BLKB

Business Context and Reporting Period

Company: Blackbaud, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: Blackbaud is the leading global provider of software and related services designed specifically for nonprofit organizations. As of June 30, 2007, the company served approximately 16,000 active customers across various verticals including religion, education, health, and human services.

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 32% ($15.4 million) for the three months ended June 30, 2007, compared to the same period in 2006. For the six-month period, revenue grew 29% ($27.0 million). Approximately 37-38% of this growth is attributable to the acquisition of Target Software, Inc. and Target Analysis Group, Inc. (the "Target Companies") in January 2007.
• Segment Performance: Subscription revenue saw the highest growth rate, increasing 120% quarter-over-quarter and 119% year-to-date, driven largely by the Target Companies. Services revenue also grew significantly (41% QoQ, 38% YTD).
• Profitability: Net income increased 7% for the quarter and 6% for the six-month period. However, net income margins declined slightly (from 15.7% to 12.8% for the quarter) due to increased operating expenses and amortization related to the acquisition.
• Balance Sheet: Cash and cash equivalents decreased by $50.1 million to $17.7 million, primarily due to the $58.7 million cash acquisition of the Target Companies, partially offset by $30 million in debt proceeds. Goodwill increased from $2.5 million to $40.6 million due to the acquisition.

Guidance, Outlook, and Risks

• Acquisition Integration: Management expects the Target Companies to significantly advance strategic goals for fundraising and direct marketing solutions. The company is aligning product development plans with the acquired entities.
• Capital Resources: On July 25, 2007 (subsequent to the reporting period), the company entered into a new $75 million revolving credit facility to replace the expiring $30 million facility, providing greater financial flexibility.
• Dividends and Buybacks: The Board increased the annual dividend to $0.34 per share. The company also repurchased 620,878 shares in the first half of 2007 and approved an additional $35 million authorization for stock repurchases in June 2007.
• Risks: Key risks include the successful integration of acquired companies, lengthy sales cycles, uncertainty regarding customer renewals, and the ability to attract and retain key personnel. The company also faces foreign currency exchange rate risks, with approximately 14.3% of revenue derived from outside the U.S.
• Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007, resulting in a $269,000 reduction to retained earnings.

Investor Verification Checklist

• Acquisition Impact: Verify the extent to which revenue growth is organic versus driven by the Target Companies acquisition, particularly in the high-growth Subscription segment.
• Cash Position: Monitor the reduction in cash reserves ($50M decrease) and the reliance on the new $75M credit facility for future liquidity and potential M&A activity (e.g., the subsequent eTapestry acquisition).
• Margin Pressure: Assess whether the decline in net income margins is temporary due to acquisition-related amortization and integration costs or indicative of structural cost increases.
• Debt Covenants: Review compliance with the new credit facility covenants, specifically leverage and interest coverage ratios, given the increased debt load.
• Deferred Revenue: Analyze the $89 million in deferred revenue (current and non-current) to gauge future revenue visibility and renewal rates.