Blackbaud, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. Blackbaud provides on-premise and cloud-based software and related services for nonprofit organizations, serving approximately 24,000 active customers. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless noted.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $95.5 | $83.2 | $276.2 | $240.1 |
| Gross profit | $55.9 | $50.0 | $161.2 | $144.5 |
| Gross margin | 58.5% | 60.0% | 58.4% | 60.2% |
| Operating income | $15.7 | $13.1 | $39.7 | $33.9 |
| Net income | $9.8 | $8.5 | $26.3 | $21.3 |
| Diluted EPS | $0.22 | $0.20 | $0.60 | $0.48 |
| Operating cash flow | Not separately provided | Not separately provided | $67.7 | $48.9 |
- Q3 and nine-month revenue each grew 15%. Subscriptions rose 23% and 27%, respectively; services increased 24% and 26%; maintenance grew 5% in both periods. License fees fell 4% in Q3 and 15% year to date.
- Operating income increased $2.6 million in Q3 and $5.8 million year to date. Higher revenue was partly offset by increased operating costs, stock-based compensation and acquisition costs.
- Cash and cash equivalents were $52.0 million at September 30, up from $28.0 million at year-end 2010. Current assets were $171.7 million and current liabilities $216.5 million; deferred revenue was the largest current liability at $155.0 million.
- There were no borrowings under the new $125 million revolving credit facility at quarter-end. Total liabilities were $226.4 million; the filing does not report outstanding funded debt at quarter-end.
- Cash flow: operating activities provided $67.7 million; investing used $28.6 million, including $16.5 million for an acquisition and $13.0 million for property and equipment; financing used $14.4 million, including $16.0 million of dividends. Cash increased $24.0 million.
Material changes and management commentary
- Growth reflected higher demand for hosted solutions, online fundraising and data management, alongside increased consulting and training activity. Management described an ongoing customer shift from upfront perpetual licenses to subscription-based pricing.
- Subscription growth came with lower segment gross margins: 63% in Q3 versus 67% a year earlier, and 65% year to date versus 67%. Management attributed this to investment in infrastructure and capacity. Services gross margin improved to 36% from 32% in Q3 and 31% from 28% year to date.
- Blackbaud acquired Public Interest Data, Inc. (PIDI) on February 1, 2011 for $16.6 million in cash. PIDI contributed $5.6 million in revenue during the first nine months. Up to $2.5 million of additional consideration may be payable based on revenue targets; $1.4 million was initially accrued as contingent consideration.
- During the first nine months, an out-of-period adjustment increased operating income by $0.8 million pre-tax ($0.5 million after tax) for subscription revenue and related commissions. The filing says it was immaterial to the applicable prior periods and expected to be immaterial to full-year 2011; no such adjustment was recorded in Q3.
- Management said it expected customers to remain cautious in spending for the rest of 2011 given economic uncertainty. It believed cash, operating cash flow and available credit would be adequate for at least the next 12 months, including operations, capital expenditures and dividends. Expected full-year 2011 capital expenditures were $15 million to $20 million.
Risks, commitments and contingencies
- Management identified economic uncertainty, long sales and implementation cycles, customer renewals, competition and technology changes, acquisition integration, growth management, key-personnel retention, and credit-facility and dividend constraints as risks.
- Future minimum operating lease commitments were $61.8 million; minimum third-party purchase commitments were approximately $4.7 million through 2013. The company also cited no material adverse effect expected from ordinary-course legal proceedings.
- Approximately $18.2 million of cash was held outside the U.S.; repatriation for U.S. use could incur U.S. taxes. Approximately 20% of nine-month revenue came from outside the U.S.; management said currency exposure had not materially affected results.
- The board declared a fourth-quarter dividend of $0.12 per share after quarter-end. The filing notes dividends are discretionary and may be discontinued. The share repurchase program had $50 million remaining; no program repurchases occurred in the first nine months.
Important facts for investors to verify
- Reconcile management’s organic-growth descriptions: the executive summary cites approximately 11% growth excluding foreign currency and acquired companies, while the revenue discussion cites 12% excluding acquired companies.
- Assess whether subscription growth can sustain margins as infrastructure, hosting and staffing costs rise, and whether the perpetual-license decline continues.
- Review the PIDI contingent-consideration estimate, integration performance and acquisition contribution to reported growth.
- Track operating cash conversion, capital spending, deferred revenue, dividend capacity and compliance with credit-facility terms.
- Evaluate the out-of-period adjustment and tax assumptions, including the $1.0 million valuation-allowance reduction and $1.7 million of unrecognized tax benefits that could affect the effective tax rate if recognized.