Blackbaud, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 4, 2016. Blackbaud provides software and services to nonprofit, education, corporate and other social-good organizations, with approximately 35,000 customers. Unless stated otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $183.1 | $158.8 | $532.5 | $462.1 |
| Gross profit / margin | $99.7 / 54.5% | $84.6 / 53.3% | $285.7 / 53.7% | $242.6 / 52.5% |
| Operating income / margin | $13.5 / 7.4% | $14.0 / 8.8% | $37.8 / 7.1% | $36.4 / 7.9% |
| Net income | $8.9 | $7.9 | $24.2 | $19.2 |
| Diluted EPS | $0.19 | $0.17 | $0.51 | $0.41 |
Q3 revenue rose 15.3% year over year; excluding Smart Tuition, acquired in October 2015, management reported an increase of $14.0 million. Nine-month revenue rose 15.2%; excluding Smart Tuition, the increase was $42.8 million. Subscription revenue grew 30.3% in Q3 and 31.2% for the nine-month period. Maintenance revenue declined 4.7% and 4.1%, respectively, as customers migrated from perpetual-license products to cloud subscriptions. Services revenue increased 2.0% and 3.5%. Subscription gross margin slipped to 50.7% in Q3 from 51.2%, mainly due to payment-processing mix and higher amortization; services gross margin improved to 34.2% from 26.9%.
GAAP operating income declined 3.1% in Q3 but increased 3.7% for nine months. Sales, marketing and customer-success spending increased 30.7% in Q3, reflecting growth investments. Net income benefited from a lower effective tax rate: 17.9% in Q3 and 18.0% for nine months, versus 35.9% and 35.2%. The decrease primarily reflected discrete tax benefits associated with early adoption of stock-compensation accounting guidance. Non-GAAP diluted EPS was $0.45 for Q3 and $1.33 for nine months; these measures exclude specified items, including stock compensation and acquisition-related amortization.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $100.1, compared with $89.5 a year earlier. Investing used $37.9, including $15.5 for property and equipment and $19.1 in capitalized software development; financing used $61.2. Cash and cash equivalents were $16.5 at September 30.
- Debt principal totaled $376.7, down from $410.2 at December 31, 2015; the balance-sheet carrying amount was approximately $375.0 after unamortized discount. Cash less principal debt implies approximately $360.2 of net debt, excluding restricted customer funds. Available credit-facility capacity was $134.0.
- Debt matures in February 2019. The company reported compliance with its covenants; net leverage was 2.39x against a maximum of 3.50x, and interest coverage was 14.84x against a minimum of 2.50x. Weighted-average effective interest rate was 2.44%.
- Current assets were $292.8 and current liabilities $454.7; reported working capital was negative $161.9, largely reflecting customer funds and deferred revenue. Restricted cash of $138.1 was matched by an equal amount due to customers and should not be treated as freely available liquidity.
Outlook, risks and notable items
- No specific financial guidance was provided in the filing. Management said available funding and anticipated operating cash flow should be adequate for at least the next 12 months to fund operations, capital expenditures, debt obligations and dividends.
- Management’s priorities include cloud-based subscription offerings, sales effectiveness, acquisitions and investments in adjacent markets, and a three-year margin plan targeting 300–600 basis points of non-GAAP operating-margin improvement over the 2014 baseline by exit 2017. Q3 non-GAAP operating margin was 18.6%, versus 19.1% a year earlier; management attributed the decline mainly to sales and customer-success investments.
- Management reported 92% retention among customers with recurring subscription or maintenance contracts for the referenced period. It expects maintenance declines to continue as customers migrate to cloud subscriptions; the shift may also defer revenue that otherwise would be recognized upfront under perpetual licenses.
- Foreign exchange reduced nine-month revenue by $3.4 and operating income by $1.5. Smart Tuition contributed $10.3 of Q3 revenue and $1.0 of operating income. Attentive.ly was acquired in July for $3.9 and had an insignificant reported operating contribution.
- A new 20-year headquarters lease is expected to begin after construction completion, estimated for Q1 2018. Phase One estimated rent payments total approximately $102.0 over the lease term; total disclosed minimum operating-lease commitments were $173.0. The company also had $35.7 of remaining minimum third-party technology purchase commitments.
- The filing reports no material change to previously disclosed risk factors, no material loss contingencies recorded, and effective disclosure controls. Key risks include customer renewals and market acceptance, execution of the cloud transition and acquisitions, foreign-exchange and variable-rate debt exposure, and the company’s ability to manage substantial lease and debt commitments. The company cautions that forward-looking statements are uncertain and undertakes no obligation to update them.
Important facts for investors to verify
- How much subscription growth is organic after separating Smart Tuition and other acquisition effects, and whether recurring-customer retention holds up.
- Whether cloud growth and services-efficiency gains offset falling maintenance revenue, payment-processing costs, amortization and higher selling and development investment.
- How much reported earnings growth reflects recurring operations versus ASU 2016-09 tax benefits and other non-GAAP adjustments.
- Debt repayment or refinancing plans ahead of the February 2019 maturity, covenant headroom, and the effect of interest rates on borrowing costs.
- The long-term cash impact of the headquarters lease, technology commitments, dividends and capitalized software development.