BLKB

Business Context and Reporting Period

Company: Blackbaud, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Blackbaud is the leading global provider of software and related services designed specifically for nonprofit organizations. Its core products include The Raiser's Edge (fundraising), The Financial Edge (accounting), and The Education Edge (student information). As of year-end 2006, the company served approximately 15,500 customers, with 97% paying annual maintenance fees.

Key Financial Metrics (Year Ended Dec 31, 2006)

Note: The company had no outstanding debt as of December 31, 2006, but utilized a $30 million revolving credit facility in January 2007 for an acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 15.4% to $191.96 million, driven by growth in services (16%), maintenance (14%), and subscriptions (49%).
• Net Income Decline: Net income decreased 8.4% to $30.51 million compared to 2005. This decline was primarily due to the adoption of SFAS No. 123(R) regarding stock-based compensation, which resulted in a $7.4 million expense in 2006 compared to only $0.3 million in 2005.
• Stock-Based Compensation: The adoption of SFAS 123(R) significantly impacted operating expenses, particularly in General and Administrative costs, which rose 38% year-over-year largely due to this accounting change.
• Acquisitions: In January 2007 (subsequent to the reporting period), the company acquired Target Software, Inc. and Target Analysis Group, Inc. for approximately $57 million, adding 400 customers and 200 employees.

Guidance, Outlook, and Risks

• Dividend Policy: In February 2007, the Board increased the annual dividend rate from $0.28 to $0.34 per share. The company intends to pay quarterly dividends at this new rate for 2007.
• Strategic Focus: Management plans to continue expanding the customer base, increasing sales to existing customers (cross-selling), and leveraging the internet for online fundraising solutions. International expansion in the UK, Canada, and Australia remains a priority.
• Key Risks:
  • Product Concentration: Approximately 60% of 2006 revenue was derived from The Raiser's Edge and related services. A decline in this product's sales would materially harm the business.
  • Deferred Tax Asset: The company holds a significant deferred tax asset ($66.4 million). Realization depends on generating sufficient future taxable income. If performance deteriorates, an impairment charge could be required.
  • Competition: The market is fragmented with competition from general software providers (e.g., Microsoft, Oracle) and custom-developed solutions.
  • Integration Risk: Successful integration of the recently acquired Target Companies is critical to realizing expected benefits.

Investor Verification Checklist

• Deferred Tax Asset Realizability: Verify the company's projections for future taxable income to ensure the $66.4 million deferred tax asset does not require a valuation allowance.
• Stock-Based Compensation Impact: Assess the ongoing impact of SFAS 123(R) on future earnings, as the 2006 expense ($7.4M) was significantly higher than 2005 ($0.3M).
• Acquisition Integration: Monitor the integration progress and financial contribution of the Target Companies acquired in January 2007.
• Revenue Concentration: Track the percentage of revenue derived from The Raiser's Edge to ensure diversification efforts are effective.
• Dividend Sustainability: Confirm that cash flow from operations remains sufficient to support the increased dividend rate of $0.34 per share while funding growth and potential acquisitions.