Image source: The Motley Fool. Blackbaud Inc (NASDAQ: BLKB)Q1 2019 Earnings CallMay. 01, 2019, 8:00 a.m. ET Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks: Operator Good day and welcome to Blackbaud's First Quarter 2019 Earnings Call. Today's conference is being recorded. And at this time I would like to turn the call over to Mark Furlong. Please go ahead, Sir. Mark Furlong -- Director-Investor Relations Good morning, everyone. Thanks for joining us on Blackbaud's First Quarter 2019 Earnings Call. Today we will review our financial and operational results and provide commentary on our performance and the context of our 4-point growth strategy. Joining me on the call today are Mike Gianoni Blackbaud's President and CEO; and Tony Boor Blackbaud's Executive Vice President and CFO. Mike and Tony will make prepared comments and then we will open up the call for your questions. Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business. Unless otherwise specified we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered 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 marketing activity which is available on our Investor Relations website. During the second quarter our team will be attending Global Consumer Technology and Services Conference in New York and Steve will sector inside conference in Boston. We will also be holding meetings with investors in Baltimore Montreal and Toronto. And finally please note that the proxy statement for our June 13 Annual Shareholder Meeting was attributed on April 24. With that, I'll turn the call over to Mike. Mike Gianoni -- President and Chief Executive Officer Thanks Mark. Good morning, everyone. Thanks for joining our call today. I'm pleased with our execution and our results for the first quarter of 2019. We made a solid progress against our strategic objectives. We continue to position the company for long-term success. We continue to rapidly advance our existing applications provide new solutions to market and close on the acquisition of YourCause which creates value for our customers and shareholders and our adjustable markets. Our sales teams are tracking well to expectations and sales account executives higher in the second half 2018 are currently under way ramping to targeted activity. And I'm incredibly proud of the recognition that Blackbaud has received on a few of our internal program initiatives. Blackbaud is one of America's Best Employers for Diversity and our was just named one of the top 50 most technology of the national diversity counsel. We're also named one of America's Best Midsize Employer by Forbes for the 4th consecutive year and MSCI recently upgraded our ESG grading following the release of our social responsibility report. A one quarter now behind us our full year financial outlook is unchanged and we are reaffirming our 2019 full year financial guidance. As usual Tony will provide more detail on our financial results and I'll provide an update on the context of our four-point growth strategy. The first of our four strategy is integrated in open solutions on the cloud. We're enabling our customers with the power of fully integrated cloud and the impact is significant. For example a recent total economic impact study conducted by Forbes research Houston zoo with a 373% return on investment increase their operations funds of more than $450,000 increased major gift campaign revenue by $2 million and avoid nearly $180000 in additional labor cost by leveraging the Blackbaud analytics target integration with Blackbaud's NXT. Our commitment to developing fully integrated specific end-to-end cloud solutions is a game changer for the industry and massive opportunity for Blackbaud. Last year was a banner year for Blackbaud innovation and we carry that momentum into 2019. During the first quarter after 2019 peer-to-peer professional form the largest annual gathering of peer-to-peer professionals we announced the U.S. launch of Blackbaud's peer-to-peer fundraising powered by JustGiving. This new solution delivers an unparalleled opportunity for all good organizations to supporter's fundraiser have. Launch elevates our industry-leading peer-to-peer portfolio while disrupting the market landscape by providing our best-in-class cloud solution and no subscription cost. This is a big deal for our customers. Let me show that more than one-fifth of Americans contribute to online social fundraising campaigns with those numbers continuing to grow year-over-year. Our fundraising industry continues to experience a radical change due to digital transformation the proliferation of mobile technology. Blackbaud is uniquely positioned to harness these growth trends with customers by making a direct connection with the fundraising campaigns and supporters who can engage their networks virtual events giving days live stream fundraising and more. Since launching Blackbaud peer-to-peer fundraising in March start of the market is very exciting. In fact we're signing up new customers every single day with the majority of them being net new payment transaction customers from Blackbaud. We also introduced Blackbaud Purchase Cards integrated with expense management in financial Edge NXT providing our customers with efficient and convenient alternative to traditional methods and peer-to-peer payment processes such as checks purchase orders and invoices. The result for our customers is centralized daily purchasing and improves monitoring with the right controls and scalable way enabling them to realize benefits such as reductions in cycle time increase savings through supplier discounts and working capital and cash flow improvements. Early feedback from our customers highlights the value of our intuitive user experience and a substantial time savings realized through automation. the progress in our Early Adopter Program for our new Cloud Solution for Faith-based Communities with our first wave of Early Adopter Customers now on a Church Management Solution in day-to-day operations. Blackbaud's SKY platform is enabling us to incorporate real-time customer feedback to rapidly advance platform. One of our early adopters hold excited they are be part of the development of our Church Management solution. Growing I believe that together develop the best Church Management system on the margin. Additionally the market response to our expanded education management portfolio higher education has been tremendous. The Blackbaud SKY enabling us to extend our proven K-12 solutions margin. In the first quarter we closed our largest education management deal today with the graduates who are adopting in total solution. This deal consists of our education management portfolio including student information learning management Tuition Management as well as FinancialEdge NXT and NXT. Also we continue to build on the partnership between Blackbaud and Microsoft to jointly develop co-market and co-sell innovative software technology that will advance the industry. Our first generally developed solution profit resource management truly in development and we're working in close collaboration with early adopters. While this development is ongoing Blackbaud and Microsoft sales team continue to meet better align our cross-selling efforts. We also participated in 2019 Microsoft Non-profit Summit which brought together a select group of nonprofit leaders and technology experts to our sector partnerships and innovative solutions to drive social This leads me to our second growth strategy which is the drive sales effectiveness. Selling modern integrated cloud solutions for a purpose build for our customers is a key competitive differentiator for our sales teams, much of 2018 working to simplify our program by trying our methodology and approach the uniform way to better enable our salespeople with process and practice. In the second half of 2018 we ramp our sales hiring more significantly than in the past. Those new hires are progressing well as a ramp to targeted productivity. In the first quarter we implemented a common sales leadership frame across the company. Sales manager's best practice tools and training necessary to be successful with the sales structure transformation now largely done the focus going forward will be adding additional sales headcount and improving sales productivity. And we have some great net new customers to support Blackbaud such as School who recognize the value being adopting our comprehensive cloud solution for K-12 schools including enrollment management Tuition Management student information learning management fundraising and financial management. It's just another example of how our sales executives now lead the total solutions strategy which we believe improves the customer experience improves outcomes drives retention and extends the customer lifetime value. Let's now turn to our third strategy which is TAM expansion. In January we added another $0.5 billion of TAM and we completed the acquisition of YourCause an industry leader in enterprise corporate social responsibility and employee engagement technology. Now we're excited about the growth opportunity in this market. In 2011 only 20% of Fortune 500 companies have formal corporate social responsibility program. By 2015 that number had quadrupled to 80% and the number of continues to rise as customers demanded employee is expected and businesses thrive because of it. Adding YourCause's innovative and differentiated capabilities and workplace giving and volunteering Blackbaud unmatched cloud software platform data intelligence services expertise and philanthropy and engagement is a game changer in driving effectiveness with companies in the broader social goods community. We're excited about the early successes we've seen in the first quarter companies like DuPont and Blackbaud manage employee volunteerism and programs. DuPont and many other notable companies YourCause is modern intuitive user experience and capabilities with cost cards and a transparent giving model were critical decision of partner with us. Our total market now expanded over $10 billion and we remain active in the evaluation of opportunities to further expand our channel 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. We execute the strategy around operational excellence that creates more scalable operating model and this is a global effort. I'll remind you a year ago David Benjamin joined the Team as President of our International Group an executive with a deep understanding of international enterprise market. This last month we had another season executive Allan Hoffmann joined David's team as President and General Manager of our Canadian operations. Allan brings over 20 years of experience with high-performance teams within the technology sector most recently of Canada's General Manager of the Education nonprofit and healthcare business at Amazon Web services. Both David and Allan delivered outstanding results throughout their careers and we're in great position to drive growth internationally under their leadership. In the U.S. we continue to execute against our workplace strategy looking to replace and upgrade some of our existing offices expand our footprint into new locations with customer this has been a multiyear program for us and we expect to be large and complete by the end of this year. Overall I'm pleased with our execution through the first quarter our continued shift toward recurring revenue and the opportunity ahead of us in 2019. And I'm particularly excited about the accelerated pace of innovation we're delivering for our customers and reaction in the market. I'll now turn the call over to Tony, to cover our financial performance in greater detail before we open up for Q&A. Tony? Tony Boor -- Executive Vice President and Chief Financial Officer Thanks Mike. Good morning everyone. Please refer to yesterday's press release and investor materials posted to our website for the full detail of Q1 financial performance. Today I'll focus on the key highlights so that we can get your questions. From a new accounting standards perspective I quickly note we adopted ASC 842 for this year and as expected the impacts our P&L and statement of cash flows were minor. The largest financial impact related to recognizing lease liabilities and right of use assets on the balance sheet for substantially all of our leases. Turning to the quarter our recurring revenue mix represented 92% of total revenue which is 320 basis points higher than Q1 of 2018 and 5.7% growth on an organic basis. We continue to successfully reduce the mix of one-time services and other revenue which is positive for us long term that creates a significant drag on total company revenue growth in the near term. One-time services and other revenue represented only 8% of our total revenue mix and declined $6 million in the quarter which is a 24% decline versus Q1 of 2018. I'll remind you that last year one-time services and other declined 17% we anticipate the rate of year-over-year decline to accelerate to roughly 25% for the full year 2019 which is healthy for the long-term. Turning to profitability, our first quarter gross margin was 60.4%. We generated operating income of $36 million representing an operating margin of 16.6% and diluted earnings per share of $0.51. It's important to note that our operating margin performance was inclusive of a heightened investment in innovation and our investment to ramp sales hiring that we began in the third quarter of 2018. As Mike mentioned we also continue to execute against our workplace strategy which is accelerated into 2019. We're currently expecting to incur total before tax restructuring cost associated with these restructuring activities of between $8.5 million and $9.5 million of which $7.3 million has been incurred to date including $2 million in the first quarter. Our updated estimates reflect more aggressive actions we've taken to relocate and consolidate some of our offices. We expect to gain operating efficiencies beyond 2019 future annual before tax savings of between $5 million and $6 million per year beginning in 2020. Moving to the cash flow statement and balance sheet, our Q1 free cash flow was a negative $22 million. I'll remind you the first quarter is typically our seasonal low and our results include our heightened investment in sales and innovation as well as restructuring and severance payments associated with our workplace strategy. We're still expecting the full year cash flow to land within our guidance range of $124 million to $134 million. We continued making necessary innovation and infrastructure investments to support our moves in a cloud amounting to $1 million in CapEx primarily associated with our global workplace strategy and investment and infrastructure and a $11 million for capitalized software development. During the quarter we paid out $6 million cash dividend to shareholders and ended with $558 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 Q1 we stood at just under 3 times. In summary continued execution against our strategic plan is allowing us to strengthen the business and reiterate our full year financial guidance. We're maintaining our disciplined approach to balanced investments that drive growth and improve profitability and we will continue to execute on our capital deployment strategy to maintain a strong balance sheet return on capital to shareholders and create growth and scalability. With that, I would like to open up the call for your questions. Questions and Answers: Operator (Operator Instructions) We will take our first question from Tom Roderick with Stifel. Tom Roderick -- Stifel -- Analyst So Mike it's been topical. I know you've been getting questions on it. I love to hear your thoughts on sales force acquiring and formally wrapping in sales force and I guess specifically kind of three elements of the question I'd love to hear your thoughts on and then I'll jump back in the queue. So we'll make it a three-part of one question here. The first part here is you commented here in the past you don't really see sales force that much competitively in the marketplace seems they played a little bit sort of mid-market but they have built what looks to be a $250 million trailing business growing 40%. So on that point how does that encourage you to think about the TAM and then other segments of the market you want to more toward that might be showing more growth? Second element here is do you expect that this will change any of the competitive response or positioning in the enterprise? And how does that make you think about your own sales force? And then the last part here you mentioned Microsoft as a growing part now. It would seem that they have even greater incentive not to deepen their relationship with Blackbaud wondering what you're seeing and hearing from Microsoft on that front with respect to your partnership in the nonprofit space. Mike Gianoni -- President and Chief Executive Officer Thanks Tom. Everyone first I want to mention I had some challenges last night. So I didn't make it back to Charleston. So Tony and I are not in the same room. We'll try to do our best to coordinate our answers. On that specifically couple of things there Tom, first I'm not surprised that this happen. They always work together very, very closely since they were founded over a decade ago. No surprises there. One thing I'll mention and kind of repeat myself we're a software company and we build very specific solutions for the markets that we serve. Just some of the examples in my prepared remarks around just giving P2P launch now in the U.S. expansion of our financial platform with purchase cards around procurement and expense management and supplier management for our customers integrated with the NXT safe based in Church Management Education Management in that space both K-12 and higher we got a student information system integrated with learning management enrollment in tuition and fundraising and financial. So very, very vertical specific solutions we build for the markets that we're in. And we do not see any competitor in many of our markets including Salesforce hasn't changed in a long time. So secondly I'll say that we're obviously quite different that we software company too. We're really focused on a very large TAM a lot of competitors that different vertical the TAM is big and growing. We keep expanding our TAM. So there is a lot to go to get out there. And lastly on the markets the partnership continues to get stronger Tom. We are building the market together. It's a great synergistic fit. The field compensation plans are synergistic. The products are because that platform company and their footprint and just things like Office 65 obviously is significant. The partnership agile full-scale this is a big one across the board. So our competitive landscape is what it's been. I'm not surprised on that acquisition and we just keep doubling down our innovation specific to our verticals and ramping up our sales headcount. Operator Our next question will come from Brian Peterson with Raymond James. Brian Peterson -- Raymond James -- Analyst Hi guys thanks for taking the question. So I wanted to start on the organic recurring revenue growth that was a little higher than our model. Obviously mid-single digits for the year it looks like you guys came in close to 6%. So any color you guys can give on what sort of that expectation that would be helpful. Tony Boor -- Executive Vice President and Chief Financial Officer Thanks Brian. This is Tony. We had two good back-to-back quarters now on our contractual subscription side of the business from our bookings perspective. So we're really happy with the initial results of this ramp in hiring and the reallocation and all the structural changes we have made over the last couple of years in sales seeming to pay off. We've seen a nice continued shift in mix toward referring revenue. You've seen we're up to 92% of our total revenues recurring this quarter one time continue to drop off we're actually seeing in that we expect that we together spoke about last quarter. Acceleration in the deceleration of one time we saw about 24% 25% reduction in one-time sales and services this both. Last year and the year before we ran at about 17% rate of decline, so that's accelerating which is good for the long term and right in line with our strategy and little painful on overall growth. And that services will continue to be a bit of drag I think for the next year or so. We hope as we spoke about last quarter bottom out sometime late this year next year going into '21 will be our expectation. We're now really focused on continuing to add more sales at a higher rate. So we'll continue to add sales and related marketing and sales op support through this year at a higher rate hopefully won't wait until the end of the like we did last year I think we have 84 net new sales ads but largely late Q3 and into Q4 so taken some time to ramp as we've spoken about. We're starting to see good results and I think you're seeing that come through on that occurring that organic recurring revenue growth rate if you're speaking to. And then acquisition have positive so that we don't that's obviously back out from an organic growth number. So I think we'll see some positive benefits of that going into next year as well. Brian Peterson -- Raymond James -- Analyst And if I could follow-up just on the higher education side with resonating pretty well there I'm curious as we think about that opportunity I know you have a strong presence there already. How should we think about the split of that opportunity with the expansion from existing institutions versus new logos? Mike Gianoni -- President and Chief Executive Officer Brian this is Mike. We think it's a great opportunity there and it's a Greenfield for us moving over into the operating side of higher ed. We've got both a cross-sell and a net new logo opportunity there. We got a good footprint in high ed in the foundation department if you will and the foundation phase where they focus on fundraising and frankly our progress there and presence in win rates in the last several years have been really fantastic. So it's opportunity to cross-sell and expand the on the operating side in the areas of things like Tuition Management enrollment student information system learning management system. And then just net new logos as well. There is several smaller legacy competitors in that space. And the advantage that we bring we really taken our success in K-12 and it worked a couple of years to add significant capability to that school management platform the universities. So it's a big opportunity for us in an expansion and existing platform up. And in my prepared remarks I'd mentioned that we just closed the largest deal to date as well. So it's only days there. We're still in the early adopter mode, that will get flipped over to general availability a bit later this year but good opportunity for us both cross-sell and new logo. Operator Our next question comes from Rishi Jaluria with D.A. Davidson. Rishi Jaluria -- D. A. Davidson -- Analyst I wanted to start with recurring gross margins. May be a little bit more detail if you could provide on why there's a little bit of contraction on this line both relative to last year even may be controlling some of those factors? Is it down relative to Q4 which is typically seasonally your weakest quarter from recuring gross margin perspective given the heavy payment delay? So any color there if you could provide would be helpful. Tony Boor -- Executive Vice President and Chief Financial Officer Absolutely, I kind of look at from total gross margin as well from a perspective and jump into the recurring. Overall I think one of the things you at last year in Q1 our gross margin was a bit inflated because of one-time adjustments we had with some of the rebates related to the transactional side of the business. And I think you can see that on the full year gross margins came in at 60. 8% versus that much higher end of Q1 2018 and we look at that more so on the full year compared our overall gross margin in Q1 came in about 40 basis points below that number last year. The big drivers on total gross margin amenities are also the same on the recurring. We continue to shift some of our offers from one-time services into recurring. So we've started in implementation services et cetera which will be a nice benefit for us long term as those contracts are new but in the initial period that create some gross margin pressure because you're taking lower-margin services business embedded into the subs line. We're also making substantial investments and have put some cost as we talk about for several quarters now moving out of our data centers and hardware into third-party cloud. So we still have a bit of that another two or three years probably will be incurring those duplicative cost with the ramp in bookings and the positive momentum we're seeing in some of the NXT and cloud-base products we're also have to take on a bit more investment in the cloud sooner than expected. It's driving that -- a little bit higher. And then thirdly the rate at which we've been driving innovation Mike spoke to this in his prepared remarks just in the prior question much larger percentage of R&D spend is going into innovation which is required to be capitalized on GAAP and amortization of that cap software gets in COGS largely all in our recurring subscription line. And therefore that's having some negative impact on those gross margins. Overall like we said gross margin appear to be a little low compared to consensus looks pretty good compared to our expectation again we're reiterating our full guide and feel good about both growth and operating margins where we come out in the year. Rishi Jaluria -- D. A. Davidson -- Analyst Got it, that's helpful. And then turning to the Microsoft partnership did you see some early signs out there? But with the launch of NRM in the future can you give us a sense for how the go-to-market on that and what the co-selling sales motion might look like? And then maybe alongside that directionally what would the revenue share for that product be? Mike Gianoni -- President and Chief Executive Officer Sure. I'll take that this is Mike. So we're in market with Microsoft in a lot of different ways not just with that new solution we're now in a lot of markets which is great and it's a really good approach for the customers as well. Specifically with that solution we're codeveloping that with them. It's under way going well. We'll both be selling that as well in the marketplace as partners. There is a lot of integration happening there between the two companies as well. So I think that's going to have a big impact. I'll remind you that that solution is in the category of supply chain management for a large global nonprofits and that's progressing well. I'm not going to break out any specific financial details at this point but we're excited about the partnership and that really took us to another layer of relationship with Microsoft to co-develop a new solution with them. So we're excited about that. Thanks. Rishi Jaluria -- D. A. Davidson -- Analyst Thanks. Operator Our next question comes from James Rutherford with Stephens Inc. James Rutherford -- Stephens, Inc. -- Analyst Hey thanks, good morning. I want to start on the recurring revenue line again few questions already but taking another crack at Nice to see the step up in the recurring growth here in the first quarter obviously a lot of difference of verticals a little different products can you give us some color on perhaps with the biggest sub verticals or products where they drove this? And with this more back to selling or more new logo wins? Tony Boor -- Executive Vice President and Chief Financial Officer This is Tony. I'll take it. We've seen really good traction across the portfolio. I wouldn't earmark this or this improvement on any individual product or product set or vertical. We've made positive investments and positive changes in structure and approach the sales productivity in our marketing efforts. We've realigned most of the sales force we've realigned combines all those things we have been working on over the last few years are starting to pay dividends as well as the ramp and accelerate ramp in sales hiring. I think a very consistent across all of the verticals I'd say we are excited about the opportunities of future. I don't think we've seen a lot of those drivers but I think the expansion Mike spoke about with our new solutions said in the higher add the Microsoft partnership are in Faith Cloud those things are still in their infancy but we would expect to see some really nice growth from those in the coming years as those rollout marketability and we start ramping efforts on that. We have started to put sales marketing efforts toward those already but not had a material impact we expect it would be for the future. But there is a nice balance that we've seen with no specific individual product or solutions that's really driving more growth than others. Over the years the payments business might have historically been a little higher growth because we were penetrating that market that was largely nonexistent before Mike got here but that's now a fairly large piece of business and that growth rate is certainly come back more in line with the rest of our pieces of business and offerings. So nothing that jumps out today specific higher growth driver I think it plays back into all of our strategy. James Rutherford -- Stephens, Inc. -- Analyst Okay and then one follow-up... Mike Gianoni -- President and Chief Executive Officer I will jump in and add that we're pleased with a strong booking performance and core subscriptions as well. Go ahead your other question. James Rutherford -- Stephens, Inc. -- Analyst Great, just a follow-up on that actually, you mentioned the gross margin question earlier that that you're kind of in some of those one-time services and subscription line with something we knew I'm just curious is that providing any benefit to the growth in that recurring line? Tony Boor -- Executive Vice President and Chief Financial Officer So it would obviously add to the ASP on product. that one is the 606 come into play creates complications of when that is recognized and then also the ASP impact would not be typically would not be trying to spread those cost over the worst term of the agreement, so in many cases that may spread out over the years to exceed the initial three-year kind of average contract term. So you wouldn't get 100% kind of uplift and then you have to evaluate the difference in potential timing of recognition under 606 although that's a most implementation will fall largely in the first year although being within recurring and then it gets driving some of the absurd that as well within the one-time revenue line item. So there is some kind of migration or geographic change. There are no but wouldn't be one-to-one. We do lose some and then you are not necessarily going to get 100% uplift on the ASP part of what we're trying to do is reduce the barrier the purchase for those in that first year and so are being very cognizant of the incremental cost and trying to help spread that from a customer perspective to hopefully drive more unit volume going forward. Operator Our next question will come from Robert Oliver with Baird. Matthew Lemenager -- Baird -- Analyst Great, good morning, it's Matt on for Rob, this morning I had a question so the direct sales hiring was up about 20% in the second half of last year has that stepped up level of direct sales rep hiring continued into the first quarter? I know that has been hiring it has been at the same stepped-up level are you starting to reach kind of the capacity that you're looking for there? Mike Gianoni -- President and Chief Executive Officer Matt its Mike, we ramped up about 20% last year. We break out the sales headcount just once a year in the K which obviously will do and then drops next year but we plan to continue to be aggressive in sales ramp this year as well. We won't wait till the back end of the year operationally and reasons to do that last year. So we feel good about the ramp in Q4. We're continuing to ramp now and that's something that will continue to focus on. Your last comment around capacity I'm not sure where the top end of the capacity is because we have a really big market here in the verticals that we're in. So the question really is about the rate of ramp and our ability to observe strain and get our new folks to productivity but the capacity could be pretty big but I'll just say that we continue to add headcount. Tony Boor -- Executive Vice President and Chief Financial Officer This is Tony. I'll just add on that. We'd expect as well we had a hit from a perspective increase in investment but the expectation will be when these folks are at the full productivity that they should help fund future classes so we historically added somewhere between 5% to 10% year and those kind of self-funding once I get to full productivity. So the expectation here is we continue to higher and but this initial class in future classes will then start funding in future classes after that. Once we get to the kind of full productivity. And then we start seeing that impact in the P&L as we said in the last couple of calls is probably more so toward the end of 2019 and certainly in '20 that we see that closer to P&L. Matthew Lemenager -- Baird -- Analyst Okay. That's helpful. And then just a quick follow-up the Blackbaud has allowed due to kind of increase the pace of innovation. In one area I think it's been around Church Management that you talked about taking that feedback from customers. What types of things are they asking for? Is there anything that stands out as necessary to add before that product sees more broader option is it just kind of incremental updates? Is there like a one or two thing that they are waiting for to see the products have more adoption? Mike Gianoni -- President and Chief Executive Officer Matt specifically in the Church Management space which I think is right you're asking let me take a step back. So the SKY platform is our engineering solution that goes across all of our products and markets. So specifically in Church Management and the way that we build solutions now across the board the Church Management it's an intuitive process. So we build the Church Management system and then brought an early adopters. The early adopters give us a feedback and then reiterate from there and we'll continue to add early adopters every month now until we get to a point fairly soon and say OK it's ready for general availability. By the way those early adopters are essentially in production as well. And so they give us feedback on their needs we have our own folks that do business now just walk understand how to drive digital transformation in the Church Management space in ways through the SKY platform that haven't been done before. And so it's an intuitive process and it just builds upon itself until we're ready for general availability then it continues because so SKY platform allows us to put capabilities into production at the pace that we want to and typically will put new features in once or twice a month. And so that's a higher velocity early on when we have early adopters when we go into general availability it might be once or twice a month we'll keep that in capabilities but that will just continue on. And that really is the power of the SKY engineering system. Operator Our next question will come from Justin Furby with William Blair & Company. Justin Furby -- William Blair & Co. -- Analyst Thanks guys. Mike I wanted to ask on JustGiving. I think you made an announcement in the last couple of months that you removed the 5% fee structure that was in place. And I wanted to understand sort of the impact of the model when you do that and then just in terms of the U.S. market and the rollout of that peer-to-peer solution, can you spend a minute on how you think that plays out over the next few years? And what your go-to-market strategy is there? Mike Gianoni -- President and Chief Executive Officer Sure. Yes. it's pretty simple. So keeping -- Justin, one is -- the pricing model it's basically monetized via payment transactions. So no subscription, so essentially free, customers don't have to sign up with us and pay us monthly subscription. They just start using it and its monetized through our payments platform. We do not see that as having a negative impact on the revenue opportunity for that. We in fact it's having an uptick in adoption because of the model. So that's the first part. The second part is we've integrated JustGiving with our middle and back office solutions and that's unique. There isn't another platform like that. It's integrated with Blackbaud's middle and black office, so integrated with our fundraising solutions and other solutions not just using our payments platform but RE-NXT and other platforms as an example. So it's unique in two ways, no subscription fee. Therefore free for customers to start using that. It's applicable really in all of our markets and integrated with our middle and back office. Those two things make it unique. I think there's great upside there. It's a fantastic platform, big footprint as you know over in the U.K. A platform that has been used by folks all over the world, highly scalable easy to start a campaign, very intuitive, mobile first. So I think it's early days we just launched in a month ago but we're excited about the opportunity there for us and for our customers. Tony Boor -- Executive Vice President and Chief Financial Officer This is Tony. Just on the U.K. piece as well, donors still have the opportunity to provide a voluntary contribution to support the platform and we've done a lot of testing on that end market and are confident that that's a sustainable business model there in the U.K. and has been very very well received across all of the various constituents in the market. So we feel pretty good about that change and that model there in the U.K. as well more specifically. Justin Furby -- William Blair & Co. -- Analyst Okay. Great, that's hopeful. And then if I could ask a quick follow-up on just the overall health of the nonprofit market for Mike or Tony. I know it looks like you've changed your benchmarking to more a quarterly cadence in terms of your release but can you give any sense for the trends you've seen here through April year-to-date? And any observations relative to kind of how the year ended last year? Mike Gianoni -- President and Chief Executive Officer Her Justin, I'll take that. One thing just to add back to the original question on JustGiving and the pricing model changes. As you might imagine we do extensive testing before we make the changes. The platform allows us to go do a lot of testing to prove out results. And so we're pretty happy with where that's going from a pricing model standpoint. As far as health of the markets, again we're in a lot of markets and it's such a huge market just in the fundraising side. It's all in front of us related to driving digital transformation and moving the fundraising to online and mobile in the pure charity marketplace, but we see really great adoption. I think the last in the last earnings call for example in the K-12 market I announced a handful of very large schools in which we've won the entire platform. And so that market continues to be a really healthy and the differentiator for us in those verticals is the integrated platform. We are in a lot of cases displacing many single stand-alone single point solutions with an integrated platform and the value prop for school is significant. So across the board we don't see any external pressure on our markets, and the fact that the markets are so big -- I'll just point to back to the last time that U.S. Giving ran their report the U.S. donation market grew I think it was $15 billion in donations year-over-year to go to $410 billion. That's a massive market, they're all doing pretty well each of our markets I think represents a big TAM for us. Operator We'll take our next question from Kirk Materne with Evercore ISI. Kirk Materne -- Evercore ISI -- Analyst I guess Mike or Tony I'm not sure who want to take this one -- but you guys had talked about sales productivity looking good in terms of the new people coming on board and obviously Mike I think you mentioned bookings were good this quarter which is great. Can you just remind us of you sort of think about sales productivity? Or how you track it? I guess as these folks are coming on and I assume that getting them to full productivity is a 9-month journey? Or just remind us kind of when the cohort that came in last year should be kind of up and running? Mike Gianoni -- President and Chief Executive Officer Sure. I'll take it. It's Mike. Couple of things we have a very detailed sales management system that looks at productivity in the full cycle all the way through, lead gen to lead qualify, the pipeline development, to competitive wins, all the way through the closure not just the backend which is quota attainment, because as we all know it's an activity-based journey to success. So we've got a very detailed program that literally all of our sales teams in the world use the same program with the same metrics for us. And it's driving a pretty uniform approach for our sales executives and for sales leadership and it's something that we've rolled out and I think it's a very, very good system and the metrics are very transparent internally to the company. So really happy with methodology that we have there. Ramp time it's different by level. If you're selling an enterprise deal it's longer. If it's a multibillion-dollar large deal to a large institution versus a smaller deal if you will. On average I would say we are in the 6- to 12-month roughly time frame, but again it's different for a very large enterprise bills executive. But to productivity takes a while to get as well. It's probably more like 18 months, 20 months to get to where we would call true full productivity and it's something that we measure. We think we're doing well. We think there is opportunity to drive better productivity. So our whole program is focused on adding new sales headcount in each of the verticals pretty aggressively and also measuring and driving productivity and we got the metrics and the system to see it with pretty full transparency across the board. So we feel pretty good about that. Tony Boor -- Executive Vice President and Chief Financial Officer And one thing -- we've spoken about this before. We have a keen focus as part of our strategy of driving that increase productivity as Mike said it. We believe there is a good sizable opportunity for us over a number of years to improve our ARR to OTE a lot of different levers in there. The shrinking of one-time services so I don't have very business bookings every single year, converting things and offers to ARR, true lead gen, better quality leads, better close rates, just all of those things that Mike was talking about come into play here. But over several years we have got a target to improve our ARR to OTE which ultimately improves our LTV to cap, assuming retention rates hold flat or assumed flat in that model. We focused as well as a company on retention rates and then obviously gross margin key drivers there but from a sales specific perspective it's really that ARR to OTE. We talked about benchmark I think you mentioned and some analysis on that in the team, we benchmark somewhere closer to the 50 percentile today in the peer group we'd and like to be toward that top quartile or better overtime. Kirk Materne -- Evercore ISI -- Analyst That's helpful thank... Mike Gianoni -- President and Chief Executive Officer The other thing I would add is which is important. I talked about this in the past is we've made a lot of operational changes too. So today we've got one sales support and operations team globally, everyone's is on one compensation plan. We're divided into hunters and farmers. We're in vertical markets. So structurally we've a lot of incremental changes which are all behind us now. Now it's about headcount adds and productivity. Structural changes are pretty much done. Kirk Materne -- Evercore ISI -- Analyst Okay, thanks for those answers. And just I guess to put a final point on it now. Given the trends look good your organic recurring bounced up a little bit sequentially this quarter. I guess maybe for Tony if you weren't to see organic recurring revenue get better over the course of the year given you're adding capacity to the system what would have to be the offsets? I assume higher late rates of change would be one. It just seems like there is a pretty good setup for you all to see organic recurring revenue to potentially accelerate over the course of the year with more capacity. If that weren't to happen, I assume churn would have to go up. I'm just trying to make sure I'm not missing something else. Can you just walk me through why that when it happened I'm sort of trying to make the case for you I guess? Tony Boor -- Executive Vice President and Chief Financial Officer I think there is you hit on a couple of things. Churn obviously is a piece of that we saw retention rates (inaudible) for some reason. The good news, and we haven't spoken about this, but we just finished sunsetting one of our -- I guess the largest of 26 products that old Sphere solution has now been officially sunset. So that's been a very big drag on us when we speak of churn. Attrition rates within the sales and marketing teams is another area that we're keenly focused on and we look at a metric that we call productive FTEs. And so you when you go out hire rate of 84 new folks and then as Mike said we do a lot of relocation of resources and changing comp plans all the things that can cause heightened attrition. So we're keeping a keen focus on our attrition rates, time to rehire and fill those positions ramp in different types of reps productivity by reps et cetera. So there's a lot that goes into that, but I would say it's really about can we increase the number of productive FTEs that we have on staff and that is where we feel really good about where we're heading. What detail that would be would be folks not ramping the expectations and then we might have to spend more time coaching them up or counseling them out if they just all plain aren't going to get there and get the right folks in those seats, and/or people may leave because of the change and the change in expectations and the reallocation of the efforts and focus. So I would say attrition on that headcount side and many churn on the side. And then lastly probably a lesser impact but we saw some amount of the last year you do have the transactional side of the business still comes out through recurring revenue being the payment Smart Tuition usage some of those things. We could have some changes again in consumer giving or things along those lines that could cause some potential deflation, but right now I really feel good about where we're heading. We continue to add net new sales folks and get them productive in a timely manner that should bode well for the long-term growth and then if we can get better productivity out of all of the sales force over time that also would drive nice acceleration to our expectation. Operator We'll take our next question from the line of Ryan MacDonald with Needham. Ryan MacDonald -- Needham and Co. -- Analyst Yeah good morning Mike and Tony. I guess first starting on YourCause it seems like first quarter in there was a decently nice performance there some nice new logos. Can you just talk about sort of what you learned I guess in the first quarter with that company being integrated? And may be where you see opportunities for incremental synergies or upside surprises with that business now that you have in the fold? Mike Gianoni -- President and Chief Executive Officer Sure. This is Mike. I'll take that. I couldn't be more pleased by having YourCause join Blackbaud, there is a lot of synergy. There is cultural synergy. It's a great platform and a great team. As you might expect we went fast on back-office integration. We're adding investments in areas like sales and go-to-market. I think it's early days there too. I think there is a lot of opportunity, because the addressable market is a significant, given the trend in companies of all sizes focusing on corporate social responsibility and in all markets too. So it's not constrained by vertical market. And in fact there is opportunities in the markets we already served healthcare universities and things. So I think there is a lot of upside. It's a great company great platform and it's just early days and our ability to partner with them and help them accelerate growth through retention is really high. And we've got a lot of really large Fortune 500 customers and keep winning even at that level although we're winning a lot of midsize customers as well. And it takes a pretty good ability to get through the due diligence of the company like DuPont that I mentioned in the script to be their platform. We have disclosed that there would be between $20 million and $25 million contribution for this year closer to the bottom end of that. And also I'll just remind you that we exclude them from our organic revenue calcs for 2019 because we closed on the deal in January that will come around next year but we do not include them in organic just in total revenue. So yes it's a great ad for us. We're excited about it. Ryan MacDonald -- Needham and Co. -- Analyst Got it, thanks. And then just a follow-up I guess on the competitive landscape. Clearly it's still early days with this competitive acquisition with sales force but as you see the assumption of the company and getting more competitive in the space, or more investment dollars behind them now. Does this change at all the strategy that's focused around products and the pace of the products onsets and service with the customer migrations to the NXT platforms just as they may be a way of preventing some of those customers going out to market with maybe a larger competitor now? Mike Gianoni -- President and Chief Executive Officer Ryan I'm just going to remind you that we do not see any competitor in all of our markets. In fact our competitors are not in most of our markets. They're very different by market. The Faith market has very specific competitors, the K-12 very specific competitors, charities, they are different. They don't cover the markets we cover, one. Two, we're a vertical software company. That's all we do build solutions that have business logic specific to the operations of our customers. And three no it doesn't change our strategy at all. I mean we had a local software company. We're doubling down on innovation because our solutions are purposely built for our customers. Our customers don't have large IT shops typically. So they are not able to adopt in many cases platforms that aren't specifically built. And so for Blackbaud our strategy doesn't change. We will continue to drive innovation and add to our distribution channel and we think we've got a long runway with a very large TAM. Operator And ladies and gentlemen, this does conclude today's question-and-answer session. I would like to turn the conference back over to Mike Gianoni with additional or closing remarks. Mike Gianoni -- President and Chief Executive Officer Great, thank you, Operator. I just want to reiterate really pleased with our Q1 results. We continue to drive our market-specific innovation. As I just mentioned really happy about the YourCause addition and the JustGiving launch in the U.S. I think there's a long runway for both. We continue to drive digital transformation for our customers which is helping them improve their results, which is most important. And Tony and I look forward to speaking with you on our next call. So thank everyone. And this does conclude today's conference. Thank you for your participation. You may now disconnect. Duration: 61 minutes Call participants: Mark Furlong -- Director-Investor Relations Mike Gianoni -- President and Chief Executive Officer Tony Boor -- Executive Vice President and Chief Financial Officer Tom Roderick -- Stifel -- Analyst Brian Peterson -- Raymond James -- Analyst Rishi Jaluria -- D. A. Davidson -- Analyst James Rutherford -- Stephens, Inc. -- Analyst Matthew Lemenager -- Baird -- Analyst Justin Furby -- William Blair & Co. -- Analyst Kirk Materne -- Evercore ISI -- Analyst Ryan MacDonald -- Needham and Co. -- Analyst More BLKB analysis Transcript powered by AlphaStreet This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability. 10 stocks we like better than BlackbaudWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. 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