Edgar Filing: BLACKBAUD INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-50600

BLACKBAUD, INC.

(Exact name of registrant as specified in its charter)

Delaware

11-2617163

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2000 Daniel Island Drive

Charleston, South Carolina 29492

(Address of principal executive offices, including zip code)

(843) 216-6200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

The number of shares of the registrant’s Common Stock outstanding as of October 28, 2009 was 44,159,781.

BLACKBAUD, INC.

TABLE OF CONTENTS


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial statements
	Consolidated balance sheets as of September 30, 2009 and December 31, 2008 (unaudited)	1
	Consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008 (unaudited)	2
	Consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008 (unaudited)	3
	Consolidated statements of stockholders’ equity and comprehensive income for the nine months ended September 30, 2009 and the year ended December 31, 2008 (unaudited)	4
	Notes to consolidated financial statements (unaudited)	5
Item 2.	Management’s discussion and analysis of financial condition and results of operations	18
Item 3.	Quantitative and qualitative disclosures about market risk	31
Item 4.	Controls and procedures	32

PART II. OTHER INFORMATION

Item 2.	Unregistered sales of equity securities and use of proceeds	33
Item 6.	Exhibits	33

Signatures
Exhibit – 31.1
Exhibit – 31.2
Exhibit – 32.1
Exhibit – 32.2

PART I- FINANCIAL INFORMATION

Item 1.

Financial statements

Blackbaud, Inc.

Consolidated balance sheets

(Unaudited)


(in thousands, except share amounts)	September 30, 2009		December 31, 2008

Assets
Current assets:
Cash and cash equivalents	$	22,238	$	16,361
Donor restricted cash		16,493		12,363
Accounts receivable, net of allowance of $2,911 and $2,777 at September 30, 2009 and December 31, 2008, respectively		51,266		52,554
Prepaid expenses and other current assets		21,978		17,281
Deferred tax asset, current portion		6,745		6,858

Total current assets		118,720		105,417
Property and equipment, net		19,287		21,384
Deferred tax asset		61,096		64,762
Goodwill		74,208		73,615
Intangible assets, net		43,815		48,171
Other assets		530		537


Total assets	$	317,656	$	313,886


Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	7,085	$	7,023
Accrued expenses and other current liabilities		26,371		21,758
Donations payable		16,493		12,363
Capital lease obligations, current portion		230		384
Debt, current portion		18,642		60,049
Deferred revenue		128,168		113,802

Total current liabilities		196,989		215,379
Capital lease obligations, noncurrent		57		203
Long-term debt, net of current portion		420		1,288
Deferred revenue, noncurrent		5,449		5,838
Other noncurrent liabilities		1,386		670


Total liabilities		204,301		223,378


Commitments and contingencies (see Note 9)
Stockholders’ equity:
Preferred stock; 20,000,000 shares authorized, none outstanding		-		-
Common stock, $0.001 par value; 180,000,000 shares authorized, 51,683,679 and 51,269,081 shares issued at September 30, 2009 and December 31, 2008, respectively		52		51
Additional paid-in capital		132,324		116,846
Treasury stock, at cost; 7,536,337 and 7,494,466 shares at September 30, 2009 and December 31, 2008, respectively		(131,265)		(130,594)
Accumulated other comprehensive loss		(164)		(899)
Retained earnings		112,408		105,104


Total stockholders’ equity		113,355		90,508


Total liabilities and stockholders’ equity	$	317,656	$	313,886

The accompanying notes are an integral part of these consolidated financial statements.

Blackbaud, Inc.

Consolidated statements of operations

(Unaudited)


	Three months ended September 30,		Nine months ended September 30,
(in thousands, except share and per share amounts)	2009	2008	2009	2008

Revenue
License fees	$ 5,919	$ 8,099	$ 19,123	$ 27,337
Services	22,818	27,076	66,412	75,988
Maintenance	29,742	27,411	86,574	79,212
Subscriptions	19,190	15,547	53,686	33,342
Other revenue	1,536	1,965	4,566	6,157


Total revenue	79,205	80,098	230,361	222,036


Cost of revenue
Cost of license fees	987	1,011	2,871	2,660
Cost of services	15,269	16,703	46,990	47,301
Cost of maintenance	5,498	5,363	16,078	14,662
Cost of subscriptions	7,462	6,259	21,240	13,739
Cost of other revenue	1,325	1,970	4,136	5,841


Total cost of revenue	30,541	31,306	91,315	84,203


Gross profit	48,664	48,792	139,046	137,833


Operating expenses
Sales and marketing	15,778	16,686	46,965	47,597
Research and development	11,389	10,568	34,151	27,977
General and administrative	7,420	9,848	24,872	24,387
Amortization	194	190	572	524


Total operating expenses	34,781	37,292	106,560	100,485


Income from operations	13,883	11,500	32,486	37,348
Interest income	32	219	131	418
Interest expense	(181)	(603)	(876)	(821)
Other income (expense), net	226	(152)	96	(192)


Income before provision for income taxes	13,960	10,964	31,837	36,753
Income tax provision	4,132	3,648	11,349	13,407


Net income	$ 9,828	$ 7,316	$ 20,488	$ 23,346


Earnings per share
Basic	$ 0.23	$ 0.17	$ 0.48	$ 0.54
Diluted	$ 0.22	$ 0.17	$ 0.47	$ 0.53

Common shares and equivalents outstanding
Basic weighted average shares	42,781,072	42,668,276	42,805,498	43,112,209
Diluted weighted average shares	43,826,550	43,409,941	43,493,362	43,889,859
Dividends per share	$ 0.10	$ 0.10	$ 0.30	$ 0.30

The accompanying notes are an integral part of these consolidated financial statements.

Blackbaud, Inc.

Consolidated statements of cash flows

(Unaudited)


	Nine months ended September 30,
(in thousands)		2009		2008

Cash flows from operating activities
Net income		$	20,488	$	23,346
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			11,563		9,099
Provision for doubtful accounts and sales returns			2,082		4,018
Stock-based compensation expense			9,062		7,912
Excess tax benefit on exercise of stock options			(4,806)		(168)
Deferred taxes			5,896		1,837
Other non-cash adjustments			94		80
Changes in assets and liabilities, net of acquisition of businesses:
Accounts receivable			1,389		(12,516)
Prepaid expenses and other assets			447		(1,020)
Trade accounts payable			(198)		904
Accrued expenses and other current liabilities			2,625		(5,459)
Donor restricted cash			(4,129)		(6,343)
Donations payable			4,129		6,343
Deferred revenue			11,713		19,963

Net cash provided by operating activities			60,355		47,996

Cash flows from investing activities
Purchase of property and equipment			(3,865)		(5,577)
Purchase of net assets of acquired companies, net of cash acquired			(2,258)		(49,927)

Net cash used in investing activities			(6,123)		(55,504)

Cash flows from financing activities
Proceeds from issuance of debt			-		86,000
Proceeds from exercise of stock options			2,127		696
Excess tax benefit on exercise of stock options			4,806		168
Payments on debt			(42,275)		(27,283)
Payments of deferred financing fees			-		(47)
Payments on capital lease obligations			(300)		(427)
Purchase of treasury stock			-		(40,338)
Dividend payments to stockholders			(13,206)		(13,196)

Net cash (used in) provided by financing activities			(48,848)		5,573

Effect of exchange rate on cash and cash equivalents			493		(537)

Net increase (decrease) in cash and cash equivalents			5,877		(2,472)
Cash and cash equivalents, beginning of period			16,361		14,775

Cash and cash equivalents, end of period		$	22,238	$	12,303

The accompanying notes are an integral part of these consolidated financial statements.

Blackbaud, Inc.

Consolidated statements of stockholders’ equity and comprehensive income

(Unaudited)


							Additional				Accumulated other				Total
(in thousands, except share amounts)		Comprehensive	Common stock				paid-in		Treasury		comprehensive		Retained		stockholders’
(in thousands, except share amounts)		income	Shares		Amount		capital		stock		income (loss)		earnings		equity
Balance at December 31, 2007			50,450,675	$	50	$	105,687	$	(85,487)	$	137	$	92,716	$	113,103
Net income	$	29,878	-		-		-		-		-		29,878		29,878
Payment of dividends		-	-		-		-		-		-		(17,497)		(17,497)
Purchase of 1,956,168 treasury shares under stock repurchase program and surrender of 106,446 shares upon restricted stock vesting		-	-		-		-		(45,107)		-		-		(45,107)
Exercise of stock options		-	126,206		1		882		-		-		-		883
Tax impact of exercise of nonqualified stock options and restricted stock vesting		-	-		-		(1,126)		-		-		-		(1,126)
Stock options assumed in acquisition		-	-		-		172		-		-		-		172
Stock-based compensation		-			-		11,231		-		-		7		11,238
Restricted stock grants		-	727,237		-		-		-		-		-		-
Restricted stock cancellations		-	(35,037)		-		-		-		-		-		-
Translation adjustment, net of tax		(1,036)	-		-		-		-		(1,036)		-		(1,036)

Comprehensive income	$	28,842
Balance at December 31, 2008			51,269,081	$	51	$	116,846	$	(130,594)	$	(899)	$	105,104	$	90,508

Net income	$	20,488	-		-		-		-		-		20,488		20,488
Payment of dividends		-	-		-		-		-		-		(13,206)		(13,206)
Surrender of 41,871 shares upon restricted stock vesting		-	-		-		-		(671)		-		-		(671)
Issuance of common stock		-	10,898		-		215		-		-		-		215
Exercise of stock options		-	380,838		1		2,126		-		-		-		2,127
Tax impact of exercise of nonqualified stock options and restricted stock vesting		-	-		-		4,484		-		-		-		4,484
Stock-based compensation		-	-		-		8,204		-		-		22		8,226
Restricted stock grants		-	59,860		-		449		-		-		-		449
Restricted stock cancellations		-	(36,998)		-		-		-		-		-		-
Translation adjustment, net of tax		735	-		-		-		-		735		-		735

Comprehensive income	$	21,223
Balance at September 30, 2009			51,683,679	$	52	$	132,324	$	(131,265)	$	(164)	$	112,408	$	113,355

The accompanying notes are an integral part of these consolidated financial statements.

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

1. Organization

Blackbaud, Inc. (the Company), a leading global provider of software and related services designed specifically for nonprofit organizations, provides products and services that enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage finances and optimize internal operations. As of September 30, 2009, the Company had approximately 22,000 active customers distributed across multiple verticals within the nonprofit market including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare and international foreign affairs.

2. Summary of significant accounting policies

Unaudited interim financial statements

The Company prepared its interim consolidated financial statements as of September 30, 2009, and for the three and nine months ended September 30, 2009 and 2008, pursuant to the rules and regulations of the SEC for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of operations, consolidated statements of cash flows and consolidated statements of stockholders’ equity and comprehensive income for the periods presented in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The Company derived its consolidated balance sheet at December 31, 2008 from the audited consolidated financial statements at that date. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2009 or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and other forms filed with the SEC from time to time.

Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company evaluates subsequent events through the date the financial statements were issued, which was November 6, 2009.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Areas of the financial statements where estimates may have the most significant effect include revenue recognition, the allowance for sales returns and doubtful accounts, valuation of long-lived and intangible assets and goodwill, stock-based compensation and provision for income taxes and valuation of deferred tax assets. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates.

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

Revenue recognition

The Company’s revenue is primarily generated from the following sources: (1) selling perpetual licenses of its software products; (2) providing professional services including implementation, training, consulting, hosting and other services; (3) providing software maintenance and support services; and (4) charging for the use of its software products in a hosted environment.

License fees

The Company recognizes revenue from the sale of perpetual software license rights when all of the following conditions are met:

•

persuasive evidence of an arrangement exists;

•

the product has been delivered;

•

the fee is fixed or determinable; and

•

collection of the resulting receivable is probable.

The Company deems acceptance of an agreement to be evidence of an arrangement. Delivery occurs when the product is shipped or transmitted, and title and risk of loss have transferred to the customers. The Company’s typical license agreement does not include customer acceptance provisions; however, if acceptance provisions are provided, delivery is deemed to occur upon acceptance. The Company considers the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within the Company’s standard payment terms. Payment terms greater than 90 days are considered to be beyond the Company’s customary payment terms. Collection is deemed probable if the Company expects that the customer will be able to pay amounts under the arrangement as they become due. If the Company determines that collection is not probable, it defers revenue recognition until collection.

The Company sells software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. The Company allocates revenue to delivered components, normally the license component of the arrangement, using the residual value method based on objective evidence of the fair value of the undelivered elements, which is specific to the Company. Fair value for maintenance services associated with software licenses is based upon renewal rates stated in the agreements with customers, which vary according to the level of support service provided under the maintenance program. Fair value of professional services and other products and services is based on sales of these products and services to other customers when sold on a stand-alone basis. When a software license is sold with software customization services, generally the services are to provide customer support for assistance in creating special reports and other enhancements that will assist with efforts to improve operational efficiency and/or to support business process improvements. These services are not essential to the functionality of the software. However, when software customization services are considered essential to the functionality of the software, the Company recognizes revenue for both the software license and the services on a percent-complete basis.

Services

The Company generally bills consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are performed. For service engagements of less than $10,000, the Company frequently contracts for and bills based on a fixed fee plus reimbursable travel-related expenses. The Company recognizes this revenue upon completion of the work performed.

The Company recognizes analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery.

The Company sells training at a fixed rate for each specific class, at a per attendee price or at a packaged price for several attendees, and revenue is recognized only upon the customer attending and completing training.

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

Additionally, the Company sells a fixed-rate program, which permits customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue is recognized ratably over this contract period.

Maintenance

The Company recognizes revenue from maintenance services ratably over the contract term, which is principally one year. Maintenance contracts are at rates that vary according to the level of the maintenance program and are generally renewable annually. Maintenance contracts also include the right to unspecified product upgrades on an if-and-when available basis. Certain support services are sold in prepaid units of time and recognized as revenue upon their usage.

Subscriptions

The Company provides hosting services to customers who have purchased perpetual rights to certain of its software products (hosting services). Revenue from hosting services, as well as data enrichment services, data management services and online training programs is recognized ratably over the service period of the contract. Any related set-up fees are also recognized ratably over the service period of the contract.

The Company is increasingly making available certain of its software products for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized over the subscription agreement, which generally ranges from one to three years. For contractual arrangements covering the use of hosted applications the stand alone value of the delivered items or the fair value of undelivered items in the arrangement have not been established. Such items include upfront activation, implementation and hosting of the solution. For these arrangements the Company treats the transaction as a single element and the revenue is deferred until the hosted application is deployed and in use, at which time revenue is recognized over the remaining term of the arrangement. Direct and incremental costs relating to activation and implementation are capitalized until the hosted application is deployed and in use, and then expensed over the remaining term of the arrangement.

Revenue from transaction processing fees is recognized when received. Credit card fees directly associated with processing donations for customers are included in subscription revenue net of related transaction costs.

Deferred revenue

To the extent that the Company’s customers are billed or pay for the above described services in advance of delivery, such amounts are recorded in deferred revenue.

Goodwill

The change in goodwill during the nine months ended September 30, 2009 consisted of the following:



(in thousands)

Balance at December 31, 2008	$	73,615
Additions related to recent business combinations		1,682
Adjustments related to prior year business combinations		(1,446)
Effect of foreign currency translation		357

Balance at September 30, 2009	$	74,208

Additions and adjustments related to business combinations are described in Note 3 to the consolidated financial statements.

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

Amortization expense

Amortization expense related to intangible assets acquired in business combinations is allocated to cost of revenue on the statements of operations based on the revenue stream to which the asset contributes. The following table summarizes amortization expense for the three and nine months ended September 30, 2009 and 2008.


	Three months ended September 30,					Nine months ended September 30,

(in thousands)		2009		2008		2009		2008

Included in cost of revenue:
Cost of license fees		$	95	$	80	$	266	$	166
Cost of services			336		336		1,006		1,004
Cost of maintenance			326		370		976		566
Cost of subscriptions			807		931		2,432		1,749
Cost of other revenue			19		18		56		56

Total included in cost of revenue			1,583		1,735		4,736		3,541
Included in operating expenses			194		190		572		524

Total		$	1,777	$	1,925	$	5,308	$	4,065

Recently adopted accounting pronouncements

In June 2009, the FASB issued the FASB Accounting Standards Codification ^TM and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. The ASC is not intended to change U.S. GAAP, but significantly changes the way in which the accounting literature is organized and the way U.S. GAAP is referenced by companies in their financial statements and accounting policies. The ASC became effective in the third quarter of 2009. The adoption of the ASC did not have an impact on the Company’s consolidated financial statements.

Recently issued accounting pronouncements

In October 2009, the FASB released Accounting Standards Update (ASU) 2009-13, which amends the existing criteria for separating consideration in multiple-deliverable arrangements. Arrangement that include perpetual software licenses are excluded from the scope of this ASU. ASU 2009-13 establishes a hierarchy for determining the selling price of a deliverable and requires the use of best estimate of the selling price when VSOE or third party evidence (TPE) of the selling price cannot be determined. As a result of the requirement to use the best estimate of the selling price when VSOE or TPE of the selling price cannot be determined, the residual method will no longer be permitted. ASU 2009-13 is applicable prospectively for revenue arrangements entered into or materially modified after the adoption date or retrospectively for all periods presented. The Company is required to adopt ASU 2009-13 on January 1, 2011. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2009-13 on its consolidated financial statements.

3. Business combinations

RLC

On April 29, 2009, the Company acquired all of the outstanding stock of RLC Customer Centric Technology B.V. (RLC), a privately held limited liability company based in the Netherlands, for €1.8 million in cash, or the equivalent of $2.4 million based on the foreign exchange rate at the time of the acquisition. The Company will also pay a maximum of €400,000, or the equivalent of $0.5 million based on the foreign exchange rate at the time of the acquisition, in earn-out payments if RLC meets revenue and EBITDA margin targets, as defined in the agreement, over the two years subsequent to the acquisition. RLC is the leading provider of software and services to nonprofits

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

in the Netherlands. The acquisition of RLC provides the Company with a foundation to expand into the Netherlands and other Western European markets. The results of operations of RLC are included in the consolidated financial statements of the Company from the date of acquisition. During the three and nine months ended September 30, 2009, total revenue from the RLC operations was $0.6 million and $1.0 million, respectively and cost of revenue was $0.3 million and $0.5 million, respectively.

The Company recorded the purchase price allocation based on the estimated fair value of the assets acquired and liabilities assumed. The following table summarizes the allocation of the purchase price:



(in thousands)

Cash and cash equivalents	$	110
Accounts receivable		374
Other assets, current and noncurrent		165
Property and equipment		188
Intangibles		840
Goodwill		1,682
Trade accounts payable		(118)
Accrued expenses and other current liabilities		(179)
Deferred tax liability, current and noncurrent		(286)
Deferred revenue, current and noncurrent		(200)
Contingent consideration liability		(208)

	$	2,368

None of the goodwill arising in the acquisition is deductible for income tax purposes. Goodwill was assigned to the license fees, consulting and education services, subscriptions and maintenance reportable segments. The acquisition resulted in the identification of $0.8 million of intangible assets, all of which are subject to amortization on a straight-line basis. A liability of $0.2 million was recognized for contingent consideration based on a probability-weighted discounted cash flow valuation technique. Any change in the fair value, or any change upon final settlement, of the contingent consideration liability will be recognized in income from operations.

Kintera

On July 8, 2008, the Company acquired Kintera, a publicly traded company based in San Diego, California. Kintera is a leader in providing web-based, software-as-a-service solutions to the nonprofit market. The acquisition of Kintera added experience in on-demand solutions and expanded the Company’s online offerings. The Company acquired all of the outstanding capital stock of Kintera through a tender offer and subsequent short-form merger, paying $1.12 per share for a total of $45,660,000. The Company financed this acquisition with cash on hand and borrowings under the Company’s revolving credit facility. The total purchase price of $50.2 million includes $2.4 million in payments to Kintera management under change of control provisions, $1.9 million of direct acquisition-related costs and $0.2 million related to Kintera employee stock options assumed. The results of operations of Kintera are included in the consolidated financial statements of the Company from the date of acquisition.

In connection with the acquisition, the Company entered into employment agreements with certain members of Kintera’s management team that include bonuses which totaled $449,000, payable in shares of the Company’s common stock based on continued employment. In February 2009, the Company issued 39,140 shares of common stock at a fair market value of $11.47 per share in connection with these employment agreements. In addition, the Company entered into an employment agreement with the former CEO of Kintera that included a targeted bonus payable in shares of the Company’s common stock conditioned upon his continued employment and achievement of certain performance targets. In August 2009, the Company issued 10,898 shares of common stock at a fair market value of $19.73 per share in connection with this bonus arrangement.

The Company finalized the purchase price allocation for Kintera within one year of the acquisition date, as permitted by the applicable accounting standards, which resulted in a net decrease to goodwill of $1.4 million. The

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

adjustments to the purchase price allocation primarily related to (i) the recognition of $2.8 million of additional deferred tax assets (see Note 10), and (ii) an increase in contingent tax liabilities, royalties and other preacquisition accruals of $1.4 million.

Pro forma information

The following unaudited pro forma information presents the consolidated results of operations of the Company as if the acquisition of Kintera had taken place at the beginning of 2008. The pro forma information includes the historical operating results of Kintera and adjustments for the business combination effect of the amortization charges from acquired intangible assets, interest expense, interest income and related tax effects. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.


(in thousands, except per share amounts)		Nine months ended September 30, 2008
Revenue		$ 241,614
Net income		17,061

Earnings per share, basic		$ 0.40
Earnings per share, diluted		0.39

eTapestry

In connection with the acquisition of eTapestry in August 2007, the Company entered into employment agreements with certain members of eTapestry’s management team. Under these arrangements, an additional amount of up to $1.0 million remains contingently payable based upon performance of the acquired business for the twelve-month period ending September 30, 2009. Based on actual performance, the Company had accrued, as of September 30, 2009, a liability of $1.0 million under these arrangements.

4. Earnings per share

The Company computes basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding. The Company computes diluted earnings per share by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares then outstanding. Diluted earnings per share reflect the assumed conversion of all dilutive securities, using the treasury stock method. Dilutive potential common shares consist of shares issuable upon the exercise of stock options, shares of non-vested restricted stock and settlement of stock appreciation rights. Additionally, dilutive potential common shares includes shares issuable for certain contingent liabilities that will be paid in shares of common stock based on the number of shares that would be issuable if September 30, 2009 and 2008 were the end of the contingency periods.

Diluted earnings per share for the three and nine months ended September 30, 2009 does not include the effect of 423,963 and 1,144,012, respectively, potential common share equivalents, as they are anti-dilutive. There were no anti-dilutive potential common shares outstanding for the three and nine months ended September 30, 2008.

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

The following table sets forth the computation of basic and diluted earnings per share:


	Three months ended September 30,		Nine months ended September 30,

(in thousands, except share and per share amounts)	2009	2008	2009	2008
Numerator:
Net income, as reported	$ 9,828	$ 7,316	$ 20,488	$ 23,346
Denominator:
Weighted average common shares	42,781,072	42,668,276	42,805,498	43,112,209
Add effect of dilutive securities:
Liabilities to be paid in shares of common stock	43,103	69,320	43,103	69,320
Employee stock options and restricted stock	1,002,375	672,345	644,761	708,330

Weighted average common shares assuming dilution	43,826,550	43,409,941	43,493,362	43,889,859

Earnings per share:
Basic	$ 0.23	$ 0.17	$ 0.48	$ 0.54
Diluted	$ 0.22	$ 0.17	$ 0.47	$ 0.53

5. Comprehensive income

Total comprehensive income for the three and nine months ended September 30, 2009 and 2008 is as follows:



	Three months ended September 30,		Nine months ended September 30,

(in thousands)	2009	2008	2009	2008
Net income	$ 9,828	$ 7,316	$ 20,488	$ 23,346
Foreign currency translation adjustment, net of tax	54	(154)	735	(200)

Comprehensive income	$ 9,882	$ 7,162	$ 21,223	$ 23,146

The amount of tax allocated to the translation adjustment recorded in accumulated other comprehensive income was an expense of $34,000 and a benefit of $98,000 for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, a tax benefit of $0.4 million and $0.1 million, respectively, was allocated to the translation adjustment recorded in accumulated other comprehensive income.

6. Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following as of September 30, 2009 and December 31, 2008:


(in thousands)	September 30, 2009	December 31, 2008
Taxes, prepaid and receivable	$ 7,840	$ 6,385
Prepaid software maintenance and royalties	4,725	3,904
Deferred sales commissions	5,376	3,047
Other	4,037	3,945
Total prepaid expenses and other current assets	$ 21,978	$ 17,281

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

7. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following as of September 30, 2009 and December 31, 2008:


(in thousands)	September 30, 2009		December 31, 2008
Accrued bonuses	$	9,005	$ 6,905
Accrued commissions and salaries		4,024	3,703
Customer credit balances		3,171	3,028
Taxes payable		4,078	2,033
Accrued health care costs		1,552	758
Accrued accounting and legal fees		1,074	1,283
Other		3,467	4,048
Total accrued expenses and other current liabilities	$	26,371	$ 21,758

8. Debt

The Company has a five-year $75.0 million revolving credit facility, which expires July 2012. Under the terms of the credit agreement, the Company may elect not more than twice over the term of the agreement to increase the amount available under the facility for an aggregate amount of up to $50.0 million, subject to certain terms and conditions. In June 2008, the Company exercised one of its options and increased the credit facility by $15.0 million to an aggregate available amount of $90.0 million. The revolving credit facility is guaranteed by the material domestic subsidiaries and is collateralized with the stock of all of the Company’s subsidiaries.

Amounts borrowed under the revolving credit facility bear interest, at the Company’s option, at a variable rate based (a) on the higher of the prime rate plus a margin of up to 0.5% or federal funds rate plus a margin of 0.5% to 1.0% (Base Rate Loans) or (b) LIBOR plus a margin of 1.0% to 1.5% (LIBOR Loans). The exact amount of any margin depends on the nature of the loan and the leverage ratio at the time of the borrowing. At September 30, 2009, the weighted average interest rate on the credit facility was 1.25%. The Company also pays a quarterly commitment fee on the unused portion of the revolving credit facility equal to 0.2%, 0.25% or 0.3% per annum, depending on the Company’s leverage ratio.

Under the credit facility the Company has the ability to choose either Base Rate Loans or LIBOR Loans. Base rate borrowings mature in July 2012. LIBOR Loans can have one, two, three or six month maturities, and the Company has the ability to extend the maturity of these loans by rolling them at their maturity into new loans with the same or longer maturities. The Company evaluates the classification of its debt based on the maturity of individual borrowings and any roll-over of borrowings subsequent to the balance sheet date, but prior to issuance of the financial statements. During the nine months ended September 30, 2009, the Company repaid $41.5 million of borrowings under the credit facility. At September 30, 2009, outstanding borrowings under the credit facility were $17.5 million, all of which were in the form of short-term LIBOR Loans, and accordingly classified as current liabilities. The fair value of the outstanding borrowings under the credit facility approximates the carrying value due to the short-term nature of the borrowings.

Note payable

As a result of the acquisition of Kintera, the Company assumed a note payable which was executed on December 1, 2007 in the amount of $3.2 million for the purchase of computer equipment. The note is collateralized by the underlying computer equipment, bears interest at a rate of 11.34% and has a maturity date of November 30, 2010. The Company recorded the note at its fair value as of the acquisition date, which resulted in an increase of $0.1 million in the carrying value. As of September 30, 2009, the note payable balance was $1.6 million, of which $1.1 million was classified as current.

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

Using a discounted cash flow technique that incorporates a market interest rate with adjustments for duration and risk profile, the Company has determined the fair value of this note payable to be $1.6 million at September 30, 2009.

9. Commitments and contingencies

Leases

The Company leases its headquarters facility from Duck Pond Creek, LLC. Two current executive officers of the Company each have a 4% ownership interest in Duck Pond Creek, LLC. The lease agreement has a term of 15 years with two five-year renewal options by the Company. The annual base rent of the lease is $3.6 million payable in equal monthly installments. The base rent escalates annually at a rate equal to the change in the consumer price index, as defined in the agreement, but not to exceed 5.5% in any year. In addition, under the terms of the lease, the lessor will reimburse the Company an aggregate amount of $4.0 million for leasehold improvements, which will be recorded as a reduction to rent expense ratably over the term of the lease. During the three and nine months ended September 30, 2009 rent expense was reduced by $66,700 and $200,000, respectively, related to this lease provision. There were no such amounts recorded during the three and nine months ended September 30, 2008 since this lease provision became effective under renegotiated lease terms in October 2008. The $4.0 million leasehold improvement allowance has been included in the table below of operating lease commitments as a reduction in the Company’s lease commitments ratably over the then remaining life of the lease from October 2008. The timing of the reimbursements for the actual leasehold improvements are expected to vary from the amount reflected in the table below.

Additionally, the Company has subleased a portion of its headquarters facility under various agreements extending through 2010. Under these agreements, rent expense was reduced by $48,000 and $68,000 for the three months ended September 30, 2009 and 2008, respectively, and by $140,000 and $199,000 for the nine months ended September 30, 2009 and 2008, respectively. The operating lease commitments in the table below have been reduced by minimum aggregate sublease commitments of $48,000 and $64,000 during the remainder of 2009 and 2010, respectively. No minimum aggregate sublease commitments exist after 2010. The Company has also received, and expects to receive through 2012, quarterly South Carolina state incentive payments as a result of locating its headquarters facility in Berkeley County, South Carolina. These amounts are recorded as a reduction of rent expense and were $0.4 million for each of the three months ended September 30, 2009 and 2008, and were $1.4 million and $1.5 million for the nine months ended September 30, 2009 and 2008, respectively.

Additionally, the Company leases various office space and equipment under operating leases. The Company also has various non-cancelable capital leases for computer equipment and furniture.

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

As of September 30, 2009, the future minimum lease commitments related to lease agreements, net of related sublease commitments and lease incentives, were as follows:


Year ending December 31, (in thousands)	Operating leases		Capital leases
2009 – remaining	$	1,915	$	91
2010		6,064		174
2011		5,602		40
2012		5,027		2
2013		4,116		-
2014 and thereafter		38,519		-

Total minimum lease payments	$	61,243		307
Less: portion representing interest				20

Present value of net minimum lease payments				287
Less: current portion				230

Noncurrent portion			$	57

Other commitments

The Company utilizes third-party relationships in conjunction with its products. The contractual arrangements vary in length from one to three years. In certain cases, these arrangements require a minimum annual purchase commitment. The aggregate minimum purchase commitments under these arrangements through 2012 were not significant as of September 30, 2009.

Legal contingencies

The Company is subject to legal proceedings and claims that have arisen in the ordinary course of business. The Company records an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company does not believe the amount of potential liability with respect to these actions will have a material adverse effect upon the Company’s financial position, results of operations or cash flows.

10. Income taxes

The Company calculated the provision for income taxes for the nine months ended September 30, 2009 using the 2009 projected annual effective tax rate of 37.5%, which excludes period-specific items. The Company’s effective tax rate for the three months ended September 30, 2009 and 2008, including the effects of period-specific events, was 29.6% and 33.3%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2009 and 2008, including the effects of period-specific events, was 35.6% and 36.5%, respectively. Period specific items recorded in the three and nine months ended September 30, 2009 include (i) the recognition of tax benefits identified during third quarter 2009 related to changes in estimates of 2007 and 2008 research and development credits and domestic production activities deductions of $1.0 million, net of reserves for uncertain tax positions, (ii) an increase of $0.8 million in the valuation allowance for certain state tax credits and net operating loss carryforwards, and (iii) a correction of an immaterial prior period error of $0.4 million, which reduced income tax expense.

The Company has deferred tax assets for, among other items, federal net operating loss carryforwards, state net operating loss carryforwards and state tax credits. A portion of the state net operating loss carryforwards and state tax credits have a valuation reserve due to the uncertainty of the future ability to use such carryforwards and credits. Additionally, the Company has a valuation allowance for certain state deferred tax assets acquired from Kintera. During the nine months ended September 30, 2009, the Company recorded purchase accounting adjustments related to the deferred tax assets acquired from Kintera and the related valuation allowance, which were reflected as a net

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

reduction to goodwill of $2.8 million. The adjustments related to (i) certain tax items that were deemed to be realizable in the future, (ii) changes in estimated tax rates at the time of the acquisition, (Iii) recognition of accrued liabilities, (iv) a reduction in taxes payable for tax deductible compensation and (v) adjustments related to Kintera’s final tax return for the period prior to the acquisition date.

The Company recorded excess tax benefits on stock option exercises and restricted stock vesting of $4.8 million and $0.2 million in stockholders’ equity during the nine months ended September 30, 2009 and 2008, respectively.

The Company has aggregate unrecognized tax benefits of $1.2 million including interest and penalties of $0.2 million as of September 30, 2009. The total unrecognized tax benefits as of December 31, 2008 were $0.6 million including $0.2 million of interest and penalties. The Company has taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amount of these unrecognized tax benefits may significantly decrease within the next twelve months. The possible decrease relates to state nexus issues and could result from the finalization of state income tax reviews and/or the expiration of statutes of limitations.

11. Stock-based compensation

During the nine months ended September 30, 2009, the Company issued 59,860 shares of restricted stock with an aggregate grant date fair value of $0.9 million. No stock options or stock appreciation rights were issued in the nine months ended September 30, 2009.

The Company allocates stock-based compensation expense to expense categories on the consolidated statements of operations. The following table summarizes stock-based compensation expense for the three and nine months ended September 30, 2009 and 2008.


	Three months ended September 30,				Nine months ended September 30,

(in thousands)	2009		2008		2009		2008
Included in cost of revenue:
Cost of services	$	335	$	360	$	1,072	$	1,012
Cost of maintenance		230		138		544		369
Cost of subscriptions		120		68		353		153

Total included in cost of revenue		685		566		1,969		1,534
Included in operating expenses:
Sales and marketing		422		424		1,093		1,005
Research and development		718		581		2,115		1,609
General and administrative		992		1,663		3,885		3,764

Total included in operating expenses		2,132		2,668		7,093		6,378

Total	$	2,817	$	3,234	$	9,062	$	7,912

12. Stockholders’ equity

Dividends

The following table provides information with respect to quarterly dividends paid on common stock during the nine months ended September 30, 2009.


Declaration Date	Dividend per Share	Record Date	Payable Date
February 2009	$0.10	February 27	March 13
April 2009	$0.10	May 28	June 15
July 2009	$0.10	August 28	September 15

In October 2009, the Company’s Board of Directors declared a fourth quarter dividend of $0.10 per share payable on December 15, 2009 to stockholders of record on November 27, 2009.

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

Stock surrenders

During the nine months ended September 30, 2009, restricted stock holders surrendered 41,871 shares of common stock, totaling $0.7 million, to satisfy their tax obligations due upon vesting.

13. Segment information

The Company has determined that it has six reportable segments based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. Internal financial reports disaggregate certain operating information into six reportable segments. The Company’s chief operating decision maker is its chief executive officer, or CEO. The CEO uses the information presented in these reports to make certain operating decisions. The CEO does not review any report presenting segment balance sheet information.

The segment revenues and direct controllable costs, which include salaries, related benefits, third-party contractors, data expense and classroom rentals, for the three and nine months ended September 30, 2009 and 2008 were as follows:

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)


(in thousands)	License fees	Consulting and education services⁽¹⁾	Analytic services⁽²⁾	Maintenance	Subscriptions	Other	Total
Three months ended September 30, 2009
Revenue	$5,919	$16,346	$6,472	$29,742	$19,190	$1,536	$79,205
Direct controllable costs	892	10,253	2,501	4,158	5,991	1,303	25,098

Segment income	5,027	6,093	3,971	25,584	13,199	233	54,107
Corporate costs not allocated⁽³⁾							5,443
Operating expenses							34,781
Interest expense, net							149
Other income, net							(226)

Income before provision for income taxes							$13,960


Three months ended September 30, 2008
Revenue	$8,099	$20,275	$6,801	$27,411	$15,547	$1,965	$80,098
Direct controllable costs	930	11,244	2,901	3,951	4,703	1,948	25,677

Segment income	7,169	9,031	3,900	23,460	10,844	17	54,421
Corporate costs not allocated⁽³⁾							5,629
Operating expenses							37,292
Interest expense, net							384
Other expense, net							152

Income before provision for income taxes							$10,964




(in thousands)	License fees	Consulting and education services⁽¹⁾	Analytic services⁽²⁾	Maintenance	Subscriptions	Other	Total
Nine months ended September 30, 2009
Revenue	$19,123	$49,827	$16,585	$86,574	$53,686	$4,566	$230,361
Direct controllable costs	2,606	32,084	7,566	11,908	16,730	4,069	74,963

Segment income	16,517	17,743	9,019	74,666	36,956	497	155,398
Corporate costs not allocated⁽³⁾							16,352
Operating expenses							106,560
Interest expense, net							745
Other income, net							(96)

Income before provision for income taxes							$31,837

Nine months ended September 30, 2008
Revenue	$27,337	$59,767	$16,221	$79,212	$33,342	$6,157	$222,036
Direct controllable costs	2,493	32,806	7,279	11,216	10,504	5,774	70,072

Segment income	24,844	26,961	8,942	67,996	22,838	383	151,964
Corporate costs not allocated⁽³⁾							14,131
Operating expenses							100,485
Interest expense, net							403
Other expense, net							192

Income before provision for income taxes							$36,753

(1)	This segment consists of consulting, installation and implementation, document imaging, customer training and other educational services.

(2)	This segment consists of donor prospect research and data modeling services.

(3)

Various corporate costs such as depreciation, facilities and IT support costs, stock-based compensation and amortization of intangibles arising from business combinations are not allocated to the segment income as management believes that the exclusion of these costs allows the Company to better understand and manage other operating expenses and cash needs.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our current view with respect to future events and financial performance and are subject to risks and uncertainties, including those set forth under “Cautionary statement” included in this “Management’s discussion and analysis of financial condition and results of operations” and elsewhere in this report, that could cause actual results to differ materially from historical or anticipated results.

Executive summary

We are the leading global provider of software and related services designed specifically for nonprofit organizations. Our products and services enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage finances and optimize internal operations. We have focused solely on the nonprofit market since our incorporation in 1982 and have developed our suite of products and services based upon our extensive knowledge of the operating challenges facing nonprofit organizations. As of September 30, 2009, we had approximately 22,000 active customers. Our customers operate in multiple verticals within the nonprofit market, including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare and international foreign affairs.

We derive revenue from selling perpetual licenses or charging for the use of our software products in a hosted environment and providing a broad offering of services, including consulting, training, installation and implementation, as well as ongoing customer support and maintenance. Furthermore, we derive revenue from providing hosting services, performing donor prospect research engagements, selling lists of potential donors, and providing benchmarking studies and data modeling services.

Overall, revenue for the third quarter and the first nine months of 2009 decreased 1% and increased 4% compared to the same periods in 2008, respectively. The inclusion of Kintera, which we acquired in July 2008, resulted in an increase in revenue of $16.1 million for the first nine months of 2009. Excluding the impact of the inclusion of Kintera, revenue decreased by 3% for the first nine months of 2009 when compared to the same period in 2008. When removing the impact of foreign currency translation, revenue increased by 0.4% when comparing the third quarter of 2009 to the same period in 2008. Further, when removing the impact of foreign currency translation and the impact from Kintera, revenue decreased by 1% when comparing the first nine months of 2009 to the same period in 2008.

Through the first nine months of 2009, our selling environment has remained challenging as difficult and uncertain economic conditions continued to put pressure on the spending of many organizations in the nonprofit industry. Revenues associated with our perpetual license offerings and related services decreased compared with the same period in 2008 as a result of these economic conditions and reduced market demand for these offerings. However, during the third quarter and the first nine months of 2009 compared to the same periods in 2008, our recurring revenue, which is comprised of maintenance services and subscription offerings, continued to experience growth. Revenue from maintenance services and subscription offerings, which represented approximately 61% of our revenue on a combined basis, grew 25% for the nine months ended September 30, 2009 compared to the same period in 2008. Approximately 15 percentage points of the 25% revenue growth is attributable to the inclusion of Kintera and the remaining growth is the result of our business increasingly evolving towards product sales on a subscription offering basis over the past several years. We believe this trend will continue in the future.

In the first nine months of 2009, we have focused on closely managing our operating expenses and achieving our targeted level of profitability. Income from operations for the third quarter and the first nine months of 2009 increased by $2.4 million and decreased by $4.9 million compared to the same periods in 2008, respectively. During the third quarter 2009, the increase in income from operations is primarily attributable to our continued focus on expense management and improvement in the efficiency of our operations. The decrease in income from operations for the first nine months of 2009 is primarily attributable to an increase in stock-based compensation

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

expense, amortization expense associated with intangible assets from our recent acquisitions, research and development expense to support our continuing product investment, and higher operating costs as a result of our acquisition of Kintera.

We ended the third quarter of 2009 with cash and cash equivalents totaling $22.2 million and outstanding borrowings on our credit facility of $17.5 million. During the first nine months of 2009, we generated $60.4 million in cash flow from operations out of which we paid $41.5 million on our credit facility and $13.2 million in dividends. Additionally, cash flow from operations allowed us to increase our cash and cash equivalents by $5.8 million.

We expect that our operating environment will remain challenging through the rest of 2009 as existing and prospective customers continue to exercise caution in expenditure decisions. Notwithstanding these conditions, we plan to continue to focus on expanding market share, selectively investing in our growth initiatives and strengthening our leadership position. As we have throughout the first nine months of 2009, we will also focus on controlling and, as necessary, reducing the costs and expenses of our operations to achieve our targeted level of profitability.

Results of operations

Comparison of the three and nine months ended September 30, 2009 and 2008

During 2008 and 2009 we acquired the following companies at the indicated dates:

•

Kintera, Inc. (Kintera) – July 8, 2008

•

RLC Customer Centric Technology B.V. (RLC) – April 29, 2009

The results of operations of Kintera and RLC are included in our consolidated results of operations from the date of their respective acquisition as noted above, which impacts the comparability of our results of operations when comparing 2009 to 2008. We have noted in the discussion below, to the extent meaningful, the impact of the inclusion of Kintera and/or RLC on our results of operations.

Revenue

The table below compares revenue from our statements of operations for the three and nine months ended September 30, 2009 with the same periods in 2008.


	Three months ended September 30,								Nine months ended September 30,

(in millions)	2009		2008		Change			% Change	2009		2008		Change			% Change


License fees	$	5.9	$	8.1	$	(2.2	)	(27)%	$	19.1	$	27.3	$	(8.2	)	(30)%
Services		22.8		27.1		(4.3	)	(16)%		66.4		76.0		(9.6	)	(13)%
Maintenance		29.8		27.4		2.4		9%		86.6		79.2		7.4		9%
Subscriptions		19.2		15.5		3.7		24%		53.7		33.3		20.4		61%
Other		1.5		2.0		(0.5	)	(25)%		4.6		6.2		(1.6	)	(26)%

Total revenue	$	79.2	$	80.1	$	(0.9	)	(1)%	$	230.4	$	222.0	$	8.4		4%

Total revenue decreased $0.9 million, or 1%, in the third quarter of 2009 compared to the same period in 2008. The decrease in revenue in the third quarter of 2009 is primarily due to decreases in license fees and services revenue. The decrease in license fees and services revenue is principally attributable to delays and postponements of purchasing decisions by our existing and prospective customers. The decreases in license fees and services revenue were offset by an increase in maintenance and subscriptions revenue. The growth in maintenance revenue is from new maintenance contracts associated with new license agreements and existing client increases. The growth in revenue from our subscription offerings resulted from the evolution of our product offerings from license based to subscription based offerings.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

Total revenue increased $8.4 million, or 4%, in the first nine months of 2009 compared to the same period in 2008. The increase in revenue is primarily due to growth in subscription revenue as a result of the acquisition of Kintera and an increase in demand for our hosting services and online data services. Maintenance revenue also increased due to additional revenue from new maintenance contracts associated with new license agreements and existing client increases. The increase in subscriptions and maintenance revenue was partially offset by decreases in license fees and services revenue. The decreases in license fees and services revenue are principally attributable to the delays and postponements of purchasing decisions by our existing and prospective customers.

During the third quarter and the first nine months of 2009, revenue attributable to the inclusion of RLC was $0.6 million and $1.0 million, respectively.

Segment results

We analyze our business according to our six operating segments as identified in Note 13, which are license fees, consulting and education services, analytic services, maintenance, subscriptions and other. The analyses provided below are presented on a non-GAAP basis before the inclusion of various allocable corporate costs such as depreciation, facilities and IT support costs, stock-based compensation and amortization of intangibles arising from business combinations because, in managing our operations, we believe that the exclusion of these costs allows us to better understand and manage other operating expenses and cash needs. These excluded costs are analyzed separately following the segment results analysis.

License fees


	Three months ended September 30,								Nine months ended September 30,

(in millions)	2009		2008		Change			% Change	2009		2008		Change			% Change

License fee revenue	$	5.9	$	8.1	$	(2.2	)	(27)%	$	19.1	$	27.3	$	(8.2	)	(30)%
Direct controllable cost of license fees		0.9		0.9		-		0%		2.6		2.5		0.1		4%

Segment income	$	5.0	$	7.2	$	(2.2	)	(31)%	$	16.5	$	24.8	$	(8.3	)	(33)%

Segment margin %		85%		89%						86%		91%

Revenue from license fees is derived from the sale of our software products under perpetual license agreements. The decrease in license fee revenue in the third quarter and the first nine months of 2009, compared to the same periods in 2008, is principally attributable to longer sales cycle times, delays and postponement of purchasing decisions and overall caution exercised by existing and prospective customers as a result of continued challenges posed by the overall economic environment. In addition, we are increasingly experiencing a shift in our customers’ buying preference away from perpetual license agreements towards hosted applications.

During the third quarter of 2009, license fee revenue decreased by $2.2 million when compared to the same period in 2008. Revenue from license fees to new customers decreased $1.6 million and sales to existing clients decreased by $0.6 million. Additionally, during the third quarter of 2009, revenue related to our Blackbaud Enterprise CRM^TM (eCRM) offering grew by $1.4 million, which was offset by decreases in our other perpetual license product offerings of $3.6 million.

During the first nine months of 2009, license fee revenue decreased by $8.2 million when compared to the same period in 2008. Revenue from license fees to new customers decreased $2.9 million and sales to existing clients decreased by $5.3 million. Additionally, during the first nine months of 2009, revenue related to our eCRM offering grew by $3.6 million, which was offset by decreases in our other perpetual license product offerings of $11.8 million.

Direct controllable cost of license fees is principally comprised of third-party software royalties and variable reseller commissions. Cost of license fees in the third quarter remained unchanged when compared to same period in 2008. Cost of license fees in the first nine months of 2009 compared to the same period in 2008 increased primarily due to increases in our third-party software costs.

The decrease in segment margin in the third quarter and first nine months of 2009 compared to the same periods in 2008 is the result of a decrease in sales of software and a change in the mix of software products sold to products with higher third-party software costs.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

Consulting and education services


	Three months ended September 30,							Nine months ended September 30,

(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change

Consulting and education services revenue	$	16.3	$	20.3	$	(4.0)	(20)%	$	49.8	$	59.8	$	(10.0)	(17)%
Direct controllable cost of consulting and education services		10.3		11.2		(0.9)	(8)%		32.1		32.8		(0.7)	(2)%

Segment income	$	6.0	$	9.1	$	(3.1)	(34)%	$	17.7	$	27.0	$	(9.3)	(34)%

Segment margin %		37%		45%					36%		45%

Consulting and education services revenue consists of consulting, installation, implementation and education services. Consulting, installation and implementation services involve converting data from a customer’s existing system, assisting in file set up and system configuration, and/or process re-engineering. Education services involve customer training activities.

During the third quarter of 2009, consulting and education services revenue decreased $4.0 million as compared to the same period in 2008. Included in consulting and education services revenue in the third quarter of 2009 is $0.3 million of revenue attributable to the acquisition of RLC. The decrease in revenue is principally the result of decreased volume of consulting, installation and implementation services delivered for our core software products and decreased demand for training services as existing and prospective customers continue to experience budgetary constraints associated with the challenges posed by the overall economic environment. To a lesser extent, the decrease in revenue is attributable to a reduction in the rates we charge as a result of a higher level of discounts offered on our service offerings during the third quarter of 2009 compared to the same period in 2008. During the third quarter these decreases of $5.7 million were partially offset by an increase of $1.7 million in consulting services associated with our new eCRM product offering and our internet-based products.

During the first nine months of 2009, consulting and education services revenue decreased $10.0 million as compared to the same period in 2008. Included in consulting and education services revenue in the first nine months of 2009 is $1.0 million of revenue attributable to the acquisition of Kintera and RLC. The decrease in revenue is principally the result of decreased volume of consulting, installation and implementation services delivered for our core software products and decreased demand for training services as existing and prospective customers continue to experience budgetary constraints associated with the challenges posed by the overall economic environment. To a lesser extent, the decrease in revenue is attributable to a reduction in the rates we charge as a result of a higher level of discounts offered on our service offerings during the first nine months of 2009 compared to the same period in 2008. During the first nine months of 2009, these decreases of $16.7 million were partially offset by an increase of $5.7 million in consulting services associated with our new eCRM product offering and our internet-based products.

Cost of consulting and education services is principally comprised of human resource costs, third-party contractor expenses, classroom rentals and other costs incurred in providing consulting, installation and implementation services and customer training.

During the third quarter of 2009, cost of consulting and education services decreased by $0.9 million. Additional headcount and other costs attributable to the acquisition of RLC increased cost of consulting and education services by $0.2 million. The remaining decrease in cost of consulting and education services of $1.1 million in the third quarter of 2009 is primarily due to a reduction in travel-related expenses, recruiting and other costs.

During the first nine months of 2009, cost of consulting and education services decreased by $0.7 million. Additional headcount and other costs attributable to the acquisition of Kintera and RLC increased cost of consulting and education services by $2.1 million. The remaining decrease in cost of consulting and education services of $2.8 million during the first nine months of 2009 is primarily due to a reduction in travel-related expenses, recruiting and other costs.

The segment margin decrease in the third quarter and first nine months of 2009 compared to the same periods in 2008 is principally due to the decrease in demand for consulting and education services while the cost of consulting and education services remained relatively flat. The cost of consulting and education services remained relatively flat principally due to maintaining resource capacity for the increase in services associated with our eCRM product offerings and the return to demand when the economic environment improves.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

Analytic services


	Three months ended September 30,							Nine months ended September 30,

(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change


Analytic services revenue	$	6.5	$	6.8	$	(0.3)	(4)%	$	16.6	$	16.2	$	0.4	2%
Direct controllable cost of analytic services		2.5		2.9		(0.4)	(14)%		7.6		7.3		0.3	4%

Segment income	$	4.0	$	3.9	$	0.1	3%	$	9.0	$	8.9	$	0.1	1%

Segment margin %		62%		57%					54%		55%

Analytic services are comprised of donor prospect research, selling lists of potential donors, benchmarking studies and data modeling services. These services involve the assessment of current and prospective donor information of the customer and are performed using our proprietary analytical tools. The end product enables the customer to more effectively target its fundraising activities.

During the third quarter 2009, analytic services revenue decreased by $0.3 million when compared to the same period in 2008. The rates charged for our analytic services have remained relatively constant year over year and, as such, the decrease in analytic services revenue is principally the result of the decreased volume of services provided.

During the first nine months of 2009, analytic services revenue increased by $0.4 million when compared to the same period in 2008. Included in analytic services revenue in the first nine months of 2009 is $0.8 million of revenue attributable to the acquisition of Kintera. Excluding the impact of the acquisition of Kintera, analytic services revenue decreased $0.4 million in the first nine months of 2009 as compared to the same period in 2008. The rates charged for our analytic services have remained relatively constant year over year and, as such, the remaining decrease in analytic services revenue is principally the result of the decreased volume of services provided.

Cost of analytic services is primarily comprised of human resource costs and data expense incurred to perform analytic services. The decrease in cost of analytic services for the third quarter of 2009 compared to the same periods in 2008 is primarily attributable to a decrease in human resource costs due to a reduction in headcount. Data expenses also decreased in the third quarter of 2009 compared to the same period in 2008.

The increase in cost of analytic services for the first nine months of 2009 compared to the same periods in 2008 is primarily attributable to human resource costs associated with additional headcount and other costs attributable to the acquisition of Kintera of $0.8 million. Excluding the impact of the acquisition of Kintera, cost of analytic services for the first nine months of 2009 decreased by $0.5 million primarily due to a decrease in data expense.

The increase in analytic services margin in the third quarter of 2009 compared to the same period in 2008 is primarily due to a decrease in human resource costs. The decrease in analytic services margin in the first nine months of 2009 compared to the same period in 2008 is primarily due to additional costs associated with the acquisition of Kintera.

Maintenance


	Three months ended September 30,							Nine months ended September 30,

(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change


Maintenance revenue	$	29.8	$	27.4	$	2.4	9%	$	86.6	$	79.2	$	7.4	9%
Direct controllable cost of maintenance		4.1		3.9		0.2	5%		11.9		11.2		0.7	6%

Segment income	$	25.7	$	23.5	$	2.2	9%	$	74.7	$	68.0	$	6.7	10%

Segment margin %		86%		86%					86%		86%

Revenue from maintenance is comprised of annual fees derived from maintenance contracts associated with new software licenses and annual renewals of existing maintenance contracts. These contracts provide customers with updates, enhancements and upgrades to our software products and online, telephone and email support.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

During the third quarter 2009, maintenance revenue increased $2.4 million when compared to the same period in 2008. Included in maintenance revenue in the third quarter of 2009 is $0.2 million of revenue attributable to the acquisition of RLC. Excluding the impact of the acquisition of RLC, maintenance revenue increased $2.2 million in the third quarter of 2009 as compared to the same period in 2008. The increase is comprised of $2.3 million from maintenance contracts with new customers associated with new license agreements and increases in contracts with existing customers and $1.0 million from maintenance contract inflationary rate adjustments, offset by $1.1 million from maintenance contracts that were not renewed.

During the first nine months of 2009, maintenance revenue increased $7.4 million when compared to the same period in 2008. Included in maintenance revenue in the first nine months of 2009 is $3.2 million of revenue attributable to the acquisition of Kintera and RLC. Excluding the impact of the acquisition of Kintera and RLC, maintenance revenue increased $4.2 million in the first nine months of 2009 as compared to the same period in 2008. The increase is comprised of $5.3 million of maintenance with new customers associated with new license agreements and increases in contracts with existing customers and $2.9 million from maintenance contract inflationary rate adjustments, offset by $4.0 million from maintenance contracts that were not renewed.

Direct controllable cost of maintenance is primarily comprised of human resource costs, third-party contractor expenses, third-party royalty costs and other costs incurred in providing support and related services to our customers. The increase in cost of maintenance in the third quarter and first nine months of 2009 compared to the same periods in 2008 is the result of an increase in human resources costs primarily attributable to headcount associated with the acquisition of Kintera.

The maintenance segment margin remained unchanged during the third quarter and first nine months of 2009 compared to the same periods in 2008.

Subscriptions


	Three months ended September 30,							Nine months ended September 30,
(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change


Subscriptions revenue	$	19.2	$	15.5	$	3.7	24%	$	53.7	$	33.3	$	20.4	61%
Direct controllable cost of subscriptions		6.0		4.7		1.3	28%		16.7		10.5		6.2	59%

Segment income	$	13.2	$	10.8	$	2.4	22%	$	37.0	$	22.8	$	14.2	62%

Segment margin %		69%		70%					69%		68%

Revenue from subscriptions is principally comprised of revenue from providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings.

Subscriptions revenue increased $3.7 million during the third quarter 2009 as compared to the same period in 2008. The increase in subscriptions revenue is attributable to growth from increased demand for hosted applications, hosting services and other online data services.

Subscriptions revenue increased $20.4 million during the first nine months of 2009 as compared to the same period in 2008. Included in subscriptions revenue in the first nine months of 2009 is $11.7 million of revenue attributable to the acquisition of Kintera. Excluding the impact of the acquisition of Kintera, growth in subscriptions revenue is primarily due to increased demand for hosted applications, hosting services and other online data services.

Direct controllable cost of subscriptions is primarily comprised of human resource costs, third-party royalty and data expenses, hosting expenses, and other costs incurred in providing support and services to our customers.

During the third quarter of 2009, cost of subscriptions increased by $1.3 million when compared to the same period in 2008. The increase in cost of subscriptions is principally due to an increase in human resource costs of $1.5 million due to an increase in headcount to meet the increasing demand for our subscription offerings. The increase in human resource costs was partially offset by a decrease in data expense, hosting and other costs.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

During the first nine months of 2009, cost of subscriptions increased by $6.2 million when compared to the same period in 2008. Additional headcount and increases in data expense, hosting and other costs attributable to the acquisition of Kintera represented $4.0 million of the increase in cost of subscriptions. Excluding the impact of the acquisition of Kintera, cost of subscriptions increased by $2.2 million in the first nine months of 2009 compared to the same period in 2008. The remaining increase is principally due to an increase in data expense, hosting and human resource costs.

The subscriptions segment margin remained substantially the same during the third quarter and first nine months of 2009 compared to the same periods in 2008.

Other revenue


	Three months ended September 30,							Nine months ended September 30,
(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change


Other revenue	$	1.5	$	2.0	$	(0.5)	(25)%	$	4.6	$	6.2	$	(1.6)	(26)%
Direct controllable cost of other revenue		1.3		2.0		(0.7)	(35)%		4.1		5.8		(1.7)	(29)%

Segment income	$	0.2	$	-	$	0.2	100%	$	0.5	$	0.4	$	0.1	25%

Segment margin %		13%		0%					11%		6%

Other revenue includes the sale of business forms that are used in conjunction with our software products; reimbursement of travel and related expenses, primarily incurred during the performance of services at customer locations; fees from user conferences; and sale of hardware in conjunction with The Patron Edge. Other revenue decreased in the third quarter and first nine months of 2009 primarily due to (i) a decrease in reimbursable travel-related costs from our services businesses as a result of reduced service engagements and (ii) a decrease in fees from user conferences as a result of fewer participants, both of which are attributable to the challenging economic environment.

Direct controllable cost of other revenue includes human resource costs, costs of business forms, costs of user conferences and reimbursable expense relating to the performance of services at customer locations. The decrease in the third quarter and first nine months of 2009 compared to the same periods in 2008 is due to a decrease in reimbursable expenses related to providing services at customer locations and a decrease in the costs of user conferences.

U.S. GAAP gross profit

Segment income does not include an allocation of corporate costs, stock-based compensation expense and amortization expense. The following schedule reconciles total segment income to gross profit as stated on the statements of operations.


	Three months ended September 30,							Nine months ended September 30,
(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change


License fees	$	5.0	$	7.2	$	(2.2)	(31)%	$	16.5	$	24.8	$	(8.3)	(33)%
Consulting and education services		6.0		9.1		(3.1)	(34)%		17.7		27.0		(9.3)	(34)%
Analytic services		4.0		3.9		0.1	3%		9.0		8.9		0.1	1%
Maintenance		25.7		23.5		2.2	9%		74.7		68.0		6.7	10%
Subscriptions		13.2		10.8		2.4	22%		37.0		22.8		14.2	62%
Other		0.2		-		0.2	100%		0.5		0.4		0.1	25%

Total segment income	$	54.1	$	54.5	$	(0.4)	(1)%	$	155.4	$	151.9	$	3.5	2%


Less corporate costs not allocated to segment expenses:
Stock-based compensation expense		0.7		0.6		0.1	17%		2.0		1.5		0.5	33%
Amortization of intangible assets acquired in business combinations		1.6		1.7		(0.1)	(6)%		4.7		3.5		1.2	34%
Corporate overhead costs		3.1		3.4		(0.3)	(9)%		9.7		9.1		0.6	7%

Gross profit as stated in statements of operations	$	48.7	$	48.8	$	(0.1)	(0)%	$	139.0	$	137.8	$	1.2	1%

Gross margin %		61%		61%					60%		62%

Stock-based compensation expense and amortization expense are analyzed separately following the operating expenses section.

Allocated corporate overhead costs are comprised of depreciation, facilities and IT support costs. The decrease in corporate overhead costs allocated to cost of revenue during the third quarter of 2009 is primarily attributable to the

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

decrease in rent expense resulting from renegotiated leases and other facilities costs resulting from our focus on closely managing our operating expenses. The increase in corporate overhead costs allocated to cost of revenue during the first nine months of 2009 is primarily attributable to the increase in facilities costs associated with the inclusion of Kintera.

Operating expenses

The operating expenses analyzed below are presented on a non-GAAP basis; that is, they exclude stock-based compensation expense. We believe that the exclusion of these costs allows us to better understand and manage other operating expenses and cash needs. Stock-based compensation expense is analyzed, in total, in the section following the operating expense analysis.

Sales and marketing


	Three months ended September 30,							Nine months ended September 30,
(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change


Sales and marketing expense excluding stock-based compensation	$	15.4	$	16.2	$	(0.8)	(5)%	$	45.9	$	46.6	$	(0.7)	(2)%
Add: Stock-based compensation		0.4		0.4		-	0%		1.1		1.0		0.1	10%

Sales and marketing expense	$	15.8	$	16.6	$	(0.8)	(5)%	$	47.0	$	47.6	$	(0.6)	(1)%

% of revenue (excluding stock-based compensation)		19%		20%					20%		21%

Sales and marketing expense includes salaries and related human resource costs, travel-related expenses, sales commissions, advertising and marketing materials, public relations and an allocation of depreciation, facilities and IT support costs.

During the third quarter of 2009, sales and marketing expense decreased $0.8 million when compared to the same period in 2008. The decrease is primarily attributable to decreases in travel-related expenses, lower allocated costs and decreases in other sales and marketing related costs.

During the first nine months of 2009, sales and marketing expense decreased $0.7 million when compared to the same period in 2008. Included in sales and marketing expense in the first nine months of 2009 is $2.8 million of human resource and other costs attributable to the acquisition of Kintera. Excluding the sales and marketing expense attributable to the acquisition of Kintera, sales and marketing expense decreased $3.5 million. The decrease is primarily attributable to a reduction in travel-related expenses, corporate allocated costs and other sales and marketing related costs of $2.5 million. Additionally, commission expense decreased by $1.0 million due to lower commissionable revenue.

As a percentage of revenue, sales and marketing expense in the third quarter and the first nine months of 2009 decreased compared to the same periods in 2008, principally due to our focus on closely managing our operating expenses during 2009.

Research and development


	Three months ended September 30,							Nine months ended September 30,
(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change


Research and development expense excluding stock-based compensation	$	10.7	$	10.0	$	0.7	7%	$	32.0	$	26.4	$	5.6	21%
Add: Stock-based compensation		0.7		0.6		0.1	17%		2.1		1.6		0.5	31%

Research and development expense	$	11.4	$	10.6	$	0.8	8%	$	34.1	$	28.0	$	6.1	22%

% of revenue (excluding stock-based compensation)		14%		12%					14%		12%

Research and development expenses include human resource costs, third-party contractor expenses, software development tools and other expenses related to developing new products, upgrading and enhancing existing products and an allocation of depreciation, facilities and IT support costs. Research and development costs increased during the third quarter and the first nine months of 2009 principally due to an increase in headcount associated with an increased investment in our products.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

During the third quarter of 2009, research and development costs increased $0.7 million when compared to the same period in 2008. The increase in research and development costs is primarily attributable to an increase in human resource costs of $0.8 million, partially offset by decreased recruiting costs.

During the first nine months of 2009, research and development costs increased $5.6 million when compared to the same period in 2008. The increase in research and development costs attributable to an increase in human resource costs was $5.3 million, of which $3.4 million is due to the acquisition of Kintera. Further increases of $0.6 million are attributable to higher allocated costs, partially offset by decreased recruiting costs.

Research and development expense as a percentage of revenue increased in the third quarter 2009 and the first nine months of 2009 compared to the same periods in 2008 primarily due to an increased investment in our product initiatives.

General and administrative


	Three months ended September 30,							Nine months ended September 30,
(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change

General and administrative expense excluding stock-based compensation	$	6.4	$	8.2	$	(1.8)	(22)%	$	21.0	$	20.6	$	0.4	2%
Add: Stock-based compensation		1.0		1.7		(0.7)	(41)%		3.9		3.8		0.1	3%

General and administrative expense	$	7.4	$	9.9	$	(2.5)	(25)%	$	24.9	$	24.4	$	0.5	2%

% of revenue (excluding stock-based compensation)		8%		10%					9%		9%

General and administrative expense consists primarily of human resource costs for general corporate functions, including finance, accounting, legal, human resources, corporate development, third-party professional fees, insurance, an allocation of depreciation, facilities and IT support costs, and other administrative expenses.

During the third quarter of 2009 compared to the same period in 2008, the decrease in general and administrative expense was primarily due to a decrease in human resource costs and a decrease in travel-related and other general and administrative costs.

During the first nine months of 2009 compared to the same period in 2008, the increase in general and administrative expense was primarily due to an increase in human resource costs attributed to the additional headcount as a result of the acquisition of Kintera. Excluding the costs attributable to Kintera, general and administrative expense decreased by $1.7 million for the first nine months of 2009 compared to the same period in 2008 primarily due to decreased human resource costs as a result of a decrease in headcount and decreased travel-related costs, bad debt expense and other costs.

As a percentage of revenue, general and administrative costs decreased by two percentage points in the third quarter of 2009 compared to the same period in 2008 due to the decreased human resource costs and travel-related and other costs.

Stock-based compensation

We recognize compensation expense related to stock-based awards granted to employees. We measure stock-based compensation cost at the grant date based on the fair value of the award and recognized it as expense over the requisite service period, which is the vesting period.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

Our consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008 include the amounts of stock-based compensation illustrated below:


	Three months ended September 30,							Nine months ended September 30,

(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change

Included in cost of revenue:
Cost of services	$	0.4	$	0.4	$	-	- %	$	1.1	$	1.0	$	0.1	10 %
Cost of maintenance		0.2		0.1		0.1	100 %		0.5		0.4		0.1	25 %
Cost of subscriptions		0.1		0.1		-	- %		0.4		0.1		0.3	300 %

Total included in cost of revenue		0.7		0.6		0.1	17 %		2.0		1.5		0.5	33 %
Included in operating expenses:
Sales and marketing		0.4		0.4		-	- %		1.1		1.0		0.1	10 %
Research and development		0.7		0.6		0.1	17 %		2.1		1.6		0.5	31 %
General and administrative		1.0		1.6		(0.6)	(38) %		3.9		3.8		0.1	3 %

Total included in operating expenses		2.1		2.6		(0.5)	(19) %		7.1		6.4		0.7	11 %

Total	$	2.8	$	3.2	$	(0.4)	(13) %	$	9.1	$	7.9	$	1.2	15 %

Stock-based compensation is comprised of expense from common stock awards, stock options, restricted stock awards and stock appreciation rights. The table below summarizes the stock-based compensation by award type for the three and nine months ended September 30, 2009 and 2008.
	Three months ended September 30,							Nine months ended September 30,

(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change

Stock-based compensation from:
Common stock	$	0.1	$	0.8	$	(0.7)	(88) %	$	0.9	$	0.8	$	0.1	13 %
Stock options		0.1		0.3		(0.2)	(67) %		0.2		1.0		(0.8)	(80) %
Restricted stock awards		2.1		1.6		0.5	31 %		6.3		4.7		1.6	34 %
Stock appreciation rights		0.5		0.5		-	- %		1.7		1.4		0.3	21 %

Total stock-based compensation	$	2.8	$	3.2	$	(0.4)	(13) %	$	9.1	$	7.9	$	1.2	15 %

During the third quarter and the first nine months of 2009, we expensed $0.1 million and $0.9 million, respectively, related to compensation and incentive arrangements payable in common stock associated with business acquisitions completed in 2007 and 2008. The decrease in compensation expense from stock options for the third quarter and the first nine months of 2009 compared to the same periods in 2008 is the result of using the accelerated method for recognizing stock-based compensation expense associated with stock options, which results in the recognition of more expense in the earlier periods of vesting when compared with the straight-line method. We have not granted stock options since 2005 and all historical awards will be fully vested by the end of 2009.

Stock-based compensation expense from restricted stock awards and stock appreciation rights increased in the third quarter and the first nine months of 2009 compared to the same periods in 2008 due to the expense recognized during 2009 associated with awards granted in the fourth quarter of 2008, partially offset by the vesting of grants issued in prior years.

The total amount of compensation costs related to non-vested awards not yet recognized was $19.1 million as of September 30, 2009. This amount will be recognized as expense over a weighted average period of 1.6 years.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

Amortization

We allocated amortization expense to cost of revenue according to the nature of the respective identifiable intangible asset and to the extent it is directly associated with revenue. Amortization expense included in our consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008 is illustrated below:


	Three months ended September 30,							Nine months ended September 30,

(in millions)	2009		2008		Change		% Change	2009		2008		Change		% Change

Included in cost of revenue:
Cost of license fees	$	0.1	$	0.1	$	-	- %	$	0.3	$	0.2	$	0.1	50 %
Cost of services		0.4		0.3		0.1	33 %		1.0		1.0		-	- %
Cost of maintenance		0.3		0.4		(0.1)	(25) %		1.0		0.6		0.4	67 %
Cost of subscriptions		0.8		0.9		(0.1)	(11) %		2.4		1.7		0.7	41 %
Cost of other revenue		-		-		-	- %		-		-		-	- %

Total included in cost of revenue		1.6		1.7		(0.1)	(6) %		4.7		3.5		1.2	34 %
Included in operating expenses		0.2		0.2		-	- %		0.6		0.6		-	- %

Total	$	1.8	$	1.9	$	(0.1)	(5) %	$	5.3	$	4.1	$	1.2	29 %

The increase in amortization expense for the first nine months of 2009 compared to the same periods in 2008 is directly attributable to the acquisition of Kintera in July 2008, which resulted in the recognition of $17.0 million in identifiable intangible assets.

Interest expense

Interest expense was $0.2 million in the third quarter of 2009 compared with $0.6 million in the same period in 2008. Interest expense was $0.9 million in the first nine months of 2009 compared with $0.8 million in the same period in 2008. These fluctuations in interest expense are directly related to the amount and duration of borrowing outstanding under our credit facility during the first nine months of 2009 compared to 2008.

Income tax provision

We record income tax expense in our consolidated financial statements based on an estimated annual effective income tax rate, prior to any quarter-specific items. The 2009 estimated annual effective tax rate of 37.5%, which excludes period-specific items, was applied as the effective rate for the nine months ended September 30, 2009. Our actual effective rate for the quarter ended September 30, 2009 and 2008 was 29.6% and 33.3%, respectively. Our actual effective rate for the nine months ended September 30, 2009 and 2008 was 35.6% and 36.5%, respectively. The lower effective rates for 2009 are attributable to (i) the recognition of tax benefits identified during third quarter 2009 related to changes in estimates of 2007 and 2008 research and development credits and domestic production activities deductions of $1.0 million, net of reserves for uncertain tax positions, (ii) an increase of $0.8 million in the valuation allowance for certain state tax credits and net operating loss carryforwards, and (iii) a correction of an immaterial prior period error of $0.4 million, which reduced income tax expense.

We record our deferred tax assets and liabilities at an amount based upon a U.S. federal income tax rate of 35.0% and appropriate statutory tax rates of various foreign, state and local jurisdictions in which we operate. If our tax rates change in the future, we will adjust our deferred tax assets and liabilities to an amount reflecting those income tax rates. Any change will affect the provision for income taxes during the period in which the determination is made.

The aggregate unrecognized tax benefits were $1.2 million, including interest and penalties of $0.2 million, as of September 30, 2009. The total unrecognized tax benefits as of December 31, 2008 were $0.6 million including $0.2 million of interest and penalties. We have taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amount of these unrecognized tax benefits may significantly change in the next twelve months. The possible decrease relates to state nexus issues and could result from the finalization of state income tax reviews and/or the expiration of statutes of limitations.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

Liquidity and capital resources

At September 30, 2009, cash and cash equivalents totaled $22.2 million, compared to $16.4 million at December 31, 2008. The $5.8 million increase in cash and cash equivalents during the first nine months of 2009 is principally the result of generating $60.4 million of cash from operations, offset by $41.5 million in debt repayments on our credit facility, $13.2 million in dividends paid to stockholders and $2.3 million used to acquire RLC.

Our principal source of liquidity is our operating cash flow, which depends on continued customer renewal of our maintenance, support and subscription agreements and market acceptance of our products and services. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures, pay dividends and repay any outstanding debt that is due. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to declare or pay further dividends and/or repurchase our common stock.

At September 30, 2009, outstanding borrowings under our credit facility were $17.5 million. We have drawn on our credit facilities from time to time to help us meet short-term financial needs, such as business acquisitions and share repurchases. Under our credit facility, we may elect not more than twice over the five-year term of the agreement to increase the aggregate amount available up to $50.0 million. We exercised one of these options for an additional $15.0 million in June 2008, which increased our aggregate amount available to $90.0 million. We believe our credit facility provides us with the financial flexibility that we need because of its size and terms. During the first nine months of 2009, we were focused on generating cash flow from operations to allow us to maintain our cash and cash equivalents balance to a desired level of liquidity and repay borrowings. We plan to continue to focus on generating cash flow from operations during the remainder of 2009, which should enable us to maintain our desired level of liquidity to preserve financial flexibility, while also reducing our debt balance.

Operating cash flow

Net cash provided by operating activities for the first nine months of 2009 of $60.4 million increased $12.4 million when compared to the same period in 2008. Throughout both periods, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash expenses such as depreciation, amortization and stock-based compensation and adjustments to our provision for sales returns and allowances; (ii) the tax benefit associated with our deferred tax asset, which reduces our cash outlay for income tax; and (iii) changes in our working capital.

Working capital changes that impact the statement of cash flows are in accounts receivable, other current assets, accounts payable, accrued expenses, accrued liabilities and deferred revenue. Net collections of accounts receivable and the change in deferred revenue represented a net increase of $13.1 million in the first nine months of 2009 and a net increase of $7.4 million in the first nine months of 2008 in cash associated with working capital changes. The increase in cash associated with these working capital changes is principally due to the decrease in billings related to slower sales growth when comparing the nine months ended 2009 to 2008. Changes in our balances of accounts payable, accrued expenses, accrued liabilities and other current assets represented a net increase of $2.9 million in the first nine months of 2009 and a net decrease of $5.6 million in the first nine months of 2008 in cash associated with working capital changes. The primary driver of the increase in the net cash flow associated with these accounts is a reduction in income tax payments and fluctuations in the timing of vendor payments.

Investing cash flow

Net cash used in investing activities in the first nine months of 2009 was $6.1 million compared to $55.5 million in the same period in 2008. The decrease in cash used for investing activities was principally due to a decrease in payments related to business acquisitions. We invested $2.3 million in the acquisition of RLC during the first nine months of 2009. In the first nine months of 2008, $49.9 million of cash was used for the acquisition of Kintera and payment of contingent purchase price obligations under arrangements associated with historical acquisitions. In addition, we invested $3.9 million in property and equipment in the first nine months of 2009 compared to $5.6 million in the same period in 2008.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

Financing cash flow

Net cash used in financing activities for the first nine months of 2009 was $48.8 million compared to net cash provided by financing activities of $5.6 million in the same period in 2008. The increase in cash used in financing activities is primarily due to the larger amount of repayment of borrowings under our credit facility during the first nine months of 2009 compared to the same period in 2008. Additionally, in the first nine months of 2008, we borrowed funds which were principally used to acquire Kintera and repurchase our stock.

Commitments and contingencies

As of September 30, 2009, we had $19.1 million of outstanding debt and future minimum lease commitments of $66.2 million as follows (amounts in millions):


	Payments due by period

	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Operating leases	$	65.9	$	2.1	$	12.8	$	9.9	$	41.1
Capital leases		0.3		0.1		0.2		-		-
Debt and interest		19.3		18.9		0.4		-		-

Total	$	85.5	$	21.1	$	13.4	$	9.9	$	41.1

Our commitments related to operating leases as shown above have not been reduced by the future minimum lease commitments under sublease agreements that expire in 2010. The outstanding debt of $17.5 million under our credit facility is reflected in the table above as a commitment for less than one year based on the maturities of the underlying individual borrowings. However, we have the ability to extend the maturities of these borrowings by rolling them into new borrowings with the same or longer maturities through the expiration of the credit facility in July 2012.

Included in the table above is interest expense of $0.2 million. The actual interest expense recognized in our consolidated statements of operations will depend on the amount of debt, interest rate and length of time the debt is outstanding, which could be different from our assumptions used in the table above.

As of September 30, 2009, we had accrued an estimate of $0.2 million related to contingent consideration in connection with the acquisition of RLC. Please refer to Note 3 in our notes to the consolidated financial statements for further information. We are unable to determine the actual amount, if any, for which this liability will be settled, and accordingly, we have not included this amount in the table above.

As of September 30, 2009, we had accrued $0.3 million of state taxes, $0.6 million of federal taxes and $0.2 million of interest and penalties related to uncertain tax positions taken in current and prior years. Please refer to Note 10 in our notes to the consolidated financial statements for further information. We are unable to determine the period in which these liabilities will be settled, and accordingly, we have not included these amounts in the table above.

We utilize third-party relationships in conjunction with our products. The contractual arrangements vary in length from one to three years. In certain cases, these arrangements require a minimum annual purchase commitment. The total minimum purchase commitments under these arrangements through 2012 were not significant as of September 30, 2009.

In February 2009, our Board of Directors approved our annual dividend of $0.40 per share for 2009. Dividends at the annual rate would aggregate to $17.6 million, assuming 44 million shares of common stock are outstanding. Our ability to continue to declare and pay dividends may be restricted by, among other things, the terms of our credit facility, general economic conditions and our ability to generate operating cash flow.

Blackbaud, Inc.

Item 2.

Management’s discussion and analysis of financial condition and results of operations (continued)

Off-balance sheet arrangements

We do not believe we currently have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons.

Foreign currency exchange rates

Approximately 12% of our total net revenue for the nine-month period ended September 30, 2009 was derived from operations outside the United States. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded as a separate component of stockholders’ equity, was $0.2 million and $0.9 million at September 30, 2009 and at December 31, 2008, respectively.

The vast majority of our contracts are entered into by our U.S., Canadian or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars, contracts entered into by our Canadian subsidiary are generally denominated in Canadian dollars, and contracts entered into by our U.K. subsidiary, Australian subsidiary and Netherlands subsidiary are generally denominated in pounds sterling, Australian dollar and euro, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our reported revenues and expenses denominated in non-U.S. currencies. For the three and nine months ended September 30, 2009, the foreign currency translation has resulted in a decrease in our reported revenues and expenses denominated in non-U.S. currencies when compared to the same period in 2008. Though we do not believe our increased exposure to currency exchange rates have had a material impact on our results of operations or financial position, we intend to continue to monitor such exposure and take action as appropriate.

Cautionary statement

We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. The following statement highlights some of these risks.

Statements contained in this Form 10-Q that are not historical facts are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained. Forward-looking statements involve known and unknown risks that could cause actual results to differ materially from expected results. Factors that could cause actual results to differ materially from our expectations expressed in the report include general economic risk; lengthy sales and implementation cycles, particularly in larger organizations; uncertainty regarding increased business and renewals from existing customers; continued success in sales growth; risk associated with successful implementation of multiple integrated software products; management of integration of recently acquired companies and other risks associated with acquisitions; the ability to attract and retain key personnel; risks related to our dividend policy and stock repurchase program, including potential limitations on our ability to grow and the possibility that we might discontinue payment of dividends; risks relating to restrictions imposed by the credit facility; risks associated with management of growth; technological changes that make our products and services less competitive; and the other risk factors set forth from time to time in our other SEC filings. For more detail, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 3.

Quantitative and qualitative disclosures about market risk

We have market rate sensitivity for interest rates and foreign currency exchange rates. Our variable rate debt is our primary financial instrument with market risk exposure for changing interest rates. We manage interest rate risk through a combination of short-term and long-term borrowings and a mix between borrowings indexed at prime, federal funds and LIBOR rates. Due to the nature of our short-term investments and debt, we have concluded that we face no material market risk exposure. Therefore, no quantitative tabular disclosures are required. For a

Blackbaud, Inc.

discussion of our exposure to foreign currency exchange rate fluctuations, see the “Foreign currency exchange rates” section of “Management’s discussion and analysis of financial condition and results of operations” in this report.

Item 4.

Controls and procedures

Evaluation of disclosure controls and procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.

Changes in internal control over financial reporting

As previously reported and as further discussed in our Annual Report on Form 10-K dated December 31, 2008, we acquired Kintera on July 8, 2008. Management is in the process of assessing and integrating internal control over financial reporting for the acquisition. No change in internal control over financial reporting occurred during the most recent fiscal quarter with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Blackbaud, Inc.

PART II. OTHER INFORMATION

Item 2.

Unregistered sales of equity securities and use of proceeds

The following table provides information about shares of common stock repurchased during the three months ended September 30, 2009 under our stock repurchase program, as well as common stock withheld by us to satisfy tax obligations of employees due upon vesting of restricted stock.


Period	Total number of shares purchased (1)	Average price paid per share	Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plan or programs (in thousands)
Beginning balance, July 1, 2009				$30,770
July 1, 2009 through July 31, 2009	66	$15.03	-	$30,770
August 1, 2009 through August 31, 2009	23,473	$19.49	-	$30,770
September 1, 2009 through September 30, 2009	33	$19.22	-	$30,770
Total	23,572	$19.46	-	$30,770

(1)	During the period, there were no shares repurchased. The shares in the table represent shares withheld by us to satisfy the tax obligations of employees due upon vesting of restricted stock.

Item 6.

Exhibits

Exhibits:


31.1		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Blackbaud, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BLACKBAUD, INC.

Date: November 6, 2009	By:	/s/ Marc E. Chardon
		Marc E. Chardon
		President and Chief Executive Officer

Date: November 6, 2009	By:	/s/ Timothy V. Williams
		Timothy V. Williams
		Senior Vice President and Chief Financial Officer

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