Blackbaud, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; filed August 7, 2012. Blackbaud provides on-premise and cloud-based software and related services for nonprofit organizations, with more than 27,000 active customers.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $110.2M | $93.8M | $204.9M | $180.4M |
| Gross profit / margin | $59.7M / 54.2% | $54.5M / 58.1% | $113.3M / 55.3% | $105.0M / 58.2% |
| Operating income (loss) | $(1.9)M | $14.5M | $3.4M | $24.3M |
| Net income (loss) | $(2.3)M | $9.4M | $0.5M | $16.7M |
| Diluted EPS | $(0.05) | $0.21 | $0.01 | $0.38 |
- Q2 revenue increased 17%; six-month revenue increased 14%. Excluding acquired companies, management reported growth of 5% and 7%, respectively.
- Subscriptions revenue rose 46% in Q2 and 33% for six months, reflecting growth in hosted and online offerings and acquired revenue. License fees fell 12% in Q2, while services gross margin declined to 20% from 28%.
- Operating cash flow was $10.9M for six months, down from $38.4M. Investing used $291.9M, principally for acquisitions; financing provided $249.7M, including debt proceeds.
- Cash and cash equivalents were $21.2M at June 30, down from $52.5M at year-end. Total debt was $259.6M; current debt was $165.0M. Current assets were $174.9M and current liabilities $413.5M, including deferred revenue and matching donor-restricted cash/donations payable.
- Six-month dividends paid were $10.8M. The board approved an annual 2012 dividend rate of $0.48 per share and declared a Q3 dividend of $0.12 per share.
Material changes and significant items
- Blackbaud acquired Convio on May 4 for approximately $335.3M, funded with cash and credit-facility borrowings. Convio contributed $10.6M revenue from acquisition through June 30. Purchase accounting remained preliminary; recorded goodwill was approximately $172.5M.
- GAAP operating results were pressured by acquisition transaction and integration costs, acquired-intangible amortization, higher hosting and infrastructure costs, and business optimization and accounting-process re-engineering expenses. Management cited $11.0M of incremental Convio-related costs in Q2 and $12.1M for six months.
- Non-GAAP operating income was $19.3M in Q2 versus $19.9M, and $32.6M for six months versus $35.9M. These measures exclude multiple expenses, including stock compensation, acquisition costs, amortization and the Convio deferred-revenue write-down; they are not GAAP results.
- The company revised prior-period financial statements for errors principally involving revenue recognition, income taxes and software-development-cost capitalization. It said the errors were not individually or collectively material to the affected prior periods, but the cumulative correction would have been material if booked entirely in Q4 2011. Comparative figures in this filing reflect revisions.
Outlook, risks and contingencies
- Management said the nonprofit market’s economic recovery and customer spending remained uncertain, and expected a challenging operating environment for the remainder of 2012. It planned continued investment in subscription infrastructure, back-office processes and product development while pursuing targeted profitability.
- Management expected 2012 capital expenditures of $20M–$25M and said available funds and anticipated operating cash flows should cover operations, planned capital expenditures and dividends for at least 12 months.
- The amended $325M credit facility matures in February 2017. At June 30, the company reported covenant compliance, with leverage of 2.96x against a maximum 3.25x and interest coverage of 52.85x against a minimum 3.50x. A $150M notional interest-rate swap portfolio hedged variable-rate exposure.
- Risks include customer renewals and spending, lengthy sales and implementation cycles, acquisition integration, hosting/product execution, debt and credit-facility restrictions, foreign-exchange exposure, and the discretionary nature of dividends. The company reported no material expected adverse effect from ordinary-course legal proceedings.
Important facts for investors to verify
- How Convio’s final purchase-price allocation, integration progress and subscription growth compare with expectations.
- Whether operating cash flow recovers, particularly given increased days sales outstanding and lower collections cited by management.
- Whether subscription and services margins improve as infrastructure investments and integration costs evolve.
- Debt maturity classification, refinancing or repayment plans, covenant headroom and sensitivity to variable interest rates.
- The effects of the disclosed prior-period revisions and whether any further accounting or control issues emerge; management stated disclosure controls were effective and was continuing to assess Convio’s control environment.