Blackbaud, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Blackbaud provides cloud software, services and payment solutions to nonprofit, education, healthcare and other social-good organizations. The company reports as one operating segment.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $219.2 million | $223.6 million | Down 2.0% |
| Recurring revenue | $206.8 million | $204.9 million | Up 0.9% |
| One-time services and other revenue | $12.4 million | $18.8 million | Down 33.7% |
| Gross profit / gross margin | $115.8 million / 52.8% | $118.8 million / 53.1% | Margin down 0.3 percentage points |
| Income from operations / operating margin | $6.6 million / 3.0% | $8.4 million / 3.8% | Operating income down 21.1% |
| Net income (loss) | $(0.2) million | $4.6 million | Declined to a loss |
| GAAP diluted EPS | $0.00, rounded | $0.10 | Declined |
| Cash provided by (used in) operations | $30.1 million | $(24.5) million | Improved $54.6 million |
| Non-GAAP free cash flow | $17.3 million | $(38.3) million | Improved |
Margins and adjusted measures: Non-GAAP gross margin was 59.4%, versus 58.4%. Non-GAAP operating income was $47.2 million, versus $33.9 million, and non-GAAP diluted EPS was $0.68, versus $0.51. These measures exclude specified costs, including stock-based compensation; GAAP results were materially weaker.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $27.8 million; restricted cash was $255.2 million, primarily funds due to customers. The corresponding “due to customers” liability was $254.9 million.
- Total debt carrying value was approximately $550.8 million, up from $531.0 million at December 31, 2020. Debt included $488.8 million under the 2020 Credit Facility. The weighted average effective interest rate was 3.14%.
- Working capital was negative $180.9 million. Blackbaud reported $406.0 million of available borrowing capacity and compliance with credit-facility covenants; net leverage was 1.79x against a 4.00x maximum.
- Management said available funding sources and expected operating cash flows should be adequate for at least the next 12 months. The company had $16.6 million of cash held outside the U.S. and did not anticipate needing to repatriate it.
- Cash used in investing was $12.8 million, including $9.3 million of capitalized software development and $3.5 million of property and equipment purchases. Financing activities used $379.6 million, including a $353.6 million reduction in amounts due to customers, $28.1 million of share repurchases and $18.4 million for employee tax withholding, partly offset by net borrowing.
Material changes and management commentary
- Recurring revenue growth was driven by a $2.8 million increase in transactional revenue, associated primarily with virtual and online fundraising, partly offset by a $0.9 million decrease in contractual recurring revenue. The latter reflected legacy maintenance migration to cloud subscriptions and pandemic-era bookings shortfalls.
- One-time revenue fell mainly because consulting revenue decreased $4.7 million, amid fewer implementation and customization services, and analytics revenue decreased $1.0 million. Management also cited a deliberate shift in sales incentives toward cloud solutions.
- GAAP operating income declined despite lower sales and marketing costs, as stock-based compensation expense rose to $30.0 million from $13.6 million. Management attributed the increase to changes in incentive awards and equity grant terms. Lower non-stock compensation and travel costs partly offset the increase.
- Customer retention for recurring-revenue contracts was approximately 93% for the 12 months ended March 31, 2021, unchanged from the full year ended December 31, 2020. Remaining performance obligations were approximately $776 million; about 60% was expected to be recognized over the next 12 months.
- Management reported Q1 bookings above plan and above Q1 2020, and said it was optimistic pandemic-related pressure on contractual recurring-revenue growth would abate as 2021 progressed. No specific quantified full-year revenue or earnings guidance is provided in the filing.
- COVID-19’s continuing effect on customer markets and purchasing decisions remained uncertain. Management noted Q1 is historically seasonal for bookings and cash flow, and expected employee salary merit increases to return in July 2021.
Risks, contingencies and unusual items
- 2020 security incident: Blackbaud reported $12.8 million of incident-related expenses and offsetting probable insurance recoveries in Q1. Cumulative recorded expenses were $22.6 million and cumulative probable recoveries were $22.1 million; only $6.4 million of recorded recoveries had been paid by March 31. The company had $50 million of insurance coverage above a $250,000 deductible, but said losses could exceed coverage and it could not estimate a possible loss range or timing.
- Related matters included approximately 630 customer reimbursement claims, 30 putative consumer class actions, and inquiries or investigations involving state attorneys general and multiple U.S. and foreign agencies. Potential outcomes, including damages, settlements, fines or other remedies, were uncertain and could be material. Blackbaud expected further response and security-enhancement costs.
- Contractual purchase commitments were approximately $79.0 million through 2024. The company also disclosed ordinary-course legal proceedings and tax uncertainties; it stated that it could not rule out a material impact from an unfavorable resolution of legal matters.
- The 131.5% effective tax rate reflected discrete tax expense against low pretax income, including stock-based compensation tax effects. The company also identified interest-rate and foreign-currency exposure; it did not expect LIBOR’s planned phaseout to have a significant effect.
Most important facts for investors to verify
- Whether recurring-revenue growth and bookings recover from pandemic-era pressure, and whether retention remains near 93%.
- Whether transactional fundraising revenue persists and offsets continuing declines in one-time services and legacy maintenance.
- The trend in stock-based compensation and its effect on GAAP operating income, net income and dilution, alongside the company’s non-GAAP adjustments.
- Cash generation and liquidity, considering negative working capital, restricted customer funds, debt maturities and the seasonal movement in customer balances.
- Developments in the security-incident claims and investigations, insurance collections, potential uncovered losses and related expenses.
- Execution against the $776 million of remaining performance obligations and management’s expectation to recognize about 60% within 12 months.