Blackbaud, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. Blackbaud provides cloud software, services and payment processing to nonprofits, education institutions and other organizations focused on social good. It reported approximately 35,000 customers.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $183.6 million | $169.3 million; up 8.5% |
| Subscriptions revenue | $118.2 million | $96.9 million; up 22.0% |
| Maintenance revenue | $33.8 million | $37.2 million; down 9.1% |
| Services and other revenue | $31.7 million | $35.2 million; down 10.2% |
| Gross profit / margin | $98.1 million / 53.4% | $89.4 million / 52.8% |
| Operating income / margin | $10.6 million / 5.8% | $10.6 million / 6.3% |
| Net income / diluted EPS | $11.5 million / $0.24 | $6.2 million / $0.13 |
| Operating cash flow | $12.8 million | $6.8 million |
- Subscription gross margin improved to 53.5% from 48.7%; maintenance gross margin fell to 82.3% from 85.7%, and services and other gross margin fell to 22.4% from 29.3%.
- Non-GAAP operating income was $34.0 million, up 7.6%, with an 18.5% margin, unchanged year over year. Non-GAAP diluted EPS was $0.46 versus $0.42. These measures exclude specified items, including stock compensation, acquisition-related amortization and severance.
- Cash and cash equivalents were $13.9 million at March 31, down from $16.9 million at year-end. Debt carrying value was $356.4 million, compared with $342.4 million at December 31; available credit capacity was $151.6 million. The company reported $357.7 million of outstanding borrowings in its executive summary.
- Working capital was negative $147.7 million, substantially reflecting customer funds and deferred revenue; working capital excluding deferred revenue was positive $89.4 million. Restricted cash due to customers was $164.7 million, matched by amounts due to customers.
- Q1 cash uses included $9.3 million for property and equipment and capitalized software development, and $5.8 million in dividends. Operating cash flow included offsetting $188.8 million changes in restricted cash and amounts due to customers.
Material changes and drivers
- Growth reflected the shift toward cloud subscriptions, increased customer demand, and higher payment-processing customer and transaction volumes. Subscription growth outpaced subscription cost growth, lifting its gross margin.
- Maintenance and services revenue declined as customers moved from on-premises products to cloud offerings that generally require less implementation work. The company said this transition may weigh on those revenue streams and can temporarily slow reported revenue growth because subscription revenue is recognized over time.
- Operating income was essentially flat despite revenue growth. Management cited investment in sales and customer success, higher severance, rent and stock-based compensation. Sales, marketing and customer success expense rose 18.6%.
- Net income benefited from a $6.1 million discrete tax benefit related to stock-based compensation, versus a $1.1 million benefit in Q1 2016. The reported effective tax rate was negative 35.6%, making the year-over-year net-income increase less indicative of operating growth.
- Revenue by segment: General Markets Group rose 7.9% to $94.9 million; Enterprise Markets Group rose 11.4% to $79.6 million; International Markets Group declined 7.2% to $9.1 million. Recurring-customer retention was approximately 93%, relatively unchanged from full-year 2016.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said it expected available liquidity and anticipated operating cash flows to fund operations, planned capital expenditures, debt obligations and dividends for at least the next 12 months.
- Management continued to emphasize cloud integration and innovation, sales effectiveness, acquisitions in adjacent markets, and operating efficiency. Its previously announced three-year plan targeted 300–600 basis points of non-GAAP operating-margin improvement from a 2014 baseline of 17.5% by the end of 2017.
- On April 3, 2017, after quarter-end, Blackbaud acquired AcademicWorks for $50.0 million cash, financed with a draw on its revolving credit facility. Purchase accounting was incomplete at filing. The acquisition adds scholarship-management offerings and is expected to be reported primarily in EMG.
- The credit facility matures in February 2019. Blackbaud reported compliance with covenants at March 31, 2017; its net leverage ratio was 2.14 against a maximum of 3.50, and interest coverage was 16.40 against a minimum of 2.50. Dividends and repurchases are subject to facility restrictions; future dividends are not guaranteed.
- Commitments included $188.9 million of operating lease payments and approximately $51.0 million of minimum third-party technology purchase commitments. Management reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements. Litigation and indemnification exposures are discussed, but no material provision was recorded for the described matters.
- Seasonality is relevant: professional-services and transaction revenue are typically lower in Q1, while customer renewals and cash flows vary across quarters. Foreign currency effects on Q1 revenue and operating income were described as insignificant.
Important facts for investors to verify
- How much of subscription growth and margin improvement is recurring and organic, and how migration affects maintenance and services revenue.
- The extent to which the unusually favorable Q1 tax benefit affects comparability of net income and EPS.
- AcademicWorks’ final purchase accounting, contribution to revenue and earnings, and impact on borrowings and leverage.
- Whether customer retention, deferred revenue and operating cash flow trends support the company’s stated liquidity outlook and dividend policy.
- Progress toward the 2017 non-GAAP margin-improvement target, including the company’s adjustments and reconciliation to GAAP results.