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Blackbaud, Inc. (NASDAQ:BLKB)
Q4 2018 Earnings Conference Call
February 7, 2019, 8:00 a.m. ET


Prepared Remarks:


Good day and welcome to the Blackbaud, Inc. Q4 2018 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Furlong. Please go ahead.

Mark Furlong -- Director of Investor Relations

Good morning, everyone. Thanks for joining us on Blackbaud's fourth quarter and full year 2018 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 are Mike Gianoni, Blackbaud's President and CEO, and Tony Boor, Blackbaud's Executive Vice President and CFO. Mike and Tony will make prepared comments and then we will open up the call 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-K and other SEC 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 internally measure our business.

Unless otherwise specified, we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP 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 on our presentation on our investor relations website.

Please also note that unless otherwise specified, we will refer to 2018 results and comparable 2017 results as adjusted to reflect our adoption on January 1st, 2018 of ASC 606 related to revenue from contracts with customers.

Before I turn the call over to Mike, I'll briefly cover our upcoming investor marketing activity, which is available on our investor relations websites. During the first quarter, our team will be attending the Raymond James Institutional Investor Conference in Orlando and Stifel Executive Summit in Streamsong. We will also be holding meetings with investors in New York, Chicago, Milwaukee, Houston, and Kansas City.

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

Michael Gianoni -- President and Chief Executive Officer

Thanks, Mark. Good morning, everyone. Thanks for joining our call today. I'm pleased to report a solid finish to 2018 as we furthered our strategic initiatives and positioned the company for long-term success. We've continued to shift toward a reoccurring revenue mix comprising 90% of total revenue in 2018. We continue to accelerate our pace of innovation to digitally transform the markets that we serve. There's no question that 2018 was a banner year for Blackbaud innovation.

The Blackbaud SKY platform has reached a level of maturity that enables us to both rapidly advance our existing applications and bring new solutions to market, such as an entirely new cloud solution for faith-based communities, expanded cloud for higher education institutions, and nonprofit resource management, which is a joint development partnership with Microsoft. And our Blackbaud SKY-powered solutions continued to lead the industry, scoring high marks with market researchers like Forrester, Gartner, and IDC.

We're committed to driving social good through innovative software technology and creating lasting value for our customers, employees, and shareholders. In 2018, we released our first ever social responsibility report, which provides insight and transparency into our global social responsibility, governance, and ethical practices. I'm pleased with the progress that we've made in our program initiatives, which have received national recognition, such as our recently awarded Top Employer for Diversity in America from Forbes.

We have a lot to cover this morning and we want to get to your questions. So, let's get started with the progress that we've made against our four-point growth strategy. The first of our four strategies is integrated and open solutions on the cloud. We've created a very high-velocity engineering environment that leverages the latest in modern cloud software technology, which is unmatched in our industry. No one else in this space is taking our approach.

We made several major innovation announcements in 2018, demonstrating our ability to rapidly innovate, address customer needs, and grow our addressable markets. We introduced our entirely new comprehensive cloud solution for faith-based communities, which will bring together our proven strengths in financial management, fundraising, marketing, payments, and analytics together with a completely new set of church management capabilities.

We have early adopters using new church management solutions today and close collaborations with our product teams and our Blackbaud SKY platform is enabling us to incorporate real time customer feedback to a rapidly advanced platform. Churches finally have a comprehensive modern cloud solution built for the way they work from a single accountable provider who can reduce their IT footprint and digitally transform their operations.

We also significantly expanded our higher education cloud by introducing enrollment management, learning management, content management, student information, and tuition management capabilities. This broadened cloud will enable higher education institutions to manage their complete student lifecycle, from admissions to alumni engagement inside one comprehensive solution.

Just like the faith market, this is a massive opportunity for Blackbaud to deliver innovation with a connected cloud experience in a space that's comprised predominately of the spirit and legacy point solution software. Blackbaud's cloud for higher education institutions takes full advantage of the rapid innovation, modern user experience, and enhanced capabilities made possible by our Blackbaud SKY platform.

Blackbaud SKY enabled us to extend our proven K12 private school solutions upmarket to higher education with significantly advanced functionality. Our development didn't start from scratch and we moved quickly by leveraging pre-existing capabilities available on Blackbaud SKY. That's the power of the platform.

We also took another major step forward in our partnership with Microsoft with the announcement of our integrated cloud initiative for nonprofits. This is a joint investment initiative to accelerate cloud innovation in areas that address critical market needs across the mission lifecycle of nonprofits.

As a part of this initiative, we announced our first jointly developed solution called Nonprofit Resource Management, which is a breakthrough in helping nonprofits effectively source, track, distribute, and measure the impact of their resources across core businesses processes, from managing their distribution of material goods to the financial and human capital distribution. Our nonprofit resource management solution suite is currently in development in collaboration with early adopters.

The solution will be sold jointly through Blackbaud and Microsoft partners in sales channels and will work seamlessly with Blackbaud solutions, providing a connected experience from our customers. This another step forward in an evolving partnership between Blackbaud and Microsoft to jointly develop co-market and co-sell innovative software technology that will advance the industry and add interesting go to market optionality for us that we didn't previously have in the past.

Finally, I'm excited about our recently announced acquisition of Texas-based YourCause, an industry leader in enterprise corporate social responsibility and employee engagement technology. YourCause stood out as an innovative, flexible, and scalable software provider with an impressive customer portfolio, including Fortune 500 companies and small businesses alike, along with exceptional customer satisfaction and retention.

Hundreds of companies like Dell, AT&T, and Samsung have chosen YourCause to enable over 8 million people to process roughly $250,000.00 in donations every business hour. YourCause has coordinated, tracked, and rewarded more than 30 million volunteer hours for its customers. Our combined footprint in corporate social responsibility, employee engagement positions us as the global industry leader in providing cloud solutions for both nonprofit organizations and for profit companies committed to social issues.

Adding YourCause's innovative and differentiated capabilities and workplace giving and volunteering to Blackbaud's unmatched cloud software platform, data intelligence, services, and expertise in philanthropy and engagement is a game-changer in driving effectiveness for companies and the broader social community.

This leads me to our second growth strategy, which is to drive sales effectiveness. Selling modern, integrated cloud solutions that are purpose built for our customers' needs is a key competitive differentiator for our sales teams. The transformational change that's taken place in R&D tightly enlightens with our selling strategy by design. Our sales account executives are now leading with a total solution selling strategy by vertical, focused on reoccurring revenue and driving both products for customers, higher ASPs, and overall increased customer lifetime value.

As you know, we have been steadily pouring the foundation to develop a highly productive and scalable sales model and we spent the second half of 2018 ramping our sales hiring more significantly than past trends. I'm pleased to share that we increased our total direct sales headcount by roughly 20% in the second half of 2018, which is more than double our historical pace of annual hiring. We'll continue investing into sales in 2019 and beyond to better address this massive market opportunity and the focus going forward will be adding additional sales headcount, improving productivity, and a greater focus on adding net new logos.

We've made big strides over the course of the year to simplify our program and refine our methodology and approach in a uniform way to better enable our sales people with process and practice. The sales transformation structure is largely done and we plan to carry that momentum into 2019 with our expanded sales organization.

We had some really terrific wins in 2018, adding to our growing customer base of over 45,000 customers. I obviously can't cover them all, but I wanted to give you a sense of momentum that's building with customers choosing to partner with Blackbaud.

Leading higher education institutions like Clemson University, some of the largest K12 private schools in America, like the Punahou School of Honolulu, well-renowned organizations like the George Bush Presidential Library Foundation, the Boston Bruins Foundation, large healthcare organizations like Dartmouth Hitchcock Health, nonprofit coalitions like the United Way of Portland, and in faith, one of the largest Catholic dioceses in the United States has selected Blackbaud to power their organization, inclusive of several hundred parishes and over 100 K12 private schools.

Our partnership with Microsoft is gaining momentum as well with Microsoft introducing us to new joint selling opportunities like Ducks Unlimited, who chose to partner with both Blackbaud and Microsoft to advance their mission in organizational objectives.

Now, let's turn to our third strategy, which is TAM expansion. We're continuing to expand our TAM into new adjacencies with acquisitions and product investments. We've been executing this strategy for several years now, primarily expanding TAM through acquisitions until 2018, which was a banner year for Blackbaud innovation. We made three organic TAM expansion announcements, introducing the Blackbaud cloud solution for faith communities, expanding cloud for higher education, and nonprofit resource management with Microsoft.

We're demonstrating that we are now able to organically build and not just acquire incremental TAM and these solution introductions adds approximately $2 billion to our addressable market. We also acquired Reeher in the second quarter of 2018 to bolter Blackbaud's extensive performance benchmarking capabilities. We're very excited about the recent acquisition of YourCause, which closed in the first business day in January 2019 and adds another $500 million to our TAM. Our TAM now stands at over $10 billion and we remain active in the evaluation of opportunities to further expand our TAM through acquisitions and internal product development.

Our final strategic initiative is to focus on operational efficiency to strength the business, position us for long-term success. We continue driving toward a more scalable operating model that creates efficiency and consistency in how we execute through infrastructure investments, productivity initiatives, and organizational realignments. In 2018, we executed a comprehensive workplace strategy to better align our organizational objectives with our geographic footprint.

We designated Charleston, Austin, London, and Sydney as our hub locations and we're leveraging a more flexible office strategy to replace and upgrade some of our existing offices and expand our footprint into new locations for customer-facing roles. This operational flexibility allows us to evolve our business to better meet our employee customer needs. Overall, 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.

We continue this initiative into 2019 and expect to be largely complete by the end of this year. Overall, I'm pleased with the continued transformation in the business and shift toward reoccurring revenue. I'm particularly excited about the accelerated pace of innovation that we're delivering for our customers and the reactions in the market. Our new cloud solutions have significantly expanded our addressable markets and cover a greater share of customer IT spend. Our commitment to developing fully integrative end to end clouds are game-changers for the industry and a massive opportunity for Blackbaud.

I'll now turn the call over to Tony to cover our financial performance in greater detail before we open it up for Q&A. Tony?

Anthony Boor -- Executive Vice President and Chief Financial Officer

Thanks, Mike. Good morning, everyone. Over the course of 2018, we strengthened the business, delivered greater value to our customers and better positioned ourselves for future growth and scale. Our fourth quarter results allowed to exceed the midpoint of our updated full-year revenue guidance and exceeded the high-end of our updated ranges for both profitability and cash.

I will refer to yesterday's press release and the investor materials posted to our website for the full detail of the quarter and the full-year financial performance. Today, I'll focus on key highlights so we can get to your questions. We continue to successfully reduce the mix of one-time services and other revenue which is positive for us long-term and creates a significant drag on our total company revenue growth in the near-term. One-time services and other revenue represented only 10% of total revenue mix and declined $6 million in the quarter, which is a 21% decline versus Q4 of 2017.

We're now selling a portfolio of modern cloud solutions, which is driving this shift away from one-time services. Recurring revenue mix represented 90% of total revenue, which is 260 basis points higher than Q4 of 2017 and 2.8% growth on an organic basis. On a full year basis, we delivered $851 million in revenue, which exceeded the midpoint of our updated guidance and represents 7.6% growth over 2017 or 2.7% on an organic basis.

Recurring revenue represented 90% of total revenue, which is 200 basis points higher than 2017 and 5.6% growth on an organic basis. One-time services and other revenue represented 10% of total revenue mix and declined $18 million, which is a 17% decline versus 2017. We successfully drove an accelerated decline in our professional services business and that rate of decline exceeded our initial expectations from the beginning of 2018.

Turning to profitability, our fourth quarter gross margin was 58.8%, which is a 50-basis point increase versus Q4 of 2017. For the full year, our gross margin was 60.8%, which is a 90-basis point improvement over 2017. We generated full-year operating income of $171 million, representing an operating margin of 20% and diluted earnings per share of $2.59.

Both operating margin and diluted earnings per share were strong and exceeded the high-end of our updated full year financial guidance. It's important to note that our operating margin performance was inclusive of our 2018 investments into innovation like our entirely new faith cloud, expansion of our higher education cloud, integrated cloud initiative with Microsoft, acquisitions of Reeher, and investment to ramp sales hiring that we began in the third quarter, adding roughly 20% to our sales headcount year over year.

Moving to the cash flow statement and balance sheet -- in Q4, we generated $51 million in free cash flow, but continued making necessary innovation and infrastructure investments to support our move to the cloud, amounting to $2 million in CapEx primarily associated with our new headquarters and investment in infrastructure and $11 million for capitalized software development. For the full year, we invested $15 million in CapEx for property and equipment and $38 million for capitalized software development, which landed within our expectation of $45 million to $55 million for the full year.

Our full year free cash flow was $149 million, which exceeded the top end of our updated guidance range due to over-performance and profitability. Free cash flow increased $11 million or 8.2% when compared to 2017 and our free cash flow margin of 17.5% for the full year was roughly flat year over year.

We didn't pay cash taxes in 2018 and received a refund in the amount of roughly $7 million. During the quarter, we paid out $6 million in cash dividends to shareholders and ended with $356 million in 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 1.9 times. I'll note that this excludes the acquisition of YourCause, which closed the first business day in 2019. Had we closed the acquisition before year end, our debt to EBITDA ratio would have been approximately 2.6 times.

Now, let's turn to 2019. We're guiding to non-GAAP revenue of $880 million to $910 million, non-GAAP operating margin of 16.7% to 17.2%, non-GAAP diluted earnings per share of $2.11 to $2.28, and free cash flow of $124 million to $134 million.

We have several key assumptions contemplated in the development of our guidance. The acquisition of YourCause is included and expected to be accretive to revenue and dilutive to profitability and cash flow for the year. From a revenue perspective, we're expecting the drag from one-time services and other revenue to continue for a third consecutive year and anticipate the rate of year over year decline to accelerate to roughly 25%.

YourCause is expected to contribute $20 million to $25 million in annual revenue and will be excluded from our organic revenue calculations in 2019. We're taking a conservative approach with the inclusion of YourCause in our guidance, which is closer to the low end of that $20 million to $25 million range as we anticipate that YourCause will cannibalize some of our corporations and foundations revenue as we integrate the business into our core offering.

From a profitability and cash flow perspective, 2019 is an investment year to better position a business for accelerated growth and long-term success. We aggressively ramped sales hiring in the second half of 2018 and in 2019, we will incur the full-year expense impact of those hires. We expect to continue this heightened pace of investment to support the future growth of the business. We're also investing in innovation for our customers. We, in essence, created two entirely new businesses with the announcement of our cloud for faith-based communities and expanded cloud for higher education. We acquired another with the YourCause acquisition.

Our estimate for 2019 combined capital expenditures is expected to be $45 million to $55 million, which is roughly equivalent to 2018 and primarily consists of costs required to be capitalized for software development. We're anticipating CapEx to decrease year over year with our new global headquarters now behind us.

As Mike mentioned, we're continuing to execute against our workplace strategy, which we've accelerated into 2019. We're currently expecting to occur before tax restructuring costs associated with these restructuring acts between $8.5 million to $9.5 million, of which $5.4 million has been incurred through 2018 and we expect the remaining costs to largely be incurred in 2019. Our updated estimates reflect the more aggressive actions we've taken to relocate and consolidate some of our offices starting in 2018. We expect to gain operating efficiencies beyond 2019 with future annual before tax savings of between $5 million and $6 million per year beginning in 2020.

Our non-GAAP tax rate will remain consistent with the 2018 rate of 20% and we're expecting to pay minimal cash taxes in 2019. Our free cash flow will be impacted from the investments we're making in the business. The 2018 cash tax refund of $7 million will repeat in 2019, accelerated restructuring associated with our workplace strategy, and impact from acquisition of YourCause.

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, providing capacity for expansion opportunities.

From a new accounting standards perspective, we will be adopting ASC 842 for leases in Q1 of 2019. We expect that the impact to our P&L and statement of cash flows will be minor. The largest financial impact will be related to recognizing lease liabilities and use assets for the balance sheet of substantially all of our leases.

I'll close by saying that we continue to execute against our strategic plan. We're maintaining our disciplined approach to balance investments that drive growth with profitability. 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 to open up the line for your questions.

Questions and Answers:


Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name and your firm before posing your question. We would ask you to limit yourself to one question and one follow-up question. Again, press *1 to ask a question.

We will now take our first question. Please go ahead, caller. Your line is open.

Tom -- Unidentified -- Analyst

Good morning, guys. Thanks for the question. I want to tackle some of the TAM expansion first. You're going after two markets that seem drastically in need of some innovation. So, right place, right time, but also pretty big markets. As you think about these investments, it strikes me that it's not just a one-year investment. The margin guidance for this year certainly positions this as an investment year.

I'd love to hear a little bit more about how long we ought to think about some of the margin suppression staying down in this level below historical margins. Is that a type of approach we ought to think of given the type of opportunity and the sales heads you need and the innovation that needs to happen? Or is this a one-year gap year and we should start to think a little bit further out, the leverage will start to materialize even given this TAM expansion?

Michael Gianoni -- President and Chief Executive Officer

From an investment standpoint related to TAM, we have really expanded our TAM in the last several years by going much wider in many of our vertical markets and that's what's happening here. So, in the faith-based market, we announced the new cloud platform there several months ago. It is just a massive opportunity. You're right on your question. That market is in need of innovation. I mentioned in my prepared remarks about one of the deals we signed for this new platform, which includes hundreds of churches and over 100 K12 school. That pulls much of our portfolio into that, not just the faith-based but the K12 platform, so big TAM expansion in faith-based.

In higher ed, what we're essentially doing is taking that K12 platform that runs schools and for a while now, we've been adding capabilities for universities and that is the new higher ed platform. It's important to note that in both of those markets, faith-based and higher ed, we're already there. We've been providing fundraising and financial solutions and scholarship management solutions with higher ed and fundraising and financials and faith-based.

We're just expanding to get a lot more TAM and a lot more IT spend. In many cases, what happens is a customer signs up and these solutions eliminate 12, 15 stand-alone software providers with one cloud solution. So, really interesting long run investment opportunities for us through these TAM expansions.

Anthony Boor -- Executive Vice President and Chief Financial Officer

Tom, on the margin side of things, we made a stair-step increase as we spoke about and planned for last year on the sales and marketing and innovation side of the business. We were relatively flat on the sales headcount through mid-year and we started to ramp in Q3 with the majority hitting us more so in Q4. We ended up 84 net heads up from a sales perspective, so roughly 20% growth, where historically, we've grown sales headcount at about 10%. So, we kind of doubled the rate. We'd expect to continue that into the future. So, there will be a heightened investment on that front.

We certainly had to increase our R&D investment for innovation as well with the buildout of these new solutions and to increase the TAM, as Mike just talked through. The payback on those -- I'd expect that we will start seeing some payback on the sales investment front late in '19, much more so in '20 as we get the folks on board and trained, build pipelines, close deals, and then routable revenue recognition.

We'll see more of that impact starting to come in '20, but maybe a little bit later yet this year as well. Innovation investments, those products are in-market being tested and/or launching this year, more so toward the second half of the year. We're already seeing some good traction. But again, we'll see some impact of that probably late in '19 but much more so in '20 and beyond. Those will be favorable from a growth perspective in the business.

The other side is one-time services shrunk 17% prior year and year before. We're accelerating that with a lot of the initiatives we have in place. We think it's going to shrink closer to 25% this year. And I think it probably bottoms out either late '19 or in '20. From that point forward, I'd hope we actually don't see that same kind of drag on the business and may actually start seeing some growth again in one-time, which will help our total growth profile probably in late '20-'21.

With the heightened growth that we should get from all of those investments, then I expect we have leverage opportunity, better leverage opportunity in the business. The other thing is that increase in the sales headcount, this new stair step kind of 20% rate should start funding the future increases in sales once they're fully productive. So, once we get to the new norm, I would expect we'll start seeing some benefits and they will be able to fund the future sales ramps.

Other things that will improve margins over the longer-term -- we've gotten a little more aggressive we've talked about in the script on our facilities optimization workforce strategy. So, we expect to take a little bit larger of charges between now and the end of the year, but we've also increased our annualized estimate for savings. So, we're ramping all the way up between $5 million and $6 million a year in expected annual savings from the facilities optimization work, which we should start seeing in 2020 and beyond.

So, that will be very favorable to margins, we also are still double-paying with the move to the cloud on the infrastructure side of the business. So, we're still paying for our data centers and for third-party cloud. So, as we finish that transition over the next couple of years, that should add to margins as well as just all the other things we're doing to gain efficiencies and leverage in the business. I'd expect kind of a gradual stair-step improvement in margins in '20 and out years.


We will now take our next question from Brian Peterson of Raymond James. Please go ahead.

Brian Peterson -- Raymond James -- Analyst

Thanks for taking the questions. Tony, maybe one for you -- I just wanted to make sure I understood the linearity of the investments and how they might translate into 2019. It looks like the sales and marketing expense at least sequentially wasn't up that much. Were there other sources of savings maybe in the fourth quarter or better execution that allowed you guys to have the OpEx beat this quarter? Then how should we think about those investments looking at margins through 2019. I know you guys don't guide quarterly, but just trying to understand how that could play out over the course of the year.

Anthony Boor -- Executive Vice President and Chief Financial Officer

The headcount was ramped very late in the year. So, we didn't have nearly as much impact on the numbers as you would expect to see. So, that full-year bow wave will start to hit us in Q1. So, you'll see that there. Plus, our planned continued ramp in sales headcount as well and innovation investments will hit us.

So, I think if you look more so at kind of the increase in the sales costs that you saw in Q4 in the detail numbers and plan for that to continue to ramp, that's where the majority of investment is going to be in the sales and marketing. The second piece will be in innovation, so in R&D and the net expense that we record there, net of the capitalization.

The Q4 numbers, as always, the team pushed really hard, did a great job to control costs in the second half. After we had to update the guide, the team pushed hard, as we've done in prior years, had a good Q4. I think there was some favorability within the expense base of us just being very focused on it. That would have offset some of that impact you'd see in the P&L.

Brian Peterson -- Raymond James -- Analyst

Got it. Maybe another one. I wanted to hit on the NXT upgrades. By my math, that's been a pretty key growth driver over the last few years. As we reach the halfway point of that migration, how should we think about the incremental growth opportunity from that going forward?

Michael Gianoni -- President and Chief Executive Officer

That's been a good program. It continues to be a good program. We keep evolving that platform. In fact, the faith-based cloud announcement we made several months ago, we were driving that whole church management solution as a derivative of NXT, if you will. It's completely bundled at the core architecture level. It's been expanded to really drive that vertical solution. The product is going well. The platform now really drives based on the sky architecture, drives a lot of capabilities. It's continuing to expand.


Thank you. We will now take our next question from Rob Oliver of Baird. Please go ahead.

Matt Lemenager -- Robert W. Baird & Co. -- Analyst

Hey, guys. Good morning. It's Matt Lemenager on for Rob. Mike, I had a question on YourCause. How much integration work needs to be done to align that with Blackbaud's core products? Then the go to market for YourCause, will all the reps be carrying it in their bag of products or will that be limited to an initial set of reps and expanded out later? I think Tony mentioned there will be a little bit of cannibalization in that $20 million to $25 million guidance number for the full year.

Michael Gianoni -- President and Chief Executive Officer

Sure. So, YourCause, we're using a playbook we've used before, where the YourCause business is a business unit within Blackbaud. What that means is there's not a ton of integration required. We will integrate quickly the corporate functions. We have already expanded the sales team from another part of the company that was in a similar market. So, we've already added that to the YourCause team. The YourCause leadership team and business unit will drive their business forward. We're just adding resources and reducing some of the burden and cost of corporate functions, if you will, and internal IT and things like that.

The really cool fit with YourCause is it gives us a very large global footprint with businesses in a very near adjacency, which is giving and volunteering. So, it's a very much a close-near adjacency for us. Their platform has provided donations to over 100,000 nonprofits. There are over 300,000 globally registered in over 170 countries. As I mentioned in my prepared remarks, there are over 8 million employees on the platform that give almost $250,000.00 every business hour.

So, it's a big reach and it creates an interesting opportunity for more of a network effect from us, given the number of nonprofits that have received donations, arguably many are not Blackbaud customers. So, it's a really great fit, really great platform, nice near-adjacency for us and we're just investing in a larger go to market as we speak.

Matt Lemenager -- Robert W. Baird & Co. -- Analyst

Tony, as we look at the 2019 guidance, is there any change in the assumption for renewal rates or churn rates at all that's included or embedded into the 2019 guidance? Thank you.

Anthony Boor -- Executive Vice President and Chief Financial Officer

Nothing that we guide to, Matt. We would have contemplated in there the normal impacts of where we are in relation to our sunset plans, migrations and the impact those have, all of those various things would have been contemplated in there, but no specific guidance we've given on retention.


We will now take our next question from James Rutherford of Stephens Inc. Please go ahead.

James Rutherford -- Stephens Inc -- Analyst

Good morning, Mike and Tony. My first question is around sales productivity. I know this has been a big focus for you and the team. Do you think you're done with some of the big changes in territories, comp structure, etc. that you've done? Maybe provide some additional commentary around how you think those initiatives are going and what you expect for the 2019 per rep billings growth directionally?

Michael Gianoni -- President and Chief Executive Officer

Sure. We've made a lot of changes for the last several years in sales to create one global selling engine, if you will. Most of those changes are behind us. We just made quite a few changes to start the year this year, mostly around the number of folks we just hired in the last several months, as Tony mentioned, up 20% headcount, and a couple of new cloud announcements that really expanded our TAM and adjustable IT spend in those verticals.

So, most of the changes are behind us. We now have one comp plan in the world for the company for the first time ever. It's really focused solely on driving recurring revenue. We had to consolidate multiple plans over the last several years. Our sales teams, as you might know, are now fully focused in vertical markets. They are separated into hunters and farmers. Those changes have been coming for a long time. But yes, structurally, we're done. Now, it's driving execution and productivity. There's a whole new management that's in place, lots of new hires. So, structurally, we're done. Now, it's just about continuing to drive productivity and continuing to add headcount.

James Rutherford -- Stephens Inc -- Analyst

Helpful. Thank you. Then Tony, my second question is around the implied organic growth guidance for 2019. So, recurring revenue growth organically was 5.6% in 2018 and 2.8% in the fourth quarter. So, based on the math I'm doing and what you gave us around one-time services declines and the YourCause contribution in 2019, it seems like the full-year 2019 recurring revenue organic guide is around 5% or better. Correct me if I'm wrong there, but that's an acceleration over the 2.8% in the fourth quarter. So, I'm just curious what gives you confidence in that implied organic growth acceleration from the fourth quarter.

Anthony Boor -- Executive Vice President and Chief Financial Officer

I think your math is roughly in line, assuming we end up having a decline in one-time and where we gave guidance on YourCause at the lower end of that 20 to 25 because of the potential for some cannibalization early on. I think the confidence -- a couple of different fronts -- we took a different approach to the budgeting and forecasting process this year on one-time. That's been a really hard and tough area for us to get right. There are a lot of moving parts there.

As we move more to the cloud, we need less implementation. We're certainly doing less customizations. As more of our base moves to the cloud, they're doing less integrations with other third-party solution sets as well. We are also changing the offers that were one-time in the past to be more recurring.

So, we've started to sell a lot of the training and learn-type stuff in a subscription right along with our NXT products. So, that's moving things to recurring. So, a lot of things are affecting that one-time services number. We took a completely different approach this year to forecasting that. I feel really good that we've got a better handle on it. That will take a lot of the variability out of our guide on the revenue front.

Then on the recurring revenue side, it's a lot more predictable. I think the place we have had any difficulty has really been on the transactional side of the business. So, that one, we've done a lot of work as well. I feel good we've got the right process and taken the right approach. The growth is really driven by our investments. We're through all this transition stage and all the noise that might create. So, really, now, it's about how do we keep improving productivity and adding headcount.

We feel good about our ability to add sales headcount based upon what we did in Q3 and Q4. We feel good about how quickly we can train and ramp those folks. We'll monitor that closely. I think the new process is going to help productivity. Based on the investments we made last year and planned investments this year, the added TAM, launch of the new products for faith and higher ed and Microsoft partnership. All of those things lead to where we'll start seeing acceleration going into 2020.

Just one clarification -- YourCause will not be counted in our organic growth for 2019. We will have a benefit of that higher growth profile in '20, but it is not included in our planned organic growth in '19 per our policy.


We will now take our next question from Justin Furby of William Blair & Co.

Justin Furby -- William Blair & Co. -- Analyst

Maybe just to start off, going back to the NXT, the migration -- can you just remind us, Tony, a few years ago you talked about 50% to 1.5 to 2x lift on the maintenance. What does that look like more recently for this year and the next few years? I've got a quick follow-up for Mike on YourCause.

Anthony Boor -- Executive Vice President and Chief Financial Officer

Sure. We are more than halfway through. From a comparative growth basis, we won't see the level of support for growth going forward now or past the top of the bell curve on that side of things. The uplift on those, where we're still truly selling those migrations from the base and moving them over. We're now on the back side of the curve, starting to evaluate programs.

I think we've talked about this before -- more focused on retention for the long-run and getting them converted over. We've started to get some programs that are more migration-focused versus sales, if that makes sense, where it's more intent on getting them to move to the new platform so we can keep them for the next 20 years versus merely focused on the potential uplift on the sales side.

I do think that average uplift we saw through these first few years will start to decline now that we're on the back side of the bell curve as we move toward more focus toward retention. We'll see more aggressive programs that help with the migration, etc. I do think it creates a tougher compare from an organic growth perspective going forward now that we're on the backside of that curve.

Justin Furby -- William Blair & Co. -- Analyst

And then Mike, one thing I missed in all this with the YourCause acquisition, back to the incremental TAM, I know you acquired a company MicroEdge, a number of years that was one of the primary competitors in the space. What's the incremental for you in terms of this acquisition and do you continue to invest on the MicroEdge platform as well?

Michael Gianoni -- President and Chief Executive Officer

The incremental TAM is a half a billion dollars. With MicroEdge, there's one small product that was a direct competitor of YourCause. The TAM expansion, again, is a half a billion.


Thank you. We will now take our next question from Rishi Jaluria of D.A. Davidson.

Rishi Jaluria -- D.A. Davidson -- Analyst

Tony, I appreciate the granularity on the guidance. So, I'm getting 5% to 6% organic recurring growth next year. You said in the past this market is growing at 7%, if I'm not mistaken. Why are your organic recurring growth rates slower than the market? Is that a function of maintenance being dragged or still converting maintenance to subscription or are there other factors there?

Anthony Boor -- Executive Vice President and Chief Financial Officer

There are a lot of things in play that we've finished executing against the strategy we rolled out several years ago when Mike came on board. Some of the pieces that still pull against growth are going to be the sunsetting of the products, the migration of the old legacy products. Those typically will have lightened churn because you put those customers in market when you're trying to move them to your new platforms like we're doing with RE NXT and FE NXT, etc. The transactional business certainly provided more lift in the early years.

So, as that base has gotten bigger and we've penetrated more of the base, we've got to replace that growth rate. Certainly, from a total growth rate, you've got one-time services that have dropped off dramatically as part of our strategy. As I answered Tom's question earlier, the prior two years, we've seen a 17% decline this year in one-time services. We're expecting that to be a 25% decline. I think the key for us as well as the base has gotten a lot bigger -- we had kind of stuck to that same number of sales headcount.

So, I think we were trying to implement a lot of the other pieces of our strategy. The last key piece was this investment in sales and marketing that we really had just begun here in late '18. I think the ramped sales, the increased productivity in sales, the expansion of TAM should bode well for future growth once we get to this final year or two of implementation of the strategy.

Michael Gianoni -- President and Chief Executive Officer

The other thing with the TAM expansion is pretty significant because if you think about the products and platforms we've announced, we're going from becoming to a departmental player to an enterprise in those verticals, which covers a lot more product and IT spend than before in verticals that we've been in for a while. So, it's not just new verticals. It's expanded within the vertical.

We've also grown the customer base quite a bit. We have announced in our prepared remarks that we have over 45,000 customers now. We've got a significant part of our sales team focused on new logos, which if you go back several years ago, that was not the case. So, the combo of driving sales productivity, headcount, focus on new logos is fairly new for the company. The footprint has been expanded quite a bit.

Anthony Boor -- Executive Vice President and Chief Financial Officer

Rishi, one of the things we've talked about is we've effectively stood up two brand new businesses, two start-ups. So, a lot of these investments we're making, we're expanding our sales team substantially, but that product doesn't launch until the second half. We've got to start building momentum in the space for the new product and then the new product doesn't launch until later in the year. So, in '19, you're not going to see a huge contribution for those start-up businesses, much like what you'd expect with any start-up, but we'll start seeing real benefits hopefully in '20 and '21.

Michael Gianoni -- President and Chief Executive Officer

I'll add one thing -- we've talked a little bit about customer wins in my prepared remarks. Just the one market of faith-based we have been really growing the success in that market for a while now and just announced that cloud solution several months ago. But a significant proof point in what we're doing there, what I said in my prepared remarks, we had a very large institution commit hundreds of churches and over 100 K12 schools contractually. That's a big commitment. I think it's an indication of proof point of what is about to come from us in the faith-based market.

Rishi Jaluria -- D.A. Davidson -- Analyst

And then just really quickly on the jointly developed NRM solution with Microsoft, I know it starts to launch later this year, if I'm not mistaken, but can you give us a sense for what is go to market and potential revenue share look like between you and Microsoft?

Michael Gianoni -- President and Chief Executive Officer

It's jointly developed and jointly brought to market. So, we'll be selling, they will be and we will be together. We have a lot of go to market initiatives just starting off with Microsoft. That one happens to be one where we're codeveloping a product. You can think of it as a supply chain management product for large global nonprofits, but we're going to market with them in education now, higher ed. nonprofit space and other markets. So, it's still very new for us, both companies to go to market together.

Microsoft's model is a very complementary model for their partners, including Blackbaud, where their teams are compensated on things like Azure consumption. So, there isn't a revenue share when we go to market because it's an Azure consumption model they use. As we continue to shift our workload to Azure, it's a complementary field compensation model, which is great for us and for them.


We will now take our next question from Kirk Materne from Evercore ISI.

Kirk Materne -- Evercore ISI -- Managing Director

Thanks very much for taking the question. Mike, given your standing up two new businesses around these TAM opportunities, what sort of payback time are you expecting in terms of getting new sales headcount ramped up? I'm trying to get a sense of how you're thinking on when they get to be fully productive.

Michael Gianoni -- President and Chief Executive Officer

Sure. It's a pretty wide gap between phone sales and enterprise field sales as far as ramp. On average, the average ramp time is less than nine months if you look at all the jobs aggregated together. The other side of that is revenue ramp for these two new cloud solutions, they don't even go live until the back-half of this year. Revenue ramp will take a while, but we're closing deals now as we speak and we have early adopter customers using the platform now.

Kirk Materne -- Evercore ISI -- Managing Director

Tony, obviously, over the course of the year, the organic recurring revenue growth rate decelerated. I just want to get a better understanding of that. I assume some of the transactional business you guys referred to last time we talked and you took down the numbers. Is there anything else going on? I realize when you bring on these sales guys, sometimes you have to recut territories. I want to have a better understanding of that. I think it would instill further confidence in your recurring revenue growth assumptions for next year.

Anthony Boor -- Executive Vice President and Chief Financial Officer

There's certainly been some change management we had to work through on the sales and marketing front. As Mike alludes, we've been working on that one for about three years now. We stood up customer success. We really changed the process and approach. We went to that hunter farmer or back to base prospect model. We moved reps out into the field that were largely all sitting in Charleston. We've changed roles. We've changed the whole management process, territories.

So, there's been quite a bit of change that we've worked through over the last three years. I think we're finally going to be to the point this year and '19 and we start seeing stability so that our real focus there will be ramping additional heads and getting more productivity out of the existing base. We will think there is a lot of opportunity to improve the productivity of the existing base of 500+ reps as well. So, we have high hopes for that to help drive more growth over the coming years as we make improvements there.

The other side of things outside of the change management that we had to deal with. You spoke about obviously the transaction business last year was a bit of tough compare. '17, we had some positive impacts from the elections that carried over into Q1. We didn't have as many one-time events. We had some change in consumer giving patterns. We talked about smart tuition, mix of parents and affluency. Obviously, UK market and Brexit, and just all the things going on in the economy, the tax reform, it's hard to put a number on any one of those individually, but overall, certainly a tougher year last year on the transaction side that pulled down our recurring revenue growth.

The other thing is we're still working through the migrations and the sunsets. As we've talked about, we are not building feature parody in all of those. When we shut those products off, we lose customers. We put customers in market when we are going to them to make decisions on migrations to the next gen platforms.

As you saw last year, we actually lost a point from a retention perspective and that's impactful. We do expect to see retention bottom out and shift back to the other direction as we get through these programs here over the next two to three years. So, that will be a favorable impact on growth as well, but that's certainly been a drag on us over the last three or four years as we've implemented this strategy also.


Thank you. We will now take our next question from Ryan MacDonald of Needham & Co. Please go ahead.

Ryan MacDonald -- Needham & Company -- Analyst

Good morning. My question is on top of that transactions business. Obviously, 2018, like you mentioned, was a bit of a rough year there for a number of reasons. As you're looking now to 2019, could you talk about the assumptions you're building in for the transactions business in '19 and what the expectations are now, particularly with JustGiving and when that should be going live in the US and how that can help with the transactions business in '19 in the US.

Anthony Boor -- Executive Vice President and Chief Financial Officer

From an assumption's perspective, as we spoke about last year with the update guide, the number of customers we've been adding, the number of large customers, high-value customers we've added to the payment's platform has all been trending positively. It was really this trend in consumer behavior and a lower average donation size that we saw. It's hard to put your hand on what drives that.

Much of that could be driven by the fact that we had one-time major incidents that drive big spikes in giving. We've got some pretty detailed forecasting tools on a product and customer level that we use and some seasonal trends at those levels. So, we build that out based upon all the current trends we're seeing and the rates of adding new customers and time to go live and penetration rates and average donation size.

We feel good about it from that perspective. There's just more volatility on the transactional side that we can't predict. We could have a really good year this year just depending on where consumer sentiment comes in in things like the UK market. That one, I feel good. We've assumed things we possibly can. The JustGiving launch was always a big plan as part of that acquisition for the US market. That will happen this year. The team is progressing on that front very well.

Again, timing of that launch and then ramp time, it won't have a huge contribution in '19, but it's another one of those areas of growth that it should provide some growth in '19 and help hold that recurring revenue growth rate up. Certainly, '20, '21, '22, I'd expect to see really good things on that front as well along with faith and education cloud and the Microsoft partnership.

Michael Gianoni -- President and Chief Executive Officer

Right. The JustGiving launch in the US is Q1, but to Tony's point, we won't see much revenue this year, but that's the launch in the US.

Ryan MacDonald -- Needham & Company -- Analyst

One quick follow-up on gross margins -- as you continue this go to market partnership with Microsoft and you talk about the Azure consumption there, could we expect to see some additional leverage on that recurring gross margin side as you continue with that migration process?

Anthony Boor -- Executive Vice President and Chief Financial Officer

Well, we don't guide the gross margin today. I spoke earlier to some of the pieces that will drive our gross margin potential improvement. That double pay that we have today moving to the cloud, getting out of our co-lo data centers, that will be a positive impact on us. We've got a little bit of a drag still coming because we are capitalizing, required to capitalize more of our innovation spend from an R&D perspective. So, that amortization will continue to build, which put a little pressure on gross margins.

But really then at the end of the day, it comes down to mix. So, our one-time services have been dropping. That's our lowest margin business. We expect that. We expect that deceleration to actually increase this year, as we said, from about 17% to 25%. So, that should help prop up gross margins depending on the mix of the payments and type of payments transaction revenue that has lower margin depending on whether that's our straight payments platform.

So, it typically will come more so to mix than anything else. We don't guide at that level. We've been able to do a pretty good job of the last couple years of holding and slightly improving gross margins. I'd hope that we can continue that for the foreseeable future.

Michael Gianoni -- President and Chief Executive Officer

Let me jump in here too to provide some clarification. Your question was around go to market with Microsoft and gross margin. Those two things are not related to us. We have no cost in going to market together with Microsoft. We don't give additional discounts. We don't pay fees. It's our standard pricing and standard discounting.

The reason I mentioned earlier that's very complementary, we do not have to pay to go to market or provide additional discounting, yet the Microsoft field team gets quoted credit because our solutions run on Azure. Those are not connected. It's a really great go to market model. It doesn't cost us anymore. We can leverage Microsoft's reach in the market and in turn, they leverage our reach.

The back end of our business, we're moving from our data centers to Azure, which will improve over time our profitability because today, we have duplicate cost in that regard and have less of that in the future.


Thank you. We will now take our next question from Mark Schappel of Benchmark. Please go ahead.

Mark Schappel -- The Benchmark Company -- Analyst

Thanks for taking my questions. Just a couple quick ones here -- Tony, was YourCause profitable?

Anthony Boor -- Executive Vice President and Chief Financial Officer

We don't break out anything on YourCause other than the expectations in the guide of that 20 to 25. We expect that it will be dilutive to margins and free cash flow, as I said in the prepared comments, in '19. I think there's a little bit of cannibalization potentially on the revenue front, but longer-term, we see some really good synergies on the revenue and cost structure side. We'll get that integrated very quickly into the business. We see some really good long-term opportunity there, but we'll be dilutive as our expectations in margins and free cash flow in '19.

Michael Gianoni -- President and Chief Executive Officer

It's nicely accretive from an organic growth standpoint, not counted in organic growth this year, but it's a fast-growing business.


Thank you. I would like to turn the conference back over to Mike for any closing comments.

Michael Gianoni -- President and Chief Executive Officer

Thanks. Operator, I'll just close by saying that I'm pleased with the progress we've made against our objectives in 2018. We finished the year well. I'm very excited with our innovation initiatives in TAM expansion. Tony and I will look forward to updating you on our progress on the next call. Thanks, everyone for your participation.


This concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 67 minutes

Call participants:

Mark Furlong -- Director of Investor Relations

Michael Gianoni -- President and Chief Executive Officer

Anthony Boor -- Executive Vice President and Chief Financial Officer

Tom -- Unidentified -- Analyst

Matt Lemenager -- Robert W. Baird & Co. -- Analyst

Brian Peterson -- Raymond James -- Analyst

James Rutherford -- Stephens Inc -- Analyst

Justin Furby -- William Blair & Co. -- Analyst

Rishi Jaluria -- D.A. Davidson -- Analyst

Kirk Materne -- Evercore ISI -- Managing Director

Ryan MacDonald -- Needham & Company -- Analyst

Mark Schappel -- The Benchmark Company -- Analyst

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