Business Context and Reporting Period
Company: Blackbaud, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Blackbaud is the leading global provider of software and related services for nonprofit organizations. As of September 30, 2008, the company served approximately 22,000 customers across various verticals including education, health, and human services. The reporting period includes the results of operations for the acquisition of Kintera, Inc. on July 8, 2008, which significantly expanded the company's on-demand and subscription-based offerings.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenue | $80,098 | $222,036 |
| Gross Profit | $48,792 | $137,833 |
| Net Income | $7,316 | $23,346 |
| Diluted EPS | $0.17 | $0.53 |
| Operating Cash Flow (9 months) | $47,996 | |
| Cash and Equivalents (Sep 30, 2008) | $12,303 | |
| Total Debt (Current + Long-term) | $61,582 | |
| Goodwill | $74,423 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 18% ($12.3 million) for the three months and 19% ($35.0 million) for the nine months ended September 30, 2008, compared to the same periods in 2007.
- Subscriptions: This segment saw the most significant growth, up 118% for the quarter and 91% for the nine months, driven primarily by the inclusion of Kintera and eTapestry.
- Maintenance: Increased 14% in both periods due to new contracts and inflationary adjustments.
- License Fees: Decreased 5% for the quarter and 1% for the nine months, attributed to longer sales cycles and economic challenges affecting new customer sales.
- Profitability: Net income decreased 17% for the quarter ($7.3M vs $8.8M) but increased 3% for the nine months ($23.3M vs $22.8M). Operating income declined 25% for the quarter due to increased operating expenses.
- Operating Expenses: Total operating expenses rose 31% for the quarter and 22% for the nine months. Increases were driven by higher salaries and benefits (including acquired company staff), increased stock-based compensation, and amortization of intangible assets from acquisitions.
- Balance Sheet: Total assets increased from $237.7 million to $321.1 million. Total liabilities increased from $124.6 million to $232.3 million, largely due to new debt incurred to finance the Kintera acquisition and increased deferred revenue.
Guidance, Outlook, and Risks
Management Commentary: Management attributes revenue growth to the successful integration of Kintera and eTapestry, which bolstered the subscription and hosted application business. However, the company notes that the challenging economic environment has led to longer sales cycles and increased scrutiny by customers regarding purchasing decisions, particularly affecting license fee revenue.
Liquidity and Capital Resources: The company maintains a $90 million revolving credit facility, with $59 million outstanding as of September 30, 2008. Management believes operating cash flows and available credit are sufficient to fund operations and debt repayment. The company continues its stock repurchase program and dividend payments ($0.10 per share declared for Q4 2008).
Risks and Contingencies:
- Economic Conditions: General economic risks and uncertainty regarding customer renewals and new business.
- Acquisition Integration: Risks associated with integrating Kintera and other acquired companies.
- Debt Covenants: Restrictions imposed by the credit facility could limit financial flexibility.
- Legal: The company is subject to ordinary course legal proceedings but does not expect a material adverse effect.
Investor Verification Checklist
- Acquisition Impact: Verify the extent to which Q3 and YTD revenue growth is organic versus attributable to the Kintera and eTapestry acquisitions.
- License Fee Trends: Monitor the decline in license fee revenue and the lengthening of sales cycles as a potential indicator of broader market softness.
- Debt Structure: Review the classification of debt (current vs. long-term) and the terms of the $90 million credit facility, noting the refinancing of LIBOR loans to Base Rate loans subsequent to the period end.
- Stock-Based Compensation: Note the 138% increase in stock-based compensation expense for the quarter, driven by acquisition-related incentives and new grants.
- Deferred Revenue: Confirm the sustainability of the $123 million deferred revenue balance as a predictor of future recurring revenue.