Blackbaud, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results; comparisons are with the corresponding 2015 periods unless stated otherwise. Blackbaud provides cloud software, services, and payment solutions to organizations focused on social good, serving approximately 35,000 active customers.
Financial performance
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Revenue | $180.2M | $156.3M | $349.4M | $303.3M |
| Gross profit / margin | $96.6M / 53.6% | $82.8M / 53.0% | $186.0M / 53.2% | $158.0M / 52.1% |
| Operating income / margin | $14.2M / 7.9% | $14.5M / 9.3% | $24.6M / 7.0% | $22.5M / 7.4% |
| Net income | $7.8M | $7.0M | $12.8M | $11.3M |
| Diluted EPS | $0.17 | $0.15 | $0.27 | $0.24 |
| Operating cash flow | Not provided separately for Q2 | $38.0M | $47.6M |
- Q2 revenue rose 15.3%; subscriptions increased 30.0% to $104.0M, while maintenance declined 3.1% to $37.4M, services rose 5.0% to $35.4M, and license fees and other fell 17.5% to $3.3M.
- Q2 operating income declined 2.1% despite higher gross profit, reflecting higher operating expenses. Sales, marketing and customer success expense increased 32.3% to $39.3M.
- H1 operating cash flow fell 20.2%. Investing used $24.2M, including $12.6M for property and equipment and $12.2M for capitalized software development. Financing used $13.9M; dividends paid were $11.4M.
- At June 30, cash and cash equivalents were $15.3M; restricted customer cash was $195.0M, matched by $195.0M due to customers. Total borrowings were $405.1M (carrying value $403.2M), with a 2.33% weighted-average effective rate. The company reported $106.7M of available credit capacity and compliance with debt covenants.
- Current assets were $371.8M and current liabilities $522.4M; reported working capital was negative $150.6M, but working capital excluding deferred revenue was positive $99.9M.
Material changes and management commentary
- Growth was led by cloud subscriptions, including payment processing, and increased customer and transaction volumes. The ongoing shift from perpetual licenses and maintenance to subscriptions reduces upfront license revenue and can weigh on near-term reported growth.
- Smart Tuition, acquired in October 2015, contributed $8.2M of Q2 revenue and $0.6M of operating income; H1 contributions were $17.4M and $1.8M. It also increased subscription-related costs and acquisition amortization.
- Excluding Smart Tuition, management reported revenue growth of $15.7M in Q2 and $28.7M in H1. Foreign exchange reduced reported revenue by $0.9M in Q2 and $2.4M in H1, and operating income by $0.3M and $1.1M, respectively.
- Recurring subscription and maintenance customer retention was approximately 93% for Q2. Management cited improved services utilization and fewer non-billable implementation hours, while investing in sales, customer success, cloud infrastructure, and product development.
- Management’s three-year margin plan targets a 300–600 basis-point improvement in non-GAAP operating margin, from a 17.5% 2014 baseline, by exit 2017. Non-GAAP operating margin was 19.1% in Q2 versus 20.6% a year earlier and 18.8% for H1 versus 19.1%. The filing does not provide specific full-year 2016 financial guidance.
- Management stated available funds and expected operating cash flows should be adequate for at least the next 12 months to fund operations, capital expenditures, debt obligations, and dividends. Dividends are discretionary and subject to credit-facility and cash-flow constraints.
Risks, contingencies, and unusual items
- Debt is primarily variable-rate; interest-rate swaps hedge portions of exposure. Interest expense increased 42.1% in Q2 and 50.0% in H1, primarily due to higher average borrowings after the Smart Tuition acquisition.
- The company entered a 20-year lease for a new Charleston headquarters, expected to be completed in Q1 2018. Phase One rent payments are estimated at approximately $102.0M over the lease term; Phase Two is optional. Total future minimum lease commitments reported were $151.2M.
- Other disclosed commitments include $41.9M of minimum technology-purchase obligations. Ordinary-course legal matters were not considered reasonably likely to have a material adverse effect; no material loss contingencies were recorded.
- On July 12, 2016, Blackbaud acquired Attentive.ly; initial purchase accounting was incomplete, and the company did not expect a material financial effect.
- Management identified no material changes to the risk factors in its 2015 Form 10-K. Foreign-currency movements, customer renewals and retention, the cloud transition, acquisition integration, and the ability to realize planned operating efficiencies remain relevant risks.
Most important facts for investors to verify
- Whether subscription growth and customer retention continue to offset declines in maintenance and perpetual-license revenue, and how the transition affects reported revenue and margins.
- Whether operating cash flow recovers from the H1 decline while the company funds product development, infrastructure, dividends, and the new headquarters lease.
- Debt reduction, interest costs, available revolver capacity, covenant headroom, and the February 2019 credit-facility maturity.
- Progress against the 2017 non-GAAP margin target, including the effects of sales and customer-success investment, stock-based compensation, and acquisition amortization.
- Final accounting for Smart Tuition and Attentive.ly, and the financial implications of the new headquarters lease and other commitments.