Blackboard Inc Q4 Earnings Call Transcript

123jump.com Staff
10 Feb, 2010
New York City

Blackboard fourth quarter revenue increased 18% to $100 million with net income jumping nearly 300% to $7.7 million. Earnings per share were 23 cents against 6 cents in the prior year quarter. Total year revenue increased 21% to $377 million with net income touching $7.9 million.

Blackboard, Inc. ((BBBB))
Q4 2009 Earnings Call Transcript
February 3, 2010 4:30 p.m. ET

Executives

Michael Stanton – Senior VP, Treasury and Investor Relations
Michael Chasen – President and Chief Executive Officer
Mike Beach – Chief Financial Officer
John Kinzer – Senior VP, Finance

Analysts

Amy Junker – Robert W. Baird & Co
Michael Nemeroff – Wedbush Morgan Securities
Terry Tillman – Raymond James
Jeff Lee – Signal Hill Capital
Tom Roderick – Thomas Weisel Partners
Kash Rangan – Merrill Lynch
Brandon Dobell – William Blair & Co

Presentation

Operator

Welcome to Blackboard’s fourth quarter 2009 earnings conference call. I will now turn the call over to Mr. Michael Stanton, Senior Vice President of Blackboard, Inc.

Michael Stanton – Senior VP of Investor Relations

Thanks, Tisha. Hello, and thank you for joining us today for Blackboard’s fourth quarter year-end conference call. I’d like to remind everyone that except for historical information presented, the matters discussed today may contain forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, including financial guidance for 2010.

Such statements are based upon management’s current expectations and are subject to a number of risks and uncertainties that could cause actual performance and results to differ materially from those disclosed in the forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are delays in product development, undetected software, competitive pressures, technical difficulties, market acceptance, availability of technical personnel, changes in client requirements, risks of international operations, general economic conditions and such other risks as described in the Risk Factors section of Blackboard’s most recent Form 10-Q on file with the SEC.

Blackboard undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.

A few notes related to the metrics we will provide today. First, we will be discussing non-GAAP adjusted net income and non-GAAP adjusted net income per share on this call as additional information regarding our results. These measures are not in accordance with or an alternative for GAAP and may be different from other non-GAAP measures used by other companies. We believe that the presentation of these non-GAAP financial measures provide useful information regarding additional financial and business trends relating to the company’s financial condition and results of operations. A reconciliation of GAAP and non-GAAP metrics has been provided in today’s earnings press release, which is available on the website. Management will also refer to EBITA and EBITDA during the course of today’s call, both of which exclude stock based compensation.

Another note is – relates to our contract value, which we’ll also discuss today. Our contract value represents the annualized recurrent ratable revenue under existing contracts with clients in effect at the end of the quarter without regard to the remaining duration or renewal of such agreements. This is not intended by management for the estimation of, or as a proxy for future revenue to be recognized, but we do believe it is a useful tool for investors to evaluate our current operating performance. We have once again provided supplemental information related to licenses and contract value on the Investor Center section of our website at investor.blackboard.com. The document is titled Blackboard Fourth Quarter 2009 Metrics.

On today’s call are Michael Chasen, President and CEO; Mike Beach, our Chief Financial Officer; and John Kinzer, who as we announced today, will be succeeding Mike as CFO on March 1 of 2010.

At this time, I’d like to turn the call over to Michael Chasen. Michael?

Michael Chasen – Chief Executive Officer

Thanks, Michael. Good afternoon, everyone. We are very pleased with our financial results for the fourth quarter and the full year, which was above our prior guidance. While the business environment was challenging during the year, Blackboard performed very well with strong revenue growth, increased profitability and expanded operating margins.

During the year, we introduced new products and services, increased our addressable market and enhancing the value we bring to our customers. Our results demonstrate the strength of our annual subscription model and the visibility and stability that it provides. Revenue for the fourth quarter was $100 million, an increase of 18% over the fourth quarter of 2008. Non-GAAP adjusted net income was $16.7 million or $0.49 per diluted share for the quarter. Our cash flow from operations was also ahead of our expectations, coming in at $20 million for the quarter and $109.9 million for the full year.

As you can see from our results, despite the range of economic challenges we faced during the year, Blackboard’s Technologies and Services continue to see strong demand. We are well positioned to continue to meet the evolving needs of our clients and prospects and deliver strong financial results to our shareholders in 2010.

In terms of our U.S. higher education market, we added a few new client relationships, as well as expanded existing relationships with a number of institutions including Midwestern University, a private institution serving nearly 4,000 students from its Arizona and Illinois campuses, upgraded to the Enterprise Blackboard Learn platform for student engagement, as well as Blackboard Managed Hosting. Additionally, Concordia University in Illinois licensed the entire Blackboard Learn platform including the Outcomes Module. Concordia intends to use the Outcomes Module to automate the many manual processes associated with the accreditation process. School leaders are also interested in building a culture of continuous improvement and they see the Outcomes Module as part of their cultural change.

We had a number of large deals for Blackboard Transact in the quarter, including two new clients, Liberty University in Virginia and Saint Augustine’s College in North Carolina.

Finally, we had a number of new sales of our Blackboard Mobile offering to clients including the University of Rochester, Northwestern University, the University of South Florida and Louisiana State University. I think the LSU example is particularly noteworthy, as this is yet another example of a non-Blackboard Learn institution who purchases Blackboard Mobile.

On the international front, I’d like to highlight Chulalongkorn University in Thailand was a significant win for our Asia Pacific region and represents another sale of the Blackboard Outcomes Module in this part of the world. In the United Kingdom, South Thames College is a new client win in the further education market licensing Blackboard Learn.

Finally, Universidad Intercontinental Giordano Bruno in Mexico licensed the entire Blackboard Learn platform as well as Blackboard Managed Hosting and Blackboard Mobile. UIGB is the first full-distance education school in Mexico and will begin serving the country this year with plans for greater expansion into the Latin America region. In K-12, our new sales included the Florida Virtual School, the nation’s oldest and largest virtual school, which licensed Blackboard Learn as the school’s online learning platform in an effort to include the virtual school experience for its students. This was a tremendous K-12 win for us in the fourth quarter as we continue to partner with leading virtual schools across the United States. Lexington County School District 1 in South Carolina, which also became a new client in the quarter, licensed the Enterprise Blackboard Learn module to serve their 21,000 students. And finally, the District of Columbia Public Schools licensed Blackboard Connect to provide mass-notification services to its students, faculty and parents.

Blackboard Professional Education team, or ProEd, wrapped up a solid 2009 with several new and expansion wins in the fourth quarter. In particular, I want to highlight Westwood College, which licensed the Blackboard Learn product. The Blackboard Learn platform will enable Westwood to keep students actively engaged, make it easier for faculty to assess student learning and provide a more personalized learning experience that will help increase overall student success and retention rates.

Moving on to our quarterly metrics, we ended the quarter with 7,693 Enterprise category licenses. Breaking out these licenses we had 2,839 licenses of the Enterprise Blackboard Learn products, 1,018 licenses of the Blackboard Community Module, 637 licenses of Blackboard Content Module, 37 licenses of Blackboard Outcomes Module, 465 licenses of Blackboard Transact and 2,697 licenses of Blackboard Connect offerings. In terms of the Blackboard Learn basic products, we ended the year with 517 licenses. The total number of licenses, including basic licenses at the end of the quarter was 8,210. In terms of our Managed Hosting business, we finished the quarter with 866 hosted clients, which is a 14% increase over last year.

As we indicated at this time last year, this will be the last time we report individual product line license metrics. The increasing variability in licensed pricing and the number of new extensions and products we are continuing to bring to market makes individual license units less relevant and less useful for modeling our business. Given these dynamics, beginning with our results in the first quarter of 2010, on a quarterly basis, we’ll be reporting the total number of Enterprise licenses and contract value. On an annual basis, we will continue to provide client counts and annual retention rates.

We ended 2009 with 5,756 clients. As for contract value, we finished the quarter with an annualized contract value of $335 million, an increase of 12% over the prior year period. Average contract value per client was $58,200 and average contract value per license was $40,800 at the end of the fourth quarter. For the year, our renewal rate was 92%, which was in line with our prior year renewal rate. Our total headcount at the end of the fourth quarter was 1,183 people. We ended the quarter with 236 people in sales, 96 in marketing and business development, 269 in product development, 260 in support managed hosting and production and 139 in special services and 183 in operations.

As we created our budget and plans for 2010 and in turn our financial guidance, we started with a baseline assumption that the general business environment will be more stable in 2010 than what we experienced in 2009. There may be pockets of education-related headline risk in some states, but, overall, we feel that it should be manageable. We continue to believe the education market is resilient to the economic slowdown and we are well positioned to achieve strong revenue growth in 2010. The core factors driving our business continue to be; one, the products we deliver are mission-critical and core to our clients’ ability to deliver on their business, whether it is to enable teaching and learning online, providing mass communication services or helping schools develop their mobile strategies, our technologies are core. And even in tough economic times, institutions will invest in these core technologies.

Two, our technology has a meaningful ROI argument that more than justifies the cost of these solutions. Three, we have expanded our solution offering with the launch of Blackboard Mobile, increasing our addressable market and the value we provide to our clients. Educational institutions are rapidly adopting Mobile strategies. With the addition of Blackboard Mobile to our product offering, we see significant opportunity to take a leadership position in Mobile learning, helping to define and capture the market. We have been working on some exciting new initiatives in the Mobile space that will lead to new products and be a long-term growth driver for the company.

And fourth, we have a large and diversified client base of more than 5,700 institutions into which we can up-sell and cross-sell our solution and we have achieved a consistent, annual renewal rate in excess of 90%.

Finally, I want to also highlight a very important executive transition taking place at Blackboard. As you saw in this afternoon’s press release, Mike Beach will be succeeded by our current Senior Vice President of Finance, John Kinzer, as CFO effective March 01, 2010. Mike is a great personal friend and has been critical to our success at Blackboard. I wish Mike and his wife, Katie the very best. Fortunately, Mike has built and maintained a stellar finance and accounting organization at all level and we’re fortunate to have John Kinzer as our new Chief Financial Officer. John has been with Blackboard since 2001 and has worked closely with Mike and me over the years and has been instrumental in driving Blackboard’s financial discipline and overall success.

As part of the planned transition process, Mike will stand as CFO until the end of the month and wrap up the year-end audit. Beginning March 01, 2010, John will take over as CFO and Mike will be available in an advisory capacity through the second quarter. I fully expect that this transition will be a smooth and efficient one given John’s deep involvement on the executive team and the strong finance and accounting team he has working with him.

In addition to Kinzer’s promotion, Michael Stanton has been appointed by Blackboard’s Board of Directors as Treasurer. As you all know, Michael has managed Blackboard’s banking and investor relation’s efforts for ten years and also led our global treasury operations for the past two years. I want to congratulate both John and Michael and express my confidence in each of them.

With that I’m pleased to hand it over to Mike Beach, one last time, to detail our financial results and then to John Kinzer, who will provide you with our forward-looking guidance. Mike?

Mike Beach – Chief Financial Officer

Michael, thank you for the kind words. Before we get in the results for the quarter, I want to say it’s been incredible experience to be part of Blackboard since 2001 and I’m proud of what we’ve accomplished. My decision to leave Blackboard has been very difficult, but now is a good time to slow down for a bit and focus on my family. I’m fully committed to support Michael and John to ensure a smooth transition and believe this will happen in short order.

Now let’s talk about some very good results for the fourth quarter. Revenue for the fourth quarter of 2009 was $100 million, up 18% from last year. Product revenue for the quarter was $90.8 million, representing an increase of 17% over the same quarter of 2008. Professional service revenue for the quarter was $9.3 million, which represents an increase of 22% over the prior year. In terms of revenue characterization, we also break out our revenues by the nature of the revenue stream, which includes ratable recurring, ratable non-recurring and other revenues. For the quarter, ratable recurring revenues increased 19% to $81.6 million, as compared to $68.4 million in the same quarter of 2008. Ratable non-recurring revenues decreased 11% to $6.6 million, as compared to $7.4 million in the same quarter of 2008. And other revenues increased 29% to $11.9 million, as compared to $9.2 million in the same quarter of 2008.

Moving on to gross profit, our gross profit for the fourth quarter, excluding stock-based compensation and the amortization of acquired intangibles was $71.5 million, compared to $59.3 million in the same quarter of 2008, representing an increase of 21%. For the quarter, our gross margin was 72%, excluding stock-based compensation and the amortization of acquired intangibles.

Total operating expenses, excluding the cost of revenues, stock-based compensation and the amortization of acquired intangibles were $47.2 million for the quarter, representing an increase of 10%, as compared to $42.9 million in the same quarter of 2008. For the quarter, we incurred stock-based compensation expense of $4 million and intangible amortization expense of $9.3 million. Our GAAP net income for the quarter was $7.7 million compared to net income of $1.8 million in the same quarter of 2008. GAAP net income for basic and diluted share was $0.24 and $0.23, respectively. Non-GAAP adjusted net income for the quarter was $16.7 million or $0.49 per diluted share.

In terms of the balance sheet, we had cash and cash equivalents of $167.4 million at the end of 2009. Accounts receivables decreased to $69.1 million at the end of 2009 from $80 million at the end of 2008, driven by our significantly improved collections. Current deferred revenues increased from $166.7 million at December 31, 2008, to $186.7 million at December 31, 2009, representing a 12% increase. You should note that our 2009 current deferred revenues reflect the netting of deferred revenues and accounts receivable for contracted revenues with future payment terms, which we believe provides better disclosure. The financial tables in today’s press release have reclassified prior periods to conform to this presentation. We realize that Wall Street’s models reflect the prior December 31, 2008, current deferred revenue balance. Accordingly, we thought it would be helpful to bridge you to a comparable ending balance for 2009. Had we not changed our methodology in 2009, our ending current deferred revenue as of December 31, 2009, would have been $13 million higher or $199 million at year end.

In addition, we are also providing more detail on the changes in our current deferred revenues related to ratable recurring revenues. Current deferred revenues related to ratable recurring revenues increased from $149.3 million at the end of December 31, 2008 to $170.5 million at December 31, 2009, representing an increase of 14%. Moving on to cash flow, cash flow provided by operations totaled $20 million for the fourth quarter. Capital expenditures were $3 million in the fourth quarter.

Now turning to the full year financials, for the year ended December 31, 2009, revenue was $377 million, an increase of 21% over 2008. GAAP net income was $7.9 million for the full year of 2009 and GAAP net income per basic and diluted share was $0.25 and $0.24 respectively. Non-GAAP adjusted net income was $47 million and non-GAAP adjusted net income per diluted share was $1.42. Cash flow provided by operations was very strong at $109.9 million for the year, exceeding our guidance and representing a 38% increase compared to 2008.

Now, I’m very pleased to turn the call over to John Kinzer to take you through our guidance. John, congratulations.

John Kinzer – Senior VP, Finance

Thanks, Mike. I’m very excited and honored for the opportunity to move into the CFO position at Blackboard and I look forward to working more closely with all our analysts and investors. I am confident this will be a smooth transition as we have a great finance and accounting team in place.

For the first quarter of 2010, we expect revenue of $98.6 million to $102.6 million, amortization of acquired intangibles of approximately $8.9 million, stock-based compensation expense of approximately $5.1 million, GAAP net income of $3.2 million to $5.7 million, resulting in GAAP net income per diluted share of $0.09 to $0.16, which is based on an estimated 34.8 million diluted shares and an estimated effective tax rate of approximately 36%, non-GAAP adjusted net income of $12.5 million to $15.1 million and non-GAAP adjusted net income per diluted share of $0.36 to $0.43 based on an estimated 34.8 million diluted shares and an estimated effective tax rate of approximately 38.5%.

For the full year 2010, we expect revenue of $424 million to $440 million, stock-based compensation expense of approximately $20.2 million, amortization of acquired intangibles of approximately $32.3 million, GAAP net income of $23.1 million to $33.3 million, resulting in GAAP net income per diluted share of $0.65 to $0.94, which is based on an estimated 35.5 million diluted shares and an estimated effective rate of approximately 36%, non-GAAP adjusted net income of $58.6 million to $68.8 million, non-GAAP adjusted net income per diluted share of $1.65 to $1.94 based on an estimated 35.5 million diluted shares and an estimated effective tax rate of approximately 38%. Cash flow from operations of $100 million to $110 million and capital expenditures will represent approximately 4% to 5% of total revenue.

One note on our cash flow guidance, as we have highlighted in the past year, our cash taxes will increase significantly in 2010 as compared to 2009. Cash tax payments in 2010 are expected to be approximately $20 million more than in 2009. From a quarterly perspective, there are a couple of items that will impact our normal seasonality and I would like to point them out as you fine-tune your models. The first note relates to the timing of certain expenses in the first half of 2010. Due to compensation adjustments, marketing events and hiring in sales in Blackboard Mobile, investors should expect second quarter earnings to be essentially flat as compared to our first quarter guidance.

Second, in today’s press release, we highlighted that as of January 1, 2010, Blackboard has adopted Accounting Standards Update 2009-13 and 2009-14 and will apply them prospectively. Under the new accounting standards, the revenue and product cost for hardware and software sales in the Blackboard Transact product line will generally be recognized upfront following delivery to customers. Before adoption of the new accounting standards, the company generally recognized revenue on such sales ratably over a period of time. The adoption of ASU 2009-13 and 14 did not impact the financial results for fiscal year 2009.

The seasonality of our revenue will be impacted by this adoption, which will result in a one-year benefit in our Blackboard Transact software revenue during 2010. We expect an estimated benefit of $8 million in additional Blackboard Transact software revenue in the third quarter of 2010. In the fourth quarter, however, our normal revenue trend will be negatively impacted by an estimated $3 million reduction in software revenue. The impact of the adoption will not be material to software revenue in the first half of the year.

Moving to the full year 2010, at the midpoint of our full year guidance, we expect to deliver EBITA margins of 25% and EBITDA margin of 30%, which were almost 200 basis points higher than pro forma margin levels for 2009. As you can see from our financial guidance, we expect to continue to deliver the financial results our shareholders have come to expect from us in terms of revenue growth and increasing margin expansion.

Again, I’m very excited with the opportunity to work with all of you more closely as Blackboard’s Chief Financial Officer. I believe that the company is well positioned for a continued success given the strength of our offerings and our business model.

That concludes my remarks for now. Now, let me hand it back to Michael Stanton for closing. Michael?

Michael Stanton

Thanks, John. We will be visiting investors in New York and Boston over the next two days. Additionally, the four of us, Michael, Mike, myself and John, will be at the Thomas Weisel Technology Conference on Monday of next week and the Deutsche Bank Small and Mid Cap Conference in Naples on Wednesday.

That concludes our formal remarks. Operator, Tisha, we are ready to begin Q&A. Thank you very much.

Question-and-Answer Session

Operator

(Operator instructions) Ladies and gentlemen if you have a question please press “*1”. If your question has been answered or you wish to withdraw your question from the queue press “*2”. Again that’s *1 and please standby for for your first question. Your first question comes from the line of Amy Junker with Robert W. Baird. Please proceed.

Amy Junker – Robert W. Baird & Co

Thanks. First, I just want to say, Mike, best of luck in the future. We’ve enjoyed working with you. And, John, congratulations for the promotion, especially given that you don’t have to change your first name to Michael. So, it’s exciting to see that trend break there.

John Kinzer

Thanks, Amy.

Mike Beach

Thank you.

Amy Junker – Robert W. Baird & Co

Just a couple of quick questions, first, I guess I was a little surprised to see that the – your enterprise licenses were down on the core product, on the Learn product. If I recall, this isn’t typically a high churn quarter. Is there something with the ANGEL acquisition that could have caused that or is there something you could point to which would have caused that to happen?

Michael Chasen

No, really it’s just part of our normal seasonality. As you know, Q3 and it tails into the very beginning of Q4, is our big renewal period. So even though we sell equally over the year, all of our renewals end up getting date-adjusted to Q3, some of that in the very beginning of Q4. So even though we obviously are adding a number of new clients in Q4, it’s certainly lessened by the fact that we just have a lot of renewals taking place right there. Again, the other trend that we’re continuing to see is we are obviously continuing to add very large dollar additional clients while seeing some of the drop-off of some of our smaller basic level clients, which is a trend that’s obviously continued for some while. We actually are up over 100 enterprise total licenses for the quarter and obviously we continue to see strong growth in contract value. So we’re very happy with the direction of all of those metrics.

Amy Junker – Robert W. Baird & Co

Great, and that was my – my second question is on the cross selling, that looks to be very strong. Are there specific types of clients that you’re seeing that more or less interest in the cross-selling? We’ve noticed that large state universities are implementing huge tuition increases. So you’re potentially seeing more traction there or maybe the opposite because the budgets are tough? Or do you see – do you have any additional visibility there?

Michael Chasen

All those are good points and certainly they’re all actually factors, but I couldn’t tell you that we’re seeing more of the demand for cross-selling and up-selling in the large schools versus the small schools. A lot of the large schools are coming and talking to us because they need better ways to more effectively reach out to their student population. They’re looking for technologies that can implement the cost savings and so of course they’re looking to our various technology solutions.

Similarly, a lot of the small schools, to make sure that they’re seeing their enrollments increase and strong interest in their student body, they are looking for high touch solutions, ways that they can offer better service and support to their student body. So again they’re also looking at Blackboard technologies. So I think all of those things end up becoming factored into schools. Michael said they’re looking to decide what type of Blackboard technology should be deployed, but I don’t think we’re seeing it in one area versus another. And let me actually tie that also to the end of the last question that you have asked specifically just about ANGEL. No, we’re continuing to see a very high renewal rate and strong interest from the clients that were previously ANGEL clients, but moving forward, we think we’ve made them part of the Blackboard family very well and seeing a strong interest from them as well.

Amy Junker – Robert W. Baird & Co

Great, and one last one and then I’ll hand it over. With regard to the stimulus, are you assuming – I’m guessing the answer is no, but any benefit from stimulus funds in 2010? And as you think forward to that, do you think there’s opportunity to secure either rates for the top funds in K through 12 or any of the 500 million in investing in innovation funds as you head towards the end of 2010 or even into 2011?

Michael Chasen

No. As we’ve commented on previous calls, we’re certainly involved in discussions at high-level state and consortia talking with multiple universities about ways in which they might be able to use budgeted funds towards improving education and certainly some piece of that includes the thoughts on stimulus. That being said, we don’t see any immediate effect of the stimulus dollars to institutions on our sales pipeline and there’s nothing currently in our budget. But we are certainly involved in the right conversations.

Amy Junker – Robert W. Baird & Co

Great, thanks. Appreciate it.

Operator

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

Michael Nemeroff – Wedbush Morgan Securities

Thanks for taking my questions. First, Mike Beach, best of luck with everything and John Kinzer, looking forward to working with you. Mike Chasen, can you talk about open source? Over the last couple weeks, there’s been increasing chatter about its competitiveness against you and how you plan on competing with the cheaper option, which it is? And whether you’re seeing or hearing anything from customers that would make you think it would be a bigger threat to customers churning when the environment improves? And then I’ve got a follow-up.

Michael Chasen

Sure. Certainly, I can tell you that open source is a competitive threat to Blackboard, but I think as our renewal numbers show, again, we have 92% renewal rate. We’re not seeing any increase in schools that are looking at leaving Blackboard technologies for open source solutions. The other point that I can give you is that I can certainly tell you that with the release of Blackboard 9 and the early feedback we’re getting through the beta program of Blackboard 9.1, we really have brought together the best features and functionality of Blackboard and WebCT in a true next-generation teaching and learning environment that I believe is steps ahead of anything else on the market and certainly steps ahead of any of the half-baked open source solutions that are currently out there.

But, even separating the great technology investments that we’ve been making and I think the full solution suite that we offer, at the end of the day, a lot of our clients continue to remain clients of Blackboard because when they are deploying these type of solutions on their campus, they’re looking for a commercial provider that can stand by them and provide them not only the technology, but the support and service they need and I think that that continues to be Blackboard and I think that shows through in our numbers.

Michael Nemeroff – Wedbush Morgan Securities

That’s great. And then for John, you talked about the guidance going forward. In the past, I think you’ve talked about low double-digits contract value growth. Obviously the company peaked a couple years ago a little north of 20%. How long do you think it’s going to take to reaccelerate that growth rate maybe into the mid-teens from the low double-digits that it is now? And what are your thoughts on that?

John Kinzer

I think, given the economy, I think we’re in the foreseeable future; we’re at about the range we are. It would take some stimulus and the economy picking up. So it would be a longer-term trend.

Michael Nemeroff – Wedbush Morgan Securities

Okay. Then just one last one, Mike, on – you didn’t discuss the Mobile product at all. If you could just comment on how things are going there? How many customers maybe? And, just a little color on that. Thanks.

Michael Chasen

Yeah, I thought I had certainly lightly touched upon it in the context of the call. We continue to see really strong momentum. We’re up over 70 institutions now that are using our technology. More and more are getting deployed every week. You can actually visit them just on the Apple iPhone store or on the different types of distribution of mobile apps. There are a couple of examples that I gave. This last quarter we added University of Rochester, Northwestern University and the University of South Florida, but the one that I want to highlight is Louisiana State University. That’s actually yet another school that was not a Blackboard Learn school that’s come to us and is purchasing our Blackboard Mobile solution.

So, I think what we’re seeing is not only very, very strong interest and I can tell you a very strong pipeline of our existing clients that, basically every time they see the technology they recognize this is the direction they need to move into, but also institutions that are not clients of Blackboard coming into Blackboard as Blackboard Mobile as their entry point.

To give you an even a little bit more color on that, we believe that the same way that every institution today has a website, because that’s the way that a lot of students find out about the school or that’s the way that the school display their information out to the public, is the same type of demand longer term we’re going to see for mobile apps. We believe that every school eventually is going to need this type of technology. And right now even though we may only have a small set of schools using our technology, I believe that we’re the market leader. Quite frankly, our technology we’ve developed stands far apart from any of the other home-grown solutions or other smaller competitors that we’re seeing out there. And we’re already managing to establish a name for ourselves in the mobile education industry.

Michael Nemeroff – Wedbush Morgan Securities

Great, thanks, guys. Thanks for taking my questions.

Operator

Your next question comes from the line of Terry Tillman with Raymond James. Please proceed.

Terry Tillman – Raymond James

Yeah. Thanks, guys. I guess I’d be remiss if I didn’t also say congrats, John and good luck, Mike. Just two easy questions, first, in terms of the ProEd business. Could you maybe give us a sense, how big that is now? What is it’s relative – what it’s growth rate was like? And is it starting to become – is there a shift going on to where that’s becoming bigger and bigger vis-à-vis like U.S. Higher Ed, International, et cetera?

Michael Chasen

Right now the professional education business, which we define as government and corporations and military institutions as well as the commercial education providers, is a very exciting part of our business, but really it’s less than 10% of our overall revenues. Now certainly because it’s such a small number, I think it is probably one of the faster growing parts of our business.

And then the thing that is I think surprising is, especially in this economic downturn – slowdown, we do continue to see increasing demand in this part of our business. So, whether it’s institutions that are looking to deploy our technology for their corporate training or military institutions that are using it to reach out to the people that are in the field with our technology. Or we talked also, about the Westwood, a very exciting sale in Q4. I mean, we are seeing strong demand, but I don’t want to overstate it, because right now it’s still less than 10% of our overall revenue.

Terry Tillman – Raymond James

Got it, and I guess, Michael Stanton, I don’t know if this would be for you, but in terms of stimulus initiatives, is that potentially helpful, hurtful, or neutral to what we had talked a lot in the past about, but not as much now, statewide initiatives? I mean how does it maybe help that K-20 kind of idea, like New Mexico in the past? Thanks.

Michael Stanton

Yeah. No, Terry, it''s a great question. So, just really quickly for everyone on Race to the Top, Race to the Top deadline for submissions for the states was January 19. We saw, I think it was, 40 or 41 states apply for the 4.3 billion. And just to remind everyone that one of the four main criteria in Race to the Top was establishing P-20 or K through 20 data systems and reporting and as well as having a focus on improving future effectiveness, college-ready standards. Of those 41 states, 10 of the states that we are keenly focused on did apply. And there are 10 states that do have very real K through 20 initiatives. Among them is a state like New Mexico. New Mexico obviously just given its population and that’s how this is formulaically driven.

If they were to be a successful grant winner, they would get a grant somewhere in the neighborhood of 20 million to 75 million along with a whole host of states that are less populated states. But the ranges for larger states, states like California, Texas, New York and Florida, those grants could be in the range of $350 million to $700 million. Again, not all of that is going to technology but certainly we feel good about how we’re aligning ourselves and positioning ourselves. And I would say to answer your question it is net positive for us at this stage of the game. And we’ll see in April when the initial decisions come out for phase one awards for Race to the Top. I’d also tack on that the administration, the President, the State of the Union are just prior to requested an additional 1.4 billion for Race to the Top and the federal budget submission. He requested overall $3 billion increase for funding of education under Elementary and Secondary Education Act. So I think generally positive trends on the federal side. At the state level, you still got a lot of state-level budget struggles. Next question?

Operator

Your next question comes from the line of Jeff Lee with Signal Hill. Please proceed.

Jeff Lee – Signal Hill Capital

Hi, best of luck to Mike Beach and congratulations to John also. Looks like a pretty strong quarter here, guys. I want to ask about IT budgets. What are you seeing with respect to college IT budgets? And obviously it looks like weak in 2009, but how is this affecting your purchase decisions going forward?

Michael Chasen

So I think the trend we really saw in 2009 to have the greatest effect was the fact that a lot of institutions were just unsure of what their budgets were going to be. So putting aside whether the budgets were going to be reduced or not, it was that uncertainty that led people to holding off on purchasing decisions. Towards the end of the year, as we talked about in previous calls, as the budget outlook became clear, certainly that’s helped them move forward then, either items that were going through the purchasing process or even just longer-term planning.

Now certainly we are still seeing pressure on institutional IT budgets, but when you take a look at that pressure, you have to counterbalance that by the type of solutions that we offer to the schools. A lot of schools, they’re looking for either additional ways to generate more revenue, they might put more of their classes online, expand their distance learning programs which would lead them to utilize Blackboard software. If they need to just be more effective, get more students in a class or allow the teachers to operate in a more economical way, then they offload more of the class to an online environment.

Schools are looking for ways to better manage their – the capital that their students are spending on campus, get some additional capital from school students. They might look to a Blackboard Transact system. So we can help institutions not only generate money but save money as well. So even as they’re getting that downward pressure on budget, we’re still seeing I think a strong amount of demand from institutions that are actually looking towards our product as a way to counterbalance that pressure.

Jeff Lee – Signal Hill Capital

Okay, great. Then the other thing I wanted to ask about was ANGEL and Desire2Learn cross-selling efforts. Where do you stand on that? My understanding was that those clients were needed to upgrade to Blackboard 9 before you could get some of that effort. So what were kind of the expectations you have when that might happen?

Michael Chasen

Yeah. I think you actually meant the ANGEL and WebCT clients. With the WebCT clients, it is the release of version 9 of Blackboard Learn and 9.1. We’ve now just for the first time reached that part of the development where the combined feature set that used to be the separate Blackboard and WebCT products is now available on a single solution. That has just recently come to market. The next upgrade too would come to market shortly.

So we are now just starting to see clients upgrade to that from WebCT. It’ll be a little bit longer before we’re going to get that ANGEL feature set included in the product as well to make it an easy transition for those clients. Now that being said, we are seeing cross sell opportunities with regards to Hosting or Blackboard Mobile, for example and some other services. So we certainly have been selling into that client base but I think that you’re right to identify that the full product cross selling of our other modules our Content Module, our Community Module, our Outcomes Module, we’re expecting that to happen post having both the ANGEL and the WebCT clients on the same product code base.

Jeff Lee – Signal Hill Capital

Thank you.

Operator

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

Tom Roderick – Thomas Weisel Partners

Hi, guys. Thanks. Good afternoon. I’ll echo the sentiments here in saying congrats to John and Mike, best of luck to you going forward. Maybe just digging in on, Amy’s, question earlier since I guess this is the last time we get to ask about the specific product line license build out. Could you provide a little bit of additional commentary around what drove the contract value growth? I guess if we look at the Enterprise license account themselves being down just a touch sequentially and the hosting up big, the conclusion might be to draw that hosting was a big driver of that contract value. Could you either confirm that? Or maybe offer a little bit of color as to what drove that big – that nice increase there in contract value? Thanks.

Michael Chasen

Sure. Well, I mean, obviously a good amount of the increase in contract value comes there because as we’re selling new clients or up selling existing clients, we’re doing so at a much larger dollar Enterprise software sale. Whether that’s Enterprise version of Blackboard Line with the – Blackboard Learn with additional modules like the community module, content module, or outcomes module, whether it’s the sale of hosting or now even the addition of mobile, we’re doing much larger contracts per client. Really where we’re seeing the fall off, as has been continuous over the last several years is a very, very low-end basic client. Some of them that have actually come to us even just through the WebCT acquisition and those are the unit numbers that have dropped off. But as you can see with the 92% renewal rate plus the strong growth in contract value we are adding several high dollar clients to our sales mix.

Tom Roderick – Thomas Weisel Partners

Okay, great. And in terms of thinking about – I know you don’t want to guide specifically on contract value growth itself, but thinking out to 2010 as we build our own models, is it still fairly appropriate to model contract value in the rough ballpark as the same organic growth as we’re seeing on the revenue line? Or are there any other dynamics that might impact the timing of that analysis?

John Kinzer

No. Tom, like I was saying before, definitely I think that contract value should grow in the relative range of what we’ve seen in the last couple quarters and we’ll expect to continue that throughout the year.

Tom Roderick – Thomas Weisel Partners

Okay. Last one from here just on the product road map. Can you provide some additional clarity around when we ought to expect a Blackboard 9.1? And any other product releases we ought to keep our eye out here for 2010?

Michael Chasen

I think you can expect to hear a lot more about Blackboard 9.1 relatively shortly. We’re towards the later stage of the development process, but I think you can also expect to hear about some additional mobile initiatives as well.

Tom Roderick – Thomas Weisel Partners

That’s great. Thanks, guys.

Operator

Your next question comes from the line of Kash Rangan with Merrill Lynch. Please proceed.

Kash Rangan – Merrill Lynch

Hi. Thank you very much. Michael, I was just wondering, just listening to the dollar amounts that the individual states stand to receive, it sounds like, they’re really big numbers and this could be a pretty pivotal event for you guys. I’m just wondering if you’ve taken the time to dig deeply through what might be the kind of technology considerations, what might be the new projects that these states might be investing in and if you can identify or if you’re in the process of identifying acquisitions that you may have to do in order to get specked into a wider range of the budget than you would otherwise be eligible to spec yourself into?

And also, secondarily, I noticed in the press release that you said the 2010 guidance should be reasonable. And then you also talked about how the stimulus could have an impact in 2011. Just wanted to make sure that those two are separate thoughts, that the stimulus does not really have any bearing on your ability to hit your 2010 targets and that you’re just making a comment about 2011? That’s it. Thanks.

Michael Chasen

As we said, we are currently involved in several high-level conversations at state levels and with large consortia of universities that are looking to implement educational standards across their various institutions. And certainly a big piece of that might be some of the stimulus funding as they’re looking at their long-term budget outlays. It’s really too early to tell at all whether that’s going to come through in 2010, or going to get allocated in 2010 for projects that might get funded in 2011.

So, none of that potential opportunity is in our budget for 2010. I would certainly say that you’re correct. This budget we proposed does not include any stimulus dollars, but if we did start to see some of that money flowing through, well there may be a chance of funds that hit in 2010. It’s a lot more likely that those projects actually start to appear in 2011.

Mike Beach

Just given the time line of race to the top funding and the fact that our revenues get recognized ratably and obviously in a more complex deal, there may be a delay in the initial revenue recognition. I think you should think about this as really impacting 2011 more so than 2010.

Kash Rangan – Merrill Lynch

Your contract bookings and the number of clients you report, etcetera, contract value.

Mike Beach

You would see it in contract value.

Kash Rangan – Merrill Lynch

Okay, great. And I think that’s it. Thank you very much.

Operator

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

Brandon Dobell – William Blair & Co

Hi, guys. And I’ll echo the congratulatory congratulations to everybody. As you think about the sales force this year, Michael, how should we think about retention, new additions, any change in strategy there given where you think the market’s going?

John Kinzer

Yeah, definitely, Brandon, this is John. We’re definitely going to be adding to the sales force this year. We think it’s going to be up about 8% to 9% throughout the year adding in strategic places like Mobile and things like that where we see great opportunity to accelerate our growth.

Brandon Dobell – William Blair & Co

Okay. I guess as a follow on to that, if Mobile represents the next kind of opportunity, obviously you’ve got to have the overall platform there, but kind of an average contract for somebody who’s doing Mobile and not much else or just want to do the basic, the Enterprise suite plus mobile. How do we think about that impact on the average revenue per client opportunity? Or what we may see from a contract value as that Mobile piece gets bigger?

Michael Stanton

I think that there are two ways that you have to actually look at the Mobile opportunity. So certainly the offering that we have today and one where we’re seeing a very large pipeline and a lot of demand is in our product that starts to extend bringing the institution and the campus to the student handheld, the smartphone device. And we think that’s a trend that’s going to continue. But in addition, Mobile isn’t just another product line of Blackboard. It’s also going to be an enhancement to all of our existing solutions.

So certainly we believe there’s an opportunity to sell another whole Enterprise license for this school around our Mobile solutions, but at the same time we believe it’s a way to make our Blackboard Learn, Blackboard Transact and Blackboard Connect products a lot more competitive as they’ll be large Mobile components to them. So an average institution now might be paying us additional an 30,000 for annual license fee for our Mobile offering. But what we’re hoping is to not only be able to leverage that as an additional product but to just be more competitive and up-sell and cross-sell some of our other solutions as well and they become more tightly integrated to a fully portable and Mobile solution.

Brandon Dobell – William Blair & Co

Great and then shifting gears for a second, looking at the hosting opportunity you’re now pushing around a quarter or so of the Blackboard Enterprise – I’m just going on rough numbers that may be used in the hosting solution for you guys. How far do you think you can get that? And the current economic environment has that created more of headwind for you, or more of an opportunity?

Michael Chasen

Look, I think that all of our clients should be utilizing our hosting services. To put it in the proper perspective, certainly a lot of institutions have their own IT shop and their own technology architecture and their own dedicated technology teams that have experience running Enterprise software. But there is a difference between Enterprise software and the solutions that we deploy in the campus because of the pure scalability that they need to manage, because of the number of students it touches on a daily basis because this is a solution that can’t go down not only at two o’clock in the afternoon but at two o’clock in the morning. Really having a team of dedicated experts that can monitor your connectivity and monitor the solution I think is critical to schools achieving real success. So we believe that we’re going to see a continued ramp-up in hosting as more and more schools move to it as they achieve different levels of scale. So we do think that there is the opportunity to sell a lot of additional hosting both towards current client base and we also see that we’re picking up, as more and more new clients come onboard, a greater percentage of them anecdotally are also moving on to our hosted solution at that time.

Mike Beach

And it’s important to keep in mind too that within the hosting unit count, that just says a – that just identifies a customer who has basic hosting or some type of hosting.

Brandon Dobell – William Blair & Co

Right.

Mike Beach

There’s the ability to up-sell them substantial other hosting services within there. So, there’s even additional up-sell opportunities within the hosted number for additional hosting.

Brandon Dobell – William Blair & Co

Okay and then final question for you again given the overall macro backdrop. Are you seeing any kind of – any changes in K-12 of post-secondary where institutions are banding together, think about doing more consortia buying either on a geographic basis or kind of like institution type? Or is it still kind of a one-off business? And if there is a trend towards consortia buying, how do you view that as an impact to the business model?

Michael Chasen

I think the federal funding might make it more likely in the future, but right now we’re seeing about the same amount of schools considering that type of consortia buying.

Brandon Dobell – William Blair & Co

Okay. Fair enough. Thanks, guys.

Operator

There are no further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Michael Chasen

Yeah, I’d like to thank everybody for taking the time to join us on today’s call. Obviously we’re very excited about the results we posted in Q4 and 2009 and are optimistic about the opportunities to showcase our expanded products and services in 2010. Thank you for the time today and we appreciate your participation on this call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect your lines.