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 March 31, 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 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 first quarter of 2009 increased 8% compared to the first quarter of 2008. The inclusion of Kintera, which we acquired in July 2008, resulted in an increase in revenue of $7.7 million. Excluding the impact of the inclusion of Kintera, revenue decreased by 3% when comparing the first quarter of 2009 to the same period in 2008. Further, when removing the impact of foreign currency translation, revenue was flat when comparing the first quarter of 2009 to the same period in 2008. During the first quarter of 2009, the selling environment remained challenging as the difficult and uncertain economic conditions continued to put pressure on the spending of many organizations in the nonprofit industry. Revenues associated with our core perpetual license offerings and related services continued to meet difficult selling markets and experienced decreases as compared to the first quarter of 2008. However, we experienced growth in revenue from our eCRM offerings and online fundraising solutions. Additionally, during the first quarter of 2009 compared to the same period in 2008, revenue from maintenance services and subscription offerings, which represents 60% of our revenue on a combined basis, experienced growth of 31%, including 20% of revenue growth attributable to the inclusion of Kintera.

We continued to closely manage our operating expenses and focus on achieving a minimum level of profitability. Income from operations of $7.8 million for the first quarter of 2009 decreased by approximately $3.5 million compared to the same period in 2008. The decrease in income from operations is primarily attributable to an increase in stock-based compensation expense, amortization expense associated with intangible assets from our recent acquisitions, research and development expense for new and existing products and services, and higher operating costs as a result of our acquisition of Kintera.

We ended first quarter of 2009 with cash and cash equivalents totaling $23.0 million and outstanding borrowings on our credit facility of $59.0 million. During the first quarter of 2009, we generated $12.4 million in cash flows from our operations out of which we paid $4.3 million in dividends. Additionally, cash flow from operations allowed us to increase our cash and cash equivalents by $6.6 million to slightly above our desired liquidity level.

We expect to continue to face a challenging economic environment through the remainder of 2009, a year in which our existing and prospective customers may continue to exercise caution in expenditure decisions. In particular,

Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

about half of all nonprofit organizations have fiscal years that commence on July 1, and are currently developing their annual capital expenditure budgets. Unlike prior years, we are unable to gain insight and visibility that we would typically have at this time related to those organizations investment plans for the upcoming fiscal year. As such, we expect that it will continue to be difficult to adequately assess what the precise impact will be on our end markets. However, we plan to continue to focus on expanding market share, selectively investing in our growth initiatives and strengthening our leadership position. To the extent our operating results continue to be challenged by a weakened economic environment, we plan to continue to focus on achieving a minimum level of profitability and to use our cash flow in a manner that will enhance long-term stockholder value.

Results of operations

Comparison of the three months ended March 31, 2009 and 2008

We completed the acquisition of Kintera, Inc. (Kintera), on July 8, 2008 and have included Kintera's results of operations in our consolidated results of operations from the date of acquisition.

Revenue

The table below compares revenue from our statements of operations for the three
months ended March 31, 2009 with the same period in 2008.



                                Three months ended March 31,
         (in millions)              2009                2008    Change   % Change

         License fees    $           7.4     $           9.6   $ (2.2)      (23)%
         Services                   21.1                23.6     (2.5)      (11)%
         Maintenance                28.0                25.4       2.6        10%
         Subscriptions              16.7                 8.8       7.9        90%
         Other                       1.5                 2.0     (0.5)      (25)%
         Total revenue   $          74.7     $          69.4   $   5.3         8%

Total revenue increased $5.3 million, or 8%, in the first quarter of 2009 compared to the first quarter of 2008. Excluding the increase in revenue attributable to the inclusion of Kintera of $7.7 million in our consolidated results of operations, revenue decreased by $2.4 million, or 3%. Further, when removing the impact of foreign currency translation, revenue was flat when comparing the first quarter of 2009 to the same period in 2008. The organic decrease in revenue, prior to the impact of foreign currency translation, in the first quarter of 2009 is primarily due to decreases in license fees and services revenue, partially offset by an increase in revenue from our subscription offerings. We also experienced growth in revenue from new maintenance contracts associated with new license agreements and existing client increases when comparing the first quarter of 2009 to the same period in 2008.

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.

                                Blackbaud, Inc.

Item 2. Management's discussion and analysis of financial condition and results
        of operations (continued)




License fees



                                                     Three months ended March 31,
(in millions)                                           2009                 2008     Change    % Change

License fee revenue                          $           7.4      $           9.6    $ (2.2)       (23)%
Direct controllable cost of license fees                 0.8                  0.8         -           0%
Segment income                               $           6.6      $           8.8    $ (2.2)       (25)%
Segment margin %                                         89%                  92%

Revenue from license fees is derived from the sale of our software products under a perpetual license agreement. The decrease in license fee revenue in the first quarter of 2009 compared to the same period in 2008 is principally attributable to longer sales cycle times, increased scrutiny of purchasing decisions and overall cautiousness taken by existing and prospective customers as a result of continued economic challenges. Revenue related to our eCRM offerings grew by $1.9 million, $1.8 million of which resulted from one transaction in the quarter, offset by decreases in our core perpetual license product offerings of $3.9 million and other products of $0.2 million. During first quarter of 2009, revenue from license fees to new customers increased $0.6 million, offset by a $2.8 million decrease in sales to existing clients.

Direct controllable cost of license fees is principally comprised of third-party software royalties and variable reseller commissions. Cost of license fees in the first quarter of 2009 compared to the same period in 2008 remained relatively flat in absolute dollars.

The three percentage point decrease in segment margin in the first quarter of 2009 compared to the same period in 2008 is the result of a decrease in sales of software while a majority of our costs of license fees remained unchanged.

Consulting and education services

                                                    Three months ended March 31,
(in millions)                                           2009                2008     Change    % Change

Consulting and education services revenue    $          16.1     $          19.3    $ (3.2)       (17)%
Direct controllable cost of consulting
and education services                                  11.2                11.0        0.2          2%
Segment income                               $           4.9     $           8.3    $ (3.4)       (41)%
Segment margin %                                         30%                 43%

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. Included in consulting and education services revenue in the first quarter of 2009 is $0.2 million of revenue attributable to the inclusion of Kintera. The rates we charge for our service offerings have remained relatively constant year over year and, as such, the remaining decrease in revenue is principally the result of decreased volume of services provided. The decrease in revenue includes a $2.9 million decrease in consulting, installation and implementation services delivered for our core software products, offset by an increase of $1.3 million in consulting services associated with our new eCRM product offerings and our internet-based products. Revenue attributable to education services delivered decreased by $1.3 million primarily due to decreased demand for training services as existing and prospective customers continue to experience budgetary constraints. The remaining decrease of $0.3 million in revenue is due to a decrease in other consulting services.

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. Additional headcount for Kintera and other costs attributable to the inclusion of Kintera represented $0.9 million of the increase in costs of consulting and education services. Excluding the impact of the inclusion of Kintera, cost of consulting and education services decreased by $0.7 million in first quarter of 2009 compared to the same period in 2008. Human resource costs decreased by $0.6 million due to a reduction in headcount and travel-related expenses, recruiting and other costs decreased $0.1 million.

Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

The segment margin decreased in the first quarter of 2009 compared to the same period in 2008 is due to decrease in demand for consulting and education services.

Analytic services

                                                    Three months ended March 31,
(in millions)                                          2009                 2008       Change     % Change

Analytic services revenue                   $           5.0      $           4.3     $    0.7          16%
Direct controllable cost of analytic
services                                                2.5                  2.2          0.3          14%
Segment income                              $           2.5      $           2.1     $    0.4          19%
Segment margin %                                        50%                  49%

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. Revenue from analytic services increased 16% in the first quarter of 2009 compared to the first quarter of 2008. Approximately $0.5 million, or 60%, of the increase is attributable to the inclusion of Kintera. The rates charged for our analytic services have remained relatively constant year over year and, as such, the remaining increase in analytic services revenue of $0.2 million is principally the result of increased volume of services provided.

Cost of analytic services is primarily comprised of human resource costs and data expense incurred to perform analytic services. The increase in cost of analytic services is primarily attributable to human resource costs associated with additional headcount for Kintera and other costs attributable to the inclusion of Kintera.

The analytic services margin increase in the first quarter of 2009 compared to the same period in 2008 is primarily due to a decrease in human resource costs as a percentage of revenue.

Maintenance



                                                    Three months ended March 31,
(in millions)                                           2009                2008      Change    % Change

Maintenance revenue                          $          28.0     $          25.4    $    2.6         10%
Direct controllable cost of maintenance                  3.8                 3.7         0.1          3%
Segment income                               $          24.2     $          21.7    $    2.5         12%
Segment margin %                                         86%                 85%

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 updates, enhancements and upgrades to our software products and online, telephone and email support. The increase in maintenance revenue for first quarter of 2009 includes $1.4 million of revenue attributable to the inclusion of Kintera. The remaining increase of $1.2 million in the first quarter of 2009 compared to the first quarter of 2008 includes an increase of $1.6 million from new maintenance contracts with both new customers associated with new license agreements and increases in contracts with existing customers. Additionally, contract inflationary rate adjustments contributed to $0.9 million of increase in maintenance revenue. These increases were partially offset by $1.3 million of 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 first quarter of 2009 compared to the same period in 2008 is principally the result of an increase in human resources costs of $0.1 million attributable to additional headcount for Kintera.

Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

The maintenance segment margin increase of one percentage point during the first quarter of 2009 compared to the same period in 2008 is primarily due to a decrease in human resource costs as a percentage of revenue.

Subscriptions



                                                    Three months ended March 31,
(in millions)                                             2009              2008      Change    % Change

Subscriptions revenue                         $           16.7     $         8.8    $    7.9         90%
Direct controllable cost of subscriptions                  5.2               2.8         2.4         86%
Segment income                                $           11.5     $         6.0    $    5.5         92%
Segment margin %                                           69%               68%

Revenue from subscriptions is principally comprised of revenue from providing access to hosted applications, providing application hosting services, and access to certain data services and our online subscription training offerings. We continue to experience growth in our hosted applications business. Approximately $5.5 million, or 70%, of the revenue growth for first quarter of 2009 is attributable to the inclusion of Kintera. The remaining increase of $2.4 million is attributable to organic growth from increased demand for 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. The increase in cost of subscriptions in first quarter of 2009 compared to the same period in 2008 is principally due to an increase in data expense, hosting and other costs of $1.6 million, of which $1.0 million is attributable to the inclusion of Kintera. Additionally human resources costs attributable to the inclusion of Kintera were $0.9 million, offset by a decrease in other human resources costs of $0.1 million.

The slight increase in subscriptions segment margin during the first quarter of 2009 compared to the same period in 2008 is predominantly due to a decrease in human resource costs as a percentage of revenue.

Other revenue

                                                     Three months ended March 31,
(in millions)                                           2009                 2008     Change    % Change

Other revenue                                $           1.5      $           2.0    $ (0.5)       (25)%
Direct controllable cost of other revenue                1.3                  1.8      (0.5)       (28)%
Segment income                               $           0.2      $           0.2    $    -           0%
Segment margin %                                         13%                  10%

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 first quarter of 2009 primarily due to a $0.5 million decrease in reimbursable travel-related costs from our services businesses.

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 first quarter of 2009 compared to same period in 2008 is due to a $0.5 million decrease in reimbursable expenses related to providing services at customer locations.

The increase in segment margin during the first quarter of 2009 compared to the same period in 2008 is primarily attributable to a decrease in reimbursable expense as a percentage of revenue.

Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

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 March 31,
(in millions)                                           2009                2008     Change    % Change

License fees                                 $           6.6     $           8.8    $ (2.2)       (25)%
Consulting and education services                        4.9                 8.3      (3.4)       (41)%
Analytic services                                        2.5                 2.1        0.4         19%
Maintenance                                             24.2                21.7        2.5         12%
Subscriptions                                           11.5                 6.0        5.5         92%
Other                                                    0.2                 0.2         -           0%
Total segment income                         $          49.9     $          47.1    $   2.8          6%
Less corporate costs not allocated to
segment expenses:
Stock-based compensation expense                         0.7                 0.5        0.2         40%
Amortization of intangible assets
acquired in business combinations                        1.6                 0.9        0.7         78%
Corporate overhead costs                                 3.1                 3.0        0.1          3%
Gross profit as stated in statements of
operations                                   $          44.5     $          42.7    $   1.8          4%
Gross margin %                                           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 increase in corporate overhead costs allocated to cost of revenue during the first quarter of 2009 is primarily attributable to the increase in facilities costs due to the inclusion of Kintera.

Operating expenses

The operating expenses analyzed below are presented on a non-GAAP basis in that 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 March 31,
(in millions)                                           2009                2008      Change    % Change

Sales and marketing expense excluding
stock-based compensation                     $          15.8     $          15.0    $    0.8          5%
Add: Stock-based compensation                            0.3                 0.3          -           0%
Sales and marketing expense                  $          16.1     $          15.3    $    0.8          5%
% of revenue (excluding stock-based
compensation)                                            21%                 22%

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. The increase in sales and marketing expense in the first quarter of 2009 compared to the first quarter of 2008 is principally due to the inclusion of Kintera. During the first quarter of 2009, human resource costs increased $1.4 million, of which $1.3 million is due the inclusion of headcount associated with Kintera. The increase

Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

in human resource costs was partially offset by decreases in commission expense of $0.5 million due to lower commissionable sales and $0.1 million in other costs. As a percentage of revenue, sales and marketing expense in the first quarter of 2009 decreased by one percentage point compared to the same period in 2008, principally due to a decrease in commission expense associated with the decline in license fees and services revenue.

Research and development

                                                    Three months ended March 31,
(in millions)                                             2009              2008      Change    % Change

Research and development expense excluding
. . .