Blackbaud, Inc. — Q1 2011 Form 10-Q
Business context and reporting period. Blackbaud provides software and related services to nonprofit organizations, with approximately 24,000 active customers. This unaudited report covers the three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $87.3 million | $76.2 million | +15% |
| Gross profit / margin | $51.0 million / 58% | $45.6 million / 60% | Profit +12% |
| Operating income | $10.3 million | $9.7 million | +6% |
| Net income | $7.6 million | $6.0 million | +27% |
| Basic / diluted EPS | $0.17 / $0.17 | $0.14 / $0.13 | Higher |
| Cash from operations | $17.5 million | $7.3 million | +$10.2 million |
- Revenue mix: subscriptions $25.5 million (+33%), services $24.0 million (+19%), maintenance $31.8 million (+4%), license fees $4.6 million (-12%), and other revenue $1.3 million (+17%). Excluding acquired-company revenue and foreign currency translation, total revenue grew 12%.
- Gross margin declined to 58% from 60%; operating margin was approximately 11.8%, compared with 12.7%. Net margin increased to approximately 8.7% from 7.8%.
- Q1 effective tax rate was 26.8%, versus 38.3%, including a $1.0 million reduction in the valuation allowance for certain state tax attributes. Management cited a projected 2011 annual effective tax rate of 36.3%, excluding period-specific items.
- Cash and cash equivalents were $24.1 million at March 31, down from $28.0 million at year-end. Current assets were $121.3 million and current liabilities $183.7 million; current liabilities include substantial deferred revenue and donations payable.
- No borrowings were outstanding under the $90 million revolving credit facility, which matures in July 2012. Total liabilities were $193.1 million. Operating cash flow funded, alongside cash on hand, the PIDI acquisition and dividends; investing cash outflow was $16.9 million and financing cash outflow was $4.8 million.
Material changes and notable items
- Growth was led by subscriptions, reflecting higher demand for hosted services, online fundraising and data management, and customers’ shift from perpetual licenses to subscription offerings. Management expects the shift away from perpetual licenses to continue.
- Services growth primarily reflected increased consulting and implementation work, particularly for Blackbaud Enterprise CRM. Higher delivery costs and a more skilled consultant mix contributed to services gross margin falling to 24% from 25%.
- Blackbaud acquired Public Interest Data, Inc. (PIDI) on February 1 for approximately $16.6 million in cash. PIDI contributed $1.4 million in Q1 revenue and $0.5 million in operating income. The purchase included $12.6 million of goodwill and $8.2 million of intangible assets. Potential additional consideration is up to $2.5 million; $1.4 million was initially accrued.
- The quarter included an out-of-period adjustment related to subscription-based solutions earned in prior periods. The financial-statement note says it increased operating income by $0.8 million ($0.5 million net of tax); MD&A separately identifies $1.7 million of subscription revenue and a $0.8 million reduction in consulting services revenue. Management considered the adjustment immaterial to prior periods and expected it to be immaterial to full-year 2011.
- Operating income increased by $0.6 million despite $1.0 million of acquisition-related costs, $0.6 million higher stock-based compensation, and $2.9 million higher sales and marketing expense. The latter reflected commissions, additional headcount, branding and marketing for newly packaged offerings.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said the nonprofit market’s economic recovery remained uncertain and expected a challenging operating environment in 2011, with cautious customer spending. It emphasized investment in growth initiatives, leadership and cost management.
- Management believed cash, expected operating cash flow and the credit facility were sufficient for at least the next 12 months to fund operations, capital expenditures and dividends. The board approved a 2011 annual dividend of $0.48 per share; future dividends are not guaranteed.
- Commitments included $63.9 million of future minimum operating lease payments and approximately $3.5 million of minimum third-party purchase commitments through 2013. The headquarters lease is with an entity in which two executives each hold a 4% ownership interest.
- The company reported ordinary-course legal proceedings and did not expect potential liabilities to materially adversely affect financial position, results or cash flows. It reported no material market-risk exposure, no off-balance-sheet arrangements, and effective disclosure controls.
- Key risks cited include economic conditions, long sales and implementation cycles, customer renewals and sales growth, acquisition integration, personnel retention, product execution and technology changes, as well as credit-facility and dividend-policy restrictions.
Important facts for investors to verify
- Reconcile the out-of-period adjustment’s amounts and presentation across the financial-statement note and MD&A, and assess its effect on reported subscription and services growth.
- Separate organic growth from PIDI and foreign-currency effects; evaluate whether subscription growth and the shift from perpetual licenses persist.
- Monitor gross-margin pressure, consulting capacity and costs, and sales and marketing expense as growth investments continue.
- Review PIDI integration, acquired-intangible amortization, goodwill valuation and the contingent earnout liability.
- Assess cash conversion and liquidity in light of working-capital timing, deferred-revenue movements, lease commitments, dividends and the July 2012 credit-facility maturity.