested $11 million in Capex for property and equipment and 47 million for capitalized software development, which when when combined land slightly above our expectation a 45 million to 55 million in total capitalized costs for the year largely due to our heightened investments in innovation to bring new solutions to market.

And the integration of your calls.

Our full year free cash flow was 124 million, a decrease of 25 million or 17% when compared to 2018 and our free cash flow margin was 14% for the full year.

Free cash flow results were within our guidance range and including the heightened capitalize investments I just mentioned as well as expected impacts from the investments, we're making into the business that 2018 cash tax refund of $7 million, which didnt repeat in 2019 accelerated restructuring associated with our work right strategy.

And impact from acquisitions of your cost.

During the quarter, we paid out six nine cash dividends to shareholders and ended were 435 million to net debt our capital strategy calls for a debt to EBITDA ratio of less than 3.5 times and at the end of Q4, we stood at 2.3 times.

Now, let's turn to 2020, we're guiding to non-GAAP revenue of 930 million to 955 million.

Non-GAAP operating margin of 16.0 present to 16.5% non-GAAP diluted earnings per share of $2.20 to $2 in 35 cents and free cash flow of 100 million to 115.

From a revenue perspective, we expect another another double digit decline in onetime services and other revenue and we are anticipating organic recurring revenue growth to be slightly above our 2019 organic recurring revenue growth of 5.8%.

Also note that this could be the last year of material declines in onetime services and other revenue.

From a profitability and cash flow perspective, we will continue to invest a better positioned the business for accelerated growth in long term success.

We are underway at a multiyear effort to enhance our scalability by migrating our cloud infrastructure to leading public cloud service providers and we anticipate continued pressure on gross margins as we incurred unnecessary costs to make this shift.

We also expect to continue a heightened pace of investment in our go to market model and cloud innovation to support the future growth of the business.

Our estimate for 2020 combined capital expenditures is expected to be 55 to 70 million, which is an increase over 2019, well capitalized software development has largely leveled off we're anticipating capex to increase year over year associated with onetime costs related to our continued shift to the cloud and necessary maintenance.

Great story existing Colo data centers.

We're currently expecting to incur minimal before tax restructuring costs in 2020, as we've largely completed the optimization phase of our work by strategy.

We estimate our non-GAAP tax rate will remain consistent with 2019 rate of 20% and after paying minimum cash taxes in 2019, we're expecting a modest increase of a few million dollars and cash taxes in 2012.

Our free cash flow will be impacted from the investments, we're making into the business the increases in capex and cash taxes, I, just mentioned and changes within working gap our deployment of capital strategy hasn't changed we will continue to pay a dividend invest in our growth and operating initiatives and continue paying down debt to provide capacity.

Expansion opportunities.

In summary, we continue to executing against our strategic plan, we're maintaining our disciplined approach to balance investments to drive growth with improved profitability and we will continue to execute on our capital deployment strategy to maintain a strong balance sheet return capital to shareholders and create growth and scalability.

With that I'd like an open up the line for your questions.

Thank you, ladies and gentlemen, if you'd like to ask a question the signal pressing star one telephone keypad.

If you using his speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.

Again as a reminder, please press star one ask your question. Please limit yourself to one question and one follow up to facilitate as many questions as possible.

We'll now take our first question from the line of Tom Roderick with Stifel. Please proceed with your question.

Hi, good morning, Thanks for taking my questions. So Mike I wanted to pitch you in the first question here, just talking a little bit more about the higher Ed vertical and congrats on some of the early successes there I know you've been a company with a large presence in higher Ed for a long time I wanted to here just a little bit more about this go to market function and what you've been able to do to build that sales capacity.

He drive more sales leads and in particular drive a your existing installed base to sell the newer features within the products that can you talk a little bit more about what that's doing to deal sizes whats. That's what that's doing to adoption rates just some more details around that higher ed vertical be fantastic sense, it's getting off the ground.

Nice fashion. Thank you.

Sure. Thanks.

Yes, I'm really pleased with what's happening and higher Ed We've really moved in the last 18 months to a portfolio sale.

And if you go back several years, we're exclusively focused on fund raising in the foundation part of the high Red institutions and now we're covering a much larger.

I see wallet spend.

Which is great we're starting with smaller universities that we've announced and.

Signing up a lot of universities for our education management.

Platform, what I mentioned in my prepared remarks around.

Focus on sales expansion and lead generation.

Also applies to higher Ed as well, we've done a really good job and recruiting.

In that part of the business.

The marketing team has done a great job in that business are getting a much broader global footprint in higher Ed showing up in a lot more places from a marketing standpoint.

We've got continuing build of lots and lots of.

References.

Most of the the industry now I was very aware of our move into the side of the business that runs the school, which is great. So I'm really excited about what's happening in that business that vertical market for us.

Expansion in the last couple of years, it's going quite well.

Outstanding Tony quick follow up for you just in thinking about the construction of 16% to 16.5% operating margins. This year and you guys have been pretty forthright.

The idea that you'd have some duplicative cost some colo cost services, new a little bit that gross margins would still be on a little bit of a down trajectory take us through whether this 56% gross margin. We saw in the fourth quarter is this the low watermark and then we start matching marching up from here how would you encourage us to model on the gross margin side relative.

I have to the construction of that operating margin and then should this year be the low watermark for gross margins. Thanks.

Yes. Thanks.

I can't speak specifically the gross margins as we did guide to that that I'd say that we do expect as we talked about in the in the prepared comments.

To see continued pressure on the gross margin side I.

I think.

If you break that apart we've not seen that.

But downward pressure on gross margins from the payments business.

In more recent times that we saw historically and I think thats because as we've talked about payments is not growing at a rate that significantly faster than the rest of our subscriptions business and so thats not no longer created downward pressure. The real pressure is from the increase in cap software amortization as you know we've been spending a significant amount.

I have investment dollars on innovation, not only with existing products and cutting converting those to the next generation products and building out Sky platform, but also that and as we're just talking about Mike the entrance into the higher Ed Cloud and then also in the face communities have quite a bit of R&D investment on innovation that results in more caps off.

Square, which now is catching up from an amortization perspective up in the gross margin line and then again as we've spoken about quite a bit the last year. So this conversion.

To third party service provider clouds away from our Colo data centers is put in quite a bit of duplicative cost pressure on gross margins and that will continue for the foreseeable future.

Thats, a fairly long migration timeline to move out of all those Colo Datacenters and then to third party cloud provider Datacenters and so I would expect you'll see that through 2020 and a bit the on that as we continue that migration from an operating margin perspective, there's still be some incremental investment as Mike spoke to it.

Prepared comments on the sales marketing side of the business as we work to drive that.

I think we've seen good leverage.

On the R&D side of the business considering all the investments we've made there and then obviously yesterday, we've got off the ground pretty well on that side, which helps from the operating margin perspective, but the majority the pressure will continue to come from gross margin.

Thank you. Our next question comes from the line of Ryan Peterson with Raymond James. Please proceed with your question.

Hi, Thanks, gentlemen, soon so I wanted to start off on the guidance. It looks like your your guidance assumes that the organic recurring revenue base is going to accelerate just maybe double quickie on that what's giving you the confidence in that acceleration in a in maybe a couple the products or segments that that you think will will ramp up in 2020.

Hey, Brian like.

Thanks for the question.

Yes. This is really the first year that we haven't had a major.

Organizational change.

The company in a while as we restructured the business in most notably in sales so.

We.

Have increased sales head count last year at the rate that we wanted to.

But even more important point is a year ago January we've made some pretty big changes in sales we moved a few hundred people around.

Gave them sort of first dollar assignments, we had a model where we had product specialists that had shared compensation with direct sellers and now they're essentially all direct sellers.

So, although we increased the sales headcount last year.

And in total heads.

It's really increases significantly more because of the re assignment and as you know in sales when you reassign you slow down productivity. So we wanted to correct. The operating model to have all direct sellers last year, even though we've taken a little bit of a hit and productivity last year.

That's not re occurring this year, where everybody's territory.

Entire team got there.

Their plans and all the information the first week of January we just had a great sales kick off here in Charleston.

So no lack of organizational change typically leads to much better productivity.

In any kind of roll, especially in sales.

Understood. Thanks, Mike and maybe just on your causes a follow up so 170000, a social good organizations received the nation. This year I believe you only have about 40 or 50000 customers. So you can you talk about how many of those 170000 organizations would be addressable for Blackbaud solutions and.

And any synergies you've seen in selling the blackwater platform into that customer base. Thanks, guys.

Yes sure.

Yeah. The your caused platform as a wide reach.

Over 170000.

So good organizations over 1 billion Indonesians, a grant last year.

Also wanting for folks that have access to that platform are located outside the U.S.

So those 170000, there's some duplicate but not a lot those many our addressable by US we're starting to work on that frankly last year was really about getting that the acquisitions are settled in.

Integrating some of the back office.

Executing our plans to.

Grow their sales teams.

So the cross sell opportunity is there was not a high focus and 19.

But it's definitely opportunity for us going forward.

Thank you. Our next question comes from the line of Rob Oliver with Baird. Please proceed with your question.

Great. Thanks for taking my question. Good morning, gentlemen, Mike one for you and then I had a quick follow up for Tony.

We're a couple of years now into the Microsoft partnership now, Mike and I was wondering if you.

It could provide some color around the ways in which Microsoft is contributing whether it be hi, read where I know they have a big presence or as you guys expand your footprint within larger institutions, just would love some more color on how to that go to market partnership is working.

Sure Bob Yes, it's coming along nicely, we started years ago and the partnership was predominantly in engineering.

We collaborated with them on architecture and to some things that that eventually came to be our our blackboard Sky engineering platform and then.

It's sort of moved over more into using Azure and Weve signed up as it is a big customer for the migration from our Colos to as your which started a while ago. It is underway and then it moved over into go to market last year, we were awarded the.

29 team Microsoft partner of the year Award in Education.

Which is pretty cool and so we sort of come out of the gate faster in earlier in the education business by basically conducting our education business units with theirs.

And then we've now connected our non profit charity focused businesses with theirs, because they have a lightning organization and now we're starting to do that with health care.

So the way that we see success is we are sharing pipeline.

We are introducing each other's teams into opportunities.

Relationships were winning deals together, we've announced a few previous.

Press releases.

That's a limited and others in so we're the market together now as well so there's several points around architecture engineering as your partnership and go to market. That's just been a building relationship in the last several years and.

I think it's a great fit for US we're also doing deeper integrations with things like Microsoft Office 365.

With that platform is virtually everywhere in the world, including all of our vertical so as we do a better job and deeper integration now it's a natural synergy from a solution standpoint for our customers. So what's happening there and it's going well.

Great. Thanks, Mike Good color appreciate it Tony I know you mentioned on the free cash flow guide it would be capex and cash taxes that were weighing on that number a little bit and just.

Curious for any color you might be able to provide around the capex side in terms of maybe what the delta is relative to what do you guys kind of.

I had expected or agreement was a delta.

You know is that around you know a platform said in cloud, Japan, where where where did you guys kind of see that delta in terms of free cash flow. Thanks, guys.

Yeah, Thanks, Rob the what I'd say from a free cash flow perspective is that we're going to have fairly strong cash earnings growth.

Despite all the investments, we're making the business and that growth in cash earnings or EBITDA will more than offset the impact of increasing cash taxes. Those are still be kind of single digit millions of dollars increased cash taxes based upon current estimates and will also offset any increase in.

Capex that we expect.

So really when you when you look at at the real impact on the free cash flow is working capital changes.

The Capex side, Rob is the biggest majority of that is investments, we're having to make to keep our current colo data centers and related equipment up to speed.

Right, we still got a lot of customers running on those.

Rigs in equipment in our Datacenters and so unfortunately as part of this transition that some duplicative costs, we have to keep upgrading that equipment hardware software until we can get moved.

Third party cloud and get out of that hardware business. So thats I'm just incremental investments we've been trying to hold off on those investments as much as possible, but we've got to keep that equipment and and good working order. So that's what's driving that kind of increase and unfortunate I think we'll see a little bit is after the next couple of years until we get all the data centers moved the.

The working capital one of the biggest chunks. There is just we performed better this year compared to plan and so our bonus accrual would be quite substantially higher year over year versus what it wasn't the innovating and so you just have a higher bonus accrual that we got a payout this year in the first quarter.

And then changes related cash conversion cycle days, we've made some really good improvement in depot, India. So over the last couple of years and those are just not something that you can repeat continually every year year on year out once you get DPL out there and the DSO down.

Kind of industry best practices.

Year over year, comparative wise that will be a bit of a hit on you from a cash flow that next period. So that's really what's driving it and then just some minor.

Individual timing related issues with specific vendors, if when we purchased and when those payments would be do would be that a piece of it. So I would put almost the entirety of the free cash flow on working capital being the big driver.

Thank you.

Our next question comes from the line of credit concern with Evercore ISI. Please proceed with your question.

Thanks, guys, it's Peter Levine in for Kirk two questions first one for Mike can you give us kind of like an update on the their faith based applications.

Kind of go to market strategy and the reps that you had in place today are they at full productivity.

And then how are the partner conversations coming along with these solutions.

Yeah sure.

The phase rollout is going quite well, we've signed up a lot of customers.

Of all sizes.

Weve built the sales team up quite a bit the entire sales team is not out productivity because.

Our new and as you know it takes a while to ramp up.

But the.

The role of Great, We've got a new mobile app.

That we've built and build out with the platform.

The market acceptance has been really great one of our challenges. There's we're in the with his broad portfolio, where newer to the market.

Theres, some marketing efforts underway around brand awareness and.

Trade show attendance conferences, and things, which we started to work on a year ago.

Thats going well so in general.

No products and production signing up a lot of customers it's building.

So the.

Quota attainment looks pretty good.

Revenue takes a while as you build these new businesses.

I can also mentioned that our R&D team is just really doing a great job you look at the number of features coming out it's built in our Sky engineering platform. So it's a high velocity.

Architecture.

And the engineering environment, that's really allowed us to bring a lot of features to production.

In Q3, Q4 last year tens and tens of features which is great. So the product gets more feature rich every couple of weeks because we continue to drive that and we're in pretty good spot. We think we're going to be pass an hour platforms in the marketplace related the capabilities now.

So it's you know it's fairly early days when you start something like this.

But we're really pleased with all the customers that have signed up the customers that alive and the references that we've built over the last six months.

Great. Thanks, you for the insight final question Tony on the infrastructure investments, we're making can you kind of give us a sense of where you are are you 50% 80%.

Completed with kind of migrating out of these co Lo centers I mean, I, just just to get a sense of you know when we can kind of get a sense. When this will come to an end and kind of see gross margins. I know you haven't guided but is this kind of when can we kind of see that level off thanks.

It's really difficult to give a percentage we have spun up.

A lot of environments in the new cloud.

[music].

And so we're preparing and then we're doing quite a bit work also in our Colo datacenters to prepare moves.

We have well over 30 839 years, we have as you can appreciate a lot of data centers around the world that we have to migrate and so it's going to be a fairly lengthy project that said as we began from a margin pressure perspective, as we begin to migrate into.

Higher product sets or full datacenters, we will begin to shutdown networks and cost infrastructure and so it will be kind of a stair step approach that you'll see the savings come in overtime.

But at least for the.

Near term I would expect we will continue to see some margin pressure at the gross margin line at least for the nearer term.

And then longer term, we should start seeing some stairstep improvements as we shutdown networks and individual.

Pockets of equipment and data centers themselves.

Thank you Sir our next question comes from the line every he jewelry out with D.A. Davidson. Please proceed with.

Hi, guys. This is.

Thanks for taking my question.

Yeah that your faith based offerings.

Well.

As mentioned successful engineering on this blackboard Sky platform. So my question, how much could you add to your Tam in the near term by adding new features and functionality.

Right.

I'll take that this is Mike.

Right now for net new in the portfolio of our products. The net new is the higher Ed and the faith based so we don't have short term plans to create something organically from scratch that net new because there's a lot of work to do across the whole portfolio, including higher Ed and faith.

Base.

But the other thing I'd like to add is with that this engineering platform.

We now have a platform, where we can add either a holding that new let we didnt faith based or extensions that once in production are just naturally integrated to the core so there's not much work to do from an integration standpoint.

So the platform has really provided environment for you know our entire engineering teams to be a lot more productive and bring solutions to market faster that run on just standard infrastructure, which stand or control and the integration. So the velocity of innovation is really.

Picked up across all the teams that are using this platform.

Great. That's helpful and then maybe one for you Tony.

The path to achieving.

Like is this something you guys think about at all thanks.

Thanks Anna.

We continue to look at that as a as a benchmark.

Obviously and the software space stresses that space that's it.

Key benchmark folks look at.

We're much older. Typically then that appear SaaS company, that's out there and much more mature we have a broader product set.

I think when you look at our strategy that Mike and I have talked about for numerous years now, it's a balance between both growth and profitability or or free cash flow like we've done a good job on that front, we continue to balance.

Kind of way between investments and profitability. We're in the midst of an investment phase to drive more Tam as Mike and you were just speaking about that more growth opportunities.

So what we're really pushed on now I think from our strategic direction as.

How much faster can we grow as a company and the current space in which we play.

And based upon what we're able to accomplish there I think we'll then determine how much focus we put in the future on profitability.

With a focus towards can we target getting to that kind of rule a 40 as a company.

Thats always at our.

Forward looking views as a business today were a bit in the investment phase of that and trying to drive more growth, but over the long term continue to focus as our strategy always has been on balancing growth and profitability.

Thank you. Our next question comes from the line of Ryan Macdonald with Needham and company. Please proceed with your question.

Yes, good morning, Mike and Tony Thanks for taking my questions.

Great to hear that the so a lot of the sales reorganization really is behind you and you're not looking sort of into 2020 and focused on productivity.

Because they're a little bit of how we should start to think about that progression I think Tony you mentioned that.

Because I know that about little less than half of your direct sales reps were on a full quota in 2019.

What should we think that starts to look like as we get through 2020 there.

Yeah I'll take it first this is Mike.

So with those changes, there's just where the lack of change we have people just a territory more.

Which is always healthy we grew headcount by about 8% last year, which we think is healthy.

We've added to our our key teams across the company, including international by the way as well, we think there's some interesting opportunities internationally.

It's pretty simple actually with the lack of a need for an organization change and folks in territory more will just get more productivity. The other thing that's important and I mentioned this in my prepared remarks is we continue to look at the whole ecosystem of sales, which includes marketing and lead Gen and we.

Got it increased investment in our digital footprint.

And we're doing multi touch attribution tracking that always through.

The process and so thats, something we can dial up and down.

By geography or team, which we think will also drive productivity, we're doing that in a much bigger way that we have historically, which I think it's going to.

That's a good results for us.

Okay.

Excellent and then just in terms of a follow up you mentioned that.

Peer to peer with just giving is is really tracking well I think you mentioned over half the customers you've added our net new to black, but what did the cross selling expansion opportunities look like for those customers.

Yeah, well basically we have that platform that can start with a customer handling their peer to peer pretty easy for customer to get going on that.

Then we look to.

Cross sell opportunities for sort of the middle and back office solutions that we have an if there are a customer of a right yep set of attributes in size it creates an opportunity for us.

For full fund raising or financial platform, so that they move into looking like a prospect that traditional black but prospect.

If they fit the profile once they sign up is that just giving peer to peer customer.

Thank you. Our next question comes from line of Mark Chappelle with benchmark. Please proceed with your question.

Hi, Good morning, Thank you for taking my questions Tony starting with you with respect to the sunsetting of your legacy products.

And migrating those customers to your cloud products I was wondering if you just give us an update on.

Where you are within your migration process here [noise].

Yes, Mark the Sun setting for all intents and purposes is complete I mean, we still have a few stragglers here there, but we completed.

Our Bihar largest product, which was the sphere product set.

Last year early last year.

So there's still some stragglers and we'll always have some of those with acquisitions your costs for instance.

Resulted in some migration needs and ultimately products and Thats, where you had competing products in the market. So we'll have those as an ongoing but not at that at the level that we had obviously when we announce a 26 products that we're all going to be sunset.

Got it said, while simultaneously from a migration perspective continue to see really good progress in the RMB seven Abbvie seven front.

That's kind of in March and ride to add in align with our plans as we continue to build out those next generation products.

We continue to get capabilities feature functionality.

And then that will allow us to move some of the more complex.

Installed bases from Orient EFI, and so Thats a continued migration is progressing very well or at the back side of that so from a revenue perspective, even with the uplift we've seen historically, it's it's a tough growth compare.

Now that we're on the back side of that kind of slow on the migrations, but continues to progress while on all fronts. There from a true signs that and then that migration perspective.

Great. Thank you and then as a follow up Tony.

On your payments business are you starting to see an uptick in that business.

We have good year in 18, we had a few surprises I think the UK market.

Was off quite a debt.

That is still not great, but it stabilized we saw pretty good performance. There. The ended the year in 18, if you recall we had some.

Performance issues in mid December was kind of interesting because it ended the year finished strong, but I think between tax reform.

Potentially than the market correction in December of 18, we had some par payments performance and then if you recall, we also had some related to smart tuition and just changing demographics and some of the parents associated with tuition management.

This year, we finished the year fairly well getting Tuesday was was very positive I think across the board and then ended the year. We finished up strong as well I think as an industry.

Payments overall, there continue to to be a shift towards online donation.

In the market and so all things early positive on payments from that said, that's now fairly big base of business for us. It doesn't grow you know at the kind of accelerated right that it did when we first launch out a few years ago, but.

It is quite a nice business for us and grew well and finished fairly strong.

Thank you. Thank you ladies and gentlemen. This concludes our question and answer session I'll turn the floor back to Mr. Genone for any final comments. Thanks, operator, let's close by saying I'm pleased with the progress we made against our objectives in 2019 and had a positive outlook on 2020, the structural changes in the business are now.

Largely behind us and we're well positioned to further differentiate ourselves as the leading cloud software company powering social good.

Ultimately delivering increased value for our customers employees and shareholders, Tony and I look forward to update you on our progress on the next earnings call. Thank everyone for your participation.

Thank you. This concludes todays teleconference. You may disconnect your lines at this time. Thank you for your participation.