Blackbaud, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; filed November 4, 2021. Blackbaud provides cloud software, services, payment processing and data solutions for nonprofits, education and other social-good organizations. It reports one operating and reportable segment.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $231.2 million | $215.0 million | $679.8 million | $670.6 million |
| Gross profit / margin | $123.5 million / 53.4% | $116.3 million / 54.1% | $360.7 million / 53.1% | $362.1 million / 54.0% |
| Operating income / margin | $11.8 million / 5.1% | $10.1 million / 4.7% | $31.5 million / 4.6% | $38.1 million / 5.7% |
| Net income | $6.2 million | $4.9 million | $12.8 million | $21.3 million |
| Diluted EPS | $0.13 | $0.10 | $0.26 | $0.44 |
- Q3 recurring revenue rose 9.2% to $218.5 million, driven mainly by transaction revenue; one-time services and other revenue fell 14.8% to $12.7 million. For the first nine months, recurring revenue increased 3.4%, while one-time services and other revenue declined 23.9%.
- Nine-month operating cash flow was $169.8 million, versus $109.2 million. Capital spending was $38.0 million, including $29.7 million of capitalized software development. Company-defined non-GAAP free cash flow was $131.8 million, versus $51.3 million.
- At September 30, cash and cash equivalents were $27.6 million; restricted cash was $216.1 million, primarily funds due to customers. Working capital was negative $202.1 million. Total debt carrying value was $527.4 million; debt under the 2020 Credit Facility was $465.9 million. Available facility borrowing capacity was $424.6 million.
- Net leverage was 1.70x; Blackbaud reported compliance with its credit-facility covenants. Management said available funding and expected operating cash flows should be adequate for at least the next 12 months.
Changes, outlook and key risks
- Q3 revenue grew 7.5%, but nine-month revenue grew only 1.4%. Nine-month operating income fell 17.2% and net income fell 40.2% year over year. Higher stock-based compensation, payment-related costs, cloud infrastructure and security investment pressured expenses; nine-month stock-based compensation rose to $89.5 million from $54.6 million.
- Management attributed recurring-revenue growth to online giving and virtual fundraising, alongside early progress on pricing initiatives. It cited lower consulting and analytics revenue as part of its shift toward cloud subscriptions. Customer retention for recurring-revenue contracts was approximately 93% for the 12 months ended September 30, materially unchanged from 2020.
- Remaining performance obligations were approximately $821 million; about 55% was expected to be recognized within 12 months. The filing provides no formal revenue or earnings guidance. Management said some business investments, including engineering, security and cloud migration, may continue into early 2022.
- The May 2020 ransomware incident remains a major contingent risk. Through September 30, the company recorded $45.7 million of related expenses and $43.9 million of probable insurance recoveries; only $18.0 million of recorded recoveries had been paid. Management expected total incident costs to exceed insurance coverage in Q4 2021, but could not estimate the excess or potential loss. It warned of continued material costs and possible adverse effects on GAAP profit and cash flow.
- Blackbaud faced 19 putative consumer class actions, customer reimbursement requests and government inquiries. The U.K. regulator issued a reprimand without a penalty; Spain imposed a €60,000 penalty, and Ireland closed its investigation without action. The company said other proceedings could materially affect results, cash flow or financial condition.
- In October 2021, the company decided to close fixed offices other than its Charleston headquarters, effective December 1. It expected $13–$14 million of mostly noncash pre-tax costs in Q4 and annual pre-tax savings of approximately $3–$5 million beginning in 2022.
- COVID-19 effects remained uncertain. Management cited signs of recovery in its markets but noted that customer spending decisions, pandemic developments and other factors could continue to affect performance.
Important facts for investors to verify
- Progress and ultimate cost of the security incident, including insurance collection, litigation and regulatory outcomes, and exposure above insurance limits.
- Whether recurring-revenue growth and customer retention persist as transactional giving trends normalize and maintenance customers move to cloud subscriptions.
- Whether higher stock-based compensation and ongoing cloud, engineering and security investment translate into improved GAAP margins and cash generation.
- Liquidity and debt capacity, taking account of negative working capital, customer funds held as restricted cash, repurchases and debt maturities.
- Actual costs, timing and savings from the office closures and remote-first workforce transition.