Blackbaud, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated financial statements; dollar amounts below are in millions unless noted. Blackbaud provides software and related services to nonprofit organizations and reported approximately 23,000 active customers.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $80.7 | $76.4 | $156.9 | $151.2 |
| Gross profit | $49.0 | $45.9 | $94.6 | $90.4 |
| Gross margin | 60.7% | 60.1% | 60.3% | 59.8% |
| Operating income | $11.2 | $10.8 | $20.8 | $18.6 |
| Net income | $6.8 | $6.6 | $12.7 | $10.7 |
| Diluted EPS | $0.15 | $0.15 | $0.29 | $0.25 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $24.7 | $34.5 |
- Revenue grew 6% in Q2 and 4% for the six-month period; excluding foreign currency translation, growth was 5% and 2%, respectively.
- Maintenance revenue increased 7% in Q2 and 8% year to date; subscription revenue increased 15% in both periods. Together, these recurring categories represented 64% of revenue.
- Services revenue fell 7% in Q2 and 6% year to date. Six-month license-fee revenue declined 8%, despite a 21% Q2 increase, partly reflecting timing of enterprise license arrangements.
- Q2 operating margin was approximately 13.8% versus 14.2%; six-month operating margin was approximately 13.3% versus 12.3%. Net margins were approximately 8.4% and 8.6% for Q2, and 8.1% and 7.1% for the six-month periods, respectively.
Financial position and capital
- At June 30, cash and cash equivalents were $13.3 million, down from $22.8 million at year-end 2009. Donor-restricted cash of $6.9 million is separately reported and is matched by donations payable.
- Total current assets were $105.6 million and current liabilities were $182.0 million. Current liabilities included $138.2 million of deferred revenue.
- Total debt was approximately $4.2 million: $3.5 million outstanding under the revolving credit facility and a $0.7 million equipment note. The facility provides up to $90 million and matures in July 2012; the credit-facility borrowing rate was 1.35% at June 30.
- Six-month investing cash outflow was $9.3 million, including $6.8 million for property and equipment. Financing cash outflow was $24.5 million, including $21.5 million of share repurchases and $9.8 million of dividends; $4.0 million of new debt proceeds partly offset these uses.
- Blackbaud repurchased 958,086 shares for $21.5 million in the first half. In August 2010, after quarter-end, the board authorized a new $50 million repurchase program. The board also declared a $0.11-per-share Q3 dividend after quarter-end.
Management commentary, outlook and risks
- Management attributed recurring-revenue growth to high renewals, new maintenance contracts, and demand for hosting, online fundraising and data-management offerings. It said customer buying preferences are shifting from perpetual licenses toward subscriptions.
- Management expected a challenging 2010 operating environment as customers remained cautious about spending. It planned to pursue growth initiatives while controlling costs as needed. No quantified revenue or earnings guidance was provided.
- Management said operating cash flow and available funding were expected to be adequate for at least the next 12 months. Dividends and repurchases are discretionary and depend in part on cash generation, economic conditions and credit-facility restrictions.
- Risks cited include weak economic conditions, longer sales and implementation cycles, customer renewals and sales growth, product competitiveness and technology changes, acquisition integration, key-person retention, growth management, and constraints or risks associated with dividends, repurchases and credit arrangements.
- Legal proceedings arise in the ordinary course; the company did not expect potential liabilities to materially affect its financial position, results or cash flows. Minimum third-party purchase commitments were $5.7 million through 2013; future minimum lease commitments were approximately $67.0 million.
Unusual items and reporting notes
- The company recorded net out-of-period adjustments that increased first-half expense by $0.2 million, net of tax: a $0.3 million net-of-tax compensation accrual reversal was offset by $0.5 million of commission expense related to correcting deferred-sales-commission recognition. Management considered the adjustments immaterial to affected periods and expected full-year impact.
- The business was reorganized into three reportable units effective January 1, 2010; prior-year segment data was recast. Goodwill impairment testing at reorganization found no impairment.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether maintenance and subscription growth and customer renewal rates continue to offset weakness in perpetual licenses and services.
- Whether accounts-receivable collections improve: receivables rose to $62.0 million, and management cited timing-related collection weakness as a drag on operating cash flow.
- How repurchases, dividends and capital expenditures affect cash balances and borrowing needs; the board’s dividend and repurchase decisions are not guaranteed.
- The future effect of deferred-sales-commission accounting corrections and adoption of ASU 2009-13, which the company was evaluating for required adoption in 2011.
- Exposure to economic conditions, foreign-currency movements, lease obligations, contingent tax matters and the company’s ability to sustain growth in hosted and subscription offerings.