Blackbaud, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Blackbaud provides software and related services primarily to nonprofit and education organizations and reports as one operating segment. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $277.6m (+6.2%) | $261.3m | $810.4m (+3.5%) | $783.3m |
| Recurring revenue | $269.0m (+7.9%) | $249.4m | $784.1m (+5.0%) | $746.6m |
| Gross profit / margin | $155.9m / 56.1% | $140.4m / 53.7% | $444.1m / 54.8% | $413.4m / 52.8% |
| Operating income (loss) | $22.0m | ($7.0m) | $12.4m | ($12.9m) |
| Net income (loss) | $9.0m | ($10.3m) | ($3.6m) | ($24.1m) |
| Diluted EPS | $0.17 | ($0.20) | ($0.07) | ($0.47) |
Q3 operating margin was 7.9%, versus negative 2.7% a year earlier. Management’s non-GAAP adjusted EBITDA was $97.1m for Q3 (35.0% margin) and $257.2m for the nine months; these are non-GAAP measures and exclude specified costs, including stock compensation and Security Incident-related costs.
For the nine months, operating cash flow was $203.0m, compared with $189.8m. Capitalized software and content development costs were $44.7m and property and equipment purchases were $4.2m; management-defined non-GAAP free cash flow was $154.1m. Net cash used in financing was $496.7m, substantially affected by changes in restricted customer funds and debt payments.
At September 30, cash and cash equivalents were $31.1m and restricted cash was $359.6m, primarily held for customers. Debt carrying value was $742.6m, including $683.2m under the credit facility; net leverage was 2.11x. Available credit facility capacity was $425.7m. Working capital was negative $358.2m, with customer funds payable a major component. The company reported compliance with its debt covenants.
Material changes versus the comparable period
- Recurring revenue growth more than offset a decline in one-time services and other revenue, which fell 27.6% in Q3 and 28.6% over nine months. Management attributed the decline to less consulting and analytics work and a continuing shift toward cloud, retained, and managed services.
- Gross margin improved, while operating income turned positive in Q3 and improved for the nine-month period. Lower non-stock compensation costs, workforce reductions, and lower Security Incident costs in Q3 contributed; nine-month Security Incident expenses were higher year over year.
- Q3 revenue growth was led by Social Sector revenue of $239.5m; Corporate Sector revenue was $38.1m. Management reported gross dollar retention of approximately 90% for the 12 months ended September 30, broadly consistent with 2022.
- Deferred revenue increased to $418.8m from $385.2m at year-end 2022, reflecting seasonal renewals and billings, including pricing initiatives. Remaining performance obligations were approximately $1.2bn; about half was expected to be recognized within 12 months.
- Debt carrying value declined from $859.0m at December 31, 2022. Unrestricted cash was nearly unchanged.
Outlook, commentary, and risks
- Management expects revenue growth to accelerate in Q4 2023 as pricing changes contribute more fully; it also expects one-time services and other revenue to continue declining compared with 2022. The filing does not provide a clear full-year revenue or earnings forecast.
- Management expects 2023 interest expense of approximately $37m–$41m and intends to reduce net leverage toward 2.0x or less. It said it expects to resume share repurchases in Q4 under the existing $250m authorization, subject to credit facility restrictions and other conditions.
- Pricing and renewal changes include three-year renewals as the standard option, with different rate increases for one- versus three-year terms and annual increases on three-year contracts. Management said nearly 90% of eligible 2023 contracts had renewed through October and that more customers than expected were choosing three-year terms.
- The May 2020 ransomware Security Incident remains a significant exposure. The company recorded approximately $50m of loss-contingency liabilities by September 30. On October 5, 2023, after quarter-end, it settled with 49 states and the District of Columbia for $49.5m, payable in Q4 and already accrued as of June 30. It also agreed to cybersecurity and compliance undertakings. The separate California investigation, customer claims, putative class actions, and other investigations remain unresolved; potential additional losses are not currently estimable and could be material.
- Security Incident-related net pretax expense was $48.6m and net cash outlays were $23.1m in the first nine months. Management estimated full-year 2023 ongoing legal-fee expense of $20m–$30m and related cash outlays of $25m–$35m, excluding prior settlements and accrued contingencies; it expects a significant decrease in ongoing legal-fee expense in 2024.
- Q3 included noncash impairment charges of $5.6m for lease right-of-use assets and $1.1m for property and equipment following a Washington, DC office sublease. The company also identified risks from generative AI, including regulatory, privacy, intellectual property, security, and reputational risks.
- Other obligations include approximately $273.3m of remaining purchase commitments through 2027. The credit facility matures in October 2025. Management believes available funding and expected operating cash flows are adequate for at least the next 12 months, while noting that unanticipated costs or material investments could require additional capital.
Important facts for investors to verify
- Whether recurring revenue growth, pricing changes, and multi-year renewals continue to support growth and retention without materially increasing customer attrition.
- Actual Q4 cash payment of the $49.5m multistate settlement, and the amounts and timing of further Security Incident legal, customer, or regulatory costs—particularly the California matter and unestimable claims.
- Cash available for general corporate use versus restricted customer funds, and the effect of customer-fund movements on reported cash flows and negative working capital.
- Debt reduction, interest expense, covenant headroom, and the conditions for any planned share repurchases.
- Progress on cloud migration, cost controls, and cybersecurity commitments, including whether they affect margins, investment needs, or customer retention.