Blackbaud, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited results are consolidated. Blackbaud provides on-premise and cloud software and related services to nonprofit organizations; it reported more than 27,000 active customers.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $122.5m | $95.4m | $327.4m | $275.8m |
| Gross profit / margin | $67.3m / 55.0% | $55.7m / 58.4% | $180.7m / 55.2% | $160.7m / 58.3% |
| Operating income / margin | $6.2m / 5.1% | $16.0m / 16.8% | $9.6m / 2.9% | $40.3m / 14.6% |
| Net income | $2.8m | $10.2m | $3.3m | $26.9m |
| Diluted EPS | $0.06 | $0.23 | $0.07 | $0.61 |
For the first nine months, operating cash flow was $39.7m, down from $68.6m. Capital expenditures were $15.4m; investing cash outflow was $296.7m, mainly reflecting the Convio acquisition. Cash and cash equivalents were $25.6m at September 30, 2012, versus $52.5m at year-end 2011; donor-restricted cash of $26.0m was offset by donations payable.
Debt was $245.0m ($10.0m current and $235.0m long-term), with a reported effective interest rate of 2.84%. The company had a $325.0m credit facility, was in covenant compliance, and reported leverage of 2.81 against a maximum of 3.25 and interest coverage of 25.13 against a minimum of 3.50. Dividends were $0.12 per share each quarter through Q3.
Changes and key drivers
- Revenue grew 28% in Q3 and 19% year to date, but excluding acquired-company revenue growth was 5% and 6%, respectively. Subscription revenue rose 82% in Q3 and 49% year to date; excluding acquired companies, it grew 11% and 12%.
- Blackbaud completed its $335.7m Convio acquisition in May, financed with cash and credit-facility borrowings. Convio contributed $31.3m of revenue from acquisition through September 30. The purchase-price allocation remained preliminary.
- Reported operating income fell $9.8m in Q3 and $30.8m year to date. Management cited acquisition and integration costs, acquired-intangible amortization, increased professional fees and hosting investment, as well as the shift from upfront license revenue to subscriptions recognized over contract terms. Services gross margin fell to 23% in Q3 from 32%.
- Non-GAAP operating income, excluding specified acquisition, amortization, stock-compensation and other items, was $20.8m in Q3 versus $21.5m, and $53.3m year to date versus $57.4m. Non-GAAP operating margin was 17% and 16%, respectively, versus 23% and 21%.
Outlook, risks and unusual items
- Management described the nonprofit market as uncertain and customer spending decisions as cautious; it expected near-term operating conditions to remain challenging. It planned continued investment in subscription infrastructure, product development and operational scalability, while pursuing growth and targeted profitability. Management warned that the subscription transition would continue to dilute near-term profitability.
- Full-year 2012 capital expenditures were expected to be $20m–$25m. Management believed available funds and operating cash flows would cover operations, anticipated capital spending and dividends for at least 12 months. The Board declared a further $0.12-per-share dividend for December; future dividends remain discretionary and subject to credit-facility limits.
- Risks include acquisition integration and synergies, customer renewals and demand, long sales and implementation cycles, competition and technological change, key-personnel retention, debt covenants, and foreign-exchange and interest-rate movements. The company used $150m of interest-rate swaps to hedge variable-rate debt. It reported no material market-risk exposure at period-end.
- The filing describes prior-period errors principally involving revenue recognition, income taxes and software-development cost capitalization. Management said the errors were not material to individual prior periods, but revised comparative information because the cumulative correction would have been material if recorded entirely in Q4 2011. Acquisition-related costs included $6.4m year to date; Q3 included $2.8m of integration and restructuring costs. The company also reported a $0.2m cost-method investment impairment year to date.
- Legal claims arise in the ordinary course; management did not expect them to materially adversely affect financial position, results or cash flows. Disclosure controls were assessed as effective; integration-related controls at Convio remained under assessment.
Investor verification priorities
- Separate organic growth from acquisition-driven growth, particularly in subscriptions, and assess customer retention and subscription economics.
- Track service and subscription gross margins, operating expenses, and the timing and effectiveness of Convio integration and planned synergies.
- Review cash conversion, receivables and days sales outstanding, capital spending, and the company’s capacity to service debt while paying dividends.
- Confirm the final Convio purchase-price allocation and monitor acquired goodwill, intangible amortization, and any impairment indicators.
- Review the revised historical figures and underlying accounting corrections, as well as covenant restrictions and any changes to tax exposures or legal contingencies.