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Blackbaud Inc (BLKB) Q3 2019 Earnings Call Transcript

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BLKB earnings call for the period ending September 30, 2019.

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Blackbaud Inc (BLKB -1.72%)
Q3 2019 Earnings Call
Oct 29, 2019, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, and welcome to the Blackbaud Q3 2019 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, sir.

Mark Furlong -- Director of Investor Relations

Good morning, everyone. Thanks for joining us on Blackbaud's Third Quarter 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 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 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-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 in 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'll briefly cover our upcoming investor engagement activity, which is available on our Investor Relations website. During the fourth quarter, our team will be attending Morningstar's Management Behind the Moat Conference in Chicago; Stifel's Midwest One-on-One Growth Conference in Chicago; Credit Suisse's 23rd Annual Technology Conference in Phoenix; NASDAQ's Investor Conference in London; and Raymond James Technology Conference in New York. We will also be holding meetings with investors in Boston, New York and the Ohio Valley.

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

Michael Gianoni -- President and Chief Executive Officer

Thanks Mark. Good morning, everyone, and thanks for joining our call today. We continue to gain momentum in our aim to drive digital transformation across the social good community and in all the markets that we serve. As many of you know, we held our Annual Conference bbcon earlier this month. It's clear that the progress we've made is having a major impact on the individuals that use our solutions every day. We had a packed agenda and introduced more than 80 product and innovation updates to over 3,000 attendees, who joined us in Nashville; making it the most well attended bbcon to-date.

There is no question that our customers and prospective customers are excited about the pace of innovation being driven by Blackbaud and our partner ecosystem, which was evident by the overwhelming positive audience reaction to the long list of mainstage announcements and a constant flow of attendees in our Innovation Expo Hall and over 300 breakout sessions. We are uniquely positioned to enable the digital transformation within social good organizations through our cloud software, services, expertise, and data intelligence. But our focus on this industry extends beyond our cloud software technology and solutions.

We have a culture built on an unmatched commitment to powering social good and that includes our participation in this ecosystem. In fact, 89% of Blackbaud employees has volunteered in the past year. Employees participating in Blackbaud's Matching Gifts program had over two times the national median and one in four employees serves on non-profit board or committee, and we're incredibly proud to be named as a leader on the 2019 Top Companies for women technologists for the second consecutive year.

Just last week, we released our second Annual Corporate Social Responsibility Report, highlighting our environmental, social, and governance accomplishments in the past year, as we continue to think critically about our responsibilities as a technology provider, employer, public company, environmental steward, and member of the global community. For example, as the owner of the industry's largest dataset, we were an early adopter of industry-leading cyber security and data privacy standards.

Blackbaud's cyber security team reflects 400 years of combined experience, including service in key government offices and Fortune 500 companies. This year, we launched the Consumer Privacy Center of Excellence, a collective of subject matter experts from different departments, all trained in privacy and how to access data usage within their respective departments.

Lastly, social good is at the heart of who we are as a company, an employer, and a brand. As usual, Tony will provide more detail on our results and I'll provide an update on the context of our four-point growth strategy. The first of our four growth strategies is delight customers with innovative cloud solutions. We made a slight modification to the strategy to highlight our relentless focus on driving value and outcomes for our customers through our solutions.

Blackbaud SKY, our platform for innovation, is a core tenant of this strategy and continues to power an unprecedented level of innovation by our engineers and enable a growing ecosystem of developers who're also passionate about social good to create amazing new capabilities that often look and feel like Blackbaud built capabilities.

For the first time in the history of the company, there are now significantly more outside developers developing on our platform, than Blackbaud engineers. In fact, third-party developers have to find over a 1,000 Blackbaud SKY applications and nearly two-thirds of these applications have already been enabled by our customers. We're providing the developer community and our partner network with the tools to extend and enhance customer's Blackbaud solutions helping them create truly connected offices.

For example, staffs at St. Leo's University are using SKY APIs to run an automated daily integration between our fundraising solution and their student information system. Instead of spending hours entering data to keep their records in sync, the integration creates new constituent records and appends new degree information to existing records. With a large segment of their non-traditional students graduating all year round, this integration creates an average of 75 new records per week.

So they can now leverage the power of Blackbaud's Raiser's Edge NXT to immediately identify the major good prospects among new graduates, and allowing [Phonetic] my office to start engaging with them right away. The customers we serve require vertical-specific business solutions to automate their operations and we build integrated, purpose-built cloud solutions that solve these business needs.

Among the many product and innovation updates across all of our vertical markets, we announced the general availability of Blackbaud Church Management, which is already transforming the church technology landscape. Within just one year of announcing plans for Blackbaud Church Management, we now serve churches in more than half of the 50 US states, representing congregations of all different sizes and spanning more than 10 denominations.

This pace of innovation is extraordinary in our industry. We've built an environment of rapid innovation through a combination of our modern cloud architecture and industry standard methodologies. Our early adopter customers have a significant role in shaping our new solutions and our Blackbaud SKY platform enables us to rapidly iterate based on their feedback before releasing the solutions to the general market. This culture of innovation led to the general availability of Blackbaud Church Management and the process is highly repeatable. We are well under way with early adopters in our higher education vertical as we extend our proven Education Management portfolio up-market.

Our early adopters are excited with one thing, and I quote we looked at a number of solutions in addition to Blackbaud, you name it, we looked at it, but our 20-plus year history with Blackbaud and its solutions for higher education held the promise of providing everything we wanted to achieve and more. This brings me to our second growth strategy, which is to drive sales effectiveness.

As you know, we have a large market opportunity, extending across our vertical markets and we spent the last several years organizing for scale and laying the foundation for our salespeople to be more successful. This year marks an important milestone in that process as the structural transformation in sales is now largely complete, enabling our account executives to focus on leading with total solution selling by vertical, driving more products per customer, higher ASPs and overall increased customer lifetime value.

With the structural changes behind us, our focus is on improving overall sales productivity. This effort extends beyond just the sales organization into areas like marketing where we're investing in the necessary technology and resources to efficiently drive an increased number of quality leads and better cover our large addressable market. Over the last three years, we've tripled the number of account executives dedicated to prospect accounts and these investments are just one way we're equipping our growing sales force to be more effective.

I'll now turn to our third strategy which is TAM expansion. Earlier this year, we acquired YourCause, a market leader in the corporate social responsibility software, and our ability to move fast on back-office integration is enabling the team to further differentiate our solutions from the competition. As corporate social responsibility programs are implemented around the world, it's becoming increasingly important for companies to have acute local knowledge in the countries where employees are accessing the programs, to remove any functionality barriers.

Just last week, we announced expansion in the YourCause global footprint by developing in-market partnerships to advance employee giving the nonprofit globally, while also implementing key product features for universal functionality. For example, by partnering with GiveIndia, India's largest and most trusted giving platform, YourCause and the employees they support worldwide will now have access to GiveIndia's network of nearly a 1,000 verified nonprofits in India alone, which ensures that employees are donating to vetted organizations.

Our 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 and internal product development.

Our final strategic initiative is the focus on operational efficiency to strengthen the business and position us for long-term success. This continuous effort spans the entire organization as we drive toward a more scalable operating model that creates efficiency and consistency in how we execute through infrastructure investments, productivity initiatives and organization alignments.

For example, we're now selling a portfolio of modern cloud solutions, which is driving a shift away from one-time services as we reduce the hours needed for implementation and integration of our solutions. In order to effectively scale as we continue to grow as a company, we've been building out our partner ecosystem which includes partnerships to implement our cloud solutions. We've made significant progress building out this program in 2019 and look forward to continuing the effort in 2020.

Overall, I'm pleased with our execution through the third quarter and we're focused on maintaining our momentum heading into the fourth quarter of 2019. We're continuing to execute against our strategic plan, which is strengthening the business and enabling us to deliver greater innovations for our customers.

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 -- Chief Financial Officer, and Executive Vice President of Finance and Administration

Thanks Mike. Good morning, everyone. Please refer to yesterday's press release and the investor materials posted on our website for the full detail of our Q3 financial performance. Today, I'll focus on key highlights, so we can get to your questions.

Recurring revenue increased 8.6% over Q3 of 2018 and 5.6% on an organic basis. We posted solid recurring revenue growth through the first three quarters of the year and anticipate carrying that performance through the end of 2019.

We continue to see a healthy shift in mix as recurring revenue represented 93% of total revenue in the third quarter. As you know, we now have one global compensation plan for our salespeople that puts an increased focus on driving recurring revenue bookings. Through our sales effectiveness programs, we're continuing to focus on opportunities to further shift our bookings mix toward ARR and to optimize the mix of business within the ARR bucket. Ultimately, incenting and prioritizing offerings with the best economics.

One-time services and other revenue represented only 7% of our total revenue mix and declined nearly $5 million in the quarter, which is a 24% decline versus Q3 of 2018. Through the first three quarters of 2019, one-time services and other declined 22% compared to the year-to-date 2018 and we still anticipate the rate of year-over-year decline to accelerate to roughly 25% for the full-year 2019, which is healthy for the long run. I'll remind you that last year one-time services and other declined 17%.

Turning to profitability, our third quarter gross margin was 59.5%. We generated operating income of $37 million, representing an operating margin of 16.5% and diluted earnings per share of $0.56. Our third quarter operating margin performance is inclusive of strategic investments to further expand our selling footprint, bring new solutions to market, and our shift to third party hosting. The investments we're making into R&D are delivering tremendous value for our existing customers and we've created entirely new product opportunities in our Higher Education and Faith verticals.

The investments in the sales and marketing are improving our ability to scale, increase our selling footprint and position us to drive future growth. And as Mike mentioned, we've seen early traction building out our partner network, including third-party implementation partners. We're planning to continue these heightened investments through the end of the year.

With three quarters behind us, we're positioned to land within our full-year guidance for operating margin of 16.7% to 17.2%. Given our planned pace of investments and incremental costs associated with the growth of our partner program, we're anticipating coming in toward the low end of our guidance range for operating margin.

Moving to the cash flow statement and balance sheet; our Q3 free cash flow was $63 million, which puts us on track to deliver our full-year guidance of $124 million to $134 million. We continued making necessary innovation and infrastructure investments to support our move to the cloud, amounting to $3 million in capex, primarily associated with our global workplace strategy and investment in infrastructure and $11 million for capitalized software development.

During the quarter, we paid out $6 million in cash dividends to shareholders and ended with $474 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 Q3, we stood at just under 2.5 times.

In summary, we continue executing against our strategic plan, which is allowing us to strengthen the business and reiterate our full-year financial guidance. We're maintaining our disciplined approach to balance investments that 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 to open up the line for your questions.

Questions and Answers:


Thank you. [Operator Instructions] We will now take our first question from Brian Peterson from Raymond James. Please go ahead.

Brian Peterson -- Raymond James -- Analyst

Thanks gentlemen. Congrats on the quarter. So maybe just start off on the sales hiring, it looks like you're through some of the structural changes so far this year. Curious where you are in terms of your hiring plans so far? What should we expect maybe in the fourth quarter? As we think about 2020, anything or any commentary you can make on the magnitude of the sales and marketing investments?

Michael Gianoni -- President and Chief Executive Officer

Yeah, we continue -- it's Mike. Brian, we continue to hire in sales and that's going to continue for a while. We're kind of moving toward a continuous hiring model, if you will. It's going to be a little lumpy this year like it was last but the plan is to move more toward a continuous hiring model going forward. So, same plan.

Brian Peterson -- Raymond James -- Analyst

Got it. And maybe a follow-up, Mike. Just on the SKY architecture. I know with the faith-based offering now generally available, curious how you're looking at some potentially new markets, and any appetite versus -- build versus buy? Thanks guys.

Michael Gianoni -- President and Chief Executive Officer

Yes, sure. So the SKY engineering platform just gets better every month, every quarter, given all the engineers that are contributing to the base engineering system. Church Management Platform is now in general availability. We have a lot of customers in implementation right now. We're not looking to build a new vertical market solutions today because we have enough on our plate to execute in both the education management and higher-ed and in faith-based. And those are both going quite well.

But I think your question is also related to build versus acquire. We're still and always are sort of in the market looking for tuck-in opportunities that makes sense in the vertical markets that we're in and with this engineering platform now we're in a much stronger position to build versus just buy as we demonstrated in the faith-based marketplace.


We will now take our next question from Tom Roderick from Stifel. Please go ahead, your line is open.

Matt VanVliet -- Stifel, Nicolaus & Company -- Analyst

Yes, hi Matt VanVliet on for Tom. Thanks for taking my two questions. I guess following up on that last question, as you look at the opportunity for the Church Management product versus something like the higher ed where it's a little more organic and adjacent build out from what you've been doing in the K-12 market and your historical -- some penetration in the higher-ed market, Tony, just curious on how each of those products can sort of flow into the model as we look out into the fourth quarter, and more importantly, out into the next couple of years. What kind of build in terms of a revenue waterfall are you expecting? How quickly can in this ramp up and be pretty significant contribution?

Michael Gianoni -- President and Chief Executive Officer

Yeah, Matt, it's Mike. Tony, [Indecipherable] along if you want to. So the build in the higher ed and faith are a little different, but not that different. So we took our K-12 operating platform, if you will, and moved it up to the higher ed and it's been very successful in K-12 and that's -- that whole program is going well. In the faith-based market, we did build Church Management net new on the engineering platform, but we already had a presence in fundraising and financials in the faith-based market and this is connected to an extension of that. So we've gone from fundraising and financials over to the operating side in faith-based.

Both of those will just continue to build. We're selling in market. We're implementing both -- we announced general availability for the Church Management platform. I mentioned in our Investor session at our conference bbcon couple of weeks ago, we have over 70 customers right now in implementation of the Church platform. We continue to sell you know every week, every day those platforms and we anticipate the continued build of the reoccurring revenue from those platforms in subsequent years moving forward. Now, it does take a while for that to happen, but we're pleased with both the launches and the presence and the reception in both those markets.

Anthony Boor -- Chief Financial Officer, and Executive Vice President of Finance and Administration

And Matt, maybe I'll follow up on your waterfall question. I think that both of those new products being new entrants per se, both in higher ed and Church, it will take a little bit of time to build out our footprint in those markets. We've done a good job, I think, of getting a good base sales and marketing team and investment and awareness built in both of those markets.

We just, as Mike said -- announced general availability of the Church one, so little further ahead there. We'll continue to ramp sales and marketing investments in both of those. Think of them both as start-ups. I'd expect what we'll see as we get both of those GA-ed is some good traction on bookings, although a very small base in '20 and more of that starting to turn into revenue as we go into '21 and that'll kind of align with our sales and marketing investments, folks building territories, pipeline etc. and then to -- turning those in the bookings and bookings ultimately into revenue.


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

James Rutherford -- Stephens, Inc. -- Analyst

Right. Thanks. Hey, Mike. Hey, Tony. Thanks for taking the questions. I was hoping to dig in on the gross margins a little bit. Tony, you've seen some year-over-year compression here for three quarters in a row, I believe. Can you just enumerate some of the main drivers of this and give us an idea how long these headwinds might persist?

Anthony Boor -- Chief Financial Officer, and Executive Vice President of Finance and Administration

Sure. I think the largest is one we've been talking about for a couple of years now, which is our move to the cloud. That one is going to continue to push down on margins for the -- at least for the foreseeable future as we migrate out of all our COLO data centers into the cloud. There is a slew of just complicating factors as we make that transition. You have licensing issues and other things that we have to deal with.

But as we get out of the old products complete rerights on NXT and some of those others, it will free up some costs. And then, as we get out of the COLOs turn off those networks and those rigs and data centers themselves will free up costs. So I'd expect we'll see kind of this increased pressure for at least the next two or three years, with this starting to lighten after that. The other two things that are hitting us is software amortization just with all the innovation, we've done over the last few years the amortization -- amount of amortization is increasing. So that's putting a little bit of downward pressure and that will continue for the next couple of years as well till that plateaus.

And then, more recently in the quarter, as we started to build out partner networks more fully, we actually started utilizing implementation partners in the last couple of quarters and you can see that in the one time and other margins that's put some pressure there from using those third parties, which is great for the long-term, we'll have some near-term pressure on our gross margins. We'll look at those models potentially start shifting some of that on to their paper. As we determined, we've got partners that we can trust to work with on that front. But that's something that will be a little bit of a moving target as well. But those are the three major drivers on margin pressure and they'll continue for the -- at least for the foreseeable future.

James Rutherford -- Stephens, Inc. -- Analyst

Got it. Helpful there, and then a follow-up to that question would be on the payments business and whether -- it's generally how that business is doing and if that's affecting -- if that mix toward payments is affecting the gross margin line as well. Thank you.

Anthony Boor -- Chief Financial Officer, and Executive Vice President of Finance and Administration

No, not right now. Payments has go to run in right line with expectations. You recall, we built a much more robust forecasting tool for that payments business coming into this year and that's worked really well. We're right on track. Obviously year-end is always a wild card, tax reform from last year, those kinds of things, what happens around Giving Tuesday Christmas season, all of those pieces. So, still yet to see what happens here in the fourth quarter, but year-to-date, we're kind of right on track with expectations. The mix has not changed significantly, so that's not really having an impact on the gross margins.


We will now take our next question from Rob Oliver from Baird. Your line is open. Please go ahead.

Matthew Lemenager -- Robert W. Baird & Co., Inc. -- Analyst

Great. It's Matt Lemenager on for Rob Oliver this morning. I have a question around larger deals. One of the nice differentiators of Blackbaud is the ability for a nonprofit to go end-to-end, thinking about tools from top of funnel marketing to fund raising to payments and I guess all the way down to Financial Edge. So, just been wondering if you can update us, even if its qualitatively, how larger deals have tracked this year, perhaps how the pipeline looks for the fourth quarter and the importance of large deals, if that's the, I guess, primetime for those larger deals to come. So just any update around larger deals even if it's qualitatively?

Michael Gianoni -- President and Chief Executive Officer

Yes, sure. This is Mike. We are continuing to do quite well with large deals in a lot of different markets. A few of the earnings calls going back, I'd mentioned and we've got some press releases on large deals in the K-12 market with large K-12 private schools. I've mentioned universities and the large deals we've gotten with universities and now we've expanded our portfolio with universities that includes the New Education Management platform. So the opportunity is there and it's happened with larger ASP deals at the University -- in the University market as well, because we're servicing the whole school, not just the foundation. The same is happening in the faith-based market as well where we are seeing the opportunity to sign contracts that cover tens or sometimes hundreds of Churches or Schools where typically we've sold one at a time. And so we're seeing, you know, medium and large deals in multiple marketplaces including in our international business as well.

Matthew Lemenager -- Robert W. Baird & Co., Inc. -- Analyst

Got it, thank you.

Michael Gianoni -- President and Chief Executive Officer

You're welcome.

Anthony Boor -- Chief Financial Officer, and Executive Vice President of Finance and Administration

Thanks Matt.


We will now take our next question from Rishi Jaluria from D.A. Davidson. Your line is open. Please go ahead.

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

Hey guys, thanks for taking my questions. A couple of products or two product ones. First, just wanted to start on the higher ed side; maybe help us understand when you're getting these deployments, what is it that you're replacing? Is it homegrown systems or is it kind of a combination of 10 different point solutions and now you can come in and have one broader suite of solutions that does everything? And from like a portfolio perspective, is everything kind of all the pieces in place there to be successful in higher-ed or are there still kind of areas in the higher-ed portfolio that you want more products to maybe round out that portfolio, be it internally developed or acquired? And then, I've got a follow -up?

Michael Gianoni -- President and Chief Executive Officer

Sure. This is Mike. So in higher-ed, it's sort of a repeat of a story that's been quite successful for us in K-12 where we have a big presence now in higher-ed and the foundation in fundraising and in scholarship management and financials. And we've now expanded that to the operating side of the school student enrollment and classroom scheduling and student information system. So it's a whole portfolio, so that covers most of the major departments in a university.

We are starting with smaller universities. There are several thousand of them and we also have cross-sell opportunities because in a lot of them we have a fundraising and financial footprint. And so, we're starting with smaller universities and we're going after that market. The product is pretty advanced because again it is the same product that's been in K-12 for years and we've taken over two-years and added a lot of capabilities for the higher education market.

It also includes Tuition Management as well, which is new for us in the higher-end market. From a competitive standpoint, we see some legacy competitors out there, mostly license type installations. There is some home-grown point solutions as well. And again it -- at the macro level, it looks a lot like what we've been doing in K-12.

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

Got it. That's helpful, thanks Mike. And then on the Church Management side. Look, I think this is one of the bigger organic new product adoptions that at least I've seen in a very long time. Help us understand kind of your expectations and sort of what the ramp looks like because it's clearly a big market opportunity you're going after, but maybe you just want to understand your expectations for an adoption curve and maybe when do we expect this to be incremental to the top-line? Thanks.

Michael Gianoni -- President and Chief Executive Officer

Sure. So, again it's a full cloud for that marketplace that that goes across the operating components of the Church. It's across more than 10 denominations, so it's a big market. We're talking to Churches of all sizes of scale it up. We priced it so it scales sort of up and down based on institution size. It also scales when we talk to an institution that is an assembly of many Churches.

We also have a new mobile app Mobile Mission, which is a mobile app for secure donations or ties in that market and offerings from a mobile standpoint that's integrated into the core SKY set of capabilities. So we're really excited about this marketplace. There, in our opinion, hasn't been any innovation in the space in a long time. And in the contracts we're signing, we are replacing a dozen or so single point solutions with a -- with a single log on modern cloud. We have live customers. We have a lot in implementation and this will just continue to build and build.

We have marketing efforts that are new in this space. We've had fundraising and financial customers in the space for a long time, but we're not that well known in that marketplace. And so we've got some marketing spend happening there in areas like lead-gen and digital footprint and conferences, which we've started about a year ago. So we think there's a long runway here and we're doing it right by building referenceable customers with a scalable high quality modern cloud platform.


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

Ryan MacDonald -- Needham & Company -- Analyst

Yes. Good morning, Mike and Tony. Thanks for taking my questions. Mike, I guess, first one for you. Can you talk about the -- what's the drivers of the YourCause International expansion was? Is this an area where you think that the domestic market is perhaps maturing quicker than expected or are there just a number of opportunities of customers wanting to pull you internationally to expand their efforts in this area?

Michael Gianoni -- President and Chief Executive Officer

Sure. So the YourCause acquisition was completed January and we remain super excited about that space and that business. It continues to grow nicely. We continue to sign-up a lot of customers. There is a big backlog in implementations that we're driving -- we're adding to sales headcount in geographic regions. The International expansion is just sort of a natural next step. We are already international. Platform is already international but our large customers have international footprints. We've got over 100 customers on the platform that are Fortune 500 companies.

And so, they need that international support. So we've been driving sort of a localization model here through both product functionality and partners in market. I think we mentioned a couple of partners; one in Canada,, Charity Trust in the UK, and a new partner in India called GiveIndia and it's sort of a combination of our sort of focus on expanding internationally, organically and helping our large customers and prospective large customers who have a really solid international footprint.

Ryan MacDonald -- Needham & Company -- Analyst

Got it. And then, just a quick follow-up for Tony. You mentioned that during the bbcon that less than half of the direct sales reps run a full quota for 2019. Can you give us a sense on what that progression looks like as these sales reps are ramping to full productivity and perhaps what expectations are for percent of reps that will be on a full quota into next year?

Anthony Boor -- Chief Financial Officer, and Executive Vice President of Finance and Administration

Yeah. Ryan, we talked about at the Investor session that going into this year, in January, we made kind of the last big organizational change, which is reallocated a lot of overlay and associate account exec roles in the full bag carrying sales roles. And so that created a lot of what we would look at as attrition. We look at attrition both external, do I lose the employee, the sales person to another organization? But also, do they have territory change or did they change roles?

And so, going into this year with that large reallocation of the workforce, we anticipated much higher overall attrition in territory for the team. We've tracked kind of right in line with those expectations. And what that resulted in then is what we call as productive full-time equivalent sales reps that we had significantly less fully productive reps because they were reramping in their new role or new territory.

It takes -- depending on the role, it takes somewhere between six to nine months, 12 months probably on the outside to ramp to full quota. We made those changes largely in the first part of the year. We would have had some other attrition that resulted from all those changes, kind of mid-year. So I'd expect -- you know, when you look at it in the whole, we will see a nice fairly significant increase in productive FTEs exiting the year. It probably continues through the first quarter before we get through all of this transition that we had this year, when you think about that six to nine to 12-month transition period.

So I think by the time we get to Q2, all this disruption we had this year from the last big organizational change should be behind us. And then we're really dealing with just normal attrition, which we're trying to make sure we don't create any more of that internally than we absolutely have to. And then obviously trying to control the loss of our employees going to third parties, which we've been able to do a pretty good job of compared to peers. So I think we'll see a much lower overall attrition in 2020 than we saw this year, which should bode well for productivity and productive reps as well.

Michael Gianoni -- President and Chief Executive Officer

Yeah, I'll just add to that. We're not standing up a new vertical market either. So the most recent one we created was the faith-based market. But if you go back five years to today, we had no vertical markets. And today, sales are organized in our vertical markets K-12, higher ed, healthcare, arts and cultural foundations, faith-based etc. and they're dedicated to the markets. And what we've seen happen is it builds significant presence in those markets and they're all very different; conferences are different, language is different, competitors are different.

And as we build muscle in each of those markets, we become a lot more competitive, but it will cause some disruption in sales productivity when you move folks around. But when they settle in with the market and they get some tenure in the market, we see productivity go up, and our ability to have a bigger presence go up in those markets. So to add on to what Tony said is, we are not standing up a new vertical market, we're settling into the markets that we're currently in and we've already stood up.


We will now take our next question from Kirk Materne from Evercore. Your line is open. Please go ahead.

Kirk Materne -- Evercore ISI -- Analyst

Yeah, thanks. Maybe I'll just start actually with a follow-up for Tony on that last question about sort of productive sales reps. I know you and guys have called out the fact that there is a lot of moving parts this year. I guess just the reps that have been put in seats or have been there for six to 12 -- six to call it nine months or even six months; is the kind of pipeline build you're seeing in line with expectations? Meaning, obviously a lot of investments in these sales reps, so is the pipeline -- meaning has the investment sort of matching up to what you hope at least in terms of pipeline build because they obviously need a pipeline going into next year if they're going to be productive?

Anthony Boor -- Chief Financial Officer, and Executive Vice President of Finance and Administration

Yeah. Kirk, we -- I think we've got this question talked about a little bit maybe at the investor sessions as well, but we've seen pretty good productivity and pipeline build. We measure kind of that ramp across many different metrics; are they getting enough leads generated? Is pipeline building? Is pipeline moving to close? Are they closing deals? All of those, so we've got a really robust process around that to measure it and we've been doing really well.

There's been a couple of areas that have been a little bit soft. One was just waiting for the product release in the faith-market. Now that we have general market availability, we believe the traction will increase significantly there. And then, one of the other areas we created a new role we'd never had, which was a prospect rep, that's just kind of telesales. And they were, again, largely in the faith-based market because we didn't have general availability of the product. They were having a little tougher time ramping prior to that.

With that market launch, I think we'll see that pick up significantly. But everywhere else, kind of tracking right to the expectation, which would be what I would expect, because we built the ramps for that based upon our historical performance. And so we would have had to go backwards if we wouldn't have been in line with those ramping activities [Phonetic].

Kirk Materne -- Evercore ISI -- Analyst

That's helpful. I appreciate the color. And then just maybe Mike, as you head into next year, obviously you've Church Management now, you've a pretty broad suite of products. I guess what's just sort of your thought process on M&A versus just kind of focusing on the suite of products you have already. it's obviously additive from a TAM perspective but I'd imagine it can at times be disruptive from service sales perspective. You're adding new products to someone's bag. So I guess just how are you kind of balancing that kind of thought process these days as you head into 2020?

Michael Gianoni -- President and Chief Executive Officer

Sure. It's been a key part of our strategy since I came, which is to have TAM expansion in our vertical markets. There is still more opportunity to do that without standing up a new vertical market and we don't cover a 100% of the IT spend in every market that we're in. So it still represents opportunity for us. It's something that we're actively involved in, just given all the transactions that happened in the software world.

People know we're an acquirer of vertical software companies and so we will continue to be active and look and learn and we can expand TAM in the vertical markets we're in, and so it's not something that's ultimately required for us to hit our objectives, but we focus on how do we fill the needs of our customers? How do we create an environment where our current solutions are stickier? And integration, at the end of the day wins for a lot of our customers and our cloud solutions. And so, it's still an active area for us and we remain active in that part of our business.

Kirk Materne -- Evercore ISI -- Analyst

Okay. Thanks for taking the questions. Appreciate it.

Michael Gianoni -- President and Chief Executive Officer

Yes, you bet.

Anthony Boor -- Chief Financial Officer, and Executive Vice President of Finance and Administration

Thanks Kirk.


As there are no further questions in the queue, I would like to turn the call back over to Mike Gianoni for any additional or closing remarks.

Michael Gianoni -- President and Chief Executive Officer

Thanks operator. I'll just conclude by saying, I'm pleased with our execution through the third quarter of the year. It's clear our progress we've made is having a major impact on the individuals that use our solutions every day. I'm excited about the advancement of Church Management, our higher-ed platform, and what's happening with YourCause. These investments we're making will ultimately create lasting value for our customers, employees and shareholders. Tony and I look forward to updating you on our progress on the next call. Thanks, everyone.


[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Mark Furlong -- Director of Investor Relations

Michael Gianoni -- President and Chief Executive Officer

Anthony Boor -- Chief Financial Officer, and Executive Vice President of Finance and Administration

Brian Peterson -- Raymond James -- Analyst

Matt VanVliet -- Stifel, Nicolaus & Company -- Analyst

James Rutherford -- Stephens, Inc. -- Analyst

Matthew Lemenager -- Robert W. Baird & Co., Inc. -- Analyst

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

Ryan MacDonald -- Needham & Company -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

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