Blackbaud, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; the figures below are full-year results, not standalone fourth-quarter results. Blackbaud provides cloud and on-premises software, payment processing, analytics, and services to nonprofits, education, healthcare, corporate, and other social-good organizations. It reported more than 45,000 customers in over 60 countries.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change or context |
|---|---|---|---|
| Revenue | $848.6 million | $788.5 million | Up 7.6% |
| Recurring revenue | $762.2 million | $684.6 million | Up 11.3%; 89.8% of FY2018 revenue |
| One-time services and other revenue | $86.4 million | $103.9 million | Down 16.8% |
| Gross profit / gross margin | $466.9 million / 55.0% | $426.6 million / 54.1% | Margin improved 0.9 percentage points |
| Operating income / margin | $59.4 million / 7.0% | $68.2 million / 8.6% | Operating income down 12.9% |
| Net income / diluted EPS | $44.8 million / $0.93 | $73.6 million / $1.54 | Down 39.1% / 39.6% |
| Operating cash flow | $201.4 million | $176.3 million | Up 14.2% |
| Non-GAAP free cash flow | $149.0 million | $137.7 million | Up 8.2%; defined as operating cash flow less capital expenditures and capitalized software development |
Recurring gross margin was 59.9%, up from 59.4%; one-time services and other gross margin fell to 11.8% from 18.9%. Operating expenses rose to $407.4 million, driven in part by sales-force expansion, product development, stock compensation, acquisition-related amortization, and restructuring. Interest expense rose 31.4% to $15.9 million. FY2018’s near-zero income-tax benefit contrasts with a $15.3 million tax benefit in FY2017, which included a substantial one-time benefit from U.S. tax reform and stock-based compensation; this is an important factor in the reported net-income decline.
At year-end, cash and cash equivalents were $30.9 million and debt carrying value was $387.1 million; net leverage was 1.87x. The company had $296.2 million of available borrowing capacity under its $700 million credit facility and was in compliance with its covenants. Operating cash flow funded investment and shareholder returns: capitalized software development and property/equipment purchases totaled $52.3 million, dividends were $23.3 million, and net cash used in investing was $97.8 million. Working capital was negative $207.7 million, substantially reflecting restricted customer funds and amounts due to customers; restricted cash is not equivalent to unrestricted corporate cash. Deferred revenue was $298.6 million, up 7.1%.
Material changes versus FY2017
- Cloud subscription demand drove recurring revenue growth, while maintenance revenue decreased $20.5 million as customers migrated from on-premises products; subscription revenue increased $98.1 million.
- Organic revenue growth was 2.7% (2.4% on a constant-currency basis), compared with reported GAAP revenue growth of 7.6%; acquisitions contributed to the difference.
- One-time services and other revenue continued to contract, and its gross margin declined as higher-margin analytics and license revenue fell faster than related costs.
- Recurring customer retention was approximately 92%, versus approximately 93% in 2017. Management attributed the decrease primarily to portfolio rationalization and migration from legacy products.
- Operating income declined despite higher revenue, as strategic sales and innovation investments and higher stock-based compensation, restructuring, and acquired-intangible amortization weighed on results.
- Debt carrying value decreased from $438.2 million to $387.1 million. Cash-flow totals include restricted funds held for customers, which declined materially year over year.
Outlook, management commentary, risks, and unusual items
Management emphasized continued migration to cloud subscriptions, product integration and innovation, sales-force investment, expansion into adjacent markets, and operating efficiency. It expected one-time services revenue to keep declining and said this transition would continue to weigh on total revenue growth. Management planned further sales hiring and investment in 2019 and beyond; it did not provide a specific numerical revenue or earnings forecast in the supplied filing text. Management expected 2019 capital expenditures to be relatively consistent with 2018 and believed available liquidity and operating cash flows would cover operations, capital expenditures, debt obligations, and dividends for at least the next 12 months.
On January 2, 2019, after the reporting period, Blackbaud acquired YourCause for $157.0 million in cash, primarily funded by credit-facility borrowings. The acquisition expands its corporate social responsibility and employee-engagement business; purchase accounting was incomplete when the filing was prepared. In 2018, Blackbaud acquired Reeher for $41.2 million. The company also incurred $4.6 million of restructuring costs in 2018 and expected total facilities-optimization costs of $8.5–$9.5 million, with most remaining costs anticipated in 2019; expected annual pretax savings of $5–$6 million were projected to begin in 2020.
Key risks include intense competition and customer renewal risk; successful execution of the shift to cloud subscriptions; service availability, software defects, cybersecurity and confidential donor/payment data protection; privacy regulation (including GDPR and the upcoming California Consumer Privacy Act); charitable-giving levels; integration and financing of acquisitions; variable interest rates and debt covenants; and international and foreign-currency exposure. The company disclosed that some solutions were not fully PCI DSS compliant, primarily due to integration delays for acquired businesses. It reported no material pending legal matter expected to have an adverse effect, while noting ordinary-course litigation contingencies. Independent auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether recurring growth and customer retention remain resilient as maintenance revenue shifts to cloud subscriptions, and how the migration affects reported growth and margins.
- Whether sales and product-development investments produce growth sufficient to offset operating-cost increases and the decline in one-time services revenue.
- YourCause’s acquired results, integration progress, purchase-price allocation, and incremental borrowing, interest expense, and leverage after closing.
- Unrestricted liquidity and covenant headroom, distinguishing corporate cash from restricted cash held for customers; assess the effect of lease obligations and dividends.
- Progress toward PCI DSS compliance and the effectiveness of cybersecurity, privacy, and data-protection controls.
- How reported GAAP performance compares with management’s non-GAAP measures, including the substantial exclusions for stock compensation, acquired-intangible amortization, and other costs.