Good afternoon, ladies and gentlemen. Again thank you for standing by. Welcome to the Blackbaud second quarter 2008 earnings conference call. As a reminder, today's call is being recorded. Now, at this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and answer-session. Instructions will be provided at that time. I would like to now turn the conference over to Mr. Tim Williams, Chief Financial Officer of Blackbaud. Please go ahead, sir.

Thank you very much. Good afternoon, everyone. Thank you for joining us today to review our second quarter 2008 results. With me on the call is Marc Chardon, President and Chief Executive Officer. Marc and I will make a few prepared remarks and then we will open up the call later for questions. Please note that our remarks today contain forward-looking statements. These statements are based solely on present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent annual report on form 10-K and the risk factors contained therein as well as our periodic reports under the Securities Act of 1934 for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements. Also, please note that a webcast of today's call will be available in the investor relations section of our website. With that, I would like to turn the call over to Marc. Then I will come back a little later to give further details regarding our financials. Marc.

Thank you, Tim and my thanks to all of you for joining us on the phone today. During the second quarter, the company delivered solid revenue growth, rapid growth in our subscription revenue and strong profit margins that drove non-GAAP EPS to the high end of our guidance. We are pleased with the company's financial results in the face of continued challenging macro-economic environment. For the second quarter, total revenue grew 13% on a year-over-year basis to $72.5 million which was the mid-point of our guidance. Subscription revenue grew 63% year-over-year to $9 million and represented 94% of our licensed revenue. The increasing mix of subscription revenue has been an important evolution of Blackbaud's business model as it further improves revenue visibility and predictability. Let me begin to include Kintera's results in the upcoming third quarter, quarterly subscription revenue will, for the first time in Blackbaud's history exceed license revenue, we think by a substantial margin. This will obviously mark a milestone for our company. License revenue came in at $9.6 million, which was down year-over-year primarily due to the fact we are facing a challenging comparison quarter in last year's Q2. A secondary factor is that we saw fewer seasonally-driven purchases when compared to last year's second quarter. As a reminder, about half of our customers have fiscal years that end in June, while most of the other half end in December. So we typically see some increased level of year-end spending, so fiscal year-end spending in Q2 and Q4 of each year. We did not see this to the same degree in the quarter just past. In spite of this, we delivered on our profitability guidance. Non-GAAP operating income of $18 million represented the 25% margin and non-GAAP EPS was $0.25 cents, both of which were at the…

Thanks, Marc. Let me begin by providing some details on our second quarter operating results then I will update our guidance and close with a quick review of our capital management program. First, let's start with the income statement. Total revenue came in at $72.5 million, which was up 13% on a year-over-year basis, and as Marc noted, was at the mid-point of our $71.5 million to $73.5 million guidance range. Within total revenues, subscription revenue was $9 million, an increase of 63% on a year-over-year basis. It increased to 12% of our total revenue in the second quarter, up from 9% in the year ago period. Even without the contribution from eTapestry, subscription revenue would have increased by approximately 30% on a year-over-year basis. We previously expected subscriptions revenue to be greater than license revenue at some point in the second half of 2008. This will certainly be the case when we begin to include Kintera's revenue in the third quarter. License revenue was 9.6 million in the second quarter, a decrease of 13% year-over-year against a difficult comparison with quarter last year. We expect our license revenue component to return to positive year-over-year growth in the upcoming third and fourth quarter. It is also worth noting that as expected neither of the two eCRM deals that Marc referenced contributed anything to license revenue in this quarter. As we have indicated previously, we expect that most of the license revenue associated with the eCRM deals will be spread over several quarters. Our services revenue came in at $25.3 million during the second quarter, an increase of 14% on a year-over-year basis, while our maintenance revenue came in at $26.4 million, an increase of 14% on a year-over-year basis. We continue to enjoy maintenance renewal rates in the mid-90s range,…

(Operator Instructions) Our first question comes from Philip Rueppel with Wachovia.

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

I will take the first part and I will let Tim have the second part there. So, the market environment was challenging from the beginning to the end of the quarter of Q2. There was not really a noticeable difference, I would say, in the market environment. Obviously that did have an impact in the second half of the quarter in terms of the year end budget spending that we sometimes see that did not materialize to a meaningful extent. On the other hand, we have now had two quarters to adapt our selling practices and processes and we saw a significant improvement throughout the quarter month from each month to the next, in our ability to convert or bring home the pipeline that we do have. So, we have a strong pipeline and I see an increasing ability to execute against that pipeline as we have learned how to sell, in the tougher scrutiny environments that our customers are putting out there.

Phil, in terms of the Kintera forecast for the second half and whether we have adjusted it in line with Blackbaud, we have basically looked at all the components of our business, including Kintera and their performance in the first half and how we believe they will perform in the second half in this environment. Remember that a sizable portion of their revenue is recurring, both subscription and maintenance. So, that certainly had an impact. However, that was all considered in the development of our guidance and in general, I would say it is not materially different than what we said at the time we announced the acquisition, potentially maybe a penny or so difference just in terms of our estimates of how quickly we feel we will be able to generate some of the savings from their public company costs and how quickly we will be able to bring those down. Other than that, nothing is really materially different in terms of our outlook.

Then a follow-up, if I might. Where are you in the process of, integrating Kintera? Do you think now that that would be the same time table as you saw with your other acquisitions and from a cost synergy perspective, have you identified any additional or cost savings or is it too early to tell?

Well, the cost one is actually easier. We have not gotten any incremental cost savings other than the engineering of public company and data source costs that we mentioned in the announcement of Kintera. So, there is nothing really new to report on that, Phil. Sorry, I just lost the first half of the question. What was the first half?

About how the integration is?

Integration.

In eTapestry, we left eTapestry pretty much as a stand alone division. So it is not really an instructive example. The Target one is, in many ways, more similar, in that Target has an analytics business, like Kintera does and Target has the software and software as a service business like Kintera does. Kintera also has, obviously, the FundWare and their Donor Advised Fund offerings as well. We saw a relatively rapid integration of the analytics teams across the two organizations, but it still took pretty much of a year to do. I am quite convinced that the analytics integration here will be much faster. The FundWare and FE integration will be probably similar in terms of time line. So the team approach one with eCRM because it involves creating a merged road map that will satisfy two customer bases and that took a year and a half or so to get done for the Target company for a combined road map with two different technology platforms. I think you will see a much more rapid integration between the CRM offerings that we have in our portfolio today in the Sphere products. So, in that sense, part of the integration will be significantly faster, in my opinion, than the team approach. So it really depends on which part of the business you are looking for and that is the range of times depending on which part of the business.

Great. Thanks very much.

Thanks, Phil.

Our next question comes from John Neff with William Blair.

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

I do not think there is a common rule across that. You have read the press as much as I have and you have seen that there have been layoffs in some organizations and some of them are obviously being more careful in some of their investment budgets or their capital budgets. So I think that like any organization, they take a look and see what is likely to impact their mission. Sometimes you do see some short-term decrease in terms of acquisition of new donors because that is a relatively low margin effort. Many organizations, in the sense that it is expensive to acquire donors and you do not necessarily get a ton of revenue from a new donor in a broad-based DM space. That has a commensurate increase on the other hand with some of our analytics. We had a good quarter in analytics, in part because people are trying to use analytics to get more out of their existing donor base. So you really see it spread across the board from higher at one space where we are seeing very little in terms of economic impact yet at this point to, as I said before, Arts & Cultural, where you are seeing very significant challenges in terms of both state funding and grant cut backs as well as to the subscribers as well as donors. So very different approaches by segment.

Thank you for that. A question for Tim. The revenue write down at Kintera, is it high relative to past acquisitions just because of the mix of revenue at Kintera? Or was it higher than you initially expected?

Well, I think the answer to both questions is yes. It was higher than what we expected and it is in point of fact probably due to the mix, but also the nature of that revenue. To just give you one example, John, a large part of their services revenue has already been in a sense delivered. Because of the way they handle their accounting for those services and they are recognized as along with the subscription revenue, there is, in essence, no cost associated with the future recognition of those services and income. Under the purchase accounting rules, basically you have to write all that off. So when we got in and started looking at this in greater depth, we realized that, in fact, the write-off was going to be a good bit larger than what we expected and in point and fact, a good bit different than what we saw on the last two acquisitions. So the only way to really handle this from a comparability standpoint is to really look at it the way I said in my comment. Hope it is helpful.

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

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

Okay. Then you did mention guidance. The guidance again from a revenue perspective for the year for the quarter. That was non-GAAP?

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

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

Yes, yes.

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

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

Okay. Two. Thank you very much.

Next up we have Tom Roderick with Thomas Weisel Partners.

Yes thanks and good afternoon.

Hey, Tom.

Hey, Tom.

So in terms of what is going on with the nonprofit industry and your customer base, Marc, you alluded with your comments that it is been a challenging macro environment out there. Can you get a little bit more granular there? Are there certain areas in your customer base that are showing signs of pronounced weakness? Are there certain areas that are perhaps more resilient than the rest and related to both of those two questions, are you able to shift any of your sales and marketing resources to focus on the markets that are proving to be more resilient?

Well, the answer is that it is hard to know right in the middle of the ones who are impacted on average like the rest of our business, but the one at the very high end of the market in terms of resilience is the higher Ed space and we very clearly shifted both engineering resources on the eCRM front to features and needs to satisfy the higher Ed space as well as focusing significant level and increased level of resources on higher Ed. So, yes, we have done some of that. We have not seen a material decrease in interest or pipeline even in some of the sectors that have been impacted on the other hand. So one of the sectors that is most impacted would be the arts and cultural. It is not like we have fewer pipelines; it is just that it is a lot harder and longer to sell. So we have not actually pulled resources away, we are still expecting to stay in the game and we will probably get a bounce out of that at some point in the future probably. We think it is plausible to believe we will get a bounce out of that at some point in the future and we do not think it is worth taking coverage away in that context. So, in general, even in the sectors that have exhibited the most slowing, the actual pipeline year-over-year is up, it is just that it is taking longer to go through and we have a slightly increased no-decision rate from previous years.

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

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

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

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

Okay.

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

Perfect. Thanks very much.

Okay.

Thank you.

Lawrence Petrone with W. R. Hambrecht is up next.

Thank you very much. Hi, Marc and Tim.

Hey. Hello.

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

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

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

Well, we are very cautious here about predicting how we are going to use our cash flow. There are obviously other choices here and, including buying back shares. We never announce really when we are going to do that, but obviously we have used our cash in the past. We do have sizable amounts of debt, so certainly that would be a high priority as well. We will certainly take a look and use our cash as we think it makes the most sense.

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

Yes. No, we are seeing continued strong interest in the higher education space and so that would be the area that has the largest single sub-vertical in terms of the percentage of pursuits that we are in and we are including an international eCRM higher end customer for whom we are in an evaluation phase right now. We also see a certain number of international or organizations that are in relief or development, including some faith-based organizations that are in development mode. So, that they would look somewhat like (inaudible) or like Save the Children and those are two areas that we see interest. Then we are seeing some interest in chapter-based organizations who are facing, however, an interesting dichotomy because they are trying to reduce their distributed organization's cost structure and getting more efficient, but at the same time the pressure is truly on both from a need basis and from a fund raising basis. This is the right time that we are seeing in a couple of these organizations that have many chapters spread around either the US or spread around the world. So, it is not that different then the very large Raiser's Edge customer based profile, other than we are further up in size or actually it is not different from that [plus TA] customer base across the two, other than we are at the side scale of bigger universities so, we used to do before and then organizations that are similar in scale, any new services as well as the TA is, [they are a producer].

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

Absolutely, yes.

Okay. That is helpful. Thank you very much. Thank you, Tim.

Thank you.

Our next question comes from Ross MacMillan with Jefferies.

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

Year-end budget spending of that nature is typically in organizations that do not have public procurement, for example. We have RFP processes and policies in a foundation for a big university, you do not really see this, oh, I have something in my budget, so what can I do with it that makes sense. So, very often you will see that more in what we would call the core sales organizations, that is to say organizations that would be typically two, three, four, Raiser's Edge implementation, so might be able to buy a volunteer module or extra training or something like that. So, it is very often more transactional and it manifest it is itself in typically in hundreds of transactions, somal number of hundreds of transactions, of all different sizes from a $1000 to $10,000 or $15,000 or $20,000. So, I have never seen a major deal happen at the end of the year because someone happens to have $2,000,000 lying around.

That is fair, thank you. Then just on the subscription line, that seemed to slowdown sequentially quite materially and it may reflect the same issue that you have seen in terms of core sales. Is there something else going on there to drive that deceleration, particular products maybe in that mix that maybe are growing a little more slowly than they have been?

I would say no. I do not think so. If we were to go back and look at what was really embedded in our guidance, our estimates upon which we build our guidance, subscriptions actually came in right on the money, Ross.

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

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

The mix between revenue line items for the acquired revenue?

Well.

Anything in rough terms?

I think, as you would expect, most of their revenue from Kintera, if you were to go back to Kintera pre-acquisition here, the vast majority or a sizable percentage of their revenue will go through subscriptions. Of course, they did have the FundWare business, where they did have substantial maintenance revenues. So that will flow through our maintenance revenue and they do have some services, obviously, as well. So we will map pretty closely to our categories.

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

Clearly, any customer who wants to migrate will have an attractive offer from us. We are not putting in any program that is designed to cause migration at this point. Right now, what we are doing is we are working with the FundWare channel and with the FundWare team in Colorado and The Financial Edge team to design the version 8 of the combined road map. Just like we worked with the Team Approach customers with the eCRM road map and built an integrated road map in over time to bring TA customers to migrate to eCRM. If you think of the FundWare acquisition or integration as being similar to the Team Approach/eCRM one, you would not be far off.

Okay. Great. Thank you very much.

Thanks, Ross.

Kirk Materne with Banc of America has our next question.

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

Well, I would say that, in some sense, yes, but it might integrate a little bit faster. Actually, the sales, the go-to market side of Target were integrated before the end of the first calendar year, right? So we integrate this whole year, this whole year we have been in an integrated sales environment where the Team Approach customers are handled by the same enterprise sales force that handles the rest of the enterprise. All public broadcasting customers are handled by one integrated sales force for the offering across our set. So just like that you will see, I think, the sales force will become integrated relatively quickly. The obvious first thing to do, though, is to have the people who know how to sell the Kintera offering to benefit from the increased financial stability that they have now got, the higher level of customer support and professional services that they can mobilize with our resources behind the Kintera professionals in that space and those were the primary reason they were having challenges selling versus another competitor in that space. So, the first step is they would stay independent. I believe, that throughout next year you will see the integration. On an engineering side, we are working very hard to define exactly the road map and we will have something to say about that the next call. We just do not know the exact steps, but we would hope to have some of the integration done and working in customers before the next call. The actual integration road map of what the two products will be over time will take time to evolve and to develop.

Great. Tim, just to follow up on Ross' question about the revenue mix coming from Kintera, you said it would map somewhat similar to yours. I mean you obviously have a much smaller percentage of subscription revenue. Can you just give any broader or any ranges that we can think about for the 9 million in the third quarter and 19 in the back half of the year?

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

Yes.

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

Okay.

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

Perfect. Thanks for the details, Tim. I appreciate it.

All right.

Our next question is a follow-up coming from John Neff with William Blair.

Actually, hearing no response, gentlemen, actually, we are going to conclude today's Q&A session. Mr. Williams, I will turn the conference back over to you.

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

Thanks to everybody. Bye.

That concludes today's conference call. Thank you for your participation and have a good day.