Blackbaud, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 1, 2022. This is an annual report, not a standalone fourth-quarter earnings report. Blackbaud provides cloud software, payment processing, data intelligence and related services to nonprofit, education, healthcare, faith, arts and other social-good organizations. It reports one operating and reportable segment.
Financial performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Revenue | $927.7 million | $913.2 million | Up 1.6% |
| Recurring revenue | $880.9 million | $850.7 million | Up 3.5%; transactional recurring revenue rose to $279.5 million from $259.5 million |
| One-time services and other revenue | $46.9 million | $62.5 million | Down 24.9%, reflecting the shift to cloud subscriptions and less consulting and analytics work |
| Gross profit / margin | $484.5 million / 52.2% | $485.2 million / 53.1% | Margin down 0.9 percentage points |
| Operating income / margin | $24.9 million / 2.7% | $37.2 million / 4.1% | Operating income down 33.1% |
| Net income / diluted EPS | $5.7 million / $0.12 | $7.7 million / $0.16 | Net income down 26.2% |
| Cash from operations | $213.7 million | $148.0 million | Up 44.4%; management cited working-capital improvement and higher earnings before noncash items |
| Non-GAAP free cash flow | $161.5 million | $76.1 million | Up 112.2%; defined as operating cash flow less property/equipment and capitalized software spending |
Stock-based compensation was $120.4 million, up from $87.3 million, and was a substantial contributor to the gap between GAAP and adjusted results. Non-GAAP operating income was $200.8 million, up 3.1%, and non-GAAP diluted EPS was $3.04, up 3.4%. These are company-defined measures and exclude several costs; they should not be treated as substitutes for GAAP results.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $55.1 million at year-end; separately reported restricted cash of $596.6 million was primarily customer funds and is not equivalent to freely available company cash.
- Total debt principal was $961.2 million, versus $534.2 million a year earlier. The company reported a 3.31-to-1.00 net leverage ratio and $239.5 million of available borrowing capacity under its credit facility.
- Working capital was negative $258.7 million. Customer-related restricted cash and corresponding amounts due to customers are significant balance-sheet items.
- Blackbaud generated $213.7 million from operations, spent $419.1 million net on the EVERFI acquisition and $52.2 million on property/equipment and capitalized software, and repurchased $108.4 million of stock. It paid no dividends in 2021 and said it did not anticipate cash dividends for the foreseeable future.
- The company stated that available funds and anticipated operating cash flows should be adequate for at least the next 12 months, while noting that acquisitions, unanticipated spending and Security Incident costs could require additional capital.
Material changes and notable items
- EVERFI acquisition: Acquired on December 31, 2021 for approximately $743.8 million: $440.1 million cash and 3,844,423 shares valued at approximately $303.6 million. It added $422.8 million of goodwill and $457.4 million of identifiable intangible assets. Because the acquisition closed on year-end, EVERFI contributed no material reported 2021 revenue; purchase-price allocation remained preliminary.
- Revenue mix and margins: Recurring revenue growth was offset by a sharp decline in one-time services revenue and higher recurring costs, including transaction-processing costs, hosting, contractors and compensation. GAAP gross profit was nearly flat, while operating income and net income declined.
- Security Incident: Costs related to the May 2020 ransomware incident were $40.6 million gross in 2021, largely offset by $38.7 million of probable insurance recoveries. The company said total costs exceeded insurance limits during the first quarter of 2022. It expected $25 million to $35 million of net cash outlays for 2022 legal fees and could not reasonably estimate the total possible loss; no loss-contingency liability was recorded at year-end.
- Share-based pay: Changes to compensation plans and equity award terms contributed to the increase in stock-based compensation expense; management expected expense to remain above historical levels.
- Workforce and offices: Blackbaud shifted to a remote-first model and closed fixed offices other than its Charleston headquarters. It recorded $12.5 million of related pretax real-estate costs in fourth-quarter 2021.
- Control and audit scope: Management and the auditor concluded internal control over financial reporting was effective, but EVERFI was excluded from the year-end assessment and audit because it was acquired on December 31, 2021. PwC completed the 2021 audit; Ernst & Young was engaged for 2022.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected 2022 capital expenditures, including capitalized software development, of approximately $60 million to $70 million.
- Management described signs of recovery in the social-good sector, while emphasizing continuing uncertainty from COVID-19, including potential customer spending delays, longer sales cycles and pressure on fundraising-dependent customers. It said digital giving had accelerated during the pandemic.
- Key risks include cybersecurity and data privacy, the ongoing Security Incident litigation and investigations, indebtedness and covenant compliance, integration of EVERFI, competition, customer renewals, charitable giving levels, and execution of the transition to cloud subscriptions. The filing identifies 19 putative consumer class-action cases related to the incident, numerous customer reimbursement requests and governmental inquiries or investigations.
- On January 31, 2022, the credit agreement was amended, including revised leverage covenants: no more than 4.00-to-1.00 through the quarter ending December 31, 2023, then 3.75-to-1.00 beginning with the quarter ending March 31, 2024.
Investor verification priorities
- Track Security Incident insurance exhaustion, legal cash costs, claims, investigations and any eventual estimate or recognition of loss contingencies.
- Assess whether EVERFI delivers expected growth and cross-selling benefits, and monitor final purchase accounting, integration costs and the added debt burden.
- Reconcile modest GAAP revenue growth and declining GAAP operating income with non-GAAP results; review the scale and persistence of stock-based compensation and other exclusions.
- Monitor cash generation, freely available liquidity, leverage and compliance with the amended credit covenants, distinguishing unrestricted cash from customer-restricted funds.
- Evaluate recurring customer retention (approximately 93% in both 2021 and 2020), subscription renewals, transactional payment volumes and the continued shift away from maintenance and one-time services.
- Review EVERFI’s integration into financial reporting controls and the effect of the auditor transition for 2022.