Blackbaud, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the same 2013 periods. Blackbaud provides cloud-based and on-premise software and related services to nonprofit organizations, with more than 30,000 active customers.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $139.4 | $125.5 | $267.0 | $241.1 |
| Gross profit | $74.7 | $68.9 | $139.0 | $130.9 |
| Income from operations | $16.0 | $14.3 | $25.3 | $18.9 |
| Net income | $9.3 | $6.6 | $13.1 | $9.3 |
| Diluted EPS | $0.20 | $0.15 | $0.29 | $0.21 |
| Gross margin | 53.6% | 54.9% | 52.1% | 54.3% |
| Operating margin | 11.5% | 11.4% | 9.5% | 7.8% |
- Revenue rose 11% in both periods reported, but management said growth excluding the impact of a payment-processing gross-versus-net presentation change was 5% in both periods. The change increased reported revenue and cost of revenue without affecting gross profit or operating income.
- Subscription revenue increased 25% in Q2 and 24% year to date; reported subscription gross margin fell to 51% and 50%, respectively, partly because payment-processing costs are now presented gross. Excluding that presentation change, subscription gross margin was 58% in Q2 and 56% year to date.
- Operating cash flow was $45.1, versus $37.5 a year earlier. Investing cash outflow was $42.0, including $32.8 net cash paid for acquisitions; financing cash inflow was $9.6. Cash and cash equivalents ended at $24.8, up from $11.9 at year-end 2013. Donor-restricted cash of $44.3 is matched by donations payable and is not presented as unrestricted cash.
- At June 30, debt was $173.9 before unamortized discount, with $4.4 current and $167.8 long-term net of discount. The company had $147.6 of available borrowing capacity and reported compliance with credit-facility covenants. The reported weighted-average effective rate on term loans was 2.39%.
- Current and long-term deferred revenue totaled $200.4, up $9.8 from December 31, 2013, primarily reflecting subscription renewals and seasonal billings.
Changes, outlook and risks
- Growth was led by cloud and hosted offerings, online payment processing and transaction-based usage revenue. Perpetual license revenue declined 25% in Q2 as customer preferences shift toward subscriptions and large license deals remain variable in timing. Services revenue was broadly flat; maintenance revenue increased.
- Blackbaud acquired WhippleHill Communications on June 16 for $35.0 million in cash, subject to adjustments. The provider of cloud solutions for private K-12 schools contributed immaterial results in the period. The acquisition added $12.3 million of goodwill and $19.0 million of finite-lived intangible assets based on preliminary valuations.
- In February, the company refinanced its credit facility with a five-year, $325 million facility and drew $175 million of term debt to repay prior borrowings. A $1.0 million loss on debt extinguishment and derivative termination was recorded in the first half.
- Management gave no numerical revenue or earnings guidance. It expects continued investment in products, sales and marketing, subscription infrastructure and operating processes. It cautioned that these investments may pressure near-term profitability, and that payment-processing growth may weigh on subscription gross margin. Management believes available funds and expected operating cash flows are adequate for at least 12 months.
- Risks identified include sales and implementation-cycle variability, customer renewals and growth, acquisition integration, competition and technological change, hiring and retention, foreign-exchange and interest-rate movements, and credit-facility restrictions. Approximately 13% of first-half revenue came from outside the U.S.; about $10.0 million of cash was held outside the U.S. Dividend payments are discretionary and subject to credit-facility conditions.
- Legal proceedings arise in the ordinary course; management did not expect potential liabilities to materially affect financial position, results or cash flows. The company expects the new revenue standard, effective for it after December 15, 2016, to affect its financial statements; impact and implementation method were still under evaluation.
Important facts for investors to verify
- Assess underlying growth using comparable revenue that excludes the payment-processing presentation change; confirm the related effects on reported subscription margins.
- Track whether subscription growth and transaction volumes translate into gross profit and operating-margin improvement as investment spending continues.
- Review WhippleHill integration, final purchase-price allocation and contribution to growth and cash generation.
- Monitor debt, covenant headroom, interest-rate exposure, available revolver capacity and the sustainability of dividends under facility restrictions.
- Consider seasonality, renewal trends, deferred-revenue movements and the company’s stated expectation of adequate liquidity for at least 12 months.