Investing In Charities
May 1, 2006 Mark Hrywna
The Dow Jones Industrial Average squeaked past 11,000 for the first time in almost five years. Talk around the water cooler is hot on Sirius satellite radio’s stock since Howard Stern debuted there. Your neighbor swears it’s a good time to pick up some shares of GM.
Nonprofits need any number of products and services: software and servers, direct mail and marketing, database management and mailing lists. Are publicly-traded companies, whose business is nonprofits, ready for a boom, or at least pop? Of the 10 public companies examined by The NonProfit Times, only three saw their stock price improve during 2005, and most experienced a drop. Coincidentally, the top gainer and largest decline within the group came from the same sector: software providers, Blackbaud (+17 percent) and Kintera (-70 percent). The group of 10 could be lumped into three categories: gains (3), modest losses (2), and double-digit losses (5). By comparison, the Dow and NASDAQ were largely unchanged in 2005, down less than 1 percent and up only 1 percent, respectively. Does that mean its nonprofit-related companies are a good investment? Well, it might depend on the sector.
The companies selected interact with nonprofits to varying degrees. Some of the companies’ business is strictly nonprofits, like Kintera and Blackbaud, while others have a small number of clients or two that are nonprofits, such as Acxiom and Alliance Data. And when you’re as big as Microsoft or Omnicom Group, there’s bound to be more than a few nonprofit clients.
San Antonio, Texas-based Harte-Hanks provides direct marketing services and distributes shopper advertising publications. The company derives almost 18 percent of its total direct marketing revenues from its Select Markets group, which includes nonprofits, but also automotive, manufacturing, utilities, travel and hospitality. Credit Suisse/First Boston (CSFB) expects a “solid but unspectacular winter quarter” for Harte-Hanks, similar to its third quarter, but it did call the company “the best and cleanest story in marketing services for ’06.”
Prior to acquiring Epsilon Data Management (now Epsilon) of Wakefield, Mass. in 2004, Alliance Data (ADS) of Dallas, Texas did not have a connection to the nonprofit world. Epsilon provides integrated marketing communications, technology, analytics and production for several nonprofit clients, as well as to other vertical markets and the industry as a whole.
CSFB rated ADS “neutral” at $38.57 a share in its December 1, 2005 company update, with a target price of $35, and said it’s among the companies most likely exposed to consumer spending in the group. ADS “looks like it should see some outperformance for transaction/marketing segments.”
CSFB rated infoUSA, Inc., a business and consumer information provider out of Omaha, Neb., as underperform at $10.90 a share, with a 12-month target of only $10 per share. In the October CSFB earnings report, the company identified revenue per customer was lower than it was a year ago and “the consolidation in telecom and financial services is shrinking the customer base.” CSFB was more enamored with a worldwide ad agency that has gobbled up nonprofit-focused com- panies over the years.
A division of the $10.3-billion New York City marketing and communications giant Omnicom Group Inc., Diversified Agency Services has a separate holding company, Nonprofit Fundraising & Communications Group, comprised of four units dedicated solely to the nonprofit sector:
• Changing Our World, Inc., New York City, a national philanthropic consulting company special- izing in capital campaigns; • Grizzard Communications Group, Atlanta, Ga., a direct response and fundraising agency; • Russ Reid Company, Pasadena, Calif., which specializes in fundraising and public relations, and • SCA Direct, Fairfax, Va., a direct marketing agency specializing in the “integration of premium and mission-based direct mail with online, major gifts, planned giving and other fundraising channels.”
CSFB was bullish on the giant advertising conglomerate, rating it “outperform” in October 2005 at $79.16 a share, and a 12-month target of $101. Calling Omnicom “a major buy right now,” CSFB said it had “deep penetration, with excellent management, top-tier agency brands…”
The Russ Reid Company was among the first to come under Omnicom’s (OMC) nonprofit-focused umbrella about eight years ago. Russ Reid President and CEO Tom Harrison said OMC’s strategy has always been to buy people successful in their own sector and let them continue to run their business while providing any necessary resources. That, he said, sets OMC apart from other holding companies like WPP Group and Interpublic Group. “They’re brilliant at that.”
“For all of us,” Harrison said, being with OMC has meant “more resources and capital than we ever could have had on our own,” which in turn benefits nonprofits. In the future, it remains to be seen whether companies can service smaller nonprofits, only a fraction of which work with agencies, Harrison said.
“If we were wise enough to find a way to work with small nonprofits; that would be the trick.”
Bullish on technology
While companies with varying degrees of nonprofit clients proved a mixed bag for stock success or analysts picks, it was the technology service sector for nonprofits that professionals believe is a good place to invest money.
Two years after Blackbaud and Kintera went public, the stock prices of the two nonprofit-focused companies went in different directions. Blackbaud saw its stock jump 17 percent for 2005 to $17.08 per share, up from $14.65. It closed at $8.62 per share the day of its Initial Public Offering (IPO) in July 2004.
After closing its first day in December, 2003 at $10.30 per share and reaching heights of $17.73 in April 2004, Kintera ended 2005 at $2.97 a share, down some 70 percent on the year.
Of the two software providers, San Diego, Calif.-based Kintera is considered the new kid on the block. Blackbaud of Charleston, S.C., while going public the same year, has been around since 1981, one reason why it’s stock price has been more stable: Wall Street knows what to expect.
“The reason I came, and the reason I was recruited, was that Kintera was at a point in its life where it was fundamental to start to become very strong operators,” Dick Davidson, who joined Kintera as CFO last spring, said. “Relative to Blackbaud, the level of investment still required to be made in our product was higher” because Kintera is a newer company, he said.
Davidson was charged with coming in to help “rationalize ongoing investment and ensure our business model operates successfully,” he said, adding that Kintera already had a very large and reasonably established client base.
The volatility around a quarterly basis has been high at Kintera, while predictability was low, since it’s a young company, Davidson said. “What we’ve heard from customers and investors is to become more predictable over time.” Volatility continued as Kintera’s stock plummeted almost 30 percent, to below $1.75 a share, when the market opened following its fourth quarter earnings call on March 16. More than 4 million shares were traded that day, way up from the previous daily average of only 110,000.
Total revenue increased 73 percent, from $23.7 million in 2004 to $40.9 million in 2005. Meanwhile, Fiscal Year 2005 earnings before interest, taxes, depreciation and amortization (EBITDA) was a loss of $30.4 million ($0.99 per share), compared to a loss of $12 million ($0.47 per share) in 2004. Specifically in fourth quarter 2005, EBITDA was a loss of $9.4 million ($0.29 per share), up from $3.5 million ($0.12 per share) in 2004’s fourth quarter. Additional reserves, write-offs and other non-cash items affected both revenue and expenses for the fourth quarter, as well as infrastructure investments, according to a company press release.
“We’re trying to balance how we grow revenue but also take cost structure into a more affordable range,” Davidson said in response to a question about headcount level and cutting expenses during the earnings call in March, and did not offer a timetable for profitability. Kintera’s employee base declined to 487 as of Dec. 31, 2005, down from 516 as of Sept. 30, 2005.
John Neff of William Blair & Co., a Chicago-based investment banking firm, rated Kintera’s stock as “market perform” last fall, meaning it will perform approximately in line with the broader market over the next 12 months. Neff cited “progress on three critical fronts: operational discipline, financial discipline and establishing credibility with the investment community. Much work remains to be done, however.” Kintera processed approximately $92 million in online donations during the third quarter of 2005, up 166 percent from the year before, Neff said, “evidence of increasing adoption and traction of Kintera’s Web-based solutions in the marketplace.”
The company processed $302 million in online donations for all of 2005, more than double the $149.2 million processed during 2004. “Despite its myriad of internal challenges, Kintera is having some degree of success in the marketplace,” Neff wrote in a November 2005 research note. Neff rated Blackbaud “outperform” (its highest rating) and said the company has a full “checklist” of long-term investment criteria, such as, “market leadership, an enormous addressable market with widespread inefficiency and low penetration, outstanding financial characteristics and a compelling valuation.”
During its fourth-quarter earnings conference call in February, Blackbaud announced it would increase its dividend from $0.20 to $0.28 per share.
The business of providing technology to the nonprofit sector is ripe for growth in the near future, according to Prem Lalvani, vice president of research, enterprise software, at Stanford Group Company. “From a broader perspective, we think that the nonprofit sector is one of the few remaining verticals that has not experienced a technology-adoption cycle. We’re in the early stages of this cycle over the next several years,” he said.
There have been years of inefficiencies at nonprofits, which typically do not have the resources to embrace technology; that’s changing, Lalvani said. High-profile scandals at nonprofits have been a black mark for the sector and the best way to meet the demand for accountability and fiscal transparency at nonprofits is through technology, he said. “A lot of individuals who serve on boards, contribute their time and money to nonprofits, come from the for-profit world. Leaders in the industry have learned a lot in the deployment of technology; those lessons will be transferred to the nonprofit sector.”
Applications offered by technology companies, whether Web- or desktop-based, help nonprofits become more efficient in their operations while not requiring significant infrastructure, Lalvani said.
The core market drivers are strong enough that this is a case of “a rising tide will lift all ships,” Lalvani said. That’s enough for Stanford to rate both companies a buy, but he described Blackbaud as “a large vessel in this market,” while Kintera might be “a small boat with maybe a hole in its hull.”
Lalvani said Kintera has struggled as a public company since its IPO, “really trying to find an appropriate business model for on-demand software.” It has a very broad product set, similar to Blackbaud, with the difference being what they charge for software. Kintera’s model is more targeted toward a large-enterprise type of sale, with the average contract price in the hundreds of thousands of dollars — compared to Blackbaud’s lower price points being tens of thousands — giving it a little trouble “gaining traction with their model in the market,” he said.
“Secondarily, they’ve been exercising less fiscal control than Blackbaud as they’re mounting considerable losses,” he added, having to raise money four times since their IPO to finance growth. “They’ve been unable to make money on their bottom line, despite growth.”
Lalvani said Kintera was not as well managed from a business operations perspective or financial perspective as it should’ve been. The losses probably won’t make the company profitable until sometime into 2007, he said. “Shareholders have really been focusing on profitability number.”
Lalvani praised Blackbaud’s business model and called it a “cash-generating company” that’s “very well fiscally managed” and has “tremendous fundamental growth.”
“They do a great job of not only serving the needs of clients but investors as well,” Lalvani said.
The primary competition for Blackbaud and Kintera has been coming from the private sector, Lalvani said, namely Convio in Austin, Texas. “It seems to be a very well managed company,” that’s moving much more rapidly toward profitability, having nearly doubled revenues from 2004 to 2005. Founded in 1999, Convio gained prominence for its online fundraising for Howard Dean’s presidential campaign. “Clearly, the potential for us to go public is very real,” Convio CEO Gene Austin said. “I think the timeline for us to go public though is still to be determined; it could be as early as this year, but it could be well into 2007 as well.” An IPO is one step in a long road to becoming a good company and it’s important to be ready when going public. “It’s important for us from day one to be built the right way. If the opportunity comes to go public, great; if not, that’s OK,” Austin said. “You set a goal as a company to invest and build an organization so it can go public, should the time come to decide to do that. It’s not a forgone conclusion that we will.” NPT