Blackbaud, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited. Blackbaud provides cloud software, services, payment processing and related solutions to nonprofit and other social-good organizations; it reports one operating segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $232.0 million | $225.6 million | $455.6 million | $441.5 million |
| Recurring revenue | $216.3 million | $208.5 million | $421.1 million | $406.6 million |
| Gross profit | $127.1 million | $124.8 million | $245.8 million | $241.4 million |
| Gross margin | 54.8% | 55.3% | 54.0% | 54.7% |
| Operating income | $19.6 million | $13.5 million | $28.0 million | $15.7 million |
| Net income | $11.8 million | $7.1 million | $16.5 million | $6.0 million |
| Diluted EPS | $0.24 | $0.15 | $0.34 | $0.13 |
- Q2 revenue grew 2.8%; recurring revenue grew 3.7%. One-time services and other revenue fell 8.4% to $15.7 million, with lower consulting and analytics revenue partly offset by a change in presentation of certain managed-services contracts.
- Q2 operating margin rose to 8.4% from 6.0%, while gross margin declined 0.5 percentage points. Operating income benefited from revenue growth, lower cash-bonus expense, and lower restructuring and amortization costs; a $4.3 million software-asset impairment and higher credit-loss expense were offsets.
- For the first half, cash from operations was $37.5 million versus $45.1 million. Capital expenditures and capitalized software development totaled $27.6 million, leaving non-GAAP free cash flow of $9.9 million versus $15.5 million.
- At June 30, cash and equivalents were $30.5 million; total debt was $489.0 million, including $9.2 million current. The company reported $190.7 million of available borrowing capacity, net leverage of 2.21x, and compliance with credit-facility covenants. Restricted customer cash of $421.9 million is matched by amounts due to customers and is not equivalent to unrestricted corporate cash.
- Deferred revenue was $337.2 million, up from $316.1 million at year-end 2019. Remaining performance obligations were approximately $854 million; the company expected to recognize about 60% over the next 12 months.
Changes, outlook and material developments
- COVID-19 disrupted customer activity and purchasing. Management said renewals were ahead of expectations through July, but contracted recurring revenue was below the original plan and bookings were falling short of budget. It expected a significant 2020 bookings shortfall and pressure on near-term revenue, with a greater effect on 2021 revenue because subscription revenue is recognized over time. No quantified financial guidance was provided.
- Management shifted emphasis toward profitability and cash flow, while continuing its cloud-product and sales-effectiveness strategy. It cited customer caution, postponed or canceled in-person events, weaker pipeline generation, and increased receivable aging and payment deferrals as concerns.
- COVID-19 actions included a hiring freeze and targeted headcount reductions, cost controls, suspension of the 401(k) match, and replacement of 2020 cash bonuses and merit increases with equity awards. The company discontinued cash dividends beginning Q2; it had paid $0.12 per share in Q1.
- Recurring revenue growth was partly offset by declining maintenance revenue as customers transition from on-premises products to cloud subscriptions. Management expected continued recurring-margin pressure from overlapping data-center costs during infrastructure migration.
- In May, Blackbaud experienced a ransomware attack. A cybercriminal copied a subset of data from a self-hosted environment; the company said it had no reason to believe the data was misused or publicly disseminated. The investigation was ongoing, future response and security costs were expected to increase, and a potential loss range could not be estimated. The filing also disclosed possible reputation, customer, litigation, regulatory and indemnification consequences.
- The company agreed to purchase its leased Charleston headquarters for $76.3 million, including assumption of $63.0 million of the seller’s obligations; closing was expected in the second half of 2020 and cash funding was expected from the credit facility.
- Other notable items included the $4.3 million software-development-cost impairment and a $4.1 million increase in the fair-value liability for interest-rate swaps since year-end. The 2017 credit facility matures in June 2022; the filing listed $90.5 million of remaining minimum third-party technology and service purchase commitments through 2024.
Key investor verification points
- Track bookings, renewal performance, deferred revenue and customer payment behavior, particularly as pandemic effects flow into 2021.
- Assess whether operating-cash generation and available credit remain adequate given debt maturities, the planned headquarters purchase and ongoing investment needs.
- Monitor the ransomware investigation, customer impacts, remediation spending and any subsequent litigation, regulatory actions or recorded liabilities.
- Evaluate recurring gross-margin trends as cloud infrastructure migration and related duplicate costs continue, and distinguish GAAP results from management’s non-GAAP measures.
- Confirm the timing and financing of the headquarters transaction and whether the dividend suspension or other cost-control measures change.