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Charity Isn't Paying at Kintera

By Sonja Ryst Bad things are happening, and that should be good for Kintera (KNTA), a San Diego company that provides software and processes donations for nonprofits.Kintera has handled fund-raising for charities such as Doctors Without Borders and local Red Cross chapters as they grapple with disasters ranging from famine in Africa to the Indian Ocean tsunami last December. After Hurricane Katrina hit in late August, Kintera signed a high-profile contract to handle the online donations for the Bush-Clinton Katrina Fund.

Yet the stock is down to less than $3 a share, from a 52-week high of about $10, after company founder Harry Gruber surprised investors with private equity deals and bought up more than a dozen companies during about two years of public trading. And Kintera is facing not only a disappointed Street but also some tough competition and a slow shift by donors to online giving.

Kintera says it assists more than 15,000 donor-supported and government entities, including the Alzheimer's Assn., AmeriCares, and AIDS organizations. And it has won praise from the Atlanta chapter of the Red Cross, which was deluged with phone calls in the weeks following Katrina.

WEB-PHOBIC. According to chapter spokeswoman Tiffany Fell, the staff couldn't handle all requests -- but people always had access to information on the charity's Web site about how to volunteer, get assistance, or donate. Kintera's services made it "easy for us to control the information on our Web page without going through a Web designer," Fell says. "We can update on an hourly or daily basis."

Even while Katrina unleashed an unprecedented outpouring of giving, most philanthropy still isn't happening via online services like Kintera's. Studies suggest that only about 2% of donations from individuals take place on the Web, the Giving USA Foundation said in June, reviewing 2004 donations.

As the economy has improved, so has individual giving. It rose to $187.9 billion for 2004, up 4.1% from 2003. That brings the 2004 total to $248.5 billion, including other U.S.-based sources such as foundations and corporations.

E-MAIL CONNECTION. Gruber, who started Kintera in 2000 and serves as chairman and CEO, says he's "creating a whole industry in philanthropy." Kintera's services help people with functions such as registering their personal information with nonprofits online. Volunteers who use Kintera can add their contacts from e-mail programs such as Microsoft Outlook and then send personalized e-mails soliciting funds, among other things.

"This completely revolutionized the orientation to online overnight," Gruber says. "Literally millions of people were donating online...that was the beginning of a general belief that anyone would donate online."

(Kintera declined to provide details about the fees it charges clients or the terms of its contracts with them, including its deal with the Bush-Clinton fund. Fund officials couldn't be reached for comment.)

LARGER LOSSES. Gruber won enough investor confidence in his business model to take Kintera public in December, 2003. He hoped that running a publicly traded company would raise nonprofits' comfort level in trusting Kintera with their donor information databases, since it operates essentially as an outsourced IT department.

Going public also attracted a "world class" board of directors, Gruber says, listing a string of prestigious names on the board that range from former Stanford University computer science department chairman Hector Garcia-Molina to former NASDAQ President Alfred Berkeley.

Investors bought Kintera's shares at $7 in its initial public offering, with sales totaling $35 million. Having tapped the market for that amount, Kintera raised $20 million more in a private placement with institutional investors in July, 2004, soon followed by a $17.5 million deal that December.

Yet in August, 2005, the company reported a second-quarter net loss of 33 cents a share, nearly double that of the previous year, and restated its first-quarter financial results, citing the accounting treatment of some software-development costs.

SHOPPING SPREE. Market players frowned on Kintera's private equity deals. When companies raise large blocks of money in IPOs, they typically ask for an amount that will meet all their immediate needs. The private placements are also less regulated than public ones. Kintera's communications with Wall Street have been "horrific," says John Neff, an analyst at the investment banking firm William Blair. "Their word has meant nothing."

Gruber used the cash he raised to gobble up dozens of companies that he thought would complement Kintera's business strategy. For example, in February, 2004, Kintera completed the acquisition of data screener Prospect Information Network. In March, 2004, it bought the online advocacy services provider Carol/Trevelyan Strategy Group. Three months later, it snapped up recreational facilities management software company BNW.

The shopping spree has continued into this year: In February, Kintera acquired Gold Box, a business that allows individuals to create a personalized charity gift card or gift certificate.

"I think there's been confusion in the first year around acquisitions [and the company's accounting] which doesn't exist anymore," Gruber says. "It was hard for investors to get their hands around what the acquisitions meant." He adds that investors will now judge performance through its new chief financial officer, Richard Davidson, whose hiring was announced in May. Davidson has also served as CFO of IBM's (IBM) Consumer Div. and of the wireless technology consulting company inCode Telecom in San Diego.

"PERSONAL CONTACTS." Even as Kintera builds its business through acquisitions, it faces rivals. Although the Red Cross's local chapters in Atlanta, San Diego, and Louisville are using Kintera, its national headquarters has opted instead to use software services from the privately held Austin-based provider Convio.

Then there's publicly traded Blackbaud (BLKB), of Charleston, S.C., which has provided technology to nonprofits since 1981 and brought in nearly $139 million of revenue during 2004. Kintera took in a bit under $24 million in revenue during the same year. (Over the past year, Blackbaud stock has risen from about $9.50 a share to just under $14.)

Meanwhile, the outlook for online giving remains subject to debate. When a charity raises funds, "most of the money will come from a small number of very large donors," says Mark Kramer, managing director of Boston consulting firm Foundation Strategy Group. "It's not a question of making it easy for them to give online -- it's a question of the personal relationship and contacts." Kintera has "taken a more ambitious vision, but it's not clear that the business model is there to support it," Kramer adds.

GUARDED OPTIMISM. Prem Lalvani, vice-president of research at financial advisers Stanford Group, thinks Kintera might manage to pull through nonetheless.

"We think that the nonprofit sector is in the early stages of a technology-adoption cycle that will play out over the next five years and Kintera is well positioned" to take advantage of the market, Lalvani says. He continues rating Kintera's stock a "buy," although in recent months he has lowered his 12-month price target from $12 to $6. As long as contributors continue to open up their wallets to charities, investors might be willing to open theirs as well.

Ryst is a reporter for BusinessWeek Online in New York

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