Michael Chason: Well, I think already this year, we have started to cross-sell successfully into the WebCT installed base, also as many of the WebCT clients have moved up to the most recent version of the software, they have noticed auto considerable amount of their problems that have now gone away as we manage to fix the offending bugs and issues in the code. However, at Blackboard world, the sense we got from when we laid out our vision of where we were driving the products and the company, and combined with the improvements they have seen in support in our product, it really excited them to continue to stay and expand with Blackboard in the long run.
I think we are going to continue to see tremendous amount of opportunity from across our whole installed base, whether they were previous Blackboard clients and at this point, all of our clients see themselves as now just Blackboard clients moving forward and are looking for additional opportunities to be able to expand the relationship with us.
Kash Rangan (Merrill Lynch): It looks like Connect had had a really strong quarter. I am just curious, with what seems to be more than one quarter of good execution along the way. You obviously raised the low end of the revenue guidance, but the contract fairly coming in as strong as it did, I''m just curious what are your thoughts on this are - are you being conservative with what you expect out of the Connect business for the second half of the year as can be implied by your revenue guidance not really going up a whole lot?
Mike Chasen: We are very excited about the early success we have seen with Blackboard Connect, the amount of deals we have been closing, focused not only in the higher education market, but in K-12 and the government opportunity as well.
We are also excited how we have started to take advantage of the installed base we already have in the number of cross sells we have had. That being said, our organic contract value growth was very strong as well.
So, we had a very successful growth just in contract value based on the e-Learning and Blackboard Transact business as well. We have very strong recurring product revenue and a big deferred revenue balance and we do factor that into the guidance. So I think we are really accurate in our projections for the rest of the year.
Mike Beach: As you look at the revenue guidance, the thing to keep in mind is the New Mexico delayed revenue recognition related to services and the transaction system delay related to the rollout of the product is going to have some impact in the rest of the year. So really services are countering the increases that we are seeing in product revenue for the remainder of the year.
Kash Rangan (Merrill Lynch): So obviously the Connect business is tracking ahead but it has a negative impact from the BTS delay and the New Mexico not being recognized in 2008.
Mike Beach: Yes, and the important thing to remember is our service recognition is generally upfront, whereas all the product recognition is ratable. So service is pushing, has a much more material impact in the quarter, or in near term, but it is getting offset and for the second half of the year we slightly took up the revenue number for the second half of the year. It is getting offset by stronger product revenues, which are being recognized ratably.
Can you discuss margins and if you see an ongoing trade-off between margins and growth? Then more specifically, if you regard the R&D is in elevated level right now as a percentage of revenue or if you think it is going to come down.
Mike Chasen: If you look at the operating margins for the remainder of the year we would expect to get some leverage in the next two quarters, more leverage in the fourth quarter than the third quarter. As you look at it by line item, I would expect for the full year, as a percent of revenues the operating expense items to be generally in line with what we experienced in the second quarter which is generally in line with the guidance we gave at the start of the year which was that we would exit this year similar to how we exited last year. The only difference is sales and marketing as a percent of revenue is going to be slightly higher for the reasons we discussed on the call.
What about R&D in the longer term over the next couple years as you chase the international opportunity or K-12 or anywhere else?
Mike Chasen: One of the great things about the education market is specifically the area that we are focused in is that when you look globally, education is then very similarly across all the markets. We are able to leverage the significant investment we have made which was originally focused in higher Ed into the K-12 and the international markets with very little additional development.
Certainly a small amount for the languages of international and one or two specific items in K-12, but otherwise throughout all of our R&D, we are able to really leverage well across the market. So we will continue to see the expansion of the margins as R&D becomes a smaller piece of overall expenses for the long run.
Robert Riggs (William Blair & Company): Can you comment on the average new deal size that you are seeing versus what you saw in the first quarter?
Mike Beach: If you look at the average deal for the quarter, it is going to be lower because of the volume of Connect sales. You can see that in contract value per license. It is down quarter-over-quarter basically because of the volume of deals on the connect side and their average selling price.
Having said that, we talked about some very large deals during the quarter, so we are seeing some very nice large deals, but we do have the new dynamic of the Connect business, which on average a lower price point per customer. However, again, their price point per customer can range pretty radically, but on average it is going to be lower than the Blackboard average license price.
Robert Riggs (William Blair & Company): Can you comment on any trends in hosting, maybe differences between what you are seeing in the U.S. than in the international markets?
Michael Chason: One of the things, we talked about this earlier in the year, is that sometimes either from a legal or marketing perspective, our international clients require that the hosting is done within the continent, either because of their own country regulations, or just from a marketing aspect they want to know that the data is hosted in continent. So, certainly as we have established our hosting centers overseas we have started to see some of it conflict with international hosting.
Overall, a general trend that I can talk to, is certainly, as our clients continue to achieve the scale and success they have, they recognize that they need professional commercial organization to be able to run and monitor their e-learning installations, and they are continuing to turn to Blackboard to run the systems for them, whether they are new clients just now coming on board, recognizing the importance of their system, or existing clients that have not deployed locally but have reached a certain level of either required uptime or complexity that they want to hand it off to Blackboard to continue to run. So we see a very strong continued pipeline for managed hosting.
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