May 30 , 2008

Blackbaud Spends $46 Million On Kintera

By Paul Clolery and Mark Hrywna

The buying spree of software vendor Blackbaud continues with the $46-million cash acquisition of troubled Software-as-a-Service (SaaS) provider Kintera. During the past 18 months, Charleston, S.C.-based Blackbaud has spent more than $130 million to tighten its grip on the nonprofit software space.

The acquisition of San Diego-based Kintera bolsters a major segment of Blackbaud’s product line, the online content management and deployment Sphere® technology platform, which has a significant market share. Blackbaud has NetCommunity™, but it hasn’t gained the wide acceptance by users that Kintera and Austin, Texas-based Convio have garnered.

Blackbaud expects to finance the deal with cash and borrowings from its credit facility. Blackbaud’s acquisition of Kintera is structured as an all-cash tender offer for all of the shares of Kintera at a price of $1.12 per share, a 65-percent premium compared to its 68-cents a share close. The company is expected to formally launch the tender sometime next week and close on or around July 2.

Blackbaud and Kintera are both publicly traded on NASDAQ and the announcement was made after the close of the stock markets on Thursday. Convio announced plans last August to go public and raise $86 million, which was expected in the first quarter of 2008 but has yet to take off. The firm purchased GetActive Software for almost $18 million early last year.

Kintera’s principal offering is the online Sphere® technology platform, which is used by such organizations as American Lung Association, Big Brothers Big Sisters of America, International Fund for Animal Welfare, Lance Armstrong Foundation and Sesame Workshop to manage online fundraising events and in 2007 processed more than $400 million in online gifts. Almost 2,300 organizations run their Web presence on Sphere®, which accounted for a majority of Kintera’s $45 million in revenue last year.

Kintera, which went on a buying spree of its own when it went public and before those purchases got the firm into financial trouble, also offers wealth profiling and screening services as well as an accounting software solution, both similar to offerings of Blackbaud. 

Although it has approximately 4,000 customers and reported $44.9 million in revenue for 2007, Kintera has never made a profit. Founded in 1999, the company raised $40 million in its July 2003 initial public offering before beginning trading that December. By April 2004, it had reached an all-time high of $17.73 per share. On March 20, it hit a 52-week low of 20 cents per share.

Blackbaud Senior Vice President and Chief Financial Officer Tim Williams said the purchase price does not take into consideration that Blackbaud will receive the benefit of Kintera’s net operating losses worth about $10 million on a net present basis. “You could argue this would effectively reduce the net purchase price to approximately $36 million,” he said.

Kintera received notice about potential de-listing from NASDAQ because its price had dropped to less than $1 for more than 30 days. It received another de-listing notice this month, this time for stockholders’ equity dropping below $10 million, to $9.806 million. The firm had until today to provide a compliance plan to NASDAQ.

During its first-quarter conference call in early May, Kintera announced another round of layoffs, this time of about 14 percent. In the past two years, Kintera has reduced staff from less than 500 to an expected 240 after the latest layoffs, which are expected to save $1 million a quarter by the third quarter of this year.

Marc Chardon, Blackbaud’s president and chief executive officer, said that the acquisition of Kintera expands Blackbaud’s online offerings and that “the online solutions of the two companies have historically served different segments of the market and this acquisition gives us the ability to broaden our addressable market with proven and rich online product functionality.”

Chardon continued, “Our core capabilities are complementary and we expect to continue to offer a full range of solutions that effectively meet nonprofits’ needs for donor acquisition and cultivation that are integrated with our suite of CRM solutions, including The Raiser’s Edge®. Kintera’s “Friends Asking Friends®” team fundraising and advocacy solutions are well suited for organizations that use these programs to grow their base of supporters. Similarly, Blackbaud’s NetCommunity™ offering is ideally suited for enriching the online experience of current donors enhancing the value of data that already exists in the CRM system.”

In addition to acquiring Sphere®, which Chardon described as “the most advanced solution in the market today,” especially for advocacy, multi-site capabilities and team fundraising, the acquisition brings a large customer base in accounting. Kintera’s Fundware has almost 1,700 customers, which would bring Blackbaud’s installation base to nearly 6,000 customers. It also accelerates a move into online fundraising, “one of the largest and most important growth areas we’ve been investing in.” Chardon said it also further increases the portion of business from recurring sources, since Sphere® is only on a SaaS subscription basis.

Bringing the two companies together is expected to reduce the combined, projected research and development spending by $2 million annually, Chardon said, through decreases in future hiring. Another $1 million in annual savings is expected from avoiding Kintera’s public company costs.

Kintera will continue to be led by current President and Chief Executive Officer Richard LaBarbera. Kintera operations will continue to be directed from its existing offices in San Diego.

LaBarbera said, “Importantly, this move also means that nonprofits will be able to choose Kintera solutions confident in the knowledge that they are backed by Blackbaud’s robust corporate infrastructure and that the partner they have selected will be there to serve them for many years into the future.” Kintera’s financial troubles spawned rumors that the firm would go bankrupt.

Williams said, "In addition to the strategic reasons supporting the acquisition of Kintera, we believe the acquisition is attractive from a financial perspective. Subscription revenue was already the fastest growing source of revenue at Blackbaud and it was expected to become larger than license revenue at some point in the second half of 2008. With the acquisition of Kintera, this will become a certainty as we will add another significant source of subscription-based revenue from an on-demand service offering. The evolution of Blackbaud’s business model toward new revenue sources with ratable revenue recognition has been a significant and positive development over the past several years, and it complements the very strong cash flow profile of the company.”

Blackbaud bought online donor management and advocacy tool eTapestry last summer for $24.8 million and up to another $1.5 million under a two-year, stock-based performance incentive arrangement. eTapestry had unaudited revenue of approximately $7 million for 2006, according to a Blackbaud spokesperson.

Blackbaud also financed that deal through a combination of cash and borrowing from its credit facility. eTapestry, based just outside Indianapolis, Ind., developed one of the first SaaS offerings built specifically for nonprofits. SaaS means that the software resides at the vendor and all transactions are done online.

eTapestry reportedly had more than 3,000 customers of its on-demand services, with donor records ranging from several hundred per organization to more than 300,000.

Earlier in 2007, Blackbaud acquired Target Analysis Group for $60 million. The Cambridge, Mass.-based Target has donor management software but also has a donor research, database operation and fundraising consultancy.