Thursday, November 3, 2011

Convio ( Nasdaq - CNVO ) -- Adoption Rate Grows Among Non-Profits

Convio (CNVO $9.25) reported excellent on target Q3 results.  Earnings (fully taxed) were flat year to year at $.08 a share.  Revenues improved 18% to $21.0 million.  Margins were affected by the cost associated with rolling out the high potential Luminate product line.  Efforts to move mid-size customers to a cloud computing format also impacted short term profitability.  Both of those programs are likely to bolster margins in future periods as recurring revenue expands.  Convio's computer based donation management technology is gaining market share among non-profit organizations.  The system coordinates all activities so donor activity can be monitored more efficiently.  Historically, charities have maintained separate databases for mailings, telemarketing, events, and other activities; making it difficult to quickly assemble a complete picture of each donor's involvement.  The better analytics also help non-profits target new solicitations more effectively.

Performance is being impacted by the weak economy.  Convio earns a piece of the donations it raises in addition to the money it makes on software sales and service.  The company is gaining a larger portion of its existing customers' money raising activities.  It's also adding more clients.  But overall donation volume is stalled due to economic factors.  Still, organic growth of 10%-15% appears sustainable in the current climate.  Two small acquisitions completed earlier in the year are providing an additional 5% revenue boost.  Changes to the tax code by the "Super Committee" theoretically could impact giving over the long haul.  Liberal members have proposed deductibility limits to divert money from non profits to government welfare agencies.  President Obama is believed to favor that approach.  Change seems unlikely but if the current policy was altered investment risk would elevate.

We estimate 2012 income (fully taxed) will advance 60% to $.40 a share.  Revenues are poised to expand 15%-20% to $92-$96 million.  Our estimate assumes the low end of the range.  International expansion promises to reinforce growth over the long haul.  A rebound in the U.S. economy could reinvigorate donation volume, providing further leverage.  In 2-3 years sales could reach $150 million to provide earnings of $1.00 a share.  Applying a P/E multiple of 20x suggests a target price of $20 a share, potential appreciation of 115% from the current quote.

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