May 19, 2008
Executives
Tim Williams - SVP and CFO Marc Chardon - President and CEO
Analysts
Philip Rueppel - Wachovia Securities John Neff - William Blair Ross MacMillan - Jefferies & Company Tom Roderick - Thomas Weisel Partners Robert Stimson - W.R. Hambrecht
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by.
Welcome to the Blackbaud first quarter 2008 Earnings Call. Today's call is being recorded.
At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.
Instructions will be provided at that time for you to queue up for questions. I would like to turn the conference over to Mr.
Tim Williams, Chief Financial Officer of Blackbaud. Please go ahead, sir.
Tim Williams
Thank you. Thank you very much.
Good afternoon, everyone. Thank you for joining us today to review our first quarter 2008 results.
With me on the call is, Marc Chardon, President and Chief Executive Officer. Marc and I will make a few prepared remarks, and then we will open up the call as we normally do for questions at the end.
Please note that our remarks today contain forward-looking statements. These statements are based solely on present information and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking statements.
Please refer to our SEC filings including our most recent annual report on Form 10-K and the risk factors contained therein as well as our periodic reports under the Securities Act of 1934 for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements. Also, please note that a webcast of today's call will be available in the investor relations section of our website.
With that, let me turn the call over to Marc, and I will come back a little bit later and give you further details regarding our financials. Marc?
Marc Chardon
Thank you, Tim, and my thanks to all of you on the phone for joining us today. During the first quarter, the company delivered revenue growth and operating profitability that was in the upper half of our guidance ranges.
Cash from operations was also strong. We were pleased with this growth and our overall financial performance considering the more challenging macroeconomic environment in which we're currently operating.
During the first quarter, we made excellent progress in several areas of our business. First, our international operations continued their strong growth.
Second, we expended our addressable market opportunity with the latest release of NetCommunity that runs independent of the Raiser's Edge. And finally our enterprise CRM offering continued to attract expanded and significant interest from very large and complex non-profit organizations.
As we will discuss more detail, we have slightly adjusted the high-end of our expectations for the year. That said, we believe that Blackbaud's large customer base, broad and deep suite of solutions, domain expertise and a set of new growth initiatives position the company well for long-term growth.
Moreover, we believe these factors coupled with our overall business model will help Blackbaud deliver revenue growth, impressive operating margins and strong cash flow in 2008 despite the current business climate. Throughout the year we will continue to invest in our products and services with a particular focus on the new product initiatives.
We continue to believe we have a competitive advantage in important growth segments of non-profit market upon which we can build farther, and as I have said before, I believe that the overall market opportunity we're addressing continues to remain largely under penetrated. Now, let me turn to the details of our first quarter performance.
Total revenue of $69.4 million grew 26% on a year-over-year basis and was in the upper half of our guidance. Licensed revenue came in at $9.6 million, up 19% year-over-year.
Our first quarter subscription revenue grew by 83% year-over-year to $8.8 million. Subscriptions remained the highest growth portion of our business and exceeded 90% of the licensed revenue for the quarter.
This increasing shift to subscription revenue sources has been and should continue to be a very important and positive evolution of Blackbaud's business model. As we have stated in the past, it would not be unreasonable to predict that our quarterly subscription revenue run rate may exceed that of licensed revenue at some point during the second half of 2008.
Finally, our non-GAAP operating income of $14.7 million grew 27% year-over-year and was at the high-end of our guidance for the quarter, while we generated $14.4 million in cash from operations. We continue to use our cash to enhance shareholder value and Tim will cover that in more detail in a moment.
Now, let's turn to the details of our growth initiatives. Let me begin with our enterprise CRM efforts.
As we previously indicated, our original plan was to identify and secure a handful of early adopter Blackbaud enterprise CRM customers or what we call eCRM customers in the goal of gaining reference accounts in key subverticals that would help us grow this segment of our business more rapidly in the years ahead. In the relatively short period of time since we introduced eCRM, we've seen significant market interest from some very large organizations and now have customers to state key subverticals of vertical submarkets.
Furthermore, we remain committed to our goal of delivering successful implementations to our early adopters to gain these reference accounts in those subverticals, and we're on track to do just that. I am pleased with the continued growth in the pipeline of opportunities related to our eCRM offering.
In particular, we're seeing strong interest in the higher education vertical, which is especially encouraging because this sector has continued to be resilient in the current economic environment. We believe that Blackbaud is early to market with the state-of-the-art enterprise offering that can meet the needs of large higher education organizations, and this is an opportunity that we believe in and of itself may represent as much as $0.5 billion in revenue in the next several years.
We plan to continue investing aggressively in our solution to build on our momentum and ensure that Blackbaud solidifies its position to capture this large opportunity. From an overall perspective, we continue to believe that we will close a couple of eCRM deals per quarter on average, though due to the size of the deals, this number can be lumpy and will fluctuate from quarter-to-quarter.
As evidence of this, we did not plan on any eCRM deals foreclosure this first quarter, but we do have a number of prospects lined up for the second and third quarters and even more potentially in the fourth. Turning to another key growth initiative, we see continued momentum in our NetCommunity offering during the first quarter.
It continues to be the largest overall contributor to our new solutions and grew solidly year-over-year. NetCommunity momentum continues to be driven by the increasing use of the internet by non-profit organizations to help drive and/or supplement relationship building activities with their constituencies.
As I mentioned upfront, a key highlight during the quarter was the latest release of our NetCommunity offering, NetCommunity Universal, which is able to be implemented and run by non-Raiser's Edge customers. As a reminder, this product was previously code-named Scorpio.
I am pleased to share with you that our first customer, a large international healthcare organization, has gone into live production with this solution. They were already a Target Software Team Approach user for their direct marketing solution, and they were previously using a competitive internet fundraising solution.
The introduction of NetCommunity Universal, which is decoupled from the Raiser's Edge, opens up a significant opportunity for Blackbaud moving forward since it leverages our Infinity platform. This platform was built to enable easier integration with other systems.
Additionally, our focus on the overall Internet opportunity is reflected by the dedicated business unit that we created at the end of last year. I would also like to highlight our analytic solutions.
The combination of Target Analysis Group and Blackbaud Analytics continues to go well. We believe, we have a differentiated value proposition in the marketplace since the combined offering spends every element of the donor lifecycle from donor acquisition and recurring annual giving to major giving and planned giving.
Furthermore, this is an area that strengthens our overall domain expertise and the strategic value we can bring to the large net profits. With respect to the geographic breakdown of our business, we were encouraged by the continued progress of our international operations during the first quarter.
International revenue grew over 30% on a year-over-year basis during the first quarter. And as a reminder, this is all organic growth as both Target and eTapestry had little to no international presence prior to our acquisition of them.
This growth was strong across all three of our key regions Canada, Europe and Asia Pacific. Our international business represented 15% of our total revenue in the first quarter, which is to say 17% of Blackbaud standalone revenue.
And we continue to believe that there remains a long-term opportunity to more than double our international revenues as a percentage of our overall business, further diversifying our revenue sources. As important as our new growth initiatives are, the majority of our larger deals and new customers still come from our suite of core solutions, which include our flagship Raiser's Edge offering, Financial Edge, and Education Edge.
RE continued to represent approximately 50% of our new sales during the quarter. If we look to our average deal size across our new and core solutions for first quarter 2008, it was just under $50,000 which is an increase from the prior year period and more than double the level compared to when Blackbaud went public several years ago.
We were quite encouraged to see our average deal size this quarter sustained at the near $50,000 level we saw for 2007, even without the benefit of an eCRM deal closed in Q1. Also, as I shared a moment ago, we're seeing solid interest in and growth in our pipeline relative to our eCRM offering, which has the largest deal size of any solution in our product suite.
Moreover, from an overall pipeline perspective, we continue to see a high level of interest across our suite of solutions, which is evidenced by a qualified pipeline that's up by over 20% on a year-over-year basis. Now to be clear, this is not a figure I plan to update on a quarterly basis or necessarily at any point in the future, but I think it is important it add a level of perspective given the current uncertainty related to the economic environment.
While interest levels are high and growing, we delivered solid revenue growth in the first quarter and we did see some solutions to not move ahead, and the general marketplace caution in the first quarter compared to recent history was evident. It is still too early to determine how long the economic environment may impact length of sales cycles, but we believe it is appropriate to expect current conditions to prevail for the remainder of 2008 until proven otherwise.
Accordingly, we've add little level of conservatism to how we plan business. But as I mentioned earlier, we continue to believe that Blackbaud will be able to deliver solid revenue growth, impressive operating margins and strong cash flow during 2008.
Moreover, there are many reasons for us to be optimistic from a longer term perspective, including the market opportunity which is still largely under penetrated, our large customer base, which continues to drive more than 50% of our sales, the overall growth in interest levels and the related pipeline of opportunities, solid progress against our growth initiatives, the growth and untapped opportunity in international markets, our recognized market leadership position and a business model that's characterized by recurring revenue sources and high retention rates. And with that, let me turn it over to Tim so he can provide more details on the financials.
Tim?
Tim Williams
Thanks, Marc. Let me provide some details first on the first quarter operating results then update our guidance and finish with a very quick review of our capital management program.
First let's start with some highlights from the income statement. Total revenue came in at $69.4 million, which was up 26% on a year-over-year basis, and was in the upper half of our $68 million to $70 million guidance range.
License revenue was $9.6 million, an increase of 19% year-over-year, and as a reminder this growth in this particular revenue component is all organic, as both eTapestry and Target contribute virtually nothing to the software licensing revenue line. Subscription revenue was $8.8 million in the first quarter, an increase of 83% on a year-over-year basis.
Subscription revenue continues to represent the fastest growing portion of our business and an increase to 13% of our total revenue in the first quarter, up from 9% in the same period a year ago. Even without the contribution from Target and eTap, subscriptions revenue would have increased by 39% on a year-over-year basis.
Our services revenue came in at $23.6 million during the first quarter, an increase of 29% on a year-over-year basis, while our maintenance revenue came in at $25.4 million, an increase of 13% on a year-over-year basis. On a purely organic basis, growth in services and maintenance would have been 24% and 12% respectively.
We continue to enjoy maintenance renewal rates in the mid-90s range, which is a testament to our customer satisfaction and the strength of our technology. Turning to gross profit, we generated $44.1 million in non-GAAP gross profit in the quarter, representing a gross margin of approximately 63%.
On a quarter-to-quarter basis, gross margins tend to be seasonal as a result of the seasonality of our revenue sources. On a year-over-year basis, however, our non-GAAP gross margin was down from 65% in the prior year quarter due primarily to slight variations in both revenue mix as well as the margin performance on individual revenue line items.
We believe, however, that incremental improvements in gross margins across all revenue streams will be the primary source of our overall margin expansion over the long-term. Looking at our operating expenses for the quarter, total non-GAAP operating expenses were $29.4 million, or 42% of revenue.
This is a slight improvement from 44% in the prior year. Non-GAAP operating income then was $14.7 million, at the high-end of our guidance of $14.2 million to $14.8 million, and growing 27% on a year-over-year basis.
On a margin basis, our non-GAAP operating margin of 21% was roughly inline with a year ago period. The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP net income of $9 million and non-GAAP diluted EPS of $0.20 per share, based on diluted shares outstanding of $45.1 million.
Non-GAAP EPS grew 25% year-over-year and was at the high-end of our guidance range of $0.19 to $0.20. Just as a reminder here, we fully taxed our non-GAAP EPS amounts even though the company's cash tax rate is much lower because of both our deferred tax assets and other tax benefits associated with last year's business acquisitions.
As we noted before, we focused most of our discussions here on these calls on non-GAAP results because we believe that excluding certain non-cash items such as stock-based comp, amortization of intangibles arising from business combinations, and other unusual one-time items provide the best indicator of the health of our overall business and the level of efficiency in our operating infrastructure. That said, we appreciate that investors also need to analyze the results on a GAAP basis, so we have provided a full tabular reconciliation of these GAAP and non-GAAP results as part of the earnings release.
To summarize, the reported net income on the basis of Generally Accepted Accounting Principles was $7 million in the first quarter of 2008, compared with $5.8 million in the first quarter of 2007, and our GAAP diluted earnings per share were $0.16 compared with $0.13 in the prior year. Let me now move to cash flow in the balance sheet.
We ended the quarter with $12.1 million in cash, down approximately $2.7 million from the end of the fourth quarter due primarily to execution of the company's capital management program. Importantly, we continued to generate strong cash flow from operations in the quarter of $14.4 million, which was close to double the amount generated in Q1 last year.
As just noted, we used that strong cash flow to partially fund our capital management program. In the quarter, we purchased approximately 921,000 shares of our stock, or $22.6 million and in addition we paid our normal quarterly dividend of $4.5 million.
At the end of the quarter, the company's deferred tax asset had a balance of approximately $52.4 million. As a reminder, this asset adds roughly $8 million to our cash flow on an annual basis.
This will continue through 2014. As we previously discussed, in the full year 2008 a similar tax benefit generated from the Target acquisition will benefit annual cash flow in the amount of approximately $1.5 million and that asset also will last another 15 years.
Accounts receivable at the end of the quarter was $42.3 million, a decrease from $44.7 million at the end of the quarter, and our DSOs continued to reside in the low 40s range. Total deferred revenue came in at $98.9 million, up $2.8 million, or 3% sequentially from the end of Q4, but up over 28% compared with Q1 last year.
This strong growth over last year is a result of a combination of factors, high maintenance contract renewal rates and strong growth in our subscription-based offerings which typically have annual payment terms, but for which we recognize the revenue ratably over the course of the contract. Additionally, the deferred revenue balance includes the impact of eTapestry in Q1 of 2008, which it did not of course in Q1 2007, because the acquisition did not occur until the second half.
You will recall that almost all of the revenue from eTapestry is subscription based. You will also note we ended the March quarter with $11.5 million in current debt, which was used along with our cash flow to fund the repurchase of shares during the quarter.
We continue to plan to use our strong cash flow to pay off this debt over the course of the year. And as a reminder, I will recall for you that last year we generated $60 million in cash from operations.
Let me now turn to our guidance beginning with the full year 2008. In thinking about our guidance, we have maintained the low end of our original guidance range which we gave during the first quarter conference call.
That range began at $295 million. We have, as I said, maintained that low end.
However, we have adjusted the high-end of our range from $305 million to $301 million as a result of the challenging economic environment which Marc referenced. This is the environment within which we are currently operating and its impact on our sales cycles.
To put this change in perspective, it represents only little over 1% of our targeted revenue for the year, and our updated use still represents growth of 15% to 17% on a year-over-year basis. This compares to our well established and consistently stated long-term growth target of low-to-mid-teens annual revenue growth.
Looking at profitability, our updated guidance is for non-GAAP operating income of $72 million to $74 million, or growth rate of 15% to 18%, and a margin at the midpoint of the range of approximately 24.5%, up very slightly from last year. This is expected to lead to non-GAAP diluted EPS of $0.98 per share to $1.01 which compares to our original guidance of $0.98 to $1.02.
It is worth reiterating that we continue to have a solid and growing pipeline of eCRM deals as Marc mentioned, and that these tend to be much larger than Blackbaud's historical deals. It is our goal to structure these in ways that ratable recognition is appropriate, and as such these deals will have less of an upfront impact compared to the majority of our licensed transactions.
We expect to close a couple of eCRM deals per quarter on average, though this will fluctuate on a quarter-to-quarter basis given the early stage of this initiative and the low volumes of transactions involved. To this point, we expect to close a couple of eCRM deals in the second quarter, that will have a more substantive revenue impact in the following third quarter and beyond.
In addition, there are deals targeted for a third quarter close that similarly would have more of an impact in the following fourth quarter and beyond. This is one of the reasons, combined with a solid pipeline that Marc referenced earlier, that we believe our year-over-year growth will be higher in 3Q and 4Q, as compared to the second quarter.
With that, let me turn to our second quarter guidance. We currently expect to generate total revenue in the range of $71.5 million to $73.5 million, which represents a growth rate of approximately 13% at the mid-point of the range.
The non-GAAP operating income guidance is $17.4 million to $18 million, representing growth of approximately 10% at the midpoint and non-GAAP fully diluted EPS of $0.24 to $0.25. Finally, now, let me finish with a quick update on our two-part mid capital management program.
The first part of that component of that program is our dividend. And today we announced that our Board of Directors declared our second quarter dividend of $0.10 per share which is payable on June 16th to stockholders of record on May 28th.
The second element of our capital management program is our share repurchase program. Through today, we have repurchased approximately 1.5 million shares of our stock for approximately $36 million.
This reflects purchases that have occurred since the beginning of the year. We remain fully committed to using our cash flow in this way to enhance stockholder value, and accordingly we also announce today that our Board has authorized an increase in our share repurchase authorization up to $40 million.
In summary, we were pleased that the company was able to deliver solid financial results that we're in the upper half of our guidance, in spite of the more challenging macroeconomic environment. We have tempered the high-end of our outlook for 2008.
However, we believe our strong market position and the progress against our new growth initiatives will enable the company to deliver solid revenue growth, impressive operating margins, and strong cash flow in 2008. We believe that Blackbaud is better positioned than most software companies to thrive through the current macroeconomic environment as a result of a business model that is characterized by recurring and highly visible revenue streams combined with the relative resiliency of the nonprofit sector over a long-term perspective.
These factors we think are evident in our forecast, which continues to call for growth in the mid to high teens range for the year. With that let me turn it over to the operator, and we will begin the Q&A session.
Operator?
Operator
(Operator Instructions). We'll take our first question from Philip Rueppel with Wachovia Securities.
Philip Rueppel
Questions on the current economic environment. Can you give us a little more color as to what's changed versus three months ago?
Are your customers being a little bit more cautious? Is it really just lengthening of sales cycles or is there anything else, in terms of their worries about fundraising?
And as part of that, are you seeing any particular caution in any segments, whether it is the low end, mid-range, or however, you would like to characterize the different segments you plan? Thanks.
Wachovia Securities
Questions on the current economic environment. Can you give us a little more color as to what's changed versus three months ago?
Are your customers being a little bit more cautious? Is it really just lengthening of sales cycles or is there anything else, in terms of their worries about fundraising?
And as part of that, are you seeing any particular caution in any segments, whether it is the low end, mid-range, or however, you would like to characterize the different segments you plan? Thanks.
Marc Chardon
We have a lot of different verticals, as you can tell from literature and also from what happens typically in the market, some of them are more sensitive to economics than others. So at one end we're seeing very little impact if any in the higher education space, and another end of the spectrum arts and cultural is often impacted more quickly in an economic downturn, because donors feel that their funds can be better used in other directions.
So this isn't really any different in that perspective than our previous downturns. We're not seeing the dramatic shift in anything like competitive response.
We're just seeing sort of cycle lengthening, and if we're seeing any difference in the sales cycle at all, it is in the core when we're seeing a little bit of probably a certain amount more of finance or board intervention on a financial perspective and sort of looking for deeper ROI thinking and so on. That being said, on the international front, we're really seeing a very little of impact on that.
Those are sort of the ways that I would describe the variable nature of the impact of what we're seeing, how it varies through the best and worse.
Philip Rueppel
Great, that's helpful. And then just kind of drilling down a little bit more on the eCRM business, you mentioned that the implementations were proceeding as planned.
Has there been any changes you had to make to the product, anything that would have caused you to be a little more cautious on driving sales in the current quarter? Or are we just experiencing, as you said, the typical lumpiness that's going to take place when you only have a few deals that could close each quarter?
Thanks.
Wachovia Securities
Great, that's helpful. And then just kind of drilling down a little bit more on the eCRM business, you mentioned that the implementations were proceeding as planned.
Has there been any changes you had to make to the product, anything that would have caused you to be a little more cautious on driving sales in the current quarter? Or are we just experiencing, as you said, the typical lumpiness that's going to take place when you only have a few deals that could close each quarter?
Thanks.
Marc Chardon
Absolutely, no change in the product road map that impacted our selling plan. There are two things that impact the selling plan, the customer's desired purchases, and it turns out that no customer who is buying wanted to buy in Q1, and that has to do with budget cycles and when to keep the best time is to start implementation.
We are investing more heavily in features and shifting a little resources of towards the eCRM an engineering team for features for the higher education sector report the faith-based sector where demand seems quite sustained. And so the most important thing is we don't want to sell projects that will start before a full team with experienced people is in place to make the project successful.
And so our next project team coming off an implementation will be the [Happer] team in the early second half of the year. And that will split in to a couple of teams, and then you'll be able to see the implementation go on like that.
And I feel very comfortable that we're exactly on the track that we had in our plan for eCRM.
Philip Rueppel - Wachovia Securities
Okay, thanks. That's it for me.
Marc Chardon
Thank you, Phil.
Operator
We'll take our next question from John Neff with William Blair.
John Neff - William Blair
Hey, guys, good afternoon.
Marc Chardon
Hey, John.
John Neff - William Blair
Marc, you had mentioned that international to this point has been all organic, and has not included Target and eTapestry. When do you imagine that Target and eTapestry would start to contribute to international expansion?
Marc Chardon
Well, there are three different parts there. The Target Software, I believe we'll see our first international eCRM deal, which really is the combined road map for a team approach and eCRM.
We'll see that first deal in this calendar year. So that I would believe is a contribution because it will be a Target like, one of them is a Target like customer of the two potential ones that might come in.
So the second is Target Analysis, and we're starting to see interest in building business for the analytics business, especially the benchmarking side of the business outside both in the UK and Australia. We don't do much analytics at all in some of the other countries, because the data privacy laws are such that getting data sources is harder.
That's going to be a slower burn, and we're doing pilots with eTapestry in Spanish language right now. We've gone through the first mini pilot, and we're thinking about that in the second half of the year.
So I would be pretty comfortable saying I will be able to give you a good sense of where those growth plans look like at the end of this calendar year.
John Neff - William Blair
That's great. And then couldn't help, I notice you mentioned eCRM as a potentially $500 million revenue opportunity in a few years.
Do you mean actual revenue is that an addressable market size or is that actual revenue contribution?
Marc Chardon
Well, I said over several years, so it is not a single year number as much as I wish it were. No.
What it basically is taking the installed base in the higher education market, which typically is 15 to 20 plus years old at this point in time. And there is a significant technology shift, and if you take each of the top 250 schools and say the average deal is about $2 million plus deal for those schools and that most of them will be making decisions in the next five to seven years, that's where the number comes from.
John Neff - William Blair
Okay. That is helpful.
And quick question, housekeeping. Could you talk about the number of employees you have at the end of this quarter, may be compared to the prior quarter a year ago, if you happen to have that handy?
Marc Chardon
We're going to look that one up, and if it doesn't come in a second or two we will answer it in a couple of minutes.
John Neff - William Blair
Okay, thanks very much.
Marc Chardon
Thank you, John.
Operator
We'll take our next question from Ross MacMillan with Jefferies & Company.
Ross MacMillan - Jefferies & Company
Thank you, so on the eCRM in the higher education segment, what is DSR doing as a competitive to reaction to what appears to be really good success for you guys in that segment? That's the first question, and then secondly, when you think about decoupled NetCommunity, what are you doing in the sales organization to basically may be find incremental growth outside, how it was positioned before as it was tied to Raiser's Edge?
Thanks.
Marc Chardon
I don't typically comment on the competitive strategy or positioning of a specific competitor. So what I can say is that the customers and prospects we're discussing in the higher ed space view the technology we have is being something that, it provides them a platform for the future, and if they are choosing us, I am going to assume they are choosing it because they believe it is the best platform for the future.
In some senses it is not interesting, because they're making a bet on early technology in order to get a robust future platform, and we don't see much change in how these cycles have gone from the very first one to the ones that we're doing now. That's how we observe the competitive environment for higher ed.
In terms of BBNC Universal, we're going to start again relatively slowly at this high-end of the market. So somewhat similar to the way we started to roll out DM or eCRM.
The first customer was a team approach customer who chose to look for a higher level of integration, and some of the benefits that the Infinity-based BBNC Universal provided. So, we will continue to look at other team approach customers who might be interested in that higher level of integration.
And then you'll see other customers of a similar type to those kinds of customers. And they'll be handled by our enterprise sales force and a specialized sales team inside the Blackbaud interactive business unit.
Ross MacMillan - Jefferies & Company
That's great, may be just one very last one. Can you remind us on eCRM deals the choice of the customer has that allows to you recognize revenue ratably.
If you can just go through the different types of contract we can see there, that would be great. Thank you.
Tim Williams
Basically contracts can fall in to any one of four different categories, three of which would produce ratable revenue recognition. One would be what we call a smart license, which generally will just provide for license fee to be paid over several quarters, typically would probably be twelve quarters.
But as you know, we haven't had that many deals that have been done at this point in time. Obviously, we could also have a SAS type license in which the product will just simply be delivered as a service fee of the web, and the customer would pay a subscription and that would result in ratable recognition.
And finally we could even at this early stage still have situations in which the customer is interested in a specific piece of functionality or capability in the product that we would not have presently available in the product, and therefore might be only be willing to contract for a future deliverable or want us to do some specific funded development, either one of which would result in the late recognition or potentially even some ratable recognition. So hopefully that addresses your question, Ross.
Ross MacMillan - Jefferies & Company
That's great. Thank you.
Marc Chardon
Let me just answer the headcount question that came up earlier. In Q1 of 2007 we had an average head count of 1,410 roughly.
Now, I will remind you that there were two missing weeks of Target in that average, so two missing weeks of 200 people, and that eTapestry was not in that average. You sort of add those back, it might have looked like 1,530 or so.
The Q4 average number was 1,655, the average for Q4. Our average number in Q1 of 2008 was 1,670, so approximately 15 average incremental heads relative to Q4 of last year.
Next question?
Operator
We'll take our next question from Tom Roderick with Thomas Weisel Partners.
Tom Roderick - Thomas Weisel Partners
Hey, Marc, hey, Tim, good afternoon.
Marc Chardon
Hey, Tom.
Tom Roderick - Thomas Weisel Partners
I wanted to follow-up on your pipeline comment from earlier. I think you indicated the pipeline is up 20% year-over-year.
So obviously, you're building up what's in the pipeline pretty robustly. Can you talk about the capacity in the sales force?
I think relative to adding 15 heads in the quarter, I am not sure if you've aggressively begun to add headcount or what your plans are for that. Can you talk about that pipeline build with respect to where the sales headcount is and where you would like to see that go?
Marc Chardon
Yes. As I have said before, we're not planning on adding headcount in the sales organization other than very judiciously.
We'll see a slight uptick in sales headcount in international, but very modest. And a couple of salespeople for things like the internet business and so on.
But this Q1 we had an average of about 165 heads on average, and in Q4 we had 162 heads on average. So it is really a net two or three people.
Tim Williams
Importantly, Tom, those are quota-carrying heads.
Marc Chardon
Quota-carrying heads. And we feel very comfortable with that, the sales capacity is there, and I remember ASP is continue to go up, so the number of units isn't growing as fast as the dollar number grows.
And you're seeing an incremental sales efficiency that I talked about in several calls over the past few years, and we had an improvement of efficiency last year, and we expect to see that improvement again this year.
Tim Williams
Tom, the only thing I would add to that is, if you just look at our sales and marketing expense line, actually as a percent of revenue partly to what Marc said, we did show a little bit over a percentage point improvement there, so that's part of what we are trying to get here a little bit.
Tom Roderick - Thomas Weisel Partners
Okay. And just I want to follow-up on your earlier comments regarding a little bit of a slowdown in the overall economy and I think everybody is feeling it out there.
Can you point to any specific sub-segments of the nonprofit market that you're seeing a slowdown in, whether it is a slowdown in their spent or where their dollars are coming from a giving standpoint? Any particulars that you can point to from a weakness standpoint, any particulars you can point to from a strength standpoint?
Marc Chardon
The strongest sectors remain the higher education spaces, international and the faith-based sectors. They seem to be going on exactly the trajectory we would have thought they would have gone pretty much relative to before any thinking about economic slowdown.
And the rest is relatively evenly spread out, the caution doesn't really stand out anywhere with the possible exception of higher level of caution in the arts and cultural customers, so people who buy ticketing for museums, aquariums and so on. That's really the range.
This is a really three sectors that are pretty strong, several that are sort of generically a little bit more cautious, and perhaps a sector that's slightly more cautious than that.
Tom Roderick - Thomas Weisel Partners
Great, very good, that's it for me. I will turn it over to others.
Thank you and nice job.
Marc Chardon
Thank you very much.
Tim Williams
Thanks, Tom.
Operator
(Operator Instructions). We will take our next question from Robert Stimson with W.R.
Hambrecht.
Robert Stimson
Good afternoon, Marc. How are you doing, Tim?
A couple of quick questions, I want to drill down a little bit. One of the questions was you tweaked the consensus guidance number on your Q2 revenue number, but you pretty much kept the EPS line pretty much in line with consensus thinking.
So the question is what are you thinking on the margin side? Are we actually getting above the 24.5%?
And if you follow-up with that, you actually widen the range on your non-GAAP annual operating income, $72 million to $77 million, which is a wider range than you gave last quarter of $73 million to $76 million. Is there a margin pickup that you're seeing or can you maybe just give us some color on that?
And I have one quick follow-up.
W.R. Hambrecht
Good afternoon, Marc. How are you doing, Tim?
A couple of quick questions, I want to drill down a little bit. One of the questions was you tweaked the consensus guidance number on your Q2 revenue number, but you pretty much kept the EPS line pretty much in line with consensus thinking.
So the question is what are you thinking on the margin side? Are we actually getting above the 24.5%?
And if you follow-up with that, you actually widen the range on your non-GAAP annual operating income, $72 million to $77 million, which is a wider range than you gave last quarter of $73 million to $76 million. Is there a margin pickup that you're seeing or can you maybe just give us some color on that?
And I have one quick follow-up.
Tim Williams
I would say on margins, Bob, what we're really trying to do is manage the business in a way that allows us to achieve for the full year some margin improvement. I think we've said repeatedly that for the full year we're trying to manage this in a way that we get some modest margin improvement as we also, though, continue to make investments.
And we do feel it is important to continue to make those investments, but in light of what we're seeing on the top line, we're being a little more selective on that, as you would expect. But we are striving pretty hard in our thinking to achieve those margins that we've targeted at the end of the year.
The other thing that I would tell you on the EPS side to keep in mind is that, rather what I guess I would characterize is pretty robust activities around share repurchases both for the first quarter and since then probably are going to add in terms of EPS a little over $0.015 to our earnings per share, and I think a little less than $0.01 as you think about the second quarter.
Robert Stimson - W.R. Hambrecht
Okay. So, one of my competitors went out with a pretty gloom and doom downgrade scenario pushing the stock down pretty hard.
Do you think that gloom and doom scenario is really playing out in the marketplace? Or is it kind of just some tweaking with sales cycle, people being a little bit more cautious because of the economic environment, but you can more than able to make up that shortfall from a revenue standpoint and EPS?
Is that a fair assessment of kind of how you see the market right now and the gloom and doom scenario didn't really play out?
Marc Chardon
I would never allow myself to discuss, this is the comments of any of your competitors, but I don't see gloom and doom. I see 15% to 17% growth.
As you know relatively high percentage of our business is pretty visible pretty far out. I feel quite comfortable that we have a lot of opportunity in front of us, and I feel like there as a certain amount of caution in the market.
But I do believe this is a sector that is less impacted on average than most other sectors by the economic downturn, and I don't see anything that changes in that opinion.
Robert Stimson - W.R. Hambrecht
And just real quick, I'm sorry, I'm taking too much time, but, Tim, you gave 28% year-over-year deferred revenue growth. How do I reconcile that 28% to kind of your 18% year-over-year revenue growth?
Obviously, you're getting some pickups and maintenance from eTapestry and from Target, but wouldn't that be kind of a better leading indicator for where your revenue growth could go? And that's my last question.
Thank you.
Tim Williams
Bob, I think one of the biggest factors that we've got in the big deferred revenue jump quarter-over-quarter was, as I think I alluded to in my prepared remarks, you do have eTapestry in the balance sheet deferred revenue number at the end of Q1 2008 and nothing in there for them in 2007, and in point of fact their business is all subscription based, so they're a pretty sizable contributor. When you analyze the rest of the pieces of deferred revenue, they move between Q1 and from Q4, pretty much in line with what we've seen in the past.
So, I wouldn't make anything more of that movement in deferred revenue at this point.
Robert Stimson - W.R. Hambrecht
Great. Thanks a lot.
Good quarter.
Marc Chardon
Thank you.
Operator
Thank you. That concludes the question and answer session today.
At this time, Mr. Williams, I would like to turn the conference back to you for any additional or closing remarks.
Tim Williams
Okay. I will only say thank you to all of you for participating in the call.
We will be doing a little bit of meetings on the road over the next several weeks. So, some of you we will no doubt see and look forward to meeting you then.
Thank you for your continued support in the company. We will talk with you soon.
Marc Chardon
Thank you very much. Goodbye now.
Operator
That does conclude today's conference. We appreciate your participation.
You may now disconnect.