Blackbaud, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, with quarterly results also disclosed. Blackbaud provides cloud software, services, payment processing and analytics to nonprofits, education, healthcare and other social-good organizations. It reported more than 45,000 customers in over 100 countries and one operating and reportable segment.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $913.2 million | $900.4 million | +1.4% |
| Recurring revenue | $850.7 million | $831.6 million | +2.3% |
| Gross profit / margin | $485.2 million / 53.1% | $482.0 million / 53.5% | Margin down 0.4 percentage points |
| Operating income / margin | $37.2 million / 4.1% | $27.1 million / 3.0% | Income increased |
| Net income / diluted EPS | $7.7 million / $0.16 | $11.9 million / $0.25 | Net income down 35.2% |
| Operating cash flow | $148.0 million | $182.5 million | Down 18.9% |
| Non-GAAP free cash flow | $76.1 million | $124.1 million | Down 38.7% |
| Cash and cash equivalents | $35.8 million | $31.8 million | At year-end |
| Debt carrying value | $531.0 million | $467.1 million | Up 13.7% |
Recurring revenue growth reflected higher payment-transaction revenue and cloud subscriptions, partly offset by declining maintenance revenue as customers moved from legacy products to cloud solutions. One-time services and other revenue fell 9.2% to $62.5 million. Management attributed revenue growth partly to increased virtual and online fundraising, while canceled or postponed in-person events weighed on transaction volumes for the year.
FY2020 GAAP results included $23.1 million of real-estate-related costs, a $4.3 million software-development impairment, higher credit-loss provisions and increased stock-based compensation. Management reported non-GAAP operating income of $194.8 million and non-GAAP diluted EPS of $2.94, compared with $151.6 million and $2.24 in 2019. These non-GAAP measures exclude significant items, including stock compensation and real-estate and restructuring costs; they are not substitutes for GAAP results.
Fourth-quarter revenue was $242.6 million. The quarter recorded an operating loss of $0.9 million and net loss of $13.6 million, or diluted loss per share of $0.28. The filing does not provide a single attribution for the full quarterly loss; it reports real-estate activity, security-incident costs and other expenses during the year.
Liquidity, capital allocation and debt
- Operating cash flow was $148.0 million; cash used in investing was $71.8 million, including $42.2 million of capitalized software development and $29.7 million of property and equipment purchases. The latter included the headquarters purchase.
- Year-end cash and cash equivalents were $35.8 million. Separately, $609.2 million of restricted cash was largely held for customers and is not equivalent to freely available company cash.
- At year-end, debt carrying value was $531.0 million; gross debt before unamortized discount and issuance costs was $534.2 million. The company had $429.3 million of available borrowing capacity under its $900 million credit facility, maturing in October 2025. Its reported net leverage ratio was 1.75x, against a 4.00x maximum covenant; it stated that it was in compliance.
- Blackbaud repurchased 714,000 shares for $41.0 million in 2020 and paid $6.0 million in dividends, all in the first quarter. It stopped dividends beginning in the second quarter. The board authorized up to $250 million of repurchases; the remaining authorization was $209 million at year-end. The filing reports further repurchases of 465,821 shares for $28.1 million through February 19, 2021.
Material changes, outlook and risks
- COVID-19 and bookings: Management reported a significant shortfall in 2020 bookings versus plan and prior-year performance, with delayed purchasing decisions and longer sales cycles. Because subscription revenue is generally recognized over contract terms, management expects the bookings decline to put pressure on 2021 revenue growth. It said the operating environment could remain challenging in 2021 and beyond; it provided no specific revenue or earnings guidance in the supplied filing text.
- Cash flow outlook: Management expects operating cash flow to increase in 2021, citing nonrecurring 2020 lease-exit payments, continued use of performance-based equity awards and expected working-capital improvements. It also identified offsetting items, including deferred payroll-tax payments, salary increases and restoration of the 401(k) match.
- Cost actions and real estate: The company incurred $23.1 million of pre-tax costs and $21.9 million of one-time cash outlays for real-estate changes in 2020. It expects approximately $14 million in annual pre-tax savings beginning in 2021. It also purchased its Charleston headquarters and exited certain leases.
- Cybersecurity incident and contingencies: A May 2020 ransomware attack resulted in a copy of a subset of data being removed from a self-hosted environment. The company said its investigation gave it no reason to believe the data was misused or publicly disseminated, but the investigation remained ongoing. It reported approximately 570 customer reimbursement claims, 30 putative consumer class actions, a multi-state demand from 44 state attorneys general and the District of Columbia, and inquiries from multiple U.S. and foreign regulators. It recorded $10.4 million of related expenses and $9.4 million of probable insurance recoveries, but had not recorded a liability for the incident because it could not reasonably estimate a possible loss. Outcomes and insurance coverage remain uncertain.
- Other risks: The filing highlights competition, dependence on customer renewals and charitable giving, COVID-19 effects on customer finances, data security and privacy regulation, international and foreign-exchange exposure, debt and covenant restrictions, and execution risk in the transition to cloud subscriptions. Management also noted expected pressure on recurring gross margin from cloud migration and duplicate data-center costs.
- Tax and unusual items: The effective tax rate was 64.3%, affected notably by a valuation allowance for state tax-credit carryforwards; the company recorded an $8.3 million tax expense related to that allowance. The auditor identified revenue recognition for contracts with multiple performance obligations as a critical audit matter. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Progress in rebuilding bookings and pipeline, and the resulting effect on 2021 revenue, renewals and customer retention.
- Developments in the ransomware investigation, customer claims, class actions and regulatory inquiries; the extent of insurance recoveries and any eventual liability.
- Whether expected $14 million annual real-estate savings materialize, alongside ongoing cloud migration costs and gross-margin trends.
- Free cash flow after capitalized software development, headquarters-related investment and debt service; also review the distinction between unrestricted and customer-restricted cash.
- Debt balances, borrowing capacity, covenant compliance and the scale and timing of share repurchases, particularly given dividend suspension and leverage.
- GAAP-to-non-GAAP reconciliations and the recurring nature of excluded expenses, especially stock-based compensation and real-estate activity.