Blackbaud, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; year-over-year comparisons are with the corresponding 2020 periods. Blackbaud provides cloud software, services and payment solutions to nonprofit, education and other social-good organizations. It reports one operating and reportable segment.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $229.4m | $232.0m | $448.6m | $455.6m |
| Recurring revenue | $217.0m | $216.3m | $423.7m | $421.1m |
| One-time services and other revenue | $12.5m | $15.7m | $24.9m | $34.5m |
| Gross profit / margin | $121.4m / 52.9% | $127.1m / 54.8% | $237.2m / 52.9% | $245.8m / 54.0% |
| Income from operations / margin | $13.0m / 5.7% | $19.6m / 8.4% | $19.7m / 4.4% | $28.0m / 6.1% |
| Net income | $6.7m | $11.8m | $6.6m | $16.5m |
| Diluted EPS | $0.14 | $0.24 | $0.14 | $0.34 |
- Q2 revenue fell 1.1%; six-month revenue fell 1.5%. Recurring revenue grew 0.3% and 0.6%, respectively, while one-time revenue declined 20.8% and 27.8%.
- Operating income declined 33.4% in Q2 and 29.7% for the six months. Management cited higher stock-based compensation, transaction and hosting costs, and lower revenue. Six-month stock-based compensation expense rose to $60.6m from $33.7m.
- Six-month operating cash flow was $99.9m, compared with $37.5m; investing cash outflow was $26.0m, and non-GAAP free cash flow was $73.9m versus $9.9m. Management attributed the operating cash flow increase largely to working-capital changes, including collections, bonus-plan timing and vendor payments.
- At June 30, cash and cash equivalents were $28.3m; restricted cash was $434.6m, substantially held for customers and not equivalent to unrestricted liquidity. Working capital was negative $186.6m. The company reported $409.6m of available borrowing capacity under its credit facility.
- Total debt was $547.3m gross ($544.9m carrying value); debt under the 2020 Credit Facility was $483.1m. Net leverage was 1.78x, and the company reported compliance with its debt covenants. Debt maturities include $451.8m in 2025, largely reflecting credit-facility maturities.
Business changes and outlook
- Recurring contractual revenue benefited from cloud solutions and early pricing initiatives, partly offset by lower maintenance revenue as customers migrate to cloud offerings. Payment transaction revenue fell in Q2 against elevated COVID-related online giving in Q2 2020.
- Management said COVID-19’s effects on customer markets remained uncertain, though it was seeing signs of recovery. It expected investment in digital marketing, engineering, security, customer success and cloud infrastructure to increase in the second half of 2021; no quantitative full-year revenue or earnings guidance is provided in the filing text.
- Customer retention for recurring-revenue customers was approximately 92% for the 12 months ended June 30, 2021, materially unchanged from 2020. Remaining performance obligations were approximately $797m, with about 55% expected to be recognized over the next 12 months.
- The company combined its U.S. general and enterprise market groups into one U.S. Markets Group and moved its Corporations vertical to the International Markets Group. It continued to evaluate acquisitions and cited a total addressable market above $10bn, with less than 10% penetration.
- Management believed available funds and expected operating cash flows would be sufficient for at least the next 12 months. The company repurchased $58.1m of shares in the first half; $150.9m remained available under its $250m authorization. It paid no dividends in the first half.
Risks, contingencies and unusual items
- 2020 ransomware incident: Q2 2021 expenses were $11.7m, offset by $11.2m of probable insurance recoveries; first-half amounts were $24.4m and $23.9m. Cumulative expenses and probable recoveries were $34.2m and $33.3m. Blackbaud said total losses are likely to exceed insurance coverage but it could not estimate the excess or its timing; it recorded no incident liability as of June 30.
- The incident had led to approximately 260 customer reimbursement requests, approximately 400 reservations of potential future claims, 29 putative consumer class actions, and inquiries or investigations by multiple state and federal U.S. agencies and foreign regulators. Further costs, claims, fines or settlements could be material and may not be covered by insurance.
- Other exposures include COVID-19 uncertainty, customer renewal and payment trends, interest-rate and foreign-currency fluctuations, and execution of cloud migration and product investments. The company reported $45m in remaining minimum technology and service purchase commitments through 2024.
- GAAP results were affected by elevated stock compensation and incident costs; adjusted non-GAAP measures exclude specified items and should be considered alongside, not instead of, GAAP results.
Important facts for investors to verify
- Progress in recurring-revenue growth, customer retention, cloud migration and pricing changes, alongside continued weakness in one-time services.
- Cash conversion and working-capital trends, especially the distinction between customer-related restricted cash and available liquidity.
- Debt repayment, covenant headroom, and the effect of planned second-half investment and share repurchases on leverage and cash.
- Developments in the security-incident litigation, regulatory inquiries, insurance recoveries and any resulting loss estimates or liabilities.
- Whether higher stock-based compensation and the exclusion of unusual expenses materially change the interpretation of reported non-GAAP performance.