Tim Williams - CFO

Philip Rueppel - Wachovia John Neff - William Blair Tom Roderick - Thomas Weisel Partners Lawrence Petrone - W. R.

Hambrecht Ross MacMillan - Jefferies Kirk Materne - Banc of America

Thank you very much. Good afternoon, everyone.

Thank you for joining us today to review our second 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 later for questions. 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 can cause actual results to differ materially from those projected in the 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, I would like to turn the call over to Marc.

Then I will come back a little later to give further details regarding our financials. Marc.

Thank you, Tim and my thanks to all of you for joining us on the phone today. During the second quarter, the company delivered solid revenue growth, rapid growth in our subscription revenue and strong profit margins that drove non-GAAP EPS to the high end of our guidance.

We are pleased with the company's financial results in the face of continued challenging macro-economic environment. For the second quarter, total revenue grew 13% on a year-over-year basis to $72.5 million which was the mid-point of our guidance.

Subscription revenue grew 63% year-over-year to $9 million and represented 94% of our licensed revenue. The increasing mix of subscription revenue has been an important evolution of Blackbaud's business model as it further improves revenue visibility and predictability.

Let me begin to include Kintera's results in the upcoming third quarter, quarterly subscription revenue will, for the first time in Blackbaud's history exceed license revenue, we think by a substantial margin. This will obviously mark a milestone for our company.

License revenue came in at $9.6 million, which was down year-over-year primarily due to the fact we are facing a challenging comparison quarter in last year's Q2. A secondary factor is that we saw fewer seasonally-driven purchases when compared to last year's second quarter.

As a reminder, about half of our customers have fiscal years that end in June, while most of the other half end in December. So we typically see some increased level of year-end spending, so fiscal year-end spending in Q2 and Q4 of each year.

We did not see this to the same degree in the quarter just past. In spite of this, we delivered on our profitability guidance.

Non-GAAP operating income of $18 million represented the 25% margin and non-GAAP EPS was $0.25 cents, both of which were at the high end of our guidance ranges. From a market perspective, the message is largely the same as last quarter.

We continue to see a high level of customer interest across our solutions. There is also a real level of cautiousness in the marketplace.

We believe this was the primary reason that there was less Q2 end-of-year spending by nonprofits when compared with previous years. I will remind you that the nonprofit market is highly diversified.

There are numerous sub-verticals, some of which are hardly being impacted by the economy while others are feeling the pinch more strongly. Last quarter we adjusted the high end of our full year guidance as we saw early signs that the selling environment was starting to become more challenging.

With the added benefit of going through the fiscal year end for a good portion of our customers, we believe it is appropriate to reduce our short-term growth expectations by approximately a point and a half. We have taken this into account in our updated outlook.

Notwithstanding the economic environment, we continue to believe that Blackbaud is well positioned to deliver solid revenue growth and strong profitability in 2008 as a result of our large customer base, broad and deep suite of solutions, domain expertise and our strategic growth initiatives. We will continue to focus on executing against these initiatives which will help Blackbaud continue to deliver solid growth and gain share.

We believe we have a competitive advantage in important growth segments of the nonprofit market and the overall market opportunity we are addressing remains largely under penetrated. Online fundraising solutions are one of the important growth segments in which we have invested aggressively.

Due demand is being driven by the increasing use of the internet by nonprofit organizations to help drive and/or supplement relationship building activities with their constituencies. Our NetCommunity offering was designed from the start to operate with deep integration with the Raiser's Edge and the success of that strategy is evidenced by the fact that it continues to be the fastest growing and largest contributor of our new solutions.

In fact, among all solutions, BBNC was the third largest contributor to our sales during the quarter and it was an important component in our largest software deal order. With the recent closing of the Kintera acquisition, we have added more than 2,000 online fund raising customers and will now be able to better serve the entire nonprofit market opportunity with the best in class standalone online fund raising application.

Customer feedback has been very positive since the acquisition announcement. We believe that Kintera's financial performance will improve our time as they a very strong technology offering and domain expertise, but prior to our acquisition had been lacking in financial strength and stability.

We have already seen some customers that had been evaluating competitive online fund raising offerings come back to Kintera after the acquisition was announced. In addition, we have seen that Kintera's employees have been reenergized as a result of the combination with Blackbaud.

They have told me that our financial capability and our commitment of resources will give their company a much great remember chance to realize its considerable market potential. We look forward to sharing more on the progress of combined efforts in upcoming calls.

We are confident that we will be successful in our efforts with Kintera for several reasons. First, from a technology perspective, we are very similar in that we both utilize the DotNet architecture and use the same development tools.

This will make it easier to integrate our internet applications with our newer solutions built on the Infinity platform. Second from a market perspective, we both possess a deep understanding on the challenges that nonprofit customers face and a commitment to addressing them through best in class technology solutions and finally from an operating perspective, Blackbaud has a proven track record of successfully integrating acquisitions, while continuing to generate world class operating performance.

The most recent acquisition preceding Kintera was eTapestry, which occurred roughly a year ago. We are pleased with the market acceptance of the eTapestry software-as-a-service fundraising solution, which is highlighted by the fact that eTapestry enjoyed record quarterly buildings and its highest monthly sales during the just completed quarter.

eTapestry principally addresses the lower end of our market and it was an important step in expanding our domain expertise in software-as-a-service solutions. I am proud to say that in the year since our acquisition of eTapestry, we have made available six major and 25 minor releases of the eTapestry solution, added a significant number of new customers, retained and grown our eTapestry team in Indianapolis and proven to prospects and customers alike that bringing eTapestry into the Blackbaud family was a very good thing for them.

In fact, our broadened offering and deeper engineering resources, when combined with stability in the eTapestry staff caring for prospects and customers have met an increase in our competitive win rates and customer satisfaction that is as good as any products or team in the entire Blackbaud portfolio. This demonstrated ability to maintain and grow market confidence in the broader group of Blackbaud companies is a good sign for the Kintera acquisition.

We are equally pleased with the progress that is been made with the integration of the Target companies. Target Analytics, which is the combined business that includes Target Analysis group and Blackbaud Analytic solutions had an exceptionally strong quarter with one of its best growth performances of the past several years.

We believe we have a differentiated value proposition in the marketplace as our combined offering spans every element of the donor analytics experiment from donor acquisition to major giving and recurring annual giving. Furthermore, this is an area that strengthens our overall demand expertise and demonstrates the significant value that we can bring to the largest nonprofits.

As I had mentioned before, integrating targets team approach software is a key part of our high end direct marketing and eCRM business plans. I am proud to say that, we still have 100% team approach customer retention a year and a half after the acquisition and we continue to see significant and growing market interest in our eCRM offering from some very large organizations that would have been team approach prospects before they joined Blackbaud.

I am pleased to announce that we closed two eCRM deals in the second quarter. The first was Save the Children, which also selected our direct marketing and community solutions as part of their overall purchase.

The second was earth justice, our first customer to commit to upgrade from Target's market leading high volume direct market solution, that a is team approach, to our eCRM product. We continue to believe the integration of team approach's functionality into our eCRM offering will enable us to address a broader set of customer needs at the highest end of the nonprofit market and will provide us good up sell opportunities with the [AD] team approach customers.

This first customer commitment to migrate from team approach is a particularly important event because it rents the achievement of the fourth and last of our four customer milestones related to the Target Software acquisition. We were able to reach this milestone approximately two quarters earlier than we would originally projected.

We continue to execute against a strong pipeline post eCRM opportunities and we believe we are on track to hit our target of adding eCRM customers in the high single digit range for the year, though this number will fluctuate on a quarter to quarter basis. Beyond the large customers interested in eCRM, we are also seeing early stage interest from some mid-sized customers.

We currently have eCRM customers in each of four key sub-verticals and we are focusing on delivering successful implications, gaining reference accountings and evaluating how to package and deliver the strategic solution in higher volumes. As important as our new growth initiatives are, the majority of our new customers and our large deals, which we define as contracts, greater than $100,000, still come from our suite of solutions, which includes flag ship flagship Raiser's Edge offering, Financial Edge and Education Edge.

Our average deal size across our new and core solutions for second quarter 2008, was in the high $40,000 range, which is consistent with the prior year period. The recent addition of Kevin Mooney to our executive team will strengthen the go to market activities associated with our entire suite of solutions.

Kevin is responsible for our sales and marketing operations in North America, including the eTapestry division. Kevin brings a wealth of knowledge and experience to Blackbaud, most recently from Travelport GDS, one of the world's largest travel conglomerates, where he was responsible for global sales, marketing, service and support activities.

Kevin's deep operational capabilities, combined with his extensive consulting background and international experience will be of great value to Blackbaud as we continue to execute our strategies of product and service solution expansion across all areas of the worldwide nonprofit industry. In summary, we have delivered solid financial results in the first half of the year, particularly in light of the current macro economic environment.

With the year more now under our belt, the Target and eTapestry acquisitions have exceeded our expectations despite a tough market. We are excited about the recent Kintera acquisition and we are already hard at work on integrating our two companies.

The principal Kintera product, Sphere, adds the best in class solution to our strategic and high growth online fund raising market. This also significantly increases our recurring revenue sources, which is an important strategic priority.

We have adjusted core Blackbaud revenue growth expectation by approximately 1.5 points for the year. However, we continue to forecast solid growth as well as strong profitability margins that are largely consistent with our previous guidance and, as I noticed, we look forward to significant benefits from the Kintera acquisition.

With that, let me turn it over to Tim.

Thanks, Marc. Let me begin by providing some details on our second quarter operating results then I will update our guidance and close with a quick review of our capital management program.

First, let's start with the income statement. Total revenue came in at $72.5 million, which was up 13% on a year-over-year basis, and as Marc noted, was at the mid-point of our $71.5 million to $73.5 million guidance range.

Within total revenues, subscription revenue was $9 million, an increase of 63% on a year-over-year basis. It increased to 12% of our total revenue in the second quarter, up from 9% in the year ago period.

Even without the contribution from eTapestry, subscription revenue would have increased by approximately 30% on a year-over-year basis. We previously expected subscriptions revenue to be greater than license revenue at some point in the second half of 2008.

This will certainly be the case when we begin to include Kintera's revenue in the third quarter. License revenue was 9.6 million in the second quarter, a decrease of 13% year-over-year against a difficult comparison with quarter last year.

We expect our license revenue component to return to positive year-over-year growth in the upcoming third and fourth quarter. It is also worth noting that as expected neither of the two eCRM deals that Marc referenced contributed anything to license revenue in this quarter.

As we have indicated previously, we expect that most of the license revenue associated with the eCRM deals will be spread over several quarters. Our services revenue came in at $25.3 million during the second quarter, an increase of 14% on a year-over-year basis, while our maintenance revenue came in at $26.4 million, an increase of 14% on a year-over-year basis.

We continue to enjoy maintenance renewal rates in the mid-90s range, a testament to our customer satisfaction and the strength of our technology. Turning to gross profit, we generated $47.7 million in non-GAAP gross profit in the quarter, representing a gross margin of 66%, which was consistent with the previous year and up from 63% sequentially.

Importantly, you will note that our services gross margin improved by approximately 2.5 percentage points. Turning to operating expenses, total non-GAAP operating expenses were $29.7 million or 41% of revenue.

This is in line with the prior year and a 1% sequential improvement. As a result, non-GAAP operating income was $18 million at the high end of our guidance range of $17.4 million to $18 million and our margin basis, our non-GAAP operating margin of 25% was above the mid-point of our guidance range and consistent with the year ago period.

The effective tax rate for non-GAAP results in the quarter was again 39%, leading to non-GAAP net income of 10.9 million and non-GAAP diluted EPS of $0.25 per share, which was at the high end of our guidance range of $0.24 to $0.25. As a reminder, let me point out that we fully tax our non-GAAP EPS amounts even though the company's cash tax rate is much lower due to our deferred tax asset and other tax benefits associated with recent business acquisitions.

In our earnings release, there is a full tabular reconciliation between our non-GAAP operating results and our GAAP results, which include the impact of stock-based compensation expense and amortization of intangibles associated with acquisitions. In summary, our GAAP net income was $9 million in the second quarter of 2008, compared with $8.2 million in the second quarter of 2007, while GAAP diluted earnings per share were $0.21 cents compared with $0.19 cents in the prior period.

Let me now turn to cash flow and the balance sheet. We ended the quarter with $10 million in cash; this was down $2.1 million from the end of Q1 and was due primarily to the execution of our capital management program and an increase in receivables, which I will explain in a moment.

Cash flow from operations for the quarter was $7.1 million and in the quarter, we repurchased approximately 580,000 shares of the company's stock for $13.4 million and paid dividends of $4.4 million. At the end of the quarter, the company's deferred tax asset had a balance of approximately $51.6 million.

Just to remind you, this asset adds roughly $8 million to our cash flow on an annual basis and is expected to do so through 2014. In addition, we expect an annual cash flow benefit of an additional $2.5 million as a result of the structure we apply to our acquisitions of Kintera and the Target companies.

As mentioned a minute ago, accounts receivable increased this quarter to $64.2 million from $42.3 million at the end of the prior quarter and our DSO increased from the low 40s range to the high 40s range. This increase was due principally to our conversion to a new accounting system which resulted in customer invoices being sent out later than normal, which in turn negatively impacted our collections.

We expect our DSO to decrease in the second half of 2008 now that we are past the accounting system transition and in fact, our collections in the month of July were at record levels. Total deferred revenue came in at $110.1 million, up $11.2 million or 11% sequentially from the end of Q1 and up over 15% compared with the end of Q2 last year.

This growth is the result of a combination of high maintenance renewal rates and strong growth in our subscription-based offerings. We ended the June quarter with $24.5 million in current debt, which was used along with our cash flow to fund the repurchase of shares during the quarter.

The Kintera acquisition of approximately $46 million was also funded by debt after the end of the quarter. We plan to use the strong cash flow of the company to significantly repay much of this debt over the remainder of the year and, in fact, since the Kintera closing, we have repaid some of that debt and today have approximately $53 million outstanding.

Let me now turn to our guidance, including the impact of Kintera results. Before doing so, however, let me note that we have made the decision that for this specific transaction, we will report non-GAAP revenue beginning with the third quarter.

As our work over the past several weeks has indicated that the deferred revenue write-down we will take under purchase accounting will likely be materially greater than what we have experienced with previous acquisitions. Accordingly and as a result, we believe reporting non-GAAP revenue is the only way to provide investors meaningful comparability of our top line results for the last several quarters.

With that said, we expect full year non-GAAP revenue of $311 million to $315 million including an impact of approximately $19 million from Kintera. As Marc noted earlier, this reflects an adjustment of approximately 1.5 percentage points in our standalone Blackbaud revenue growth to the 14% to 15% range, which is still in line with our long-term annual growth target of low to mid-teens growth.

In terms of profitability, we currently expect full year, non-GAAP operating income of $70.5 million to $72 million with only a minor impact from Kintera. This leads to non-GAAP earnings per share of $0.97 to $0.99 cents.

What that represents is approximately $0.01 cent of the change in EPS from our previous EPS guidance, that is due to the adjusted, standalone Blackbaud outlook and another $0.01 would be associated with the incremental cost to finance the Kintera acquisition. Turning to our third quarter guidance, we expect non-GAAP revenue in the range of $82.5 million to $84.5 million, including an impact of approximately $9 million from Kintera.

Non-GAAP operating income is expected to be in the range of $17.7 million to $18.4 million, leading to non-GAAP EPS of $0.25 to $0.26. One final note, we expect to call out the separate impact of Kintera's financial performance through the end of this year, but beginning in the first quarter of 2009, we will focus exclusively on the combined Blackbaud business.

Finally, let me finish with a quick update on our two-part capital management program. First, we announced today that our Board of Directors, declared our third quarter dividend of $0.10 per share payable on September 15, 2008 to stockholders of record on August 28, 2008.

Secondly, we used approximately $13.4 million to buyback approximately 580,000 shares of our stock in the second quarter. We remained fully committed to using our cash flow in this way to enhance stockholder value and during the second quarter, the Board of Directors authorized an increase in the company's common stock share repurchase authorization to $40 million and as of the quarter end, we had approximately $38.5 million remaining under this authorization.

In summing up here, the company is delivering solid financial results in the face of a tough economic environment. We believe the inclusion of Kintera's best in class online fund raising solution and the subscription revenue stream will be of significant benefit to Blackbaud as we move forward.

Our updated forecast continues to reflect our overall optimism in our business and market opportunity as evidenced by our expectation of solid, total revenue growth, rapid subscription revenue growth and strong profitability. With that, we would like to turn it over to the operator to begin the Q&A session.

Operator?

Yes, thanks very much. You made some commentary about, now that you have seen the first half about the environment.

Did you see the the business environment deteriorate during the second quarter or, what is your perspective today vis-a-vis how it was at the end of the second quarter? Then as part of that, could you talk about now that you have completed the Kintera acquisition, are your expectations for that business in the second half of the year changed materially?

I will take the first part and I will let Tim have the second part there. So, the market environment was challenging from the beginning to the end of the quarter of Q2.

There was not really a noticeable difference, I would say, in the market environment. Obviously that did have an impact in the second half of the quarter in terms of the year end budget spending that we sometimes see that did not materialize to a meaningful extent.

On the other hand, we have now had two quarters to adapt our selling practices and processes and we saw a significant improvement throughout the quarter month from each month to the next, in our ability to convert or bring home the pipeline that we do have. So, we have a strong pipeline and I see an increasing ability to execute against that pipeline as we have learned how to sell, in the tougher scrutiny environments that our customers are putting out there.

Phil, in terms of the Kintera forecast for the second half and whether we have adjusted it in line with Blackbaud, we have basically looked at all the components of our business, including Kintera and their performance in the first half and how we believe they will perform in the second half in this environment. Remember that a sizable portion of their revenue is recurring, both subscription and maintenance.

So, that certainly had an impact. However, that was all considered in the development of our guidance and in general, I would say it is not materially different than what we said at the time we announced the acquisition, potentially maybe a penny or so difference just in terms of our estimates of how quickly we feel we will be able to generate some of the savings from their public company costs and how quickly we will be able to bring those down.

Other than that, nothing is really materially different in terms of our outlook.

Then a follow-up, if I might. Where are you in the process of, integrating Kintera?

Do you think now that that would be the same time table as you saw with your other acquisitions and from a cost synergy perspective, have you identified any additional or cost savings or is it too early to tell?

Well, the cost one is actually easier. We have not gotten any incremental cost savings other than the engineering of public company and data source costs that we mentioned in the announcement of Kintera.

So, there is nothing really new to report on that, Phil. Sorry, I just lost the first half of the question.

What was the first half?

About how the integration is?

Integration.

In eTapestry, we left eTapestry pretty much as a stand alone division. So it is not really an instructive example.

The Target one is, in many ways, more similar, in that Target has an analytics business, like Kintera does and Target has the software and software as a service business like Kintera does. Kintera also has, obviously, the FundWare and their Donor Advised Fund offerings as well.

We saw a relatively rapid integration of the analytics teams across the two organizations, but it still took pretty much of a year to do. I am quite convinced that the analytics integration here will be much faster.

The FundWare and FE integration will be probably similar in terms of time line. So the team approach one with eCRM because it involves creating a merged road map that will satisfy two customer bases and that took a year and a half or so to get done for the Target company for a combined road map with two different technology platforms.

I think you will see a much more rapid integration between the CRM offerings that we have in our portfolio today in the Sphere products. So, in that sense, part of the integration will be significantly faster, in my opinion, than the team approach.

So it really depends on which part of the business you are looking for and that is the range of times depending on which part of the business.

Great. Thanks very much.

Thanks, Phil.

Hi, thank you. Question for Marc.

As you said, nonprofit sector is very diversified, but is there any rule of thumb in terms of where do nonprofits look to cut costs during an economic downturn?

I do not think there is a common rule across that. You have read the press as much as I have and you have seen that there have been layoffs in some organizations and some of them are obviously being more careful in some of their investment budgets or their capital budgets.

So I think that like any organization, they take a look and see what is likely to impact their mission. Sometimes you do see some short-term decrease in terms of acquisition of new donors because that is a relatively low margin effort.

Many organizations, in the sense that it is expensive to acquire donors and you do not necessarily get a ton of revenue from a new donor in a broad-based DM space. That has a commensurate increase on the other hand with some of our analytics.

We had a good quarter in analytics, in part because people are trying to use analytics to get more out of their existing donor base. So you really see it spread across the board from higher at one space where we are seeing very little in terms of economic impact yet at this point to, as I said before, Arts & Cultural, where you are seeing very significant challenges in terms of both state funding and grant cut backs as well as to the subscribers as well as donors.

So very different approaches by segment.

Thank you for that. A question for Tim.

The revenue write down at Kintera, is it high relative to past acquisitions just because of the mix of revenue at Kintera? Or was it higher than you initially expected?

Well, I think the answer to both questions is yes. It was higher than what we expected and it is in point of fact probably due to the mix, but also the nature of that revenue.

To just give you one example, John, a large part of their services revenue has already been in a sense delivered. Because of the way they handle their accounting for those services and they are recognized as along with the subscription revenue, there is, in essence, no cost associated with the future recognition of those services and income.

Under the purchase accounting rules, basically you have to write all that off. So when we got in and started looking at this in greater depth, we realized that, in fact, the write-off was going to be a good bit larger than what we expected and in point and fact, a good bit different than what we saw on the last two acquisitions.

So the only way to really handle this from a comparability standpoint is to really look at it the way I said in my comment. Hope it is helpful.

Yes. It is.

I realize that is accounting, but does it change what you want to accomplish in the way of cost savings with Kintera?

No. I think as Marc said, we still see the cost savings, the synergies that are there that he alluded to and as I said earlier the only thing we might say, given our look on the cost side so far, is perhaps we will not be able to reduce the public company costs quite as quickly as we might have thought.

Again, we are talking about a very minor impact here about any.

Okay. Then you did mention guidance.

The guidance again from a revenue perspective for the year for the quarter. That was non-GAAP?

That is non-GAAP. That includes, in essence, it includes what we would otherwise expect Kintera to generate in terms of revenue without a deferred revenue write-off, so it excludes any deferred revenue write-off.

Last house keeping question here, Marc, I think you said eCRM wins for this year, was the number high-single digits for the full year in terms of customer wins?

Yes, yes.

Okay. Can you just remind us where you stand at the end of the second quarter?

We did two in this quarter and we did none in the first quarter, so two so far this year.

Okay. Two.

Thank you very much.

Yes thanks and good afternoon.

Hey, Tom.

Hey, Tom.

So in terms of what is going on with the nonprofit industry and your customer base, Marc, you alluded with your comments that it is been a challenging macro environment out there. Can you get a little bit more granular there?

Are there certain areas in your customer base that are showing signs of pronounced weakness? Are there certain areas that are perhaps more resilient than the rest and related to both of those two questions, are you able to shift any of your sales and marketing resources to focus on the markets that are proving to be more resilient?

Well, the answer is that it is hard to know right in the middle of the ones who are impacted on average like the rest of our business, but the one at the very high end of the market in terms of resilience is the higher Ed space and we very clearly shifted both engineering resources on the eCRM front to features and needs to satisfy the higher Ed space as well as focusing significant level and increased level of resources on higher Ed. So, yes, we have done some of that.

We have not seen a material decrease in interest or pipeline even in some of the sectors that have been impacted on the other hand. So one of the sectors that is most impacted would be the arts and cultural.

It is not like we have fewer pipelines; it is just that it is a lot harder and longer to sell. So we have not actually pulled resources away, we are still expecting to stay in the game and we will probably get a bounce out of that at some point in the future probably.

We think it is plausible to believe we will get a bounce out of that at some point in the future and we do not think it is worth taking coverage away in that context. So, in general, even in the sectors that have exhibited the most slowing, the actual pipeline year-over-year is up, it is just that it is taking longer to go through and we have a slightly increased no-decision rate from previous years.

Okay and, Tim, just in relation to that, to that answer, you mentioned that you have got confidence that the license will return to positive growth next quarter. Can you give us any details behind what builds that confidence level for you?

Well, I think certainly it is the strength of the pipeline that we see. As we look to 3Q, I would tell you that as a comparison quarter is not nearly as difficult as the second quarter was, but I would focus you primarily on where we stand with our overall pipeline of opportunities and the degree to which the sales team has succeeded in closing against what that pipeline shows.

So that is what gives us that confidence.

Will you take revenues next quarter on your two eCRM deals that you closed this quarter?

I believe that with respect to both of these, I do not believe there will be. In the case of one of those deals, we are going to have to do some accounting that is similar to what we described with one of our deals last year where because of the nature of the deliverable, our revenue is going to be deferred for some time.

Okay.

In the case of the other deal, the impact is relatively minor. Remember what Marc said about that particular deal, that represented a conversion of an existing TA customer to eCRM and so as a conversion customer in an early adopter state, you would appreciate that that had some impact on the amount of the license component in the deal, so…

Perfect. Thanks very much.

Okay.

Thank you.

Thank you very much. Hi, Marc and Tim.

Hey. Hello.

Just a quick question on the deferred revenue piece, Tim. If I look at the growth in deferred revenues as well as the cash flow from operations in Q2 and then take into consideration your comments regarding the new accounting system in Q2 and then the normal nonprofit financial calendar, do you think it is reasonable to assume at this point that you are going to have a pretty substantial pickup and cash flow from operations in Q3, similar to what you saw last year?

My expectation would be that our pick up in cash flow would be substantial in Q3. As I already mentioned, that what we have seen in our collections activity in July, we were basically at record levels relative to where we were last year.

So I would expect, yes, that our cash flow should be quite strong.

Do you think you will use some of that cash to continue to de-leverage your balance sheet?

Well, we are very cautious here about predicting how we are going to use our cash flow. There are obviously other choices here and, including buying back shares.

We never announce really when we are going to do that, but obviously we have used our cash in the past. We do have sizable amounts of debt, so certainly that would be a high priority as well.

We will certainly take a look and use our cash as we think it makes the most sense.

Okay. Marc, I wonder if I could get back to the eCRM product.

I wonder if you could give us a little bit more color on the pipeline that you are seeing for that platform. Are you seeing the interest that you and Tim have expressed to me in regard to the higher educational vertical there?

I just wonder if you can give us a little bit more color on that pipeline?

Yes. No, we are seeing continued strong interest in the higher education space and so that would be the area that has the largest single sub-vertical in terms of the percentage of pursuits that we are in and we are including an international eCRM higher end customer for whom we are in an evaluation phase right now.

We also see a certain number of international or organizations that are in relief or development, including some faith-based organizations that are in development mode. So, that they would look somewhat like (inaudible) or like Save the Children and those are two areas that we see interest.

Then we are seeing some interest in chapter-based organizations who are facing, however, an interesting dichotomy because they are trying to reduce their distributed organization's cost structure and getting more efficient, but at the same time the pressure is truly on both from a need basis and from a fund raising basis. This is the right time that we are seeing in a couple of these organizations that have many chapters spread around either the US or spread around the world.

So, it is not that different then the very large Raiser's Edge customer based profile, other than we are further up in size or actually it is not different from that [plus TA] customer base across the two, other than we are at the side scale of bigger universities so, we used to do before and then organizations that are similar in scale, any new services as well as the TA is, [they are a producer].

Okay. Of the two deals that you have already done that you have mentioned, is there a significant consulting end, certainly maintenance fees associated with those two contracts?

Absolutely, yes.

Okay. That is helpful.

Thank you very much. Thank you, Tim.

Thank you.

Thanks. Just want to go back to the comment around, the fiscal year end, so you hadn't seen so much of the budget flush that you typically see with the fiscal year end at June, but you also said you hadn't seen any slowdown from a macro standpoint with higher education and that I had thought that most higher education establishments were, mid-year, fiscal year end.

Has it been in other parts of the nonprofit world away from higher education with June fiscal year end that you have seen that lack of budget flush?

Year-end budget spending of that nature is typically in organizations that do not have public procurement, for example. We have RFP processes and policies in a foundation for a big university, you do not really see this, oh, I have something in my budget, so what can I do with it that makes sense.

So, very often you will see that more in what we would call the core sales organizations, that is to say organizations that would be typically two, three, four, Raiser's Edge implementation, so might be able to buy a volunteer module or extra training or something like that. So, it is very often more transactional and it manifest it is itself in typically in hundreds of transactions, somal number of hundreds of transactions, of all different sizes from a $1000 to $10,000 or $15,000 or $20,000.

So, I have never seen a major deal happen at the end of the year because someone happens to have $2,000,000 lying around.

That is fair, thank you. Then just on the subscription line, that seemed to slowdown sequentially quite materially and it may reflect the same issue that you have seen in terms of core sales.

Is there something else going on there to drive that deceleration, particular products maybe in that mix that maybe are growing a little more slowly than they have been?

I would say no. I do not think so.

If we were to go back and look at what was really embedded in our guidance, our estimates upon which we build our guidance, subscriptions actually came in right on the money, Ross.

Okay. Then just a couple of house keeping's on the acquisition.

So, the consolidation date, from what date are you consolidating it? Then just in terms of the revenue mix, on a non-GAAP basis, how should we expect to see that revenue from Kintera come through?

Well, it will be as of the date that we closed, we will begin consolidating from July 8 and in point of fact, we will have what amounts to a full quarter less basically a week in that first reported quarter and that does not change for the comments I made about the deferred revenue, right. We will go in and adjust the balance sheet and recognize on that basis.

The mix between revenue line items for the acquired revenue?

Well.

Anything in rough terms?

I think, as you would expect, most of their revenue from Kintera, if you were to go back to Kintera pre-acquisition here, the vast majority or a sizable percentage of their revenue will go through subscriptions. Of course, they did have the FundWare business, where they did have substantial maintenance revenues.

So that will flow through our maintenance revenue and they do have some services, obviously, as well. So we will map pretty closely to our categories.

On FundWare, a final one, just is there any plan to go to the FundWare base with financial edge or similar to migrate those customers yet?

Clearly, any customer who wants to migrate will have an attractive offer from us. We are not putting in any program that is designed to cause migration at this point.

Right now, what we are doing is we are working with the FundWare channel and with the FundWare team in Colorado and The Financial Edge team to design the version 8 of the combined road map. Just like we worked with the Team Approach customers with the eCRM road map and built an integrated road map in over time to bring TA customers to migrate to eCRM.

If you think of the FundWare acquisition or integration as being similar to the Team Approach/eCRM one, you would not be far off.

Okay. Great.

Thank you very much.

Thanks, Ross.

Yes, thanks. Just one quick question to follow up on Kintera.

I assume since this is going to be somewhat similar to the Target company acquisitions, you all are going to mainly leave the good market engine for Kintera alone in the beginning and just focus on the integration on the engineering side?

Well, I would say that, in some sense, yes, but it might integrate a little bit faster. Actually, the sales, the go-to market side of Target were integrated before the end of the first calendar year, right?

So we integrate this whole year, this whole year we have been in an integrated sales environment where the Team Approach customers are handled by the same enterprise sales force that handles the rest of the enterprise. All public broadcasting customers are handled by one integrated sales force for the offering across our set.

So just like that you will see, I think, the sales force will become integrated relatively quickly. The obvious first thing to do, though, is to have the people who know how to sell the Kintera offering to benefit from the increased financial stability that they have now got, the higher level of customer support and professional services that they can mobilize with our resources behind the Kintera professionals in that space and those were the primary reason they were having challenges selling versus another competitor in that space.

So, the first step is they would stay independent. I believe, that throughout next year you will see the integration.

On an engineering side, we are working very hard to define exactly the road map and we will have something to say about that the next call. We just do not know the exact steps, but we would hope to have some of the integration done and working in customers before the next call.

The actual integration road map of what the two products will be over time will take time to evolve and to develop.

Great. Tim, just to follow up on Ross' question about the revenue mix coming from Kintera, you said it would map somewhat similar to yours.

I mean you obviously have a much smaller percentage of subscription revenue. Can you just give any broader or any ranges that we can think about for the 9 million in the third quarter and 19 in the back half of the year?

Yes. I would just say that probably my guess is that, without getting too specific, of that 9 million, well, let's talk about the 19 for the entire second half, Kirk.

That is probably easier to do it.

Yes.

I would say that maintenance would end up being somewhere probably in maybe half of that.

Okay.

The rest would be largely subscription and a relatively modest amount of services.

Perfect. Thanks for the details, Tim.

I appreciate it.

All right.

Actually, hearing no response, gentlemen, actually, we are going to conclude today's Q&A session. Mr.

Williams, I will turn the conference back over to you.

Okay, well, thank you, everyone, for being on the call. We appreciate your support and interest and Marc and I will be out in the market sometime near the end of the month or early September at a couple of conferences, so we look forward to meeting some of you then.

Thank you very much.

Thanks to everybody. Bye.