Blackbaud, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Blackbaud provides cloud-based and on-premise software and related services to nonprofit, charitable giving, and education organizations; it reported more than 30,000 active customers.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $144.6 million | $127.9 million | $411.6 million | $368.9 million |
| Gross profit / margin | $76.5 million / 52.9% | $71.7 million / 56.1% | $215.4 million / 52.3% | $202.6 million / 54.9% |
| Operating income / margin | $13.5 million / 9.3% | $18.0 million / 14.1% | $38.8 million / 9.4% | $36.9 million / 10.0% |
| Net income | $10.4 million | $9.4 million | $23.5 million | $18.7 million |
| Diluted EPS | $0.23 | $0.21 | $0.51 | $0.41 |
| Operating cash flow | Not separately stated | Not separately stated | $85.5 million | $78.0 million |
Q3 revenue rose 13%, while operating income fell 25%; lower operating income was more than offset at the net-income level by a lower tax provision. Nine-month revenue increased 12%, operating income 5%, and net income 26%. The effective tax rate was 15.4% for Q3 and 30.5% year to date, versus 43.0% and 41.7%, respectively, in 2013; discrete tax benefits included $1.6 million from statute expirations and $1.0 million from a lower U.S. state tax rate.
Subscription revenue grew 29% in Q3 and 25% year to date, while perpetual license revenue declined 29% and 13%, respectively, reflecting customers’ shift toward hosted and subscription offerings. Services revenue was broadly flat. Q3 subscription gross margin was 50%, versus 59%; excluding the payment-processing presentation change, management reported margins of 57% versus 59%. Maintenance gross margin improved to 83% from 81%.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $54.0 million at September 30, compared with $11.9 million at year-end 2013. Donor-restricted cash of $50.1 million was matched by donations payable and should not be treated as unrestricted liquidity.
- Nine-month operating cash flow was $85.5 million. Investing cash outflow was $47.9 million, including $33.3 million for acquired businesses; financing cash inflow was $4.7 million. Dividends paid totaled $16.6 million.
- Debt at September 30 was $172.8 million principal ($171.1 million carrying amount, net of discount and current portion presentation); the reported debt balance included $4.4 million current and $166.8 million long-term net of discount. The term loan’s weighted-average effective rate was 2.15%. The company was in compliance with credit-facility covenants.
- Following the October 1 MicroEdge acquisition, Blackbaud reported approximately $315 million outstanding on letters of credit, revolving loans, and term loans, with approximately $108 million available under the revolver. Management said available funding and expected operating cash flows should cover operations, capital expenditures, debt obligations, and dividends for at least 12 months.
Changes, outlook, and notable items
- Reported revenue growth includes a prospective change, effective October 2013, from net to gross presentation for certain payment-processing services. The change increased reported revenue and cost of revenue but did not affect gross profit, operating income, or net income; therefore reported revenue and margins are not fully comparable with prior periods.
- WhippleHill, acquired in June for $35.0 million in cash, contributed $2.5 million of revenue from acquisition through September 30. Its results were included in the quarter; purchase accounting remained preliminary.
- On October 1, Blackbaud completed its $160 million cash acquisition of MicroEdge, financed with cash and $140 million of revolving borrowings. MicroEdge results are not included in Q3. The company also increased revolving commitments by $100 million.
- Management emphasized growth in cloud subscriptions, payment processing, analytics, product investment, and operational efficiency. It expects near-term profitability pressure from investment and the transition from upfront license revenue to subscription revenue, and expects payment-processing growth to weigh on subscription gross-margin percentage. It also anticipated additional incremental R&D expense during the remainder of 2014; no specific revenue or earnings guidance was provided.
- Non-GAAP operating income declined 6% in Q3 and 3% year to date; non-GAAP operating margin was 19% and 18%, respectively, down from 23% and 21%. Management attributed the declines principally to strategic operating investments and, for margin percentages, the gross-versus-net presentation change.
- Other considerations include variable-rate debt and foreign-exchange exposure, seasonal revenue and cash-flow patterns, dividend and share-repurchase restrictions under the credit facility, and ordinary-course legal claims. Management said it did not expect the legal matters to materially affect results or financial position. The $0.996 million year-to-date debt-extinguishment and derivative-termination loss was associated with the February refinancing.
Most important facts for investors to verify
- Underlying subscription growth and margins after separating payment-processing gross presentation and acquired revenue.
- Post-MicroEdge debt, borrowing availability, interest costs, covenant headroom, and integration performance.
- Whether operating investment converts into the targeted growth and margin improvement, given Q3’s lower GAAP operating income and margins.
- Sustainability of earnings growth in light of unusually favorable tax benefits and the company’s expected transition-related margin pressure.
- Cash-flow conversion and dividend capacity, distinguishing unrestricted cash from donor-restricted funds.