Blackbaud, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; compared with the three months ended March 31, 2014 unless otherwise noted. Amounts are in U.S. dollars. Blackbaud provides cloud-based and on-premise software and related services to nonprofit, education, charitable giving, and related organizations, serving more than 30,000 active customers.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $147.0 million | $127.6 million | +15% |
| Gross profit | $75.2 million | $64.3 million | +$10.9 million |
| Income from operations | $8.0 million | $9.3 million | −14% |
| Net income | $4.3 million | $3.8 million | +13% |
| Diluted EPS | $0.09 | $0.08 | +$0.01 |
| Operating cash flow | $4.2 million | $13.3 million | −$9.0 million |
- Subscriptions revenue increased 24% to $72.5 million; maintenance rose 9% to $38.9 million; services rose 11% to $31.3 million. License fees and other revenue declined 23% to $4.3 million.
- Subscription gross margin improved to 50% from 48%; maintenance gross margin declined to 81% from 85%; services gross margin improved to 14% from 6%.
- GAAP operating margin fell to 5.5% from 7.3%. The company reported non-GAAP operating margin of 17.6% versus 15.6% and adjusted EBITDA of $32.0 million versus $24.5 million; these are non-GAAP measures and include specified exclusions.
- Cash and cash equivalents were $13.3 million at March 31, down from $14.7 million at year-end. The balance included $8.5 million held outside the U.S. Donor-restricted cash of $58.4 million was matched by donations payable and is not equivalent to unrestricted liquidity.
- Gross debt under the credit facility was $287.5 million; the reported carrying amount was approximately $285.8 million. Available borrowing capacity was $130.7 million. Effective weighted-average interest rate was 2.28%. The company was in compliance with its debt covenants.
- Capital spending and capitalized software development costs totaled $5.7 million; dividends paid were $5.6 million. The board approved an annual dividend rate of $0.48 per share, subject to board discretion and credit-facility restrictions.
Material changes and drivers
- Revenue growth reflected stronger demand for cloud and hosted subscriptions, payment-processing volume and usage-based transaction revenue, as well as acquisitions. MicroEdge contributed $6.6 million of Q1 2015 revenue; WhippleHill also contributed, but its revenue is not separately disclosed.
- Operating income decreased despite higher revenue, primarily due to increased acquisition-related intangible amortization, stock-based compensation and employee severance. Higher operating expenses included increased sales and marketing, research and development, and general and administrative costs.
- ECBU revenue grew 20% to $66.9 million, including $6.6 million from MicroEdge; GMBU grew 14% to $69.9 million, partly reflecting WhippleHill; IBU declined 5% to $10.1 million.
- Operating cash flow weakened mainly because of working-capital timing, including annual rather than quarterly bonus payouts and higher commission payments. Deferred revenue decreased 3% from December 31, 2014 to $215.0 million, partly reflecting seasonal maintenance billings.
- The effective tax rate declined to 29.0% from 42.2%, primarily because of a discrete tax benefit from settling an IRS audit.
Outlook, risks and unusual items
- Management provided no specific full-year revenue or earnings guidance. It expects to continue investing in cloud offerings, payment processing, analytics, product development, sales and marketing, back-office processes, and operating scalability.
- Management expects payment-processing growth to continue weighing on overall gross and operating margin percentages in the near term, as transaction volumes are expected to grow faster than certain other offerings. The shift toward cloud subscriptions may also reduce maintenance renewals and consulting or implementation revenue over time.
- Management stated that available funding and anticipated operating cash flows should be adequate for at least the next 12 months. Liquidity depends on customer renewals and market acceptance; future acquisitions or unanticipated spending could require additional capital.
- Key exposures include variable-rate debt, foreign-currency translation, seasonal revenue and cash flows, and the ability to maintain covenant compliance and dividends. The credit facility matures in February 2019; $271.1 million of scheduled debt maturities fall in 2019.
- The filing reports ordinary-course legal proceedings but says potential liability is not expected to materially affect financial position, results or cash flows. It reports no material off-balance-sheet arrangements and no material change in disclosure controls.
- Q1 results included $1.1 million of employee severance, $0.5 million of acquisition integration costs and $0.1 million of acquisition-related expenses. The MicroEdge purchase-price allocation remained preliminary; final valuations could affect future results and financial position.
Important facts for investors to verify
- How much of reported growth reflects organic performance versus MicroEdge and WhippleHill, and how acquisition integration affects costs and margins.
- Whether subscription and payment-processing growth can continue while sustaining or improving margins and operating cash generation.
- Debt balances, borrowing availability, interest-rate exposure, covenant headroom, and the capacity to fund dividends and future investment.
- The effect of the IRS audit settlement benefit on the tax rate in subsequent quarters, and the eventual impact of the new revenue-recognition standard.
- Changes in deferred revenue, customer renewals, seasonal cash flow, and acquisition-related amortization or purchase-accounting estimates.