UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to

Commission file number: 001-34707

CONVIO, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	74-2935609 (I.R.S. Employer Identification No.)
11501 Domain Drive, Suite 200, Austin, TX (Address of principal executive offices)	78758 (Zip Code)

(512) 652-2600

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of exchange on which registered
Common Stock, $0.0001 par value	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes    ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes    ý No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes    o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this

chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer ý Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    ý No

Based on the closing price of the registrant's common stock on the last business day of the registrant's most recently completed second fiscal quarter, which was June 30, 2011, the aggregate market value of its shares held by non-affiliates on that date was approximately $102,835,843. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status was based on publicly filed documents and is not necessarily a conclusive determination for other purposes.

There were 18,911,875 shares of the registrant's common stock outstanding as of February 29, 2012.

Table of Contents

			Page Number
Part I
	Item 1.	Business	2
	Item 1A.	Risk Factors	20
	Item 1B.	Unresolved Staff Comments	39
	Item 2.	Properties	39
	Item 3.	Legal Proceedings	39
	Item 4.	Mine Safety Disclosures	39
Part II
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	40
	Item 6.	Selected Financial Data	42
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	46
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	68
	Item 8.	Financial Statements and Supplementary Data	68
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68
	Item 9A.	Controls and Procedures	69
	Item 9B.	Other Information	70
Part III
	Item 10.	Directors, Executive Officers and Corporate Governance	71
	Item 11.	Executive Compensation	76
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	90
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	92
	Item 14.	Principal Accounting Fees and Services	93
Part IV
	Item 15.	Exhibits and Financial Statement Schedules	95

Cautionary Statement

Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K (as well as documents incorporated herein by reference) may be considered "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include declarations regarding the intent, belief or current expectations of Convio, Inc. and its management and may be signified by the words "expects," "anticipates," "intends," "believes" or similar language. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under "Risk Factors" and elsewhere in this report. Convio, Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Statements indicating "Convio", the "Company", "we", "our" or "us" refer to Convio, Inc. and its wholly-owned subsidiaries.

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Part I

Item 1.    Business

Merger Agreement with Blackbaud, Inc.

On January 16, 2012, Convio entered into an Agreement and Plan of Merger (the "Merger Agreement") with Blackbaud, Inc., a Delaware corporation ("Blackbaud"), and Caribou Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Blackbaud ("Merger Sub"), for the acquisition of Convio by Blackbaud. Pursuant to the terms of the Merger Agreement, Blackbaud (through Merger Sub) will make a cash tender offer for all of the issued and outstanding shares of Convio's common stock at a per share purchase price of $16.00, for aggregate consideration of approximately $275 million.

As promptly as practicable following the consummation of the tender offer, Merger Sub will merge with and into Convio and Convio will become a wholly-owned subsidiary of Blackbaud (the "Merger"). In the Merger, the remaining stockholders of the Company, other than stockholders who have validly exercised their appraisal rights under the Delaware General Corporation Law, will be entitled to receive the $16.00 per share of common stock. Upon completion of the Merger, all outstanding vested options to purchase Convio's common stock shall be converted into the right to receive cash equal to the spread and unvested options and restricted stock units shall be assumed by Blackbaud.

The Merger Agreement includes customary representations, warranties and covenants of Blackbaud, Merger Sub and Convio. Blackbaud and Merger Sub have made various representations and warranties and agreed to specified covenants in the Merger Agreement regarding, among other things, Blackabaud's efforts to secure and maintain any necessary third party financing. Convio has made various representations and warranties and agreed to specified covenants in the Merger Agreement, including covenants relating to Convio's conduct of its business between the date of the Merger Agreement and the closing of the Merger, restrictions on solicitation of proposals with respect to alternative transactions, public disclosures and other matters. The Merger Agreement contains certain termination rights for both Blackbaud and Convio, and further provides that, upon termination of the Merger Agreement under specified circumstances, including a termination by Convio pursuant to an unsolicited superior proposal, Convio is required to pay Blackbaud a termination fee of $11.0 million plus all reasonable, documented out-of-pocket expenses of up to $1.5 million. The Merger Agreement also provides that in the event of termination in certain circumstances because of or if there exists any antitrust action, any antitrust consent has not been obtained or any antitrust order has not been vacated, filed, reversed or overturned, then, subject to certain conditions in the Merger Agreement, Blackbaud is required to pay Convio a termination fee of $11.0 million plus all reasonable, documented out-of-pocket expenses of up to $1.5 million.

Convio's Board of Directors has approved the Merger Agreement and unanimously recommends that its stockholders accept the tender offer.

The consummation of the tender offer and the Merger is subject to customary closing conditions. Additionally, the waiting periods applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other applicable antitrust laws must have expired and all antitrust consents must have been obtained prior to closing. Depending on the number of shares held by Blackbaud after its acceptance of the shares properly tendered in connection with the tender offer, approval of the Merger by the holders of Convio's outstanding shares remaining after the completion of the tender offer may be required.

The foregoing description of the Merger Agreement is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is filed as Exhibit 2.3 hereto as is incorporated herein by reference.

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Overview

We are a leading provider of on-demand constituent engagement solutions that enable nonprofit organizations ("NPOs") to more effectively raise funds, advocate for change and cultivate relationships with donors, activists, volunteers, alumni and other constituents. We serve more than 1,600 NPOs globally of all sizes; including 51 of the top 100 largest charities as ranked by contributions in the November 2011 Forbes article, "The 200 Largest U.S. Charities." During 2011, our clients used our solutions to raise over $1.3 billion online and deliver almost 5 billion emails to over 150 million email addresses to accomplish their missions. Our average deliverability rate for email was greater than 95%. In addition, nonprofit organizations used Convio advocacy applications to power almost 70 million advocacy actions to the United States Congress, State and Local elected officials, as well as other targets of cause-related campaigns.

We were incorporated in Delaware in October 1999, and we offered our first commercially available online marketing solution in 2000. We acquired GetActive Software, Inc. ("GetActive") in February 2007. On April 28, 2010, we completed an initial public offering of shares of our common stock and those shares are listed on the NASDAQ Global Market under the symbol CNVO. Our executive offices are located at 11501 Domain Drive, Suite 200, Austin, Texas 78758, and our telephone number is (512) 652-2600.

On January 28, 2011, our wholly-owned subsidiary, StrategicOne, Inc. ("StrategicOne"), acquired substantially all of the assets and assumed certain liabilities of StrategicOne, LLC, a privately-owned company, to strengthen our offerings to large, enterprise-size nonprofits by adding the experience and expertise of a proven provider of data analytics, predictive modeling and other database marketing services to the company. StrategicOne helps nonprofits discover, analyze and act on information to more effectively attract new constituents, retain existing donors, reactivate lapsed supporters and steward each relationship to a higher level of engagement.

On July 1, 2011, we acquired Baigent Limited ("Baigent"), a privately owned company located in the United Kingdom ("UK"), to enter the international marketplace by adding the experience and expertise of a leading provider of digital strategy, design, technology implementation and online fundraising solutions to charities in the UK.

Our revenue continued to grow year over year to $80.4 million in 2011, up 15% from 2010 with usage revenue up 24% from 2010. Our clients pay us recurring subscription fees with agreement terms that typically range between one and three years. Our subscription fees grow as our clients grow their constituent bases and purchase additional modules of Convio Luminate™ and additional seats and modules of Convio Common Ground^®. We also receive transaction fees that include a percentage of funds raised for special events such as runs, walks and rides.

Nonprofit Industry Background

Large and Evolving Nonprofit Sector

The nonprofit sector is a large and vital part of the economy. The missions of NPOs span many aspects of our society including animal welfare, arts and culture, disaster relief, education, environment,healthcare, international development, professional and trade associations, public policy, religion, and social and youth services.

Challenges Facing Nonprofit Organizations

NPOs face unique challenges that center upon the need to reach new constituents and to engage effectively with a large and diverse number of existing constituents. In particular, NPOs struggle with the following challenges:

• High cost of fundraising.   As postal rates and print production costs rise, the cost of traditional direct mail - the primary channel through which NPOs raise funds - continues to rise. Donors and prospects growing expectations of personalized content are creating more highly targeted direct mail pieces, which makes it difficult to leverage economies of scale, thus increasing costs.

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• Outdated and inflexible donor management systems.   Many NPOs have legacy donor databases that are deployed on-premise, have limited extensibility, and can be difficult and expensive to adapt to NPOs' evolving needs. Additionally, many of these legacy systems focus on managing relationships with existing donors rather than the acquisition of new constituents and the management of other key business processes, such as volunteer and event management.

• Limited ability to act rapidly and quickly mobilize constituents.   Major occurrences, such as the 2011 earthquake and tsunami in Japan, and political developments can provide opportunities for NPOs to mobilize their constituents and generate a significant number of new donors and advocates. However, many NPOs have a limited ability to act rapidly and mobilize constituents at the grassroots level because these NPOs rely on long lead-time communications such as direct mail.

• Higher expectations from constituents.   We believe constituents increasingly expect personalized communications from NPOs via the constituents' medium of choice. Many constituents are online, conversant in social media and active at events. Due to the proliferation of communication channels, NPOs are pressured to deploy many different techniques to effectively engage their constituents. Based on our fundraising experience with more than 1,600 NPOs, we also believe constituents increasingly expect transparency into the use of donations, which makes fundraising and constituent relationship management more difficult.

• Difficulty in sharing data across operational silos.   Constituent data such as giving history, interests and preferred methods of communication are often stored in separate systems, making it difficult to share the data across an organization and, in the case of enterprise NPOs, with other chapters and national offices. Additionally, non-integrated databases can result in uncoordinated communications and data inconsistencies and can limit an NPO's ability to cross-market to its constituents.

• Failure to integrate online and offline for strategic insight.   Most nonprofits segment donors and prospects based on traditional direct mail analytics of reach, frequency and monetary analysis, which, while effective, do not optimize the value of relationships as they do not discover behaviors, preferences and interests that can drive more efficient multichannel strategies. Traditional donor databases and vendors have not integrated online and offline through modern constituent relationship management or CRM technology and services to generate insights that bring greater clarity to their analytics, strategy and constituent management services.

• Limited technical and marketing resources.   Many NPOs have limited in-house technical expertise and time to manage on-premise legacy systems, fully utilize the Internet as a marketing medium, and integrate their online marketing programs with their traditional offline programs and donor databases. Due in part to these limitations, marketing resources at many NPOs are constrained in their ability to create mass appeals that are personalized and effective.

The emergence of the online channel has accentuated NPOs' struggles to integrate their online and offline communications and fundraising efforts. We believe the Internet and the increasing adoption of social media and mobile technologies are enabling NPOs to raise funds, advocate for change and cultivate relationships with their constituents in more cost-effective and engaging ways. We believe that holistic constituent engagement software and services that lead to the discovery of constituent preferences and the design and implementation of multichannel strategies will provide nonprofits with the opportunity to more strategically and efficiently connect people with their cause and drive mission-focused results.

Our Solutions

Our integrated solutions have historically included our Convio Online Marketing platform ("COM") and Convio Common Ground, our constituent relationship management application, both of which are designed to help NPOs maximize the value of every relationship.

In July of 2011, we rebranded COM as Luminate Online and also launched a new suite of solutions called Convio Luminate targeted at large, enterprise NPOs. As a result of this market launch, we now offer two open, cloud-based constituent engagement solutions for NPOs of all sizes:

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Convio Luminate^TM ("Luminate") offers an open, extensible solution that allows large, enterprise NPOs to fully engage with individuals online and offline, as well as analyze the relationships they have with donors, volunteers, advocates and other supporters to design tailored, integrated, multichannel campaigns and interactions that are beneficial to both the NPO and the individual constituent. Luminate combines our leading online fundraising suite, Luminate Online, with Luminate CRM - built on the Force.com cloud computing application platform from salesforce.com - leading analytics technologies and our expertise to meet the complex needs of large, enterprise NPOs. Luminate can be sold as a single integrated solution encompassing both the Luminate Online suite and the Luminate CRM suite, or the Online and CRM suites can be sold separately. Luminate CRM clients enter into a license agreement with us and separately enter into a license agreement with salesforce.com for use of its solution.

Convio Common Ground® ("Common Ground") provides small and mid-sized NPOs with a simple, easy to use, complete and affordable solution that combines a powerful database for donors, volunteers and other constituents with online fundraising, marketing and volunteer management modules so that NPO professionals can manage all their fundraising and constituent engagement operations from one solution. We utilize the Force.com cloud computing application platform from salesforce.com to develop, package and deploy Common Ground. Common Ground clients need to enter into a license agreement with us and separately enter into a license agreement with salesforce.com for use of its solution.

Our Luminate and Common Ground solutions are built on an open, configurable and flexible architecture that enables our clients and partners to customize and extend its functionality. All of our software is delivered through the Software as a Service ("SaaS") or cloud computing model. We believe cloud computing is the most cost-effective, efficient and scalable way for nonprofits to use and manage technology to maximize the value of constituent relationships. Our solutions are enhanced by a portfolio of value-added services tailored to our clients' specific needs, as well as a network of technology and services partners that enhance our solutions.

       Our solutions provide the following benefits to NPOs:

• Extend reach and raise more funds at a lower cost.   Our solutions enable NPOs to reach new constituents, increase retention rates and improve the cost-effectiveness of engaging with constituents. We also improve the performance of NPOs' fundraising activities by enabling our clients to increase gift frequency and average gift size.

• Engage constituents more effectively.   Our solutions enable NPOs to cultivate relationships with constituents by tracking and integrating their online and offline interactions, interests and preferences. This comprehensive constituent information enables NPOs to engage in more personalized and meaningful ways, and can lead to more active constituents who give more and help to recruit new constituents.

• Act rapidly to mobilize constituents.   Our solutions enable NPOs and their constituents to quickly respond to current events such as natural disasters, which can be a catalyst for giving, advocacy and the acquisition of new constituents. Our solutions allow NPOs to create and deploy broad-based online fundraising or advocacy campaigns within minutes of a significant development.

• Eliminate data and process silos.   Our solutions are designed to manage online and offline data and processes across the entire organization and to be interoperable with an NPO's existing systems and processes. We also provide permission-based access for chapters and national offices, which is of particular importance to enterprise NPOs. Our solutions reduce uncoordinated communications and data inconsistencies and make cross-marketing to constituents easier.

• Easily adapt our solutions using our open platform.   We have developed our solutions based on open architectures that enable customization and extension of our solutions to third-party platforms such as social networks, mobile devices, collaboration tools and donor databases. Our open approach allows NPOs to adapt our solutions to their business processes and to address expanding communication channels and evolving constituent preferences.

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• Reduce burden on limited resources.   Our on-demand model enables rapid deployment of our solutions, so our clients can quickly realize value from their investment and access real-time upgrades that enable them to keep pace with rapidly evolving technology. There is no hardware to purchase or maintain, and there are no software upgrades to manage.

• Access best practices, knowledge and guidance based on our experience.   We enable NPOs to access best practices through our software, services and publications that help NPOs more effectively achieve their missions. For example, we publish "The Convio Online Marketing Nonprofit Benchmark Index™ Study" to help NPOs understand key marketing metrics and the relative performance of their organizations. This peer benchmark information helps NPOs better manage the performance of their marketing programs and donor management practices. This quantitative approach to measuring success enables NPOs to continually refine their tactics, improve the effectiveness of their marketing initiatives and allocate resources more efficiently.

• Discovery of constituent behaviors, preferences and interests that lead to increased engagement. With the acquisition of StrategicOne, as well as the growth and expansion of Convio's services team, we provide a full array of data analytics, predictive modeling and other database marketing services that support analytics and marketing needs of nonprofits, such as prospect and donor acquisition, retention and reactivation, major gifts, planned giving and donor upgrades, and campaign optimization.

Business Strengths

        We pioneered the delivery of SaaS online marketing solutions to NPOs, launching the first version of our solution in 2000. We have maintained an exclusive focus on NPOs which has enabled us to develop deep nonprofit industry expertise. We are a leading provider of on-demand constituent engagement solutions to NPOs, and are providing modern constituent engagement solutions that connect people and causes in ways designed to enhance the value of each relationship. We believe the following business strengths are fundamental to our success:

• A leading online marketing solution for NPOs.   The maturity, breadth, depth and measurable results of our Luminate Online solution enable us to compete more effectively, attract new customers and grow our presence within existing clients. Through continuous research and product innovation, we strive to ensure that our clients are at the forefront of online marketing.

• Disruptive model for donor management market.   Our CRM applications are innovative solutions. Unlike many traditional donor databases, Luminate CRM and Common Ground allow NPOs to manage fundraising and other program operations in a single, open application built on salesforce.com's Force.com platform. Luminate CRM and Common Ground enable NPOs to improve operational efficiency and to identify new fundraising prospects. These benefits have allowed us to quickly penetrate the donor management market.

• Loyal clients producing predictable recurring revenue that scales with client growth.   We sell our software on a subscription basis which provides greater levels of recurring and predictable revenue than perpetual license-based business models. Our subscription fees grow as our clients grow their constituent bases and purchase additional modules of Luminate and additional seats and modules of Common Ground.

• Marquee clients, providing referrals and references that can shorten sales cycles.   We have marquee clients in each nonprofit vertical we serve, and they provide us with a significant number of referrals and references. The NPO community is highly networked, and client referrals and references can lead to new opportunities and shorten our sales cycles.

• Nonprofit industry thought leadership.   We invest in primary research to identify trends in charitable giving and constituent behavior. We also aggregate data across our clients to perform benchmarking and best practice analysis. As evidenced by the approximately 164,000 downloads of our industry whitepapers, tip sheets and benchmarking studies in 2011, NPOs recognize our thought leadership, which generates sales leads and guides our product development and strategic consulting services.

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• Ability to acquire and effectively serve NPOs of all sizes.   We sell our solutions through a direct sales force complemented by our partner network, and cost-effectively tailor our sales processes to the nonprofit markets we serve. We develop and package our solutions to meet the unique needs of these markets, enabling us to acquire new NPO clients of all sizes.

• Data analytics, predictive modeling and other database marketing services.   We offer a variety of data analytics, predictive modeling and other database marketing services that help NPOs discover, analyze and act on information to more effectively attract new constituents, retain existing constituents, reactivate lapsed supporters and steward each relationship to a higher level of engagement.

• Portfolio of value-added services.   Our services are designed to help our clients achieve success through the development and execution of effective online and offline marketing and constituent engagement strategies. Our consultants assist clients in setting operational goals, developing strategies and tactics, improving user experience and analyzing online campaigns. We also offer cohort-based consulting services designed for mid-market NPOs. Our services help us acquire new clients and deepen relationships with existing clients.

Our Strategy

        Our objective is to be the leading worldwide provider of constituent engagement solutions that connect people and causes, and help nonprofits maximize the value of every relationship while continuing to lead the market in innovation, best practices and client service. Key elements of our strategy include:

• Expand our client base by attracting new clients.   We believe the market for our solutions is large and underpenetrated. We intend to expand our presence in both the enterprise and mid-market segments by increasing sales and marketing efforts, and by offering an expanded services portfolio and greater solution functionality. We introduced the Luminate suite in 2011 to specifically target large, enterprise NPOs. We plan to expand our software and services to better enable multichannel marketing and fundraising, as well as provide holistic services in data analytics, predictive modeling and other database marketing services to clients.

• Retain and grow revenue from our existing client base.   Our revenue is driven by a combination of the number of Luminate modules and Common Ground seats and modules licensed and services purchased by our clients, as well as their ongoing usage of our solutions. As online marketing continues to grow relative to other channels, we believe NPOs will allocate more of their fundraising spend to online initiatives. We plan to sell additional software and services to existing clients to help them more fully utilize our solutions, to grow their online constituent base and better integrate traditional fundraising channels.

• Use Luminate CRM and Common Ground to disrupt the donor management market and create cross-selling opportunities.   We intend to further develop and continue to market aggressively our Luminate CRM and Common Ground applications. We believe our CRM applications are disruptive to the donor management market, particularly in the mid-market where innovation has been the most limited. The functionality of our CRM applications extend beyond cultivating donors and tracking gifts by helping NPOs manage their service delivery options and other mission-related programs. In addition, new CRM clients provide us with opportunities to sell other solutions and services.

• Expand geographically.   In 2011, approximately 5% of our revenue was derived from clients based outside the United States. We intend to expand into additional geographic areas by leveraging our expertise developed by serving our more than 1,600 clients in the United States and Canada, as well as in the UK through our 2011 acquisition of Baigent.

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Our Products

        Our solutions include Luminate and Common Ground, cloud-based constituent engagement solutions for NPOs of all sizes. We have purpose-built our solutions for NPOs based on our interactions with more than 1,600 clients. We deliver our software on-demand, and our clients and their constituents access all of our software using a standard Internet browser. Our software employs an open, multi-tenant architecture that allows our clients to customize and extend our software.

Convio Luminate

Luminate is targeted at large, enterprise NPOs and can be sold as a single integrated solution encompassing both the Luminate Online suite and the Luminate CRM suite, or the Online and CRM suites can be sold separately. Pricing for our Luminate solution is based on the number of modules licensed, the constituent record file size and any related services. We also recognize usage revenue from our clients as a percentage of funds raised at special events, such as runs, walks and rides, and based on additional fees for their increased use of our Online solution.

The following table includes the key functions and features of Luminate Online:

Function		Key Features
Fundraising	•	Enables NPOs to easily build and tailor online fundraising campaigns and quickly create specialized websites to motivate giving in response to current events;
	•	Dynamically solicits online donations including one-time gifts, installments, sustaining gifts, honor/memorial gifts and memberships;
	•	Provides secure, PCI-compliant payment processing with multiple payment options, including credit card, bank account debit and PayPal; and
	•	Generates comprehensive reporting and analysis.
Email Marketing	•	Provides online marketing tools that help NPOs build and manage effective email campaigns, from creation and testing to targeted delivery and follow-up, to drive higher response and increased constituent participation;
	•	Delivers robust capabilities to generate and send branded, graphical email messages, online newsletters and electronic greeting cards;
	•	Manages content, workflow, delivery, storage and subscriptions; and
	•	Enables NPOs to tailor content to individual constituent interests to drive higher response and increased participation.
Advocacy	•	Encourages and manages grassroots activism;
	•	Enables NPOs to publish targeted action alert forms to be completed by constituents for delivery to legislators or media organizations; and
	•	Includes legislator scorecards that allow NPOs to rate legislators on issues, automatically computing numerical scores based on historical voting records.
TeamRaiser Events	•	Provides tools for NPOs' constituents to create personal or team fundraising web pages and send email donation appeals to their networks of family and friends in support of events such as a walks, runs and rides;
	•	Motivates NPOs' constituents to recruit new donors and reach their fundraising goals; and
	•	Creates a network effect that increases NPOs' fundraising results and grows their email list size.

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MultiCenter	•	Enables the national offices of multi-chapter NPOs to interoperate across their chapters;
	•	Facilitates a coordinated, integrated marketing strategy across chapters;
	•	Allows individual chapters to control their web presence including branding and content; and
	•	Allows controlled access to shared information across multiple chapters to house constituent data, create and launch campaigns, and manage administrative settings.
Content Management	•	Enables NPOs to create high impact websites, empowers their content contributors to become content owners, reduces the reliance on technical staff to publish changes and creates powerful, database-driven web pages;
	•	Provides content authoring tools, editorial workflow, personalization, search and document management; and
	•	Addresses websites of virtually all sizes, including multiple web properties, thousands of web pages and multiple content contributors.
Personal Fundraising	•	Empowers constituents to drive fundraising for NPOs as a champion or in honor or memory of a loved one;
	•	Enables constituents to create personalized tribute web pages and encourage friends and family to learn about NPOs' causes through easy-to-use web content, email authoring tools and templates; and
	•	Provides an innovative means for NPOs to acquire new constituents, generate funds and create rich content and community around their websites.
Events	•	Enables NPOs to promote and register participants in a variety of events using a website calendar; and
	•	Accommodates a variety of events including simple announcements with date, time and location, more complex events that are recurring, multi-faceted or multi-day, and events requiring online RSVPs, ticketing and online registration forms.
Personal Events	•	Enables constituents to organize and host different types of personal events such as dinners or house parties; and
	•	Enables constituents to promote events, track RSVPs and solicit online donations.

Luminate CRM is built on the Force.com cloud computing application platform from salesforce.com and offers NPOs an extensible suite for consolidating information and business processes into one system. The core components of Luminate CRM are campaign management, constituent relations, business intelligence and analytics.

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The following table includes the key functions and features of Luminate CRM:

Function		Key Features
Donation Management	•	Provides for gift tracking, processing transactions and managing sustaining donors; and
	•	NPOs can build revenue forecasts, find prospective donors and monitor major donor opportunities.
Direct Marketing	•	Enables NPOs to structure, segment and analyze multi-part campaigns; and
	•	Facilitates in-house campaign management.
Reporting and Dashboards	•	Enables NPOs to define summary counts and record grouping;
	•	Provides ease and flexibility in creating new reports and duplicating existing reports through multiple filter options; and
	•	NPOs can build multiple online graphic dashboards for displaying key metrics and statistics.
Volunteer Management	•	Enables NPOs to organize multi-shift volunteer jobs; and
	•	Provides auto-selection and identification process for matching volunteers to activities based on their specific qualifications, availability and skills.
Event Management	•	Enables tracking of invitations, sponsorships, payments, expenses and donations; and
	•	Accommodates a variety of events including simple announcements with date, time, and location, more complex events that are recurring, multi-faceted or multi-day and events requiring online RSVPs, ticketing and online registration forms.
Predictive Modeling and Analytics	•	Enables NPOs to apply knowledge about constituent interests and behaviors to different types of events; and
	•	Provides business intelligence insights to attract new constituents, retain and nurture existing constituents, and reactivate lapsed supporters.

Common Ground

        Common Ground is our mid-market CRM application that builds stronger relationships with donors, volunteers, activists, alumni and other constituents. We utilize the Force.com cloud computing application platform to develop, package and deploy Common Ground. We have developed NPO-specific functionality including donation management, event management and volunteer management to create a solution tailored to the needs of mid-market NPOs.

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The following table provides an overview of the key features and functionality of each module of Common Ground:

Function		Key Features
Donor Management	•	Tracks incoming gifts, builds revenue forecasts, identifies prospective donors, and pursues major donor opportunities; and
	•	Utilizes sophisticated gift coding approaches that facilitate effective donor stewardship and segmentation for future communications.
Contact Management	•	Provides a high degree of flexibility in defining and tracking relationships between NPOs and their constituents; and
	•	Allows creation of relationship types, definition of key relationships and set up of rules for automatic assignment of relationships based on peer-to-peer fundraising results.
Campaign Management	•	Plans and executes a variety of outreach campaigns, including direct marketing; and
	•	Tracks participation, costs and key performance indicators.
Event Management	•	Plans and manages special events such as galas and golf tournaments;
	•	Tracks detailed event information, including invitations and sponsorships; and
	•	Provides the capability to sell multiple ticket levels and assign various benefits associated with those ticket levels.
Volunteer Management	•	Organizes volunteer opportunities with multiple shifts, locations and required volunteer qualifications; and
	•	Provides a volunteer profile that tracks an individual's availability and skills, which can then be matched against upcoming volunteer opportunities.
Fundraising	•	Enables NPOs to easily create web forms to match campaign initiatives and capture online donations to the database in real-time;
	•	Enables NPOs to publish event forms that are integrated with Common Ground's event management tools to offer an online ticket and registration option; and
	•	Enables NPOs to acquire new constituents from their website directly into their database for newsletters and other appeals with integrated sign up forms.
Integrated Email Marketing	•	Provides online marketing tools that help NPOs build and manage effective email campaigns, from creation and testing to targeted delivery and follow-up, to drive higher response and increased constituent participation.
Social Fundraising	•	Provides easy-to-use interface so supporters can register, personalize and share their unique fundraising pages in three easy steps;
	•	Enables tracking and direct interaction with supporters and their networks, and everyone who supports the NPOs cause, with peer interaction and donations built-in; and
	•	Enables seamless flow of donation data so information received about donors and their gifts automatically shows up in the NPO's database.

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Convio Open

        We provide an open platform that allows NPOs to evolve their online marketing strategies as new media and other opportunities arise. We offer application programming interfaces ("APIs") and extensions that meet the growing demand of NPOs to access the Internet, leverage popular social media sites and integrate with mobile services. This approach allows NPOs, partners and others to create external, custom-built applications that integrate with our solutions to provide a more compelling constituent experience and reach a wider audience.

        Our Donations APIs enable clients to embed our donation processing in websites, web applications or mobile applications. Additionally, our open platform supports fundraising and communications in a mobile context through mobile ready donation forms, text messaging, and text based donations. Our Web Services APIs allow clients to extract data for use in third-party systems.

        Our extensions enable clients to leverage social networking and Web 2.0 capabilities to engage constituents through these popular channels:

• Our Facebook extension enables clients to publish their content and engagement opportunities on Facebook;

• Our Google Maps extension empowers administrators, event participants and personal event hosts to include maps in their content;

• Our Flickr extension provides a user-generated event marketing opportunity for NPOs with a TeamRaiser event;

• Our YouTube extension enables NPOs to include video content on any page; and

• Our Plaxo extension provides a point and click method for constituents to access any of their address books and contact lists, directly from a client's Convio-powered website.

Our Services

Our services are an integral part of our solutions. We believe the scope and quality of our services, which have been developed and refined based on our experience with more than 1,600 active clients, meaningfully differentiate us from our competitors.

        We deliver services to our clients through a traditional consulting model, characterized by highly customized strategic consulting services. We believe this is the best way for our clients to achieve success in their online programs.

        We deliver services to many mid-market clients through Convio Go!, a structured one-year program designed to get clients up and running quickly with the help of a cohort-based approach. Clients receive regular coaching sessions with our consultants who help produce campaigns with an emphasis on fundraising and email list size growth.

        In addition to Convio Go!, account management, technical support and deployment services, the following table provides an overview of the types of services we offer, along with a description of the key attributes:

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Service Type		Key Attributes
Strategic Planning	•	Develops Internet marketing roadmaps outlining key metrics, targets, strategies, tactics and recommended resources.
Campaign Management	•	Assists clients in executing on their Internet roadmap by providing campaign strategy, project management, creativity and production.
Web Design	•	Helps clients effectively design their websites by using industry-recognized user experience methodologies combined with audience engagement strategies specifically designed for NPOs.
Data Analytics	•	Provides robust data analytic services that highlight useful information, suggest conclusions, and support decision making.
Benchmarking	•	Provides benchmarking services using standard metrics which allow clients to compare results with aggregated results from other clients.
Campaign Analytics	•	Analyzes campaign results and identifies potential areas of improvement based on established benchmarks.
Data Integration	•	Utilizes data connectors to synchronize essential constituent data; and
	•	Provides custom data integration, data de-duplication, custom report builds and custom synchronization.
Training	•	Provides comprehensive classroom and online training on the features and functionality of our solutions; and
	•	Provides customized training programs at client sites.

        With the addition of StrategicOne, we strengthened our services offering by adding the experience and expertise of a proven provider of data analytics, predictive modeling and other database marketing services to the company. These services help NPOs discover, analyze and act on information to more effectively attract new constituents, retain existing donors, reactivate lapsed supporters and steward each relationship to a higher level of engagement. The following table provides an overview of the types of services we offer with the addition of StrategicOne, along with a description of the key attributes:

Service Type		Key Attributes
Data Warehousing	•	Delivers intelligence to marketers and knowledge workers in logical subsets with easily understood data labels.
Business Intelligence	•	Gives executives, marketers and fundraising professionals easy access to the data, ability to visualize data and interact with the visualizations for greater insights and improved ROI.
Analytics/Modeling	•	Assists in identifying opportunities to create personalized, compelling, and lifelong connections between an organization's brand and constituents.
Strategic Consultation	•	Provides strategic leadership, test design, measurement and monitoring to better design and implement campaigns that deliver results; and
	•	Provides custom data integration, data de-duplication, custom report builds and custom synchronization.
Marketing Execution	•	Manages campaign selection and customer solicitations every step of the way to ensure quality, on-time delivery of data and results.

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We complement our service offerings with a network of partners serving the nonprofit market, including interactive agencies, direct marketing agencies, public affairs firms and complementary technology companies. This partner network allows us to provide additional services and to expand our deployment capacity, including services provided by our certified Convio Solution Providers who follow our deployment methodologies.

Our solution providers are authorized partners whom we train, test and recommend to our clients for consultation and deployment services around our solutions. In the case of Common Ground, deployment activities are typically handled by our solution providers. They also provide post-deployment services that include interactive strategy and web design. These partners enable us to maintain lower personnel costs and expand our deployment capacity. Our technology partners provide technologies that complement and extend the breadth of our solutions. Their offerings typically integrate with our solutions through our open APIs and include social networking, tools, mobile messaging platforms and web applications. Through these partners, we are able to attract clients who want the additional functionality and services that these partners provide to our solutions. Our referral partners refer clients to us in exchange for a percentage of the value of the referred business which we close. The commission rate is negotiated between us and each partner based on a percentage of the contract's value.

Clients

We serve more than 1,600 NPO clients which include leading NPOs in each of the verticals we serve. We define a client as an organization with which we have a billing relationship. In certain cases, we bill individual chapters of multi-chapter NPOs and, in other cases, we have a single billing relationship with multi-chapter NPOs.

In 2011, 2010 and 2009, substantially all of our revenue was derived from clients in the United States and Canada, and substantially all of our long-lived assets were located in the United States. No client accounted for more than 10% of our total revenue in 2011, 2010 and 2009.

Sales and Marketing

        We sell our solutions using a direct sales force. As of December 31, 2011, we employed approximately 124 sales, marketing and business development professionals, 57 of whom comprised our direct sales force. These sales and marketing professionals focus on sales to new and existing clients and are located at our headquarters in Austin, Texas, regional offices in Washington, D.C. and Emeryville, California, and in metropolitan areas throughout the United States. Our sales force is organized by geographic territory, size of NPO and market segment. We employ a separate sales team focused on upselling new solutions and services to our existing clients. Our sales representatives are supported by a team of sales engineers and sales associates responsible for technical and pre-sales support.

We complement our direct sales force with a network of partners serving the nonprofit market, including interactive agencies, direct marketing agencies, public affairs firms and complementary technology companies. Our partner network helps us to grow our client base, enhances our implementation services capacity and enables us to provide a more complete solution for our clients.

We conduct a variety of marketing programs that are designed to create brand recognition and market awareness for our solutions. Our marketing efforts include membership and board-level participation in industry associations, participation at industry conferences, search engine marketing, search engine optimization, company-sponsored seminars and webinars, white papers, media relations, development of case studies, online marketing and sponsoring co-marketing events with our partners. We enhance our position as an NPO thought leader through industry publications and our annual benchmarking index study designed to help NPO professionals evaluate online marketing metrics, as well as the effectiveness of their organization when compared to similar NPOs.

We receive significant exposure from our "powered by" logo program, which allows us to place our logo on web pages and emails created and sent by our clients. To enhance client loyalty and generate opportunities for additional sales, we maintain a client advisory board, conduct an annual client summit and host an online client community.

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Research and Development

We continue to make substantial investments in research and development on new solutions, features and platform extensibility. Our on-demand model provides us with the ability to quickly bring new functionality to the market. We gather feedback from clients, partners and industry thought leaders, and we have robust processes for software development and deployment that have been adapted from industry best practices. As of December 31, 2011, we had 77 employees working on research and development, primarily in Austin, Texas and Emeryville, California. Our research and development expenses were $10.7 million, $10.6 million and $10.0 million in 2011, 2010 and 2009, respectively.

Competition

The nonprofit market for constituent engagement solutions is fragmented and rapidly evolving, and there are limited barriers to entry for some aspects of this market. With Luminate Online, we compete with several nonprofit sector online marketing suites, a variety of specialized point solutions for tasks such as online donations, peer to peer fundraising and advocacy, and a variety of open source and commercial systems for tasks such as web content management and email marketing.  With Luminate CRM and Common Ground, we compete with industry-specific donor management solutions who focus more exclusively on the nonprofit industry, as well as commercial database and constituent relationship management providers who sell to NPOs as well as a broader set of markets.  Among the industry-specific donor management solutions, our primary competitors are Blackbaud, Inc., The Sage Group plc, and SofterWare, Inc.  Among the commercial database and constituent relationship management providers, our primary competitors are Microsoft Corporation, Oracle Corporation and Salesforce.com, Inc.  NPOs using such commercial database and constituent relationship management providers also often seek to adapt such offerings themselves or through third party system integrators to create additional custom competitive solutions.  The larger competitors, such as Microsoft Corporation, Oracle Corporation and Salesforce.com, Inc., could also make acquisitions or develop solutions to further expand their presence in and increase their focus on the nonprofit market.  In addition, we compete with a variety of smaller, private companies integrating point and open source solutions and also with web development providers which provide custom applications. 

We believe the principal competitive factors in our industry include the following:

• breadth, depth and configurability of solution;

• scope and value of product and service offerings;

• software delivery model (on-demand vs. on-premise);

• size and satisfaction of installed client base;

• nonprofit industry expertise;

• track record of innovation;

• ease-of-use;

• measurability of results;

• openness of architecture and ability to integrate with third-party applications; and

• performance and reliability.

We believe we compete favorably across all of these factors. However, some of our existing and potential competitors have substantially greater name recognition, longer operating histories and greater resources. They may be able to devote greater resources to the development, promotion and sale of their products and services than we can to ours. Additionally, our competitors may offer or develop products or services that are superior to ours, have lower prices or that achieve greater market acceptance.

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Technology

Each of our software applications uses a single code base and employs a multi-tenant architecture and is delivered by an on-demand model, requiring only a web browser for client access. In addition, our technology strategy was designed to meet the stringent standards of NPOs, including scalability, performance, reliability and security.

Our platform is open and extensible. We have built the platform on the Java 5 runtime environment and have developed and published more than 175 APIs. This approach allows our clients to more easily leverage the functionality available within our solutions without requiring modifications to our source code. Customers are also able to use open source technologies to integrate with our solutions using these APIs.

        Our technology is designed to be scalable, both in the number of clients that can be hosted and in the volume of traffic and transactions processed by our solutions. Scalability is achieved through multiple methods:

• our multi-tier production topology employs dedicated devices separated into multiple tiers of web servers, application servers, email appliances, accelerator appliances, database servers and file servers; and

• each tier can be expanded horizontally to add capacity.

        Performance is another key requirement for clients, particularly as it relates to email deliverability and traffic volumes and spikes associated with constituent response to current events. We address these needs in several ways:

• our production topology improves performance and scalability by providing load balancing and failover, encryption acceleration, caching of static content, compression of text-based content and multiplexing;

• our email server farm utilizes specialized appliances to provide capacity in excess of 500,000 personalized email messages per hour; and

• we have been able to provide greater than 95% email deliverability by using sender verification standards, managing Internet service provider relationships to integrate email reputation feedback, whitelisting, monitoring and providing robust subscription management and opt-out features.

        Over the past three years, we have achieved on average more than 99.7% system uptime, excluding scheduled maintenance and disruptions caused by third-party vendors, through the use of industry-standard failover and redundancy technologies. We use storage technology and redundant application servers that allow individual servers to be rotated in and out of service for routine maintenance without causing downtime.

        Security is a key requirement for our clients because of the sensitive nature of our clients' missions and their strong desire to protect constituent information. Our systems are periodically attacked by unauthorized third parties with increasing sophistication, and we have experienced security incidents in our history. We have designed and continue to upgrade our solutions, policies and practices to provide security for clients in several ways:

• a security model built into the architecture which allows varying levels of permissions to particular data, thus allowing for secure delegation of authority to administrators based on role;

• use of security standards, including standard encryption and the HTTPS protocol for secure transfer of sensitive data; and

• compliance with PCI Data Security Standard and SSAE 16 as certified by third party testers.

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Operations

We serve our clients mainly from a third-party hosting facility located in Austin, Texas. This facility provides around-the-clock manned operations and security staff. Access is limited to authorized individuals and the site is served by both interior and exterior video surveillance equipment. Electrical and environmental controls are all fully redundant and Internet connectivity is maintained by multiple peering and physical access points within the facility. We own or lease and operate all of the hardware on which our applications run in the facility. We entered into an agreement for the services provided by the Austin third-party hosting facilities in October 2001. Pursuant to the agreement, we pay a monthly service fee for hosting services. The most recent term of the Austin agreement ends in May 2014, at which time the agreement can automatically be renewed for three years.

In March 2011, we elected to not renew our agreement with a Sacramento facility that previously was hosting our former GetActive clients after we completed the client migration and retirement of our GetActive platform. As part of our StrategicOne acquisition in January 2011 and our Baigent acquisition in July 2011, we now have additional third-party hosting agreements. The agreement with the facility used by StrategicOne expires in March 2012 and has not yet been renewed. The agreement for the facility used by Baigent in the UK expires in June 2014 with an option to renew the agreement for an additional three years at that time.

We continuously monitor internally and externally the availability and performance of our systems using custom and commercially available tools. In order to prevent service loss from hardware failure, we maintain redundant servers within each tier of our production environment. Web servers are operated in load-balanced server pools and databases and file servers are replicated to standby servers, which can provide near real-time failover in the event of a failure with primary hardware. Databases and file servers are backed up daily with tapes being rotated to separate secure offsite storage facilities.

We have also contracted with SunGard Data Systems, Inc. to provide a disaster recovery site in the Phoenix area in the event of a complete or substantial datacenter disaster at our Austin facility.

Government Regulation

We and our clients are subject to various laws and governmental regulations due to the nature of our business, including those regulating email communications and the collection, use and disclosure of personal information obtained from customers and other individuals. While our solutions provide a platform for our clients' fundraising, advocacy, email marketing, peer-to-peer communications, website content management and eCommerce activities, we do not provide any of the content of those activities and communications nor any of the donor lists or contacts. Our clients are responsible for their compliance with all applicable privacy, direct marketing and data protection laws.

We are subject to certain state statutes which require companies that provide fundraising consulting services to register and comply with the applicable state registration requirements. Currently, we are registered in each of the 24 states that require registration. Since many of our clients run national fundraising campaigns, which often include solicitation activity occurring across the country, Convio must maintain a registration in any state in which a client wishes to utilize our fundraising consulting services to conduct solicitations. The registration requirements and enforcement process vary widely from state to state with some states requiring a simple completed form to others compelling us to disclose each fundraising consulting contract applicable in that state. Failure to comply with these registration requirements could result in our registration being revoked and/or the state's refusal to let Convio register and provide professional fundraising consulting to clients in that state. In addition, a state can levy fines, penalties, and suspend service activity under a particular client contract. These registration requirements continue to change and develop and oblige us to monitor our compliance.

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We are also covered by the Health Insurance Portability and Accountability Act ("HIPAA") which was expanded by the Health Information Technology for Economic and Clinical Health Act ("HI-TECH Act") which Congress passed as part of the American Recovery and Reinvestment Act of 2009. The HI-TECH Act expands the reach of data privacy and security requirements of HIPAA. HIPAA and associated United States Department of Health and Human Services regulations permit our clients in the healthcare industry to use certain protected health information for fundraising purposes, such as email addresses or other demographic information, and to disclose that protected health information to their service providers. We may be included in this service provider group under the revised HIPAA regulations by virtue of our service provider relationship with our clients in the healthcare industry.

Although our healthcare industry clients may upload into our systems personal information that HIPAA permits to be used for fundraising so that we may provide email software services, we ask our healthcare industry clients not to provide us with health or medical information of individuals. In general, our agreements with our healthcare providers seek to prohibit them from storing other forms of protected health information on our system, including any information related to diagnosis or treatment. The HI-TECH Act provides for criminal and civil penalties if we violate the privacy and security rules applicable to us, and also requires us to notify our clients in the event of an unauthorized release, whether inadvertent or purposeful, of any protected health information for which we are responsible.

Our clients are subject to certain U.S. and foreign laws and regulations governing the collection, use and disclosure of personal information obtained from individuals. For instance, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN-SPAM Act") and associated Federal Trade Commission regulations govern our clients' email fundraising campaigns.

These regulations establish certain requirements for "commercial" email messages and provide penalties for transmitting email messages in a manner intended to deceive the recipient as to source or content. Email message campaigns are generated by our clients by using our solutions. We do not create or control the content of such emails, nor do we obtain email lists from sources other than our clients. Our clients' email campaigns are governed by the CAN-SPAM Act's prohibitions and requirements, including:

• prohibition on using false or misleading email header information;

• prohibition on using deceptive subject lines;

• requirement that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender, with the opt-out effective within 10 days of the request;

• requirement that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively permitted the message; and

• requirement that the sender include a valid postal address in the email message.

The CAN-SPAM Act also prohibits unlawful acquisition of email addresses, such as through directory harvesting. The CAN-SPAM Act prohibits transmission of commercial emails by unauthorized means, provides for enhanced damages or penalties if commercial messages are sent in violation of the CAN-SPAM Act to email addresses that were acquired through certain specified methods such as through relaying messages with the intent to deceive recipients as to the origin of such messages. Violations of the CAN-SPAM Act's provisions can result in criminal and civil penalties. In addition, although the CAN-SPAM Act preempts most state restrictions specific to email marketing, some states have adopted consumer protection regulations that, if deemed not to be preempted by the CAN-SPAM Act, could impose liabilities and compliance burdens in addition to those imposed by the CAN-SPAM Act. Our terms and conditions require that our clients comply with the CAN-SPAM Act and that they are liable for any breaches of its provisions. If we become aware that a client has violated the CAN-SPAM Act, we can suspend or terminate its use of our solutions.

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In addition, due to the increasing popularity and use of the Internet, governmental authorities in the United States and abroad may continue to adopt laws and regulations to govern Internet activities of our clients, including email messaging, collection and use of personal information, ownership of intellectual property, solicitation of charitable contributions and other activities important to our online business practices. For instance, although we do most of our business in the United States, we

have clients in Canada and, with our recent expansion into the United Kingdom through our acquisition of Baigent, we have additional clients and employees in the United Kingdom, who are subject to data protection and fundraising laws in Canada and the European Union, respectively. As an example, European Union member state laws typically prohibit sending promotional email messages outside of an established business relationship with the recipient, unless the recipient has opted into receipt of such messages, and require honoring opt-out requests by recipients. Such laws largely prevent the use of email to obtain new prospects in the European Union, and similar laws have been adopted in some other countries. We do not evaluate our clients' compliance with these foreign laws or domestic laws, but if we learn that any client has violated such laws, we may suspend or terminate its use of our solutions.

Available Information

        Our website address is www.convio.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our internet website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. The public may read and copy any materials we file with SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http : / /www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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Item 1A.    Risk Factors

Risks Relating to the Proposed Merger with Blackbaud

The pendency of our agreement to be acquired by Blackbaud could have a negative impact on our business.

On January 16, 2012, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Blackbaud pursuant to which a wholly owned subsidiary of Blackbaud will, subject to the satisfaction or waiver of the conditions contained in the Merger Agreement, merge with and into Convio, and Convio will be the surviving corporation of the Merger and will become a wholly owned subsidiary of Blackbaud (the "Merger"). Pursuant to the terms of the Merger Agreement and subject to the satisfaction or waiver of the closing conditions set forth in the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each share of common stock of Convio issued and outstanding immediately prior to the Effective Time will be canceled and converted into the right to receive $16.00 in cash, without interest and less any applicable tax withholdings. The Merger Agreement is an executory contract subject to numerous closing conditions beyond our control including, but not limited to, approval by the United States Federal Trade Commission and Department of Justice, whose review of the transaction has required the tender off to be extended and the closing to be delayed. There is no guarantee that these conditions will be satisfied in a timely manner or at all.

The announcement and pendency of the Merger may have a negative impact on our business, financial results and operations or disrupt our business by:

• intensifying competition as our competitors may seek opportunities related to our pending Merger;

• affecting our relationships with our customers, distributors, suppliers and employees;

• affecting the purchasing decisions of existing and prospective customers, which could cause them to delay purchasing decisions or to seek alternative suppliers, resulting in a reduction in sales and increased churn;

• limiting certain of our business operations prior to completion of the Merger which may prevent us from pursuing certain opportunities without Blackbaud's approval;

• causing us to forego certain opportunities we might otherwise pursue absent the Merger Agreement;

• impairing our ability to attract, recruit, retain, and motivate current and prospective employees who may be uncertain about their future roles and relationships with Blackbaud following the completion of the Merger; and

• creating distractions from our strategy and day-to-day operations for our employees and management and a strain on resources.

The failure to complete the Merger with Blackbaud could negatively impact our business.

There is no assurance that the Merger with Blackbaud or any other transaction will occur or that the conditions to the Merger will be satisfied in a timely manner or at all. Further, there is no assurance that any event, change or other circumstances that could give rise to the termination of the Merger Agreement will not occur. If the proposed Merger or a similar transaction is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee and related costs of Blackbaud of up to approximately $12.5 million. Certain costs associated with the Merger are already incurred or may be payable even if the Merger is not completed. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Finally, any disruptions to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers, vendors and employees or recruiting and retention efforts, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these relationships or our financial condition will not be negatively impacted, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated. If the proposed Merger or a similar transaction is not completed, we would incur significant unplanned costs in order to address the negative impacts on our business, including to restore our business reputation with customers, employees and investors. There can be no assurance that we could be successful in restoring our business reputation and financial condition to where it would be had the Merger not been announced.

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Risks Relating to Our Business

If NPOs do not adopt our solutions, our revenue and operating results will be adversely impacted.

Our ability to generate revenue and maintain profitability depends on the adoption of our solutions by NPOs of all sizes. We cannot be certain that the demand of NPOs for solutions such as ours will continue to develop and grow at its historic rates, if at all. We also do not know to what extent NPOs will be successful utilizing our solutions to engage constituents and generate funds. The less they are able to do so, the less revenue we will generate.

We initially began our business with one solution and now offer multiple products and services. As we grow, we plan on offering new solutions and services in the future. We cannot be certain that NPOs will elect to use our solutions or want or need the functionality of our new solutions and service offerings. As a result, as NPOs become more comfortable and sophisticated in their use of technology for their constituent relationship needs, we may fail to develop and offer solutions and services that meet NPOs' needs in this area, and our revenue may not grow.

Factors that may affect market adoption of our solutions, some of which are beyond our control, include:

• uncertainties related to our pending Merger with Blackbaud;

• reluctance by NPOs to adopt on-demand solutions;

• the price and performance of our solutions;

• our ability to integrate with other solutions used by NPOs;

• the impact of the economic downturn on NPOs, their fundraising and their spending on technology and services;

• the purchasing cycles of NPOs;

• the level of customization we can offer;

• the availability, performance and price of competing products and services, including internally developed solutions and general solutions not designed specifically for NPOs;

• the breadth and quality of our service offerings;

• the concerns related to security and the reluctance by NPOs to trust third parties to store and manage their internal data; and

• any adverse publicity about us, our solutions or the viability, reliability or security of on-demand software solutions generally from third-party reviews, industry analyst reports and adverse statements made by clients and competitors.

While no one client accounted for more than 10% of our revenue during the year ended December 31, 2011, our enterprise clients can contribute substantially to our revenue from quarter to quarter. If NPOs, especially enterprise NPOs, do not continue to adopt and renew their subscriptions to our solutions, our revenues will experience volatility and our stock price could fall.

Our business depends on our clients' renewing and expanding their subscriptions for our solutions. Any decline in our client renewals and expansions would reduce our revenue.

        We sell solutions pursuant to agreements that are generally three years in length for our online marketing solutions and Convio Luminate and one to two years in length for Common Ground. Our clients have no obligation to renew their subscriptions for our solutions after the expiration of their initial subscription period. Our client renewal rates may decline or fluctuate and our client cancellation rates may increase or fluctuate as a result of a number of factors, including the following:

• uncertainties related to our pending Merger with Blackbaud;

• a client switches to a competitor or competitive point applications;

• a client terminates its agreement with us due to employee turnover in the client organization;

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• a client is dissatisfied with our agreement terms;

• a client encounters financial difficulties;

• our solutions do not continue to fit a client's needs as they evolve; and

• our client has a poor service experience with our partners or us.

        If clients do not renew their agreements, our revenue will decline and our operating results will be adversely affected.

        We seek to grow our business by expanding the products and services our clients buy from us as their needs evolve. However, if our clients fail to buy additional products and services from us, the growth of our business will be harmed. Further, if our clients elect to subscribe to a fewer number of products upon renewal with us, our business will be harmed.

        Some of our agreements also provide that our clients may terminate their agreements for convenience after a specified period of time. Some of our agreements allow a client to cancel during the first year of such client's initial subscription for our solutions for performance-related reasons. If our clients terminate their agreements with us, our revenue will grow more slowly than expected or even decline, and we may not be able to maintain profitability. Further, if a client seeks to terminate its agreement with us, we may not be successful in enforcing, or we may not elect to enforce, our agreement with the client.

        We serve a broad range of NPOs, the less established of which may be subject to a higher rate of insolvency or may have limited durations due to the underlying causes that they support, such as political campaigns. We are generally not able to perform financial due diligence on the creditworthiness of our prospective clients, and we may not accurately predict a client's creditworthiness. As a result, if we are unable to collect from our clients, our revenue and cash flows could be less than what we expect.

Our financial results will fluctuate, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

Our results of operations are difficult to forecast. We have experienced and expect to continue to experience fluctuations in revenue and operating results from quarter to quarter. In particular, our usage revenue is difficult to predict because it is derived from our clients' usage of our solutions for special events such as runs, walks and rides, and we recognize the associated revenue in the period reported and billed to the client. The growth, if any, and amount of usage revenue vary based on the number of events, the percent of funds raised online for these events, the growth and success of events and our signing of new clients for events. These factors are very difficult to predict, and our usage revenue fluctuates significantly as a result.

Our usage revenue reflects the general seasonality of special events which are held more often in the spring and fall. Therefore, we recognize a majority of our usage revenue in the second and third quarters. We recognized 61% and 62% of our annual usage revenue in the combined second and third quarters of 2011 and 2010, respectively. Usage revenue in the second and third quarters represented between 21% and 20% of total revenue for those periods in 2011 and 2010, respectively; whereas, usage revenue in the first and fourth quarters represented between 14% and 13% of total revenue for those periods in 2011 and 2010, respectively. Furthermore, although we experience seasonally lower usage revenue from special events during the first and fourth fiscal quarters, our operating expenses experience less of a reduction during those periods. Such seasonality causes our quarterly operating results to fluctuate and be difficult to predict.

We expense sales commissions in the period in which we sign our agreements, but we generally recognize the related revenue over the terms of those agreements. We may report poor operating results due to higher sales commissions in a period in which we experience strong sales of our solutions, particularly sales to enterprise clients. Alternatively, we may report better operating results due to lower sales commissions in a period in which we experience a slowdown in sales. As a result, our sales and marketing expenses are difficult to predict and fluctuate as a percentage of revenue.

Other reasons for these fluctuations include but are not limited to:

• our ability during any period or over time to sell our products and services to existing and new clients and to satisfy our clients' requirements;

• the addition or loss of clients, particularly enterprise clients, and our inability to forecast the timing and size of larger deals;

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• changes in our pricing policies, whether independent or in reaction to a change by our competitors;

• client renewal rates and unexpected early contract terminations or concessions;

• the impact of general economic conditions on our clients and their ability to pay us in a timely manner;

• the changing mix in our client base and revenue per client;

• the amount and timing of our sales and marketing expenses, in particular commission and referral payments;

• the amount and timing of research and development expenses, in particular the costs to develop internal use software that are capitalized under the applicable accounting guidance;

• the impact of significant occurrences, such as natural disasters, on fundraising by NPOs, including those with missions unrelated to these occurrences;

• the expansion and increasing complexity of our multiple solutions and our business generally;

• the timing of project and milestone achievements under our services arrangements and the related revenue recognition;

• the amount and timing of third-party contracting fees;

• the impact of any security incidents or service interruptions;

• the timing and significance of the introduction of new products and services by us and our competitors;

• our regulatory compliance costs;

• any impairment of our intangible assets;

• any introduction of new accounting rules; and

• future costs related to investigations and negotiations of acquisitions of technologies or businesses and, if successful, their integration.

We believe that our results of operations, including the levels of our revenue and operating expenses, will vary in the future and that period-to-period comparisons of our operating results may not be meaningful. If our financial results fall below the expectations of securities analysts or investors, our stock price and the value of your investment could decline substantially. You should not rely on the results of any one quarter as an indication of future performance.

Our failure to maintain profitability could limit the growth of our business.

The first year in which we were profitable was 2010. We had operating losses in each year from our inception in October 1999 until 2010. We expect to incur additional costs and operating expenditures as we further develop and expand our operations. In addition, as a public company, we incur additional legal, accounting and other expenses that we did not incur as a private company. While our revenue has grown in recent periods and we recently achieved profitability, this growth may not be sustainable, and we may not continue to achieve sufficient revenues to maintain profitability in the future. Our operating expenses, which include sales and marketing, research and development and general and administrative expenses, are based on our expectations of future revenue and are, to a large extent, fixed in the short term. In addition, we may elect to spend more to grow our business in the future without certainty of near-term returns. Accordingly, we may not maintain profitability, and we may incur losses in the future, which could affect the market price of our common stock or harm our ability to raise additional capital.

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Many NPOs are price sensitive, and if the prices we charge for our solutions are unacceptable to NPOs, our operating results will be harmed.

Many NPOs are price sensitive. As the market for our solutions matures, or as competitors introduce new products or services that compete with ours, we may be unable to renew our agreements with existing clients or attract new clients at prices that sustain historical margins.

In addition, poor general economic conditions have led to our offering sales promotions and to our clients' renegotiating their pricing and contract terms as well as requesting other concessions, especially during their contract's renewal period. These promotions and concessions can adversely impact our operating results. These conditions can also lead our competitors to aggressively price their product offerings, further intensifying the pricing pressure on our solutions. Furthermore, demand for our more comprehensive and higher-priced solutions may decline. As a result, our revenue, gross margin and operating results may be adversely affected.

Because we expense commissions associated with sales of our solutions immediately upon execution of a subscription agreement with a client and generally recognize the revenue associated with such sale over the term of the agreement, our operating income in any period may not be indicative of our financial health and future performance.

        We expense commissions paid to our sales personnel in the period in which we enter into an agreement for the sale of our solutions. In contrast, we generally recognize the revenue associated with a sale of our solutions ratably over the term of the subscription agreement, which is typically three years for our online solutions and one to two years for Common Ground. We anticipate that Luminate will be offered pursuant to agreements that are generally three years in length. Although we believe increased sales is a positive indicator of the long-term health of our business, increased sales, particularly sales to enterprise clients, would increase our operating expenses and decrease earnings in any particular period. Thus, we may report poor operating results due to higher sales commissions in a period in which we experience strong sales of our solutions. Alternatively, we may report better operating results due to the reduction of sales commissions in a period in which we experience a slowdown in sales. Therefore, you should not rely on our operating income during any one quarter as an indication of our financial health and future performance.

Because we generally recognize revenue from sales of our subscription services ratably over the term of our agreements, downturns or upturns in sales may not be immediately reflected in our operating results.

We generally recognize revenue on a subscription basis, meaning we recognize the revenue ratably over the terms of our clients' agreements. We typically do not invoice clients the full contract amount at the time of the execution of an agreement. Rather, we invoice our clients periodically based on our arrangement with each client. We record deferred revenue when we invoice a client and only with respect to the invoiced amount for such period, but we only recognize the corresponding revenue ratably over the term of the agreement. As a result, deferred revenue is not an effective determinant of sales or predictor of revenue in any particular period, and much of the revenue we recognize in any quarter may be from deferred revenue from previous quarters. A decline in new or renewed subscriptions in any one quarter may not result in a decrease in revenue in such quarter but will negatively affect our revenue in future quarters. We may be unable to adjust our cost structure to reflect these reduced revenues. Accordingly, downturns in sales or renewals of our subscription services will adversely impact revenue and operating results on an on-going basis in future periods.

We anticipate that our constituent engagement solutions, Common Ground and Luminate, will help us to grow our business, but if NPOs do not adopt these solutions, the growth in our revenue could be limited and our business harmed.

        We introduced our Common Ground application in September 2008, which was historically targeted primarily at mid-market NPOs. In December 2010, we introduced an online fundraising and marketing engine directly integrated with Common Ground. In July 2011, we introduced our new solution, Convio Luminate, which is targeted at large, enterprise NPOs. Thus we now offer two distinct constituent engagement solutions, Common Ground for the small and mid-market NPOs and Luminate for large, enterprise NPOs. We expect to increase our spending on research and development and sales and marketing to expand the number of both Common Ground and Luminate clients and the revenue we generate from these clients.

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Common Ground and Luminate are new and evolving products, and if NPOs do not continue to adopt them, then our business will have difficulty growing and will be harmed. We believe that acceptance and adoption of these solutions by NPOs will be dependent upon, among other things, their functional breadth, quality, ease of use, performance, reliability, and cost effectiveness. Even if the advantages of these solutions over legacy solutions are established, we are unable to predict to what extent they will be adopted in the marketplace.

We plan on releasing more functionality for our Common Ground application. The introduction of these new features may replace sales of our legacy online marketing solution, particularly in the mid-market, which could offset the benefits of a successful feature introduction. This could also harm our operating results by decreasing sales of our higher priced solution, exposing us to greater risk of decreased revenues.

As we market our new Luminate solution to the enterprise market, there is no guarantee that the large enterprise NPOs will adopt Luminate or that the features will prove to be useful for this market. Failure in this regard may significantly impair our ability to compete effectively and cause us to lose existing clients or fail to sell our solutions to new clients. Any or all of the above occurrences could harm our business and results of operations.

We do not have any control over the availability or performance of salesforce.com's Force.com platform, and if we or our clients encounter problems with it, we may be required to replace Force.com with another platform, which would be difficult and costly.

        Common Ground and Luminate CRM run on salesforce.com's Force.com platform, and we do not have any control over the Force.com platform or the prices salesforce.com charges to our NPO clients. Salesforce.com may discontinue or modify Force.com. Salesforce.com could also increase its fees or modify its pricing incentives for NPOs. If salesforce.com takes any of these actions, we may suffer lower sales, increased operating costs and loss of revenue from Common Ground and Luminate CRM until equivalent technology is either developed by us, or, if available from a third party, is identified, obtained and integrated. Additionally, we may not be able to honor commitments we have made to our clients and we may be subject to breach of contract or other claims from our clients.

        In addition, we do not control the performance of Force.com. If Force.com experiences an outage, Common Ground and Luminate CRM will not function properly, and our clients may be dissatisfied with our Common Ground and Luminate CRM applications. If salesforce.com has performance or other problems with its Force.com platform, they will reflect poorly on us and the adoption and renewal of our Common Ground and Luminate CRM applications and our business may be harmed.

We encounter long sales cycles, particularly for our largest clients, which could have an adverse effect on the size, timing and predictability of our revenue and cash flows.

Generally, our sales cycles last between three and nine months, but in the case of enterprise NPOs our sales cycle can last longer. Potential clients, particularly our larger clients, generally commit significant resources to an evaluation of available technologies and require us to expend substantial time, effort and money educating them as to the value of our solutions. We may expend significant funds and management resources during a sales cycle and ultimately fail to close the sale. The sales cycle for our solutions is subject to significant risks and delays over which we have little or no control, including:

• our clients' budgetary constraints;

• the timing of our clients' budget cycles and approval processes;

• our competitors' offerings and sales activities;

• our clients' willingness to replace their current methods or solutions;

• our clients' employee turnover rates; and

• our need to educate potential clients about the uses and benefits of our solutions.

If we are unsuccessful in closing sales after expending significant funds and management resources or if we experience delays in our sales cycles, the size, timing and predictability of our revenue and cash flows could be harmed.

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Interruptions, delays or security breaches at third-party datacenters, third-party infrastructure providers or by our payment processors could impair the delivery of our solutions and harm our reputation and business.

We host a portion of our solutions from a third-party datacenter located in Austin, Texas. Additionally, we use certain other third-party providers of infrastructure, such as virtual servers and other cloud computing resources. Any interruptions or problems at such datacenter or other providers would likely result in significant disruptions in our solutions hosted at or affected by such site. We do not control the operation of such datacenter or other providers, and each is vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. Such datacenter and other providers are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions at such third party locations, the occurrence of a natural disaster or an act of terrorism, a security breach, a decision to close the datacenter or such provider without adequate notice or other unanticipated problems such as work stoppages could result in interruptions or delays in our solutions. Any interruption or delays in our solutions could harm our reputation, increase our operating costs and cause us to breach commitments to our clients. Such datacenter and other providers have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with the datacenter and other providers on commercially reasonable terms, we may experience costs or downtime in connection with the transfer to new third-party providers.

        In addition, we rely on third-party providers for payment processing of funds contributed to our clients by their constituents. Such third-party providers have experienced significant downtime in the past due to high transaction volumes and may experience similar downtime in the future. Although substantially all of our subscription agreements do not provide service level commitments relating to payment processing services provided by third parties, any interruptions in our solutions may cause harm to our reputation, cause clients to terminate their subscription agreements and harm our renewal rates.

We provide service level commitments to our clients, which could cause us to issue credits for future products and services if the stated service levels are not met for a given period and could significantly harm our reputation and operating results.

        We provide service level commitments in our subscription agreements. Our transaction volumes are erratic, and our volumes spike significantly during large special events or major occurrences such as natural disasters. High transaction volumes can cause delays in response times. If we are unable to meet stated service level commitments, we may be contractually obligated or choose to provide clients with refunds or credits for future products and services. While we provide these service level commitments in our subscription agreements, we may not receive credits from our third-party providers sufficient to cover our obligations to our clients, and therefore we may not be able to recover fully from our third-party datacenter and other third-party providers any refunds or credits that we provide to our clients. Our revenue could also be adversely affected if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our clients. Any service outages could harm our reputation, decrease our revenue and increase our operating costs.

If we are not able to develop enhancements to, and new features for, our existing solutions or acceptable new products and services that keep pace with technological developments, we may lose clients or fail to sell our solutions to new clients.

        We intend to develop or license our new solutions as well as enhancements to and new features for our existing solutions to keep pace with rapid technological developments and to improve our solutions. The success of such new solutions, enhancements, new features and services depends on several factors, including their timely completion, the license on acceptable terms of software from third parties and the introduction and market acceptance of such enhancements, features or services. Failure in this regard may significantly impair our ability to compete effectively and cause us to lose existing clients or fail to sell our solutions to new clients. In addition, because the software underlying our solutions is designed to operate on a variety of network hardware and software platforms using a standard browser, we will need to continuously modify and enhance our solutions to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements or bringing them to market in a timely manner. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies could increase our research and development expenses. Any failure of our solutions to operate effectively with future network platforms and technologies could reduce the demand for our solutions.

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Our solutions, and in particular our Common Ground and Luminate applications, may contain errors or defects, negatively affecting their adoption which may cause us to lose clients and reimburse fees.

        Our solutions are novel and complex and, accordingly, may contain undetected errors or failures when first introduced or as new enhancements are released. This may result in the loss of, or delay in, market acceptance of our new solutions. We have in the past discovered software errors in our solutions and new solutions after their introduction. We have experienced delays in release, lost revenues and customer frustration during the period required to correct these errors. We may in the future discover errors and scalability limitations in new solutions after they become available or be required to compensate customers for such limitations or errors. In addition, our clients may use our solutions in unanticipated ways that may cause a disruption in our solutions for other clients. Since our clients use our solutions for mission-critical processes, any errors, defects or disruptions in, or other performance problems with, the software underlying our solutions could harm our reputation and may damage our clients' activities. If that occurs, clients could elect not to renew or delay or withhold payment to us, we could lose future sales and clients may make claims against us.

If our solutions do not scale to accommodate a high volume of traffic and transactions, we may experience client dissatisfaction and fail to grow our revenue.

We seek to generate a higher volume of website traffic and other electronic transactions for our clients as part of our product and service offerings. Our transaction volumes are erratic, and our volumes spike significantly during large special events and major occurrences such as natural disasters. In addition, high transaction volumes can cause delays in response times. The satisfactory performance, reliability and availability of our solutions, including our network infrastructure, are critical to our reputation and our ability to attract and retain new clients. Any system interruptions that result in the unavailability or under-performance of our solutions would reduce the volume of traffic and transactions processed on our system for our clients and may also diminish the attractiveness of our solutions to our clients. Furthermore, our inability to add software and hardware or to develop and further upgrade our existing technology or network infrastructure to accommodate increased traffic or increased transaction volume may cause unanticipated system disruptions, slower response times, degradation in levels of client service and impaired quality of the users' experience. We expect to continue to upgrade our solutions, but we may be unable to upgrade and expand our solutions effectively or to integrate efficiently any new technologies with our existing solutions. Any inability to do so would harm our reputation, ability to maintain our client relationships and growth of our business.

In addition, most of our subscription agreements provide for higher revenue as the volume of client traffic and transactions increase over the term of the agreement. If we are unable to scale our solutions to effectively accommodate a higher volume of traffic and transactions, we will not be able to realize an increase in our revenue.

The market in which we operate is intensely competitive, and our failure to compete successfully would cause our revenue and market share to decline.

The market in which we operate is fragmented, competitive and rapidly evolving, and there are limited barriers to entry for some aspects of this market. Competitive pressures can adversely impact our business by limiting the prices we can charge our clients and making the adoption and renewal of our solutions more difficult. With Luminate Online, we compete with several nonprofit sector online marketing suites, a variety of specialized point solutions for tasks such as online donations, peer to peer fundraising and advocacy, and a variety of open source and commercial systems for tasks such as web content management and email marketing.  With Luminate CRM and Common Ground, we compete with industry-specific donor management solutions who focus more exclusively on the nonprofit industry, as well as commercial database and constituent relationship management providers who sell to NPOs as well as a broader set of markets.  Among the industry-specific donor management solutions, our primary competitors are Blackbaud, Inc., The Sage Group plc, and SofterWare, Inc.  Among the commercial database and constituent relationship management providers, our primary competitors are Microsoft Corporation, Oracle Corporation and Salesforce.com, Inc.  NPOs using such commercial database and constituent relationship management providers also often seek to adapt such offerings themselves or through third party system integrators to create additional custom competitive solutions. Any of these competitors could take actions that adversely affect our business.

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The larger competitors, such as Microsoft Corporation, Oracle Corporation and Salesforce.com, Inc., could also make acquisitions or develop solutions to further expand their presence in and increase their focus on the nonprofit market. Smaller competitors, such as those providing open source solutions, web development services and content management, email marketing and other point tools, may strengthen their offerings through internal development or acquisitions and enhance their respective ability to compete. Other competitors have established or strengthened cooperative relationships with strategic partners serving the nonprofit market, thereby limiting our ability to promote our solutions and the number of partners available to help market our products and services. These competitive pressures could cause our revenue and market share to decline.

If we are not able to manage our anticipated growth effectively, our operating costs may increase and our operating margins may decrease.

We will need to grow our infrastructure to address potential market opportunities. Our growth has placed, and will continue to place, to the extent that we are able to sustain such growth, a significant strain on our management, administrative, operational and financial infrastructure. We anticipate that further growth will be required to address increases in our client base, as well as our planned expansion into new geographic areas. If we continue to grow our operations, we may not be effective in enlarging our physical facilities and our systems and our procedures or controls may not be adequate to support such expansion or our business generally. If we are unable to manage our growth, our operating costs may increase and our operating margins may decrease.

We depend on our direct sales force and our partner network for sales and deployments of our solutions and, if we do not attract and retain our sales personnel or maintain our partner relationships, our revenue may not grow and our business could be harmed.

        We depend primarily on our direct sales force to obtain new clients and to manage our client base. There is significant competition for direct sales personnel with the advanced sales skills and technical knowledge that sales of our solutions require. Our ability to achieve significant revenue growth in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel.

We complement our direct sales personnel with a network of partners serving the nonprofit market, including interactive agencies, direct marketing agencies, public affairs firms and complementary technology companies. Our partner network helps us grow our client base and, we believe, enables us to provide more complete solutions for our clients. If our partners fail to increase awareness of our solutions or to assist us in gaining access to decision-makers at NPOs, then we may need to increase our marketing expenses, change our marketing strategy or enter into marketing relationships with different parties, any of which could impair our ability to generate increased revenue. Our typical partner agreement is not exclusive and our partners may choose not to promote sales of our solutions. If we do not maintain and increase our partner relationships, our revenue may not grow and could decline.

We also rely on third-party implementation providers whom we recommend to our clients to deploy our solutions. In the case of Common Ground, to date we have relied primarily on third-party implementation providers to provide deployment services. Any failure to perform, unprofessional conduct, delays or difficulties with the deployment on the part of such third-party implementation providers may require us to perform these services ourselves and may reflect poorly on our reputation and the marketability of our solutions, which could harm our business and results of operations. Our agreements with these third-party implementation providers do not obligate them to continue to deploy our solutions. Our clients either enter into agreements directly with us or alternatively with the third-party implementation providers, so we have limited ability to seek recourse from them if deployment issues arise with clients.

We rely on third-party software in our solutions that may be difficult or costly to replace or which could cause errors or failures and harm our reputation.

        We rely on software licensed from third parties in order to offer our solutions, including database software from Oracle Corporation. The third-party software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any necessary third-party software could result in delays in the provisioning of our solutions until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our reputation, increase our operating costs and cause us to breach commitments to our clients. Any errors or defects in third-party software could result in errors or a failure of our solutions which could harm our reputation, be costly to correct and cause us to breach commitments to our clients. Many of our third-party providers attempt to impose limitations on their liability for errors, defects, or failures in their hardware, software, or services, which we are required to pass through to our clients. Those limitations may or may not be enforceable, and we may have liability to our clients or providers that could harm our reputation and increase our operating costs.

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If we fail to retain key personnel or if we fail to attract additional qualified personnel or if newly hired personnel fail to reach productivity as anticipated, we may not be able to achieve our anticipated level of growth, our revenue may decrease and our operating costs may increase.

Our future success depends upon the continued service of our officers and other key finance, sales and marketing, research and development and professional services staff. In addition, our future success will depend in large part on our ability to attract a sufficient number of highly qualified personnel, and there can be no assurance that we will be able to do so. Competition for qualified personnel can be intense, and we might not be successful in attracting and retaining them. The pool of qualified personnel with experience working with or selling to NPOs is limited overall and specifically in Austin, Texas, Washington, D.C. and the San Francisco Bay Area of California, where a significant portion of our operations are located. If we fail to retain key personnel or attract a sufficient number of highly qualified personnel, we may expend more resources in an effort to recruit qualified personnel and our operating costs would increase. In addition, the diversion of management's attention to recruiting efforts may cause our sales and revenue to decrease.

Our ability to maintain and expand our finance, sales and marketing, research and development and professional services teams will depend on our ability to recruit, train and retain top quality people with advanced skills who understand sales to, and the specific needs of, NPOs. For these reasons, we have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications for our business. In addition, it takes time for our new sales and services personnel to become productive, particularly with respect to obtaining and supporting enterprise clients. If we are unable to hire or retain qualified personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity slower than anticipated, it would be more difficult for us to sell our solutions and provide services to our clients, and we could experience a shortfall in revenue and may not achieve our planned growth.

Various private spam blacklists have in the past reduced, and may in the future reduce, the effectiveness of our solutions and our ability to conduct our business, which may cause demand for our solutions to decline.

We depend on email to market to and communicate with our clients, and our clients rely on email to communicate with their constituents. Various private entities attempt to limit the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that exceed current legal requirements in the United States and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain "blacklists" of companies and individuals, and the websites, Internet service providers and Internet protocol addresses associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company's Internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked by servers that receive or route email and subscribe to the blacklisting entity's service or purchase its blacklist. Any blocking of email communications generated by clients using our solutions will reduce the effectiveness of our solutions and our ability to conduct our business, which may cause demand for our solutions to decline and increase non-renewals.

Government regulation could increase our compliance expenses, subject us to fines or penalties of non-compliance or adversely affect the marketability of our solutions.

We are subject not only to laws and regulations applicable to businesses generally, but also to laws and regulations directly applicable to electronic commerce and fundraising activities. In addition, our clients are subject to United States and foreign laws and regulations governing the collection, use and disclosure of personal information obtained from individuals, which restrict how our clients use our solutions. There are many laws and regulations related to electronic commerce and online fundraising, and state, federal and foreign governments may adopt or enforce additional laws and regulations applicable to our business and to our clients' use of our solutions. If the burdens or costs of our clients' compliance with additional regulations increase, NPOs may decide not to use our solutions. Further, our failure to comply with any such laws or regulations could subject us to fines, penalties or other damages that could harm our reputation and increase our operating costs.

The promulgation, amendment or enforcement of any laws or regulations in the following areas could increase our compliance expenses:

• charitable fundraising and related services;

• campaign finance;

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• user privacy and notification statutes;

• the transmission and storage of personal data;

• the tax exempt status of NPOs;

• the Internet;

• the pricing and taxation of products and services offered over the Internet;

• money laundering;

• transactions or sales to terrorist organizations or to nations which sponsor terrorist activities;

• the content of websites;

• patents, copyrights, trade secrets, trademarks and other areas of intellectual property;

• consumer protection, including the potential application of "do not call" registry requirements on our clients;

• freedom of speech and expression;

• the online distribution of specific material or content over the Internet;

• the characteristics and quality of products and services offered over the Internet; and

• federal, state or local taxation, particularly with respect to charitable giving, research and development activities, employee compensation and other activities generally pertaining to our business.

We are also subject to certain state registration and periodic filing requirements related to companies that provide fundraising consulting services. States' regulations vary and the application of these regulations to our business is unclear. Our clients rely in part on our registrations in states that require registration to conduct our clients' national fundraising campaigns. As of December 31, 2011, we were registered in each of the 24 states that require registration. If we fail to comply with any of these regulations, our registrations could be revoked or we may be prevented from registering, and our clients could terminate their agreements with us if we do not meet their fundraising needs in those states. In addition, we could incur fines, penalties or other damages that could harm our reputation and increase our operating costs, and we may be obligated to file client agreements that may disclose competitively sensitive information. Furthermore, the states in which we are registered may impose new requirements and additional states may adopt registration requirements that may increase our compliance expenses.

Evolving privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our solutions, which could reduce overall demand for our solutions and increase operating costs.

Our clients can use our solutions to store personal or identifying information regarding their constituents. Federal, state and foreign government bodies and agencies, however, have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers and other individuals. For instance, as part of the American Recovery and Reinvestment Act of 2009, Congress passed the Health Information Technology for Economic and Clinical Health Act ("HI-TECH Act"). The HI-TECH Act expands the reach of data privacy and security requirements of the Health Insurance Portability and Accountability Act ("HIPAA") to service providers. HIPAA and associated United States Department of Health and Human Services regulations permit our clients in the healthcare industry to use certain demographic protected health information (such as name, email or physical address and dates of service) for fundraising purposes and to disclose that subset of protected health information to their service providers for fundraising. We may be included in this service provider group under the revised HIPAA regulations by virtue of our service provider relationship with our clients in the healthcare industry. In general, we are seeking to prohibit contractually our healthcare industry clients from uploading other types of health information of their clients into our systems because HIPAA does not permit this information to be used for fundraising without certain permissions, but we believe that monitoring our healthcare clients' compliance with such prohibitions is not legally required of service providers and would be cost prohibitive. The law and regulations under HI-TECH are new and still subject to change or interpretation by legal authorities who could cause additional compliance burdens.

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The costs of compliance with, and other burdens imposed by, HIPAA, the HI-TECH Act and such other laws and regulations that are applicable to the businesses of our clients may limit the use and adoption of our solutions, reduce overall demand for our solutions and increase our operating costs, and we may be unable to pass along those costs to our clients in the form of increased fees.

In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If regulatory burdens related to collection and use of personal information increase, our solutions would be less effective, which may reduce demand for our solutions and harm our business.

United States federal legislation entitled Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 imposes certain obligations on the senders of commercial emails, which could minimize the effectiveness of our email product and establishes financial penalties for non-compliance, which could increase the costs of our business.

In December 2003, Congress enacted Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN-SPAM Act") which establishes civil penalties for failure to meet certain requirements for commercial email messages (which may include email messages sent by NPOs that advertise a commercial product or service) and specifies criminal and civil penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source, transmission path or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to identify their recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act. For example, Utah and Michigan have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as products that minors are prohibited from purchasing. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The ability of our clients' constituents to opt out of receiving commercial emails may minimize the effectiveness of our email product. Moreover, non-compliance with the CAN-SPAM Act can involve significant financial penalties. In addition, European Union member state laws typically prohibit sending promotional email messages outside of an established business relationship with the recipient unless the recipient has opted into receipt of such messages and require honoring opt-out requests by recipients. Such laws largely prevent the use of email to new prospects in the European Union, and similar laws have been adopted in some countries. Although our agreements prohibit violations of these laws, if we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or European Union or foreign laws regulating the distribution of commercial email, whether as a result of violations by our clients or if we were deemed to be directly subject to and in violation of these requirements by the future interpretation of such laws by a court of law or regulatory agency, we could be required to pay penalties or we may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain clients or increase our operating costs.

We may be subject to legal costs and liabilities for content and activities of our clients and their constituents, which could harm our reputation and increase our operating costs.

We host content provided by our clients and their constituents and provide products and services that enable them to exchange information, conduct business and engage in various online activities. From time to time, we are requested to provide information or otherwise become involved in legal and other matters involving our clients' online activities. While we require our clients to agree to comply with acceptable usage policies and other content restrictions, clients and their constituents may provide content or undertake activities that could require us to conduct investigations or defend claims by private persons and entities or governmental entities that may be with or without merit and may subject us to legal costs and liabilities to our third-party suppliers and others, which could harm our reputation and increase our operating costs.

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If existing clients and prospective clients refuse to adopt or renew our solutions, or we choose not to engage a prospective client, because of conflicts over ideological missions, our revenue will not grow at our anticipated rate.

Our clients have a wide range of ideological missions. Many NPOs focus upon and support ideological causes that may conflict with the ideological causes of our other clients. A few prospective clients in the past have hesitated or refused to use our solutions because of our relationship with NPOs with ideologies that directly conflict with the ideologies of such prospective clients. If the number of our clients grows, the potential for such conflict will increase. We have adopted a policy of working with NPOs supporting a wide range of ideological missions other than those that promote violence, hatred, or racial or religious intolerance. We will exercise our judgment in determining whether an organization violates the spirit of these client engagement principles. Based on these principles, we have and may continue in the future to choose not to engage prospective client NPOs. If our prospective clients refuse to adopt our solutions, if we choose not to engage a prospective client, or if our existing clients do not renew or otherwise terminate their use of our solutions due to such conflicts, our revenue may be adversely affected and our reputation may be harmed.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our operating results.

A change in accounting standards or practices could harm our operating results and may affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or the way we conduct our business.

We may incur significant expenses to defend against or settle claims that we infringe upon third parties' intellectual property rights.

Litigation regarding intellectual property rights is common in the software industry. We expect that our solutions may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products and services in different industry segments overlaps. We have encountered and may encounter in the future disputes over rights and obligations concerning intellectual property. In the past, we have been involved in litigation with Kintera, Inc., which was acquired by Blackbaud, Inc. Third parties may seek to bring claims against us in the future. Such claims may be with or without merit. Any litigation to defend against claims of infringement or invalidity could result in substantial costs and diversion of resources. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our solutions. Our operating costs may increase or our revenue may decline if any of these events occurred.

In addition, we generally indemnify our clients against certain claims that our solutions infringe upon the intellectual property rights of others. We could incur substantial costs in defending ourselves and our clients against infringement claims and paying any resulting damage awards or settlements. In the event of a claim of infringement, we and our clients might be required to obtain one or more licenses from third parties. We, or our clients, might be unable to obtain necessary licenses from third parties at a reasonable cost, if at all. We, or our clients, might become subject to an injunction that prevents use of the allegedly infringing technology. Any intellectual property rights claim against us or our clients, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our solutions to our clients and may require that we procure or develop a substitute solution that does not infringe.

For any intellectual property rights claim against us or our clients, we may have to pay damages or stop using technology found to be in violation of a third party's rights. We may have to seek a license for the technology, which may not be available on reasonable terms, if at all, may significantly increase our operating expenses or may require us to restrict our business activities in one or more respects. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense. Defense of any lawsuit, the cost of any damages or settlements, failure to obtain any such required licenses or issuance of an injunction would increase our operating costs and may reduce our revenue.

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If the security of the software or systems underlying our solutions is breached, our reputation and our business could be harmed and our operating costs could increase.

Fundamental to the use of our products and services is the secure collection, storage and transmission of constituent information. Unauthorized third parties have periodically attempted to attack our system, and we have had security breaches in the past. We regularly upgrade our security technologies, policies and programs, but we do not directly control the security technologies, policies and programs of our clients or third parties to which we outsource functions. We expect third parties to continue to attempt to attack our system, our clients' systems and the systems of third-parties to which we outsource datacenter storage, payment processing and other functions, in the future with increasing sophistication. If a third party breaches our security, that of our clients or that of our third-party datacenter, payment processing partners or other third-party providers, our business could be harmed. It could result in misappropriation of proprietary information or interruptions in operations. We might be liable to our clients or their constituents for damages from breaches of security, and clients could seek to terminate their agreements with us. Although we carry insurance to help protect against such a risk, a breach could also harm our reputation and increase our operating costs, particularly any breach resulting in the imposition of liability that is not covered by insurance or is in excess of insurance coverage. We might be required to expend significant capital and other resources to notify and communicate with state and federal regulatory agencies and affected clients and their constituents, provide credit monitoring or other protections, protect further against security breaches or to rectify problems caused by any security breach. Any of these results would be harmful to our business.

We rely upon trademark, copyright and trade secret laws to protect our proprietary rights, which might not provide us with adequate protection, and we may therefore be unable to compete effectively.

Our success and ability to compete depend to a significant degree upon the protection of our software and other proprietary technology rights. We might not be successful in protecting our proprietary technology, and our proprietary rights might not provide us with a meaningful competitive advantage. To protect our proprietary technology, we rely on a combination of trademark, copyright and trade secret laws, as well as nondisclosure agreements, each of which affords only limited protection. We have no patents on our proprietary technology and, accordingly, have no way to exclude others from practicing inventions relating to similar technologies, unless wrongfully misappropriated from us in violation of trade secret law or any non-disclosure agreements. Any inability to protect our intellectual property rights could harm our ability to compete effectively, which would reduce our revenue. Such harm includes but is not limited to the following:

• without any patents of our own to counter assert, there is a greater risk that current and future competitors who may have patented similar technologies that cover our products and services would seek damages and a prohibition on the use and sale of such products and services;

• our trademarks may not be protected in those jurisdictions in which such trademarks have not been registered, and in such jurisdictions others may be able to use confusingly similar marks or prevent our use of such trademarks; and

• current and future competitors may independently develop similar technologies or duplicate our solutions.

Despite the measures taken by us, it may be possible for a third party to copy or otherwise obtain and use our proprietary technology and information without authorization. Policing unauthorized use of our solutions is difficult, and litigation could become necessary in the future to enforce our intellectual property rights. Any litigation could be time consuming and expensive to prosecute or resolve and could result in substantial diversion of management attention and resources.

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We use open source software in the software underlying our solutions that may subject our software to general release or require us to re-engineer such solutions, which could reduce our revenue or increase our operating costs.

We use open source software in the software underlying our solutions and plan to use more open source software in the future. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that open source software infringes the claimants' intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights resulting from our use of open source software in accordance with the terms of the license under which we received such open source software. Use and distribution of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use, modification and distribution. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software and license such proprietary software under the terms of the open source license for free or for a nominal fee. Open source license terms may be ambiguous and many of the risks associated with usage of open source software cannot be eliminated and could, if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source software or failed to comply with the terms of the open source licenses, in addition to the potential that we license modifications or derivative works we create under open source license terms, we may be subject to suits by licensors claiming infringement of intellectual property rights related to such open source software and required to re-engineer our software underlying our solution, discontinue the sale of our solutions in the event re-engineering cannot be accomplished on a timely basis, take other remedial action that may divert resources away from our development efforts or be subject to an injunction or damage award or settlement, any of which could reduce our revenue or increase our operating costs.

If we are not able to integrate StrategicOne, Baigent or any future acquisitions successfully, our operating results and prospects could be harmed.

 In January 2011, we acquired substantially all of the assets of StrategicOne and have integrated most of their operations. In July 2011, we acquired all of the outstanding share capital of Baigent. In the future we may pursue additional acquisitions of businesses to complement our existing business. We cannot assure you that our acquisition of StrategicOne, Baigent or that any acquisition we make in the future, will provide us with the benefits we anticipated in entering into the transaction. Our acquisitions of StrategicOne and Baigent are, and any acquisitions we do in the future will be, accompanied by a number of risks, including:

• difficulties in retaining key employees and clients and in integrating the operations and personnel of the acquired companies;

• difficulties in maintaining acceptable standards, controls, procedures and policies;

• potential disruption of ongoing business and distraction of management;

• inability to maintain relationships with clients of the acquired business;

• impairment of relationships with employees and clients as a result of any integration of new management and other personnel;

• difficulties in incorporating acquired technology and rights into our products and services;

• unexpected expenses resulting from the acquisition;

• potential intellectual property or other litigation if we do not consummate an acquisition;

• potential unknown liabilities associated with acquired businesses; and

• additional legal, regulatory or other compliance requirements applicable to the acquired businesses.

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        In addition, acquisitions may result in the incurrence of debt, restructuring charges and write-offs, such as write-offs of acquired in-process research and development. We also may not be able to recognize as revenue the deferred revenue of an acquired company. Acquisitions may result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges. Furthermore, if we finance future acquisitions by issuing convertible debt or equity securities our existing stockholders may be diluted and earnings per share may decrease. To the extent we finance future acquisitions with debt, such debt could include financial or operational covenants that restrict our business operations.

        We may enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If we fail to evaluate and execute acquisitions successfully, we may not be able to realize the benefits of these acquisitions, and our operating results could be harmed.

We have established our first international subsidiary, which subjects us to additional business risks including increased logistical and financial complexity and currency fluctuations.

As a result of our acquisition of Baigent in the United Kingdom, we have established our first international subsidiary and entered our first international market. We may not be able to maintain or increase market demand for Baigent's products. Baigent's operations are subject to a number of risks, including:

• increased complexity and costs of managing international operations and related tax obligations;

• multiple, conflicting and changing tax and other laws and regulations that may impact both our international and domestic tax and other liabilities and result in increased complexity and costs;

• the risk that we are unsuccessful selling our products and services in the United Kingdom;

• the risk that we are unable to successfully use Baigent's experience and reputation to accelerate entry into the United Kingdom market;

• the risk that our acquisition of Baigent will cause disruptions in Baigent's or our business or customer relationships;

• regulatory, foreign exchange and other risks associated with entry into the United Kingdom market;

• risks associated with modifying our products and services for sale and delivery in foreign jurisdictions;

• the risk of litigation or other claims by public or private entities or persons related to the acquisition generally or related to the products, services, personnel or operations of the combined company;

• the risk related to competitive responses to the acquisition;

• the risk that we are unable able to protect our or Baigent's intellectual property rights in the United Kingdom or elsewhere;

• the risks related to our and Baigent's reliance on third parties for products and provision of services;

• the need to have business and operations systems that can meet the needs of our international business and operating structure;

• risks associated with maintaining the security of client and donor data obtained through international accounts;

• risks associated with unfamiliar and more restrictive laws and regulations, including those governing Internet activities, email messaging, collection and use of personal information, solicitations of charitable contributions and other activities important to our business; and

• risks associated with supporting an international client base primarily using USA based infrastructure, including the risk of interrupted or slow connectivity between international clients and USA based servers.

To date, all of our sales to customers have been denominated in U.S. dollars. Historically, Baigent has denominated and we expect it to continue to denominate all of its costs and expenses in pounds sterling. As a result, we will incur risk associated with fluctuations in the exchange rate between U.S. dollars and pounds sterling.

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If we continue to expand our international operations, our expansion may subject us to risks that may increase our operating costs.

        An element of our growth strategy is to continue to expand our international operations beyond the United Kingdom and develop a worldwide client base. To date, we have not realized a material portion of our revenue from clients outside the United States. However, beginning with our acquisition of Baigent in July 2011, we anticipate that the portion of our revenue generated from clients outside the United States will grow. Operating in additional international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States and the United Kingdom. Because of our limited experience with international operations, we cannot assure you that our international expansion efforts will be successful. In addition, we will face risks in doing business internationally that could increase our operating costs, including:

• economic conditions in various parts of the world;

• unexpected and more restrictive laws and regulations, including those laws governing Internet activities, email messaging, collection and use of personal information, ownership of intellectual property, solicitation of charitable contributions and other activities important to our online business practices;

• new and different sources of competition;

• multiple, conflicting and changing tax laws and regulations that may affect both our international and domestic tax liabilities and result in increased complexity and costs;

• if we were to establish international offices, the difficulty of managing and staffing such international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

• the need to make capital expenditures in foreign jurisdictions;

• difficulties in enforcing contracts and collecting accounts receivable, especially in developing countries;

• if contracts become denominated in local currency, fluctuations in exchange rates; and

• tariffs and trade barriers, import/export controls and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets.

        If we decide to further expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks associated with future international operations. Our failure to manage any of these risks successfully could increase our operating costs.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy.

We intend to continue to make investments to support our growth and believe that our existing cash and cash equivalents and our cash flow from future operating activities will be sufficient to meet our anticipated cash needs for the next twelve months. We may, however, require additional capital from equity or debt financings in the future to fund our operations or respond to competitive pressures or strategic opportunities. In addition, we may require additional financing to fund the purchase price of future acquisitions. Additional financing may not be available on terms favorable to us, or at all. Any additional capital raised through the sale of equity or convertible debt securities may dilute your percentage ownership of our common stock. Furthermore, any new debt or equity securities we issue could have rights, preferences and privileges superior to our common stock. Capital raised through debt financings could require us to make periodic interest payments and could impose potentially restrictive covenants on the conduct of our business. If we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

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We incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives, which will increase our operating costs.

As a public company, we incur legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Listing Rules, impose additional requirements on public companies, including requiring changes in corporate governance practices. For example, the listing requirements of the NASDAQ Global Market require that we satisfy certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of conduct. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial additional costs to maintain the same or similar coverage. These rules and regulations also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Risks Relating to Ownership of Our Common Stock

Our stock price is volatile, and the value of an investment in our common stock may decline.

An active public market for our shares may not continue to develop or be sustained. Shares of our common stock were sold in our initial public offering on April 29, 2010 at a price of $9.00 per share, and our common stock has subsequently traded as high as $13.00 and as low as $6.90. The trading price of our common stock could be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Factors affecting the trading price of our common stock include:

• the pending merger with Blackbaud;

• variations in our quarterly and annual operating results;

• announcements of technological innovations, new products, services or enhancements, strategic alliances or agreements by us or by our competitors;

• the gain or loss of clients;

• recruitment or departure of key personnel;

• changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;

• sales of common stock or other securities by us in the future;

• market conditions in our industry, the industries of our clients and the economy as a whole; and

• adoption or modification of regulations, policies, procedures or programs applicable to our business.

In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our common stock. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert management's attention and resources.

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Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. As of February 29, 2012, we had outstanding 18,911,875 shares of common stock. In addition, as of February 29, 2012, 10,589 shares subject to our remaining outstanding warrants, 2,072,547 shares that are subject to outstanding options, 745,591 shares subject to outstanding restricted stock units and 596,922 shares reserved for future issuance under our equity plans, were eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Some of our existing stockholders have contractual demand or piggyback rights to require us to register with the SEC up to 5,336,038 shares of our common stock. If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public market.

We have filed a Registration Statement on Form S-8 with the SEC to register 4,175,859 shares of our common stock that we have issued or may issue under our equity plans. These shares can be freely sold in the public market upon issuance.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change of control of our company and may affect the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, which apply to us, may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our restated certificate of incorporation and bylaws:

• authorize the issuance of "blank check" preferred stock that could be issued by our board of directors to thwart a takeover attempt;

• establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

• require that directors only be removed from office for cause and only upon a supermajority stockholder vote;

• require that a supermajority vote be obtained to amend or repeal certain provisions of our certificate of incorporation;

• require that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders;

• provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;

• prevent stockholders from calling special meetings; and

• prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.

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Our management will continue to have broad discretion over the use of the proceeds raised in our recent initial public offering and might not apply the proceeds in ways that may enhance our operating results or the price of our common stock.

        Our management will continue to have broad discretion over the use of proceeds from our recent initial public offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of the initial public offering in ways that increase the value of your investment. On May 12, 2010, we used $1.9 million of the net proceeds from the initial public offering to retire all the outstanding debt under the revolving line of credit and the term loan with Comerica Bank. On January 28, 2011, we used approximately $4.9 million of the net proceeds from the initial public offering to acquire StrategicOne. On July 1, 2011, we used approximately $2.9 million of the net proceeds from the initial public offering to acquire Baigent. We anticipate that we will use the remaining net proceeds from the initial public offering for general corporate purposes. We may use a portion of the proceeds to expand our business through acquisitions or investigations in other complimentary businesses, particularly those with similar clients and adjacent products or technologies, however, we have no agreements or commitments with respect to any acquisitions at this time. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how the net proceeds of the initial public offering are used.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

We lease office space for our corporate headquarters located in Austin, Texas. This lease expires in September 2023. We also lease additional office space in the San Francisco Bay Area of California and Washington, D.C. With the acquisition of StrategicOne, we acquired leases for small offices in Overland Park, Kansas and Lincoln, Nebraska. With the acquisition of Baigent, we acquired leases for two small offices in the UK. We believe our facilities are adequate for our current needs but we may add new facilities or expand our existing facilities as we add employees. We believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.

Item 3.    Legal Proceedings

As of the date of filing of this annual report on Form 10-K, we were not party to any active legal proceedings responsive to this item. In the ordinary course of the Company's business, the Company from time to time becomes involved in legal proceedings, claims and litigation. The outcomes of these matters are inherently unpredictable. The Company periodically assesses its liabilities and contingencies in connection with these matters, based upon the latest information available. Should it be probable that the Company has incurred a loss and the loss, or range of loss, can be reasonably estimated, the Company will record reserves in the unaudited condensed consolidated financial statements. In other instances, because of the uncertainties related to the probable outcome and/or amount or range of loss, the Company is unable to make a reasonable estimate of a liability, and therefore no reserve will be recorded. As additional information becomes available, the Company will adjust its assessment and estimates of such liabilities accordingly. Further, as the costs and outcomes of these types of matters can vary significantly, including with respect to whether they ultimately result in litigation, the Company believes its past experiences are not sufficient to provide any additional visibility or predictability to reasonably estimate the additional loss or range of loss that may result, if any. Based on the foregoing, the Company believes that an estimate of an additional loss or range of loss cannot be made at this time for contingencies for which there is a reasonable possibility that a loss may have been incurred. It is possible that the ultimate resolution of the Company's liabilities and contingencies could be at amounts that are different from any recorded reserves and that such differences could be material.

Item 4.    Mine Safety Disclosures

Not applicable.

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Part II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders

Our common stock has been listed on the NASDAQ National Market ("NASDAQ") under the symbol "CNVO" since April 28, 2010. Prior to that date, there was no public trading market for our common stock. Our initial public offering ("IPO") was priced at $9.00 per share on April 28, 2010. The table below shows the high and low per-share sales prices of our common stock for the periods indicated, as reported by NASDAQ.

	Sales Price Per Share in 2011
	High		Low
Fourth Quarter	$	11.23	$	8.01
Third Quarter	11.57		8.06
Second Quarter	13.00		10.35
First Quarter	12.16		8.03

	Sales Price Per Share in 2010
	High		Low
Fourth Quarter	$	9.84	$	7.01
Third Quarter	9.57		7.00
Second Quarter (beginning April 29, 2010)	10.99		6.90

On March 6, 2012, the last reported sales price of our common stock on the NASDAQ was $15.63 per share and, as of February 29, 2012, there were 81 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, this number is not representative of the total number of stockholders represented by these stockholders of record.

Dividend Policy

We have never declared or paid any cash dividends on our common stock and we do not intend to pay cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund the operation and expansion of our business.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

(a)   Recent Sales of Unregistered Securities

On January 28, 2012, we issued 16,666 shares of our common stock to the former members of StrategicOne, LLC pursuant to an earnout provision in the Asset Purchase Agreement we entered into with them. The issuances of these securities was determined to be exempt from registration under Section 4(2) of the Securities Act or Regulation D thereunder as transactions by an issuer not involving a public offering. The recipients of such shares represented their intention to acquire the securities for investment only and not with a view to or for resale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. The issuance of these securities were made without general solicitation or advertising.

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(b)   Use of Proceeds from Public Offerings of Common Stock

On April 28, 2010, our registration statement on Form S-1 (File No. 333-164491) was declared effective for our initial public offering. There has been no material change in the planned use of proceeds from our initial public offering as described in our Prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on April 29, 2010. On May 12, 2010, we used $1.9 million of the net proceeds from the initial public offering to retire all the outstanding debt under a revolving line of credit and the term loan with Comerica Bank. On January 28, 2011, we used approximately $4.9 million of the net proceeds from the initial public offering to acquire StrategicOne. On July 1, 2011, we used approximately $2.9 million of the net proceeds from the initial public offering to acquire Baigent. We anticipate that we will use the remaining net proceeds from the initial public offering for general corporate purposes. We may also use a portion of the proceeds to expand our current business through acquisitions or investments in other complementary businesses, particularly those with similar clients and adjacent products or technologies. The amount and timing of what we actually spend may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations as well as the other factors described in the section titled "Risk Factors." Pending the use of the net proceeds from the initial public offering described above, we invested the funds in a registered money market account and in marketable securities.

Securities Authorized for Issuance Under Equity Compensation Plans

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	2,373,852	$	5.03	159,684
Equity compensation plans not approved by security holders	—	—		—
Total	2,373,852	$	5.03	159,684

(1) As of December 31, 2011, we had 460,693 outstanding restricted stock units to be issued upon vesting with a weighted average fair value of $10.43 per share.

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Stock Performance Graph

_______________________________________________________________________________

* $100 invested on 4/29/10 in stock and 4/30/10 in index, including reinvestment of dividends. Fiscal year ending December 31.

Issuer Purchases of Equity Securities

None.

Item 6.    Selected Financial Data

We have derived the following consolidated statements of operations data for 2011, 2010 and 2009 and consolidated balance sheet data as of December 31, 2011 and 2010 from our audited consolidated financial statements contained in this Annual Report on Form 10-K. We have derived the following consolidated statements of operations data for 2008 and 2007 and consolidated balance sheet data as of December 31, 2009, 2008 and 2007 from our audited consolidated financial statements not included in this Annual Report. You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and related notes thereto and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our historical results are not necessarily indicative of our results to be expected in any future period.

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	Year Ended December 31,
	2011			2010			2009			2008			2007
	(in thousands, except per share amounts)
Statements of Operations Data:
Revenue:
Subscription	$	48,934		$	46,203		$	44,013		$	40,514		$	30,955
Services	17,262			12,150			10,887			9,589			7,799
Usage	14,157			11,391			8,186			6,877			4,329
Total revenue	80,353			69,744			63,086			56,980			43,083
Cost of revenue:
Cost of subscription and usage (1)(3)	13,525			12,376			12,152			10,980			9,122
Cost of services (2)(3)(4)	17,622			13,165			12,627			11,931			9,594
Total cost of revenue	31,147			25,541			24,779			22,911			18,716
Gross profit	49,206			44,203			38,307			34,069			24,367
Operating expenses:
Sales and marketing (3)	25,413			22,468			21,556			21,432			19,428
Research and development (3)	10,744			10,552			10,041			8,754			7,189
General and administrative (3)	9,287			6,552			6,034			5,883			4,456
Amortization of other intangibles	971			857			1,400			1,452			1,271
Write off of deferred stock offering costs	—			—			—			1,524			—
Restructuring expenses	—			—			—			—			284
Total operating expenses	46,415			40,429			39,031			39,045			32,628
Income (loss) from operations	2,791			3,774			(724		)	(4,976		)	(8,261		)
Interest income	96			61			6			115			279
Interest expense	—			(126		)	(355		)	(691		)	(883		)
Other income (expense)	(4		)	45			(803		)	1,808			(1,644		)
Income (loss) before income taxes	2,883			3,754			(1,876		)	(3,744		)	(10,509		)
Provision (benefit) for income taxes (5)	(11,980		)	299			219			—			—
Net income (loss)	$	14,863		$	3,455		$	(2,095	)	$	(3,744	)	$	(10,509	)
Net income (loss) attributable to common stockholders:
Basic	$	14,863		$	3,048		$	(2,095	)	$	(3,744	)	$	(10,509	)
Diluted	$	14,863		$	3,455		$	(2,095	)	$	(3,744	)	$	(10,509	)
Net income (loss) per share attributable to common stockholders:
Basic	$	0.82		$	0.22		$	(0.29	)	$	(0.52	)	$	(1.69	)
Diluted	$	0.76		$	0.20		$	(0.29	)	$	(0.52	)	$	(1.69	)
Weighted average shares used in computing net income (loss) per share attributable to common stockholders:
Basic	18,151			14,155			7,313			7,257			6,257
Diluted	19,513			17,517			7,313			7,257			6,257

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	Year Ended December 31,
	2011		2010		2009		2008		2007
	(in thousands, except per share amounts)
Other Operating Data:
Adjusted EBITDA (6)(unaudited)	$	11,266	$	9,228	$	6,581	$	1,405	$	(3,378	)
Net cash provided by (used in) operating activities	8,485		9,122		6,791		2,862		(1,225		)

The amounts shown above in the consolidated statements of operations data include amortization of acquired technology and stock-based compensation as follows:

			Year Ended December 31,
			2011		2010		2009		2008		2007
			(in thousands)
(1	)	Amortization of intellectual property and acquired technology:
		Cost of subscription and usage	$	630	$	127	$	1,016	$	1,016	$	887
(2	)	Compensation expense related to earnout provisions of business acquisitions:
		Cost of services	$	305	$	—	$	—	$	—	$	—
(3	)	Stock-based compensation:
		Cost of subscription and usage	$	195	$	162	$	111	$	95	$	50
		Cost of services	544		307		472		288		114
		Sales and marketing	898		659		742		585		300
		Research and development	409		357		343		235		85
		General and administrative	983		563		834		353		142
(4	)	Services margins improved during 2011 as we adopted ASU 2009-13 effective January 1, 2011 which more effectively matches services revenue to the associated services expense.  We expect services margins to continue to improve go forward as we recognize more of our services revenue under the new method of accounting.
(5	)	As of December 31, 2011, the Company believes the objective and verifiable positive evidence of its historical pretax net income, coupled with sustained taxable income and projected future earnings outweighs the negative evidence of its previous year losses and the Company determined that it was more likely than not that the Company would realize the benefits associated with its deferred tax assets. As a result, no valuation allowance was recorded against the Company's deferred tax assets and the valuation allowance was thereby decreased by approximately $13.4 million.
(6	)	We define Adjusted EBITDA as net income (loss) less interest income and gain (loss) on preferred stock warrant revaluation plus interest expense, provision for taxes, depreciation expense, amortization expense, stock-based compensation expense and acquisition related transaction costs. See further discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Financial Measures" below.

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	As of December 31,
	2011		2010		2009			2008			2007
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	14,035	$	18,447	$	16,662		$	13,828		$	14,600
Restricted cash	2,329		1,248		—			—			—
Marketable securities	37,857		36,774		—			—			—
Working capital	44,870		44,184		2,379			(1,260		)	322
Total assets	101,219		80,411		41,344			40,873			44,156
Preferred stock warrant liability	—		—		1,375			562			2,366
Long-term obligations, net of current portion	—		—		1,348			1,205			3,384
Convertible preferred stock	—		—		33,869			33,869			33,869
Total stockholders' equity (deficit)	78,272		58,414		(18,909		)	(19,357		)	(17,337		)

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading provider of on-demand constituent engagement solutions that enable nonprofit organizations, or NPOs, to more effectively raise funds, advocate for change and cultivate relationships with donors, activists, volunteers, alumni and other constituents. We serve more than 1,600 NPOs globally of all sizes; including 51 of the top 100 largest charities as ranked by contributions in the November 2011 Forbes article, "The 200 Largest U.S. Charities." During 2011, our clients used our solutions to raise over $1.3 billion online and deliver almost 5 billion emails to over 150 million email addresses to accomplish their missions. Our average deliverability rate for email was greater than 95%. In addition, nonprofit organizations used Convio advocacy applications to power almost 70 million advocacy actions to the United States Congress, State and Local elected officials, as well as other targets of cause-related campaigns.

We were incorporated in Delaware in October 1999, and we offered our first commercially available online marketing solution in 2000. We acquired GetActive Software, Inc. ("GetActive") in February 2007. On April 28, 2010, we completed an initial public offering of shares of our common stock and those shares are listed on the NASDAQ Global Market under the symbol CNVO. Our executive offices are located at 11501 Domain Drive, Suite 200, Austin, Texas 78758, and our telephone number is (512) 652-2600.

        On January 28, 2011, we acquired StrategicOne, LLC, a privately-owned company, to strengthen our offerings to large, enterprise-size nonprofits by adding the experience and expertise of a proven provider of data analytics, predictive modeling and other database marketing services to the company. StrategicOne helps nonprofits discover, analyze and act on information to more effectively attract new constituents, retain existing donors, reactivate lapsed supporters and steward each relationship to a higher level of engagement.

On July 1, 2011, we acquired Baigent Limited ("Baigent"), a privately owned company located in the United Kingdom ("UK"), to enter the international marketplace by adding the experience and expertise of a leading provider of digital strategy, design, technology implementation and online fundraising solutions to charities in the UK.

Merger Agreement with Blackbaud, Inc.

On January 16, 2012, Convio entered into the Merger Agreement with Blackbaud and the Merger Sub, for the acquisition of Convio by Blackbaud. Pursuant to the terms of the Merger Agreement, Blackbaud (through Merger Sub) will make a cash tender offer for all of the issued and outstanding shares of Convio's common stock at a per share purchase price of $16.00, for aggregate consideration of approximately $275 million.

As promptly as practicable following the consummation of the tender offer, Merger Sub will merge with and into Convio and Convio will become a wholly-owned subsidiary of Blackbaud. In the Merger, the remaining stockholders of the Company, other than stockholders who have validly exercised their appraisal rights under the Delaware General Corporation Law, will be entitled to receive the $16.00 per share of common stock. Upon completion of the Merger, all outstanding vested options to purchase Convio's common stock shall be converted into the right to receive cash equal to the spread and unvested options and restricted stock units shall be assumed by Blackbaud.

The Merger Agreement includes customary representations, warranties and covenants of Blackbaud, Merger Sub and Convio. Blackbaud and Merger Sub have made various representations and warranties and agreed to specified covenants in the Merger Agreement regarding, among other things, Blackabaud's efforts to secure and maintain any necessary third party financing. Convio has made various representations and warranties and agreed to specified covenants in the Merger Agreement, including covenants relating to Convio's conduct of its business between the date of the Merger Agreement and the closing of the Merger, restrictions on solicitation of proposals with respect to alternative transactions, public disclosures and other matters. The Merger Agreement contains certain termination rights for both Blackbaud and Convio, and further provides that, upon termination of the Merger Agreement under specified circumstances, including a termination by Convio pursuant to an unsolicited superior proposal, Convio is required to pay Blackbaud a termination fee of $11.0 million plus all reasonable, documented out-of-pocket expenses of up to $1.5 million. The Merger Agreement also provides that in the event of termination in certain circumstances because of or if there exists any antitrust action, any antitrust consent has not been obtained or any antitrust order has not been vacated, filed, reversed or overturned, then, subject to certain conditions in the Merger Agreement, Blackbaud is required to pay Convio a termination fee of $11.0 million plus all reasonable, documented out-of-pocket expenses of up to $1.5 million.

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Convio's Board of Directors has approved the Merger Agreement and unanimously recommends that its stockholders accept the tender offer.

The consummation of the tender offer and the Merger is subject to customary closing conditions. Additionally, the waiting periods applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other applicable antitrust laws must have expired and all antitrust consents must have been obtained prior to closing. Depending on the number of shares held by Blackbaud after its acceptance of the shares properly tendered in connection with the tender offer, approval of the Merger by the holders of Convio's outstanding shares remaining after the completion of the tender offer may be required.

The foregoing description of the Merger Agreement is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is filed as Exhibit 2.3 hereto as is incorporated herein by reference.

Our Solutions

Our integrated solutions have historically included our Convio Online Marketing platform ("COM") and Convio Common Ground, our constituent relationship management application, both of which are designed to help NPOs maximize the value of every relationship.

In July of 2011, we rebranded COM as Luminate Online and also launched a new suite of solutions called Convio Luminate targeted at large, enterprise NPOs. As a result of this market launch, we now offer two open, cloud-based constituent engagement solutions for NPOs of all sizes:

Convio Luminate ("Luminate") offers an open, extensible solution that allows large, enterprise NPOs to fully engage with individuals online and offline, as well as analyze the relationships they have with donors, volunteers, advocates and other supporters to design tailored, integrated, multichannel campaigns and interactions that are beneficial to both the NPO and the individual constituent.

Luminate combines our leading online fundraising suite, Luminate Online, with Luminate CRM - built on the Force.com cloud computing application platform from Salesforce.com - analytics technologies and our expertise to meet the complex needs of large, enterprise NPOs. Luminate can be sold as a single integrated solution encompassing both the Luminate Online suite and the Luminate CRM suite, or the Online and CRM suites can be sold separately. Luminate CRM clients need to enter into a license agreement with us and separately enter into a license agreement with salesforce.com for use of its solution.

Convio Common Ground ("Common Ground") provides small and mid-sized NPOs with a simple, easy to use, complete and affordable solution that combines a powerful database for donors, volunteers and other constituents with online fundraising, marketing and volunteer management modules so that NPO professionals can manage all their fundraising and constituent engagement operations from one solution. We utilize the Force.com cloud computing application platform from salesforce.com to develop, package and deploy Common Ground.

Our Luminate and Common Ground solutions are built on an open, configurable and flexible architecture that enables our clients and partners to customize and extend its functionality. All of our software is delivered through the Software as a Service (SaaS) or cloud computing model. We believe cloud computing is the most cost-effective, efficient and scalable way for nonprofits to use and manage technology to maximize the value of constituent relationships. Our solutions are enhanced by a portfolio of value-added services tailored to our clients' specific needs, as well as a network of technology and services partners that enhance our solutions.

Our Business Approach

We sell our solutions through a direct sales force complemented by our partner network. Our sales force focuses on acquiring large enterprise NPOs, acquiring mid-market NPOs and expanding our footprint within existing clients.

We currently derive the substantial majority of our revenue from subscriptions to our Luminate Online (formerly COM) solution. In July of 2011, we rebranded our COM offering as Luminate Online as part of a new constituent engagement solution for large, enterprise NPOs called Luminate. Luminate can be sold as a single integrated solution encompassing both the Luminate Online suite and the Luminate CRM suite, or the Online and CRM suites can be sold separately. Pricing for our Luminate solution is based on the number of modules licensed, the constituent record file size and any related services. We also recognize usage revenue from our clients as a percentage of funds raised at special events, such as runs, walks and rides, and based on additional fees for their increased use of our Online solution.

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Pricing for Common Ground is generally based on the modules purchased and the number of seats licensed. We typically do not derive revenue from deployment services for Common Ground as deployment activities are generally handled by third-party implementation providers. Common Ground is built on salesforce.com's Force.com platform. Common Ground clients enter into a license agreement with us and separately enter into a license agreement with salesforce.com for use of its solution.

We believe the nonprofit market for on-demand constituent engagement solutions is large and under-served, and we plan to continue to invest in our business to pursue this opportunity. In particular, we expect to incur significant sales and marketing expenses to increase the number of clients on both of our constituent engagement solutions, Luminate and Common Ground. We also expect to make substantial investments in research and development, primarily on new features, internationalization and platform extensibility for both of our solutions. We anticipate increased operating expenses as we seek to grow our business domestically and outside of the United States. We expect the percentage of revenue generated from clients outside the United States to increase.

Opportunities, Trends and Uncertainties

We have noted several opportunities, trends and uncertainties that we believe are significant to an understanding of our financial results:

• Effects of Merger. On January 16, 2012, we entered into the Merger Agreement and announced the Merger.  The Merger Agreement is an executory contract subject to numerous closing conditions beyond our control including, but not limited to, approval by the United States Federal Trade Commission and Department of Justice, whose review of the transaction has required the tender offer to be extended and the closing to be delayed. There is no guarantee that these conditions will be satisfied in a timely manner or at all.  The announcement and pendency of the Merger may have a negative impact on our business, financial results and operations or disrupt our business by, among other things: intensifying competition as our competitors may seek opportunities related to our pending Merger; affecting our relationships with our customers, distributors, suppliers and employees; affecting the purchasing decisions of existing and prospective customers, which could cause them to delay purchasing decisions or to seek alternative suppliers, resulting in a reduction in sales and increased churn; limiting certain of our business operations prior to completion of the Merger which may prevent us from pursuing certain opportunities without Blackbaud's approval; causing us to forego certain opportunities we might otherwise pursue absent the Merger Agreement; impairing our ability to attract, recruit, retain, and motivate current and prospective employees who may be uncertain about their future roles and relationships with Blackbaud following the completion of the Merger; and, creating distractions from our strategy and day-to-day operations for our employees and management and creating a strain on resources.  Certain costs associated with the Merger are already incurred or may be payable even if the Merger is not completed.  During the pendency of the Merger, we may deem it necessary to offer concessions to existing and new customers in order to win or retain business or to incur other unplanned costs in order to maintain our business reputation and retain our employees.  Further, a failed transaction may result in negative publicity and a negative impression of us in the business and investment community. If the proposed Merger or a similar transaction is not completed, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee and related costs of Blackbaud of up to approximately $12.5 million. Finally, any disruptions to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers, vendors and employees or recruiting and retention efforts, could continue or accelerate in the event of a failed transaction.  If the proposed Merger or a similar transaction is not completed, we would incur significant unplanned costs in order to address the negative impacts on our business, including to restore our business reputation with customers, employees and investors.  There can be no assurance that we could be successful in restoring our business reputation and financial condition to where it would be had the Merger not been announced.

• Growth and investment in Luminate. We introduced the complete Luminate solution in July of 2011, targeted primarily at large enterprise NPOs. We intend to continue to invest significantly in Luminate research and development and sales and marketing. However, the complete Luminate solution is new and it is difficult for us to predict whether NPOs will adopt this solution or what impact it will have on our business. In addition, as we invest in significant upgrades or enhancements to our products to support Luminate, we may incur additional costs to develop internal use software that are capitalized under the applicable accounting guidance. Our capitalization of software development costs in future periods could cause our financial results to fluctuate and be more difficult to predict.

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• Seasonality and fluctuations in usage and services revenue. A significant portion of our usage revenue has historically been derived from funds raised by our Luminate Online (formerly COM) clients at special events. The growth and amount of usage revenue vary based on the number of events, the percent of funds raised online for these events, the growth and success of events and our signing of new clients for events. We recognize the usage revenue from these events when the usage amounts are determined, reported and billed to the client. Usage revenue is seasonal as events are typically held in the spring and fall. As a result, our usage revenue will be higher during the second and third quarters. In addition, period-over-period comparisons may be impacted significantly by the change in timing of events, by the addition or loss of any events of our enterprise clients or the loss of an enterprise client. Additionally, our services revenue is dependent upon the level of services required by our clients, the pricing of those services and the capacity of our services organization to deliver those services in any given period.  The level of services required varies significantly by client and is dependent upon, among other things, the solutions utilized by the client, the client's availability of internal resources to implement and utilize the solutions and the client's ability to pay for the services.  The capacity of our services organization may cause the amount of revenue recognized in any given period to fluctuate due to, among other things, our ability to effectively schedule resources to meet client demands, turnover in our services organization, the time it takes to train new resources to deliver the services and staff availability and utilization rates. As a result, services revenue may fluctuate significantly from quarter to quarter.

• Sales commissions expensed upon sale. We expense sales commissions in the period in which we sign our agreements, but we generally recognize the related revenue over the terms of those agreements. We may report poor operating results due to higher sales commissions in a period in which we experience strong sales of our solutions, particularly sales to enterprise clients. Alternatively, we may report better operating results due to lower sales commissions in a period in which we experience a slowdown in sales. As a result, our sales and marketing expenses are difficult to predict and fluctuate as a percentage of revenue.

• Churn. Our management uses churn to monitor the satisfaction of our clients, to evaluate the effectiveness of our business strategies and as a factor in executive compensation. We define churn as the amount of any lost software monthly recurring revenue and usage revenue in a period, divided by our software monthly recurring revenue at the beginning of the year plus our average usage revenue of the prior year. Our annual churn improved to 8.5% in 2011 from 9.5% in 2010. As previously reported, our 2010 churn was lower than our annual churn in 2009 despite the retirement of our GetActive platform in December 2010. However, our churn is variable and accordingly, churn is difficult to predict and can fluctuate significantly on a quarterly basis and will likely be significantly higher in any period in which we lose a large, enterprise client. Our use of churn has limitations as an analytical tool, and you should not consider it in isolation.

• International Expansion.  An element of our growth strategy is to continue to expand our international operations beyond the United Kingdom and develop a worldwide client base.  To date, we have not realized a material portion of our revenue from clients outside of the Unites States. However, beginning with our acquisition of Baigent in July 2011, we anticipate that the portion of our revenue generated from clients outside the United States will grow.  Operating in additional international markets involves increased complexity, requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the Unites States, including among others: unexpected and more restrictive laws and regulations; multiple, conflicting and changing tax laws; the increased cost and complexity of managing and staffing international locations; fluctuations in currency exchange rates; and difficulties with enforcing contracts and collecting receivables under foreign law.

Discussion of Financial Information

The following discussion of our financial information is based upon our results of operations for the periods presented.

Revenue

We derive revenue from sales of our solutions to clients and their usage of these solutions. Our subscription and services revenue is comprised of fees from clients licensing our on-demand software modules and purchasing our consulting and other professional services. Our usage revenue is derived from agreements in which we receive a percentage of funds raised in connection with special events and also from additional fees received for increased use of our Luminate solution.

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No single client accounted for more than 10% of our total revenue in 2011, 2010 or 2009. We derived approximately 23%, 19% and 22% of our total revenue from our top 10 clients in 2011, 2010 and 2009, respectively.

We adopted ASU 2009-13 effective January 1, 2011. The eventual impact of adopting this standard is to better match services revenue with associated services expense. In accordance with ASU 2009-13, we now report our revenue on three separate lines: subscription revenue, services revenue and usage revenue. Additionally, we report our cost of revenue on two separate lines: cost of subscription and usage and cost of services. The components of each of these line items are discussed below.

Subscription Revenue. We derive a substantial amount of our revenue from multi-year subscription agreements with clients for licenses of our on-demand solutions. The terms of our agreements are typically three years for Luminate and one to two years for Common Ground. For Luminate, we typically agree to fees based on the number of modules licensed and the constituent record file size. For Common Ground, we typically agree to fees based on the modules purchased and the number of seats licensed by the client. Subscription revenue is recognized ratably over the contract term beginning on the later of the activation date or the date the client begins paying for the subscription.

Services Revenue. We generate revenue from sales of our deployment, consulting and professional services and with the addition of the StrategicOne services, we also provide data analytics, predictive modeling and other database marketing services. When the Company provides fixed price service offerings, they are priced based on the average level of effort expected to complete the work and the current hourly rates charged on time and materials contracts.

Usage Revenue. We have agreements in which we charge a percentage of funds raised by clients from their special events such as runs, walks and rides. Usage revenue occasionally includes a percentage of funds raised online that are unrelated to special events. Usage revenue is determined when donations are made online and is recognized when reported and billed to the client, which is normally done on a monthly basis. In addition, we typically enter into subscription agreements that require payment of additional fees for usage of our Luminate solutions above the levels included in the subscription fee set forth in the agreement. These fees are recognized when the usage amounts are reported and billed to clients.

Cost of Revenue

Cost of subscription and usage. Cost of subscription and usage includes costs related to hosting our on-demand solutions. These costs consist of the salaries, incentive payments, bonuses and stock-based compensation of our information technology, client support and client education personnel and their related travel expenses. These costs also include third-party datacenter hosting fees, outside service provider costs, depreciation expense related to the hosting of our datacenters, amortization of costs capitalized for internal use software and allocated overhead. Note that the cost of client support and client education are included as a cost of subscription revenue as we do not typically charge separately for standard product support and training but rather offer those services as a standard part of our product offer.

In connection with our acquisition of GetActive, we recorded $3.0 million in acquired technology and we amortized this amount as a cost of subscription and usage revenue on a straight-line basis over three years ending in February 2010. During 2010, we completed the migration of our former GetActive clients to our Luminate Online (formerly COM) platform and we retired the GetActive platform in December 2010. In connection with our acquisition of StrategicOne LLC's net assets, we recorded $1.8 million in intellectual property and we are amortizing this amount as a cost of subscription and usage revenue on a straight-line basis over three years beginning in February 2011. In connection with our acquisition of Baigent, we recorded $550,000 in intellectual property and we are amortizing this amount on a straight-line basis over three years beginning in July 2011.

Cost of services. Cost of services includes costs related to providing our deployment, consulting and professional services, including the costs associated with the newly acquired StrategicOne and Baigent services. These costs consist of the salaries, incentive payments, bonuses and stock-based compensation of our deployment, consulting and professional services personnel and their related travel expenses as well as compensation expense related to the achievement of StrategicOne milestones. These costs also include third-party contractor fees, equipment costs and allocated overhead.

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Operating Expenses

Each operating expense category, including cost of revenue, reflects an overhead expense allocation. We allocate overhead such as rent, employee benefits, insurance and information technology costs and depreciation on equipment other than our equipment at our datacenters, to all departments based on relative headcount. We expect our aggregate overhead expense to increase in absolute dollars as we grow our business, increase headcount, occupy additional space and incur higher fees from employee benefit providers. Allocated overhead may also fluctuate in future periods if we are required to make payments under our self-insured benefit plans.

Sales and Marketing.    Sales and marketing expenses consist of salaries, commissions, incentive payments, bonuses and stock-based compensation of our sales, marketing, account management and business development personnel. These expenses also include travel expenses, marketing programs, client events, corporate communications, partner referral fees and allocated overhead.

We expense commissions in the period of a sale of our solutions. As we generally recognize revenue over the terms of our agreement, we incur commission expenses prior to recognizing the underlying revenue. As a result, our sales and marketing expenses have historically fluctuated as a percentage of revenue, and we expect such fluctuations to occur in the future.

We expect our sales and marketing expenses to increase in absolute dollars as we sell more solutions and incur related commissions, continue to hire additional personnel in these areas and increase the level of marketing activities to grow our business and brand. We believe that sales and marketing expenses as a percentage of revenue will generally decrease as our revenue base grows, sales and marketing personnel become more effective and usage revenue and revenue from renewals and upsells increase.

Research and Development.    Research and development expenses consist of salaries, incentive payments, bonuses and stock-based compensation of our software development and quality assurance personnel. We capitalize the costs to develop software for internal use (including the costs of developing our Luminate and Common Ground solutions) incurred during the application development stage as well as costs to develop significant upgrades or enhancements to existing internal use software. These costs are amortized to cost of subscription and usage on a straight-line basis over an estimated useful life of three years. Capitalized costs are recorded as part of property and equipment. Research and development costs that do not qualify for capitalization are expensed as they are incurred. We expect our research and development expenses to increase in absolute dollars and as a percentage of revenue as we continue to invest in new features, internationalization and platform extensibility for both our Luminate and Common Ground solutions.

General and Administrative Expenses.    General and administrative expenses consist of salaries, incentive payments, bonuses and stock-based compensation of our executive, finance and accounting, human resources and legal personnel. These expenses also include legal fees, audit and tax fees and other general corporate expenses in addition to expenses incurred in connection with acquisition related matters. We expect general and administrative expenses to increase as we continue to add personnel and incur additional expenses as we grow our business and comply with the requirements of operating as a public company.

Amortization of Other Intangibles.    Other intangible assets consist of intellectual property, customer relationships, trade names and agreements not to compete acquired in connection with the GetActive, StrategicOne and Baigent acquisitions. We are amortizing amounts allocated to acquired intangible assets on a straight-line basis over their estimated useful lives as follows:

	Estimated Useful Life
Customer relationships	3 to 9 years
Intellectual property	3 years
Trade names	6 months to 3 years
Agreements not to compete	3.5 to 4 years

The GetActive agreements not to compete were fully amortized in February 2009, and the GetActive trade names were fully amortized in February 2010. Baigent trade names were fully amortized in December 2011.

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Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions management believes to be reasonable under the circumstances. Management could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from those estimates. To the extent that such differences are material, our future financial statement presentation, financial condition, results of operations and cash flows may be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application, while in other cases, management's judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that our significant accounting policies, which are described in Note 2 to our audited financial statements, and the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee.

Revenue Recognition

We derive our revenue from subscriptions, services and usage. We recognize revenue under the applicable accounting guidance, as prescribed in ASC Topic 605. We provide our software as a service, and our subscription agreements do not provide clients the right to take possession of the software at any time. As an on-demand software provider, our arrangements do not contain general rights of return. We recognize revenue when all of the following conditions are met:

• there is persuasive evidence of an arrangement;

• the service has been provided to the client;

• the collection of the fees is reasonably assured; and

• the amount of fees to be paid by the client is fixed or determinable.

Prior to adoption of ASU 2009-13, Multiple-Deliverable Revenue Arrangements ("ASU 2009-13") on January 1, 2011, services, when sold with a subscription of our modules, did not qualify for separate accounting as we did not have objective and reliable evidence of fair value of the undelivered subscription service. Therefore, we recognized such services revenue from these multiple-element agreements ratably over the term of the related subscription agreement and allocated subscription revenue and services revenue based on the stated contract price. If elements were not separately priced in the contract then the entire amount was allocated to subscription revenue. We will continue to recognize revenue on all services sold together with a subscription entered into prior to January 1, 2011 ratably over the remaining subscription period.

As a result of adopting ASU 2009-13, we account for services as a separate unit of accounting from subscriptions when each is sold in one arrangement. In accordance with ASU 2009-13, we allocate revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence ("VSOE") of selling price, if available, third-party evidence ("TPE") of selling price, if VSOE is not available, or best estimated selling price ("BESP"), if neither VSOE nor TPE is available. We have been unable to establish VSOE or TPE for the elements included in our multiple-element sales arrangements. Therefore, we have established the BESP for each element primarily by considering the average price of actual sales of services sold on a standalone basis, renewal pricing of subscription services, the number of modules purchased or renewed and the expected usage by the client over their subscription term, as well as other factors, including but not limited to market factors, management's pricing practices and growth strategies. Revenue allocated to the subscription is recognized over the subscription term and revenue allocated to services is recognized as the services are delivered.

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The total arrangement fee for a multiple-element arrangement is allocated based on the relative BESP of each element. If the amount of the total arrangement consideration allocable to services under this method is greater than the fee stated in the contract for the delivery of such services, only the contractually-stated amount is recognized as revenue as the services are delivered to the client. The additional fees allocated to services above the amount stated in the contract are recognized ratably over the term of the subscription as that allocated fee becomes due.

When we sell services other than with the subscription of our modules, we consider the following factors to determine the proper accounting:

• availability of the services from other vendors;

• whether the services are priced at an amount commensurate with the effort required to deliver such services;

• the nature of the services;

• the timing of when the services agreement was signed in comparison to the subscription service start date; and

• the contractual dependence of the subscription service on the client's satisfaction with the services.

When we sell services other than with the subscription of our modules, we recognize revenue under time-and-material contracts as the services are rendered, and we recognize revenue from fixed price contracts using a proportional performance method.

Certain clients have agreements that provide for a percentage of donations received online through our modules to be paid to us in place of or in conjunction with the standard monthly subscription fee. In addition, certain clients have contracts which require payment of additional fees for usage above the levels included in their agreements. These additional fees are recognized as revenue when the usage amounts are determined and reported and billed to the client.

Marketable Securities

We follow authoritative guidance in determining the classification of and accounting for our marketable securities. Our marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss in stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of interest income based on the specific identification method. Fair value is determined based on quoted market prices or pricing models using current market rates.

We review our available-for-sale investments as of the end of each reporting period for other-than-temporary declines in fair value based on the specific identification method. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, our intent to sell or the likelihood that we would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When we conclude that an other-than-temporary impairment has occurred, we assess whether we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery. If either of these two conditions is met, we recognize a charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value. If we do not intend to sell a security or it is not more likely than not that we will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recorded in accumulated other comprehensive loss.

Allowance for Doubtful Accounts

Based on a review of the current status of our existing accounts receivable and historical collection experience, we have established an estimate of our allowance for doubtful accounts. We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based on a consideration of the aging of the accounts receivable balances, historical write-off experience, current economic conditions and client-specific information. For those invoices not specifically reviewed, provisions are provided based on our collection history and current economic trends. As a result, if our actual collections are lower than expected, additional allowances for doubtful accounts may be needed and our future results of operations and cash flows could be negatively affected. Write-offs of accounts receivable and recoveries were insignificant during each of 2011, 2010 and 2009. A 1% change in our allowance for doubtful accounts would not have a material effect on our consolidated financial statements.

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Valuation of Goodwill and Identifiable Intangible Assets

We apply ASC Topic 350 in accounting for the valuation of goodwill and identifiable intangible assets. In accordance with this guidance, we replaced the ratable amortization of goodwill and other indefinite-lived intangible assets with a periodic review and analysis for possible impairment. We assess our goodwill on October 1 of each year or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The events and circumstances that we consider include deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. Because we operate in a single reporting unit, we perform the impairment test at the consolidated entity level by comparing the estimated fair value of the company to the carrying value of the goodwill. Our goodwill impairment test requires the use of fair-value techniques which are inherently subjective.

We determine fair value using a combination of the income approach, which utilizes a discounted cash flow model, and the market value approach. Both of these approaches are developed from the perspective of a market participant. Under the income approach, we calculate the fair value of the company unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market multiples of revenue and earnings for comparable publicly-traded companies or comparable sales transactions of similar companies. The estimates and assumptions used in our calculations include revenue growth rates, expense growth rates, expected capital expenditures to determine projected cash flows, expected tax rates, and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity and our weighted average cost of capital.

Both of these approaches include inherent uncertainties. With the income approach there are uncertainties around our estimates of the future cash flows of our company; the most significant of which include our estimates of future revenue growth, operating expense growth, and projected cash flows from operations. In making these estimates, we have considered factors important to our business, including gross bookings, pricing, market penetration, competition, seasonality, and customer churn. With the market approach, uncertainties exist around future market valuations of comparable publicly-traded companies. Significant changes in these estimates or their related assumptions in the future for the income and market approaches could result in an impairment charge related to our goodwill.

In addition, we periodically review the carrying value and the estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life, using a two-step approach. The first step screens for impairment and, if impairment is indicated, we will employ a second step to measure the impairment. If we determine that an impairment has occurred, we will record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. Although we believe goodwill and intangible assets are appropriately stated in our consolidated financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance.

Stock-Based Compensation

We follow the provisions of the applicable guidance under ASC Topic 718 for share-based payment transactions. Under the provision of this guidance, stock-based compensation costs for employees is measured on the grant date, based on the estimated fair value of the award on that date, and is recognized as expense over the employee's requisite service period, which is generally over the vesting period, on a straight-line basis.

Under the provisions of this guidance, we make a number of estimates and assumptions. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as an adjustment in the period estimates are revised. Actual results may differ substantially from these estimates. In valuing share-based awards under this guidance, significant judgment is required in determining the expected volatility of our common stock and the expected term individuals will hold their share-based awards prior to exercising. Expected volatility of the stock is based on our peer group in the industry in which we do business because we do not have sufficient historical volatility data for our own stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding and is calculated based on historical information. In the future, as we gain historical data for volatility in our own stock and more data on the actual term employees hold our options, expected volatility and expected term may change which could substantially change the grant-date fair value of future awards of stock options and ultimately the expense we record.

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Provision for Income Taxes

We use the liability method of accounting for income taxes as set forth in the authoritative guidance for income taxes. Under this method, we recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the respective carrying amounts and tax bases of our assets and liabilities.

In accordance with the guidance on accounting for uncertainty in income taxes, we are required to identify, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of these positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities. Although we believe that our estimates and judgments are reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities.

We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. We evaluate the need for, and the adequacy of, valuation allowances based on the expected realization of our deferred tax assets. The factors used to assess the likelihood of realization include our recent operating results, our latest forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.

We accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2011 and 2010, there was no accrued interest or penalties.

Foreign Currency Translations

For our foreign subsidiaries denominated in currencies other than the United States dollar, which is our reporting currency, we translate assets and liabilities at exchange rates in effect at the balance sheet date and translate income and expense accounts at the average monthly exchange rates for the periods. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity. We also record gains and losses from currency transactions denominated in currencies other than the functional currency as other income (expense) in our consolidated statements of operations.

Use of Non-GAAP Financial Measures

We define Adjusted EBITDA as net income (loss) less interest income and gain (loss) on preferred stock warrant revaluation plus interest expense, provision for taxes, depreciation expense, amortization expense, stock-based compensation expense and acquisition related transaction costs. We have included Adjusted EBITDA in this Annual Report because (i) we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts and other interested parties in our industry as a measure of financial performance and (ii) our management uses Adjusted EBITDA to monitor the performance of our business.

We also believe Adjusted EBITDA facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures affecting interest income and expense, tax positions, such as the impact of changes in effective tax rates, the impact of depreciation and amortization expense and the impact of items not directly resulting from our core operations.

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Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;

• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

• Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

• Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

• Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

• other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:

	Year Ended December 31,
	2011			2010		2009
	(in thousands)
Reconciliation of Adjusted EBITDA to net income (loss):
Net income (loss)	$	14,863		$	3,455	$	(2,095	)
Interest (income) expense, net	(96		)	65		349
Depreciation and amortization	4,466			3,243		4,792
Stock-based compensation	3,029			2,048		2,502
Loss on warrant revaluation	—			15		814
Acquisition related transaction costs	984			103		—
Provision (benefit) for income taxes	(11,980		)	299		219
Adjusted EBITDA	$	11,266		$	9,228	$	6,581

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Results of Operations

The following table sets forth our results of operations for the periods indicated:

	Year Ended December 31,
	2011			2010			2009
	(in thousands)
Statements of Operations Data:
Revenue:
Subscription	$	48,934		$	46,203		$	44,013
Services	17,262			12,150			10,887
Usage	14,157			11,391			8,186
Total revenue	80,353			69,744			63,086
Cost of revenue:
Cost of subscription and usage	13,525			12,376			12,152
Cost of services	17,622			13,165			12,627
Total cost of revenue	31,147			25,541			24,779
Gross profit	49,206			44,203			38,307
Operating expenses:
Sales and marketing	25,413			22,468			21,556
Research and development	10,744			10,552			10,041
General and administrative	9,287			6,552			6,034
Amortization of other intangibles	971			857			1,400
Total operating expenses	46,415			40,429			39,031
Income (loss) from operations	2,791			3,774			(724		)
Interest income	96			61			6
Interest expense	—			(126		)	(355		)
Other income (expense)	(4		)	45			(803		)
Income (loss) before income taxes	2,883			3,754			(1,876		)
Provision (benefit) for income taxes	(11,980		)	299			219
Net income (loss)	$	14,863		$	3,455		$	(2,095	)
Other Operating Data:
Adjusted EBITDA(1)(unaudited)	$	11,266		$	9,228		$	6,581

(1) We define Adjusted EBITDA as net income (loss) less interest income and gain (loss) on preferred stock warrant revaluation plus interest expense, provision for taxes, depreciation expense, amortization expense, stock-based compensation expense and acquisition related transaction costs.

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The following table sets forth our results of operations expressed as a percentage of total revenue for each of the periods indicated:

	Year Ended December 31,
	2011		2010		2009
Statements of Operations Data:
Revenue:
Subscription	61	%	66	%	70	%
Services	21		18		17
Usage	18		16		13
Total revenue	100		100		100
Cost of revenue:
Cost of subscription and usage	17		18		19
Cost of services	22		19		20
Total cost of revenue	39		37		39
Gross margin	61		63		61
Operating expenses:
Sales and marketing	32		32		34
Research and development	13		15		16
General and administrative	11		10		10
Amortization of other intangibles	1		1		2
Total operating expenses	57		58		62
Loss from operations	4		5		(1	)
Interest income	0		0		0
Interest expense	—		(0	)	(1	)
Other income (expense)	(0	)	0		(1	)
Loss before income taxes	4		5		(3	)
Provision (benefit) for income taxes	(15	)	0		0
Net loss	19	%	5	%	(3	)%
Other Operating Data:
Adjusted EBITDA(1) (unaudited)	14	%	13	%	10	%

(1) We define Adjusted EBITDA as net income (loss) less interest income and gain (loss) on preferred stock warrant revaluation plus interest expense, provision for taxes, depreciation expense, amortization expense, stock-based compensation expense and acquisition related transaction costs.

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 and Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

The following discussion of our results of operations is based upon actual results of operations for each of the years ended December 31, 2011, 2010 and 2009. Dollar information provided in the tables below is in thousands.

Revenue

	Year Ended December 31,
	2011			2010			2009
Subscription	$	48,934		$	46,203		$	44,013
Percent of total revenue	60.9		%	66.2		%	69.8		%
Services	$	17,262		$	12,150		$	10,887
Percent of total revenue	21.5		%	17.4		%	17.3		%
Usage	$	14,157		$	11,391		$	8,186
Percent of total revenue	17.6		%	16.3		%	13.0		%

Subscription Revenue

2011 to 2010 Comparison. Subscription revenue increased $2.7 million, or 5.9%, in 2011 as compared to 2010. The increase in subscription revenue was attributable to revenue recognized from sales of our solutions to new clients and from sales of additional products to existing clients.

2010 to 2009 Comparison.    Subscription revenue increased $2.2 million, or 5.0%, in 2010 as compared to 2009. The increase in subscription revenue was attributable to revenue recognized from sales of our solutions to new clients and from sales of additional products to existing clients.

Service Revenue

2011 to 2010 Comparison. Services revenue increased $5.1 million, or 42.1%, in 2011 as compared to 2010. Approximately $2.2 million of the increase is attributable to services revenue generated as a result of our StrategicOne acquisition in January 2011 and our Baigent acquisition in July 2011. Additionally, revenue recognized in 2011 from four large enterprise client deals signed during 2010 contributed $1.5 million to the increase in services revenue. We adopted new revenue guidance under ASU 2009-13 on January 1, 2011 and therefore now recognize the revenue allocated to services upon delivery and completion of the work rather than ratably over the contracted term of the subscription as required under the previous accounting guidance. The adoption of ASU 2009-13 resulted in an increase in services revenue of approximately $706,000 for the year ended December 31, 2011. The remaining increase is attributable to sales of services to our other new and existing clients.

2010 to 2009 Comparison. Services revenue increased $1.3 million, or 11.6%, in 2010 as compared to 2009. Revenue recognized in 2010 from three large enterprise client deals signed during 2010 contributed $852,000 to the increase in services revenue. The remaining increase is attributable to sales of services to our other new and existing clients.

Usage Revenue

2011 to 2010 Comparison.    Usage revenue increased $2.8 million, or 24.3%, in 2011 as compared to 2010. The increase was attributable to a $2.5 million increase in revenue from special events and a $252,000 increase in additional fees for client usage above the levels included in monthly subscription fees. The increase in usage revenue from special events was primarily due to the growth and success of our existing clients' events and the addition of events from new clients.

2010 to 2009 Comparison.    Usage revenue increased $3.2 million, or 39.2%, in 2010 as compared to 2009. The increase was attributable to a $2.9 million increase in revenue from special events and a $274,000 increase in additional fees for client usage above the levels included in monthly subscription fees.

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Cost of Revenue

	Year Ended December 31,
	2011			2010			2009
Cost of subscription and usage	$	13,525		$	12,376		$	12,152
Cost of services	17,622			13,165			12,627
Total cost of revenue	31,147			25,541			24,779
Gross profit	49,206			44,203			38,307
Gross margin	61.2		%	63.4		%	60.7		%

Cost of Subscription and Usage

2011 to 2010 Comparison.    Cost of subscription and usage increased $1.1 million, or 9.3%, in 2011 as compared to 2010. The increase was primarily due to a $413,000 increase in amortization of acquired technology, a $403,000 increase in the amortization of costs capitalized for internal use software, a $278,000 increase in depreciation of assets used in our production hosting environment and a $253,000 increase in personnel costs. These increases were offset by a $310,000 decrease in contracting costs as fewer temporary resources were used and fewer consulting costs were incurred. The amortization of acquired technology increased due to business acquisitions that occurred in January and July 2011. In 2010 and 2011, certain expenses incurred to upgrade and enhance our internal development software qualified for capitalization and these costs were capitalized and began amortizing to cost of subscription and usage when those upgrades and enhancements were placed into service, leading to an increase in the amortization of costs capitalized for internal use software during 2011. Prior to 2010, no costs had been capitalized related to internal use software. The increase in depreciation relates to increased capital expenditures for new servers and upgrades to existing servers to maintain our expanding client base.

2010 to 2009 Comparison.    Cost of subscription and usage increased $224,000, or 1.8%, in 2010 as compared to 2009. The increase was primarily due to a $845,000 increase in personnel costs, a $332,000 increase in hosting and transaction fees and a $139,000 increase in equipment costs. These increases were offset by a $889,000 decrease in the amortization of acquired technology and a $139,000 decrease in depreciation expense. The increase in personnel costs was the result of increased personnel in addition to providing merit increases to existing employees at the end of the first quarter of 2010. The increase in hosting and transaction fees was related to the corresponding increase in the volume of online transactions processed by outside service providers. The increase in equipment expense was attributable to increased maintenance and support agreements on the additional equipment placed in service. Amortization of acquired technology decreased as the related intangible assets became fully amortized in February 2010. The decrease in depreciation is due to assets purchased in 2007 to upgrade our servers becoming fully depreciated in 2010.

Cost of Services

2011 to 2010 Comparison.    Cost of services increased $4.5 million, or 33.9%, in 2011 as compared to 2010. The increase was primarily due to increases in personnel costs of $3.1 million, contracting costs of $375,000, overhead costs of $291,000, third-party service provider costs of $194,000 and travel expenses of $127,000. Personnel costs increased by $1.5 million and $545,000 due to the acquisitions of StrategicOne in January 2011 and Baigent in July 2011, respectively. Personnel costs also increased from additional services headcount hired during 2011. The increase in overhead and travel expenses was due primarily to the increase in services personnel. The StrategicOne acquisition resulted in an increase in third-party service provider costs to support our new data analytics and predictive modeling services. The increase in contracting costs was a result of the increased use of outside consultants to supplement services capacity.

2010 to 2009 Comparison.    Cost of services increased by $538,000, or 4.3%, in 2010 as compared to 2009. The increase was primarily due to a $385,000 increase in personnel costs and a $103,000 increase in contracting costs. The increase in personnel costs was due to merit increases to existing employees at the end of the first quarter of 2010. The increase in contracting costs was a result of the increased use of outside consultants to supplement services capacity.

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Gross Margin

2011 to 2010 Comparison.    Gross margins for 2011 were 61.2% compared to gross margins of 63.4% for 2010. This decrease in gross margins reflects the increased mix of services and the StrategicOne and Baigent acquisitions as well as the amortization of costs capitalized for internal use software and acquired technology.

2010 to 2009 Comparison.    Gross margins for 2010 were 63.4% compared to gross margins of 60.7% for 2009. This improvement in gross margins is driven primarily by the higher than expected increase in usage revenue, in addition to the decrease in amortization of acquired technology.

Sales and Marketing

Year Ended December 31,
2011	2010	2009