Blackbaud, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Blackbaud provides cloud software, services, payment processing and data solutions to nonprofit, education, corporate social responsibility and other social-good organizations. Figures are in U.S. dollars; financial statement amounts are unaudited.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $261.3m | $231.2m | $783.3m | $679.8m |
| Recurring revenue | $249.4m | $218.5m | $746.6m | $642.3m |
| Gross profit / margin | $140.4m / 53.7% | $123.5m / 53.4% | $413.4m / 52.8% | $360.7m / 53.1% |
| Operating income (loss) / margin | $(7.0)m / (2.7%) | $11.8m / 5.1% | $(12.9)m / (1.7%) | $31.5m / 4.6% |
| Net income (loss) | $(10.3)m | $6.2m | $(24.1)m | $12.8m |
| Diluted earnings (loss) per share | $(0.20) | $0.13 | $(0.47) | $0.26 |
- Revenue grew 13.0% in Q3 and 15.2% for the nine-month period. Recurring revenue growth was 14.1% and 16.2%, respectively. Management reported non-GAAP organic revenue growth of 1.7% in Q3 and 3.5% year to date; on a constant-currency basis, growth was 3.6% and 4.7%.
- Operating results weakened despite revenue growth. Higher employee, contractor, hosting, transaction, amortization and security-incident costs contributed to the operating losses. Q3 interest expense was $9.3m, versus $4.0m a year earlier; nine-month interest expense was $25.9m, versus $14.2m.
- For the nine months, operating cash flow was $189.8m, compared with $169.8m. Investing cash outflow was $67.8m and financing cash outflow was $384.2m. The latter included a $243.1m decrease in amounts due to customers, which corresponded to a decline in restricted cash held for customers.
- Non-GAAP free cash flow for the nine months was $136.5m; non-GAAP adjusted free cash flow, which adds back security-incident cash outflows net of insurance, was $146.1m. These are company-defined non-GAAP measures.
- At September 30, cash and cash equivalents were $31.4m; restricted cash was a separate $343.9m, principally funds due to customers, and should not be treated as freely available operating cash. Working capital was negative $323.5m.
- Total debt principal was $857.5m, including $795.5m under the credit facility; balance-sheet debt, net of unamortized discount and issuance costs, was $854.1m. The company reported $326.9m of available credit-facility capacity, a 3.10:1 net leverage ratio and compliance with its debt covenants.
Material changes and notable items
- EVERFI, acquired at the end of 2021, contributed substantially to growth: management attributed $23.7m of Q3 and $71.2m of nine-month contractual recurring revenue increases to EVERFI. Corporate Sector revenue rose to $37.3m in Q3 from $8.6m a year earlier.
- Recurring revenue gains reflected cloud performance and transactional activity, including online giving and tuition management. One-time services and other revenue declined 6.1% in Q3 and 2.1% year to date as the company continues its shift toward cloud subscriptions.
- Customer retention for recurring-revenue customers was approximately 91% for the twelve months ended September 30, 2022, down from the full-year 2021 rate; management cited portfolio rationalization and migration away from legacy solutions.
- Blackbaud acquired Kilter for approximately $2.9m in cash, with up to $3.0m of additional contingent consideration, and sold FIMS and DonorCentral NXT for approximately $6.4m, subject to closing adjustments.
- The company recorded Q3 and nine-month net security-incident expenses of $13.7m and $29.2m, respectively. It also recorded impairment charges during 2022, including $2.3m for capitalized software development costs, $2.0m for intangible assets held for sale and $1.3m for certain lease and property assets.
Outlook, risks and contingencies
- Management expects foreign-exchange movements to have a significant negative impact on full-year 2022 revenue. Year-to-date EVERFI bookings were lighter than expected; management said account executive positions had been filled and were ramping.
- Management expects full-year 2022 interest expense of approximately $34m–$37m. It also expects $6m–$8m of pre-tax severance costs, primarily in Q4 2022, from a workforce reduction. The reduction and other cost actions are expected to lower the planned pre-tax cost run rate by approximately $40m–$50m beginning in 2023, partly offset by continued cybersecurity and innovation investment.
- For the 2020 ransomware incident, management expects 2022 net pre-tax legal expense of approximately $30m–$35m and net cash outlays of approximately $15m–$25m. The $50m insurance limit has been exhausted. Approximately $5.0m of related loss contingencies had been accrued, but additional losses are possible and not currently estimable.
- Incident-related matters include 19 putative consumer class actions, customer reimbursement requests and reservations, subrogation claims, and investigations by U.S. and foreign authorities, including the SEC. The company said it was discussing a potential resolution with SEC staff but gave no assurance of acceptable terms. Outcomes, additional costs, fines or penalties remain uncertain.
- Other commitments include $236.0m of minimum purchase obligations through 2027 and $65.9m of remaining operating-lease payments. Management believes available funding and anticipated operating cash flows will be adequate for at least the next twelve months.
- Subsequent to quarter-end, the board adopted a stockholder rights agreement with a 20% ownership trigger; it is scheduled to expire October 2, 2023. The filing notes it may delay or deter a change in control.
Key facts for investors to verify
- Whether organic growth, bookings and customer retention improve, particularly for EVERFI and cloud subscriptions, and how foreign exchange affects reported growth.
- Whether cost reductions deliver the expected savings without undermining customer retention, innovation or cybersecurity investment; track GAAP results alongside the company’s non-GAAP measures.
- Future security-incident legal costs, insurance coverage status, case and investigation developments, and any additional loss accruals or cash requirements.
- Debt, interest expense, leverage and covenant headroom in a higher-rate environment; distinguish restricted customer funds from corporate liquidity.
- Execution and economics of the Kilter acquisition, FIMS and DonorCentral disposition, and the implications of the stockholder rights agreement.