BLACKBAUD INC quarterly report, Q2 FY2022

Blackbaud, Inc. — Second Quarter 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022; filed August 4, 2022. Blackbaud provides cloud software, payment and related services to nonprofits, education and other social-good organizations. It reports one operating segment. Amounts below are in U.S. dollars; financial statement amounts are GAAP unless identified otherwise.

Key financial results

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Revenue	$264.9 million	$229.4 million	$522.1 million	$448.6 million
Gross profit / margin	$139.3 million / 52.6%	$121.4 million / 52.9%	$273.1 million / 52.3%	$237.2 million / 52.9%
Operating income (loss)	$0.1 million	$13.0 million	$(5.9) million	$19.7 million
Net income (loss)	$(3.4) million	$6.7 million	$(13.8) million	$6.6 million
Diluted EPS	$(0.07)	$0.14	$(0.27)	$0.14

• Q2 revenue increased 15.5%; six-month revenue increased 16.4%. Recurring revenue grew 16.4% and 17.3%, respectively. One-time services and other revenue was essentially flat.
• Growth included EVERFI, acquired on December 31, 2021. On the company’s non-GAAP organic basis, revenue growth was 3.8% for Q2 and 4.5% for the first half; constant-currency organic growth was 4.9% and 5.2%. Organic recurring revenue growth was 5.1% and 5.9%.
• GAAP operating performance weakened: Q2 operating income was nearly break-even versus $13.0 million a year earlier, and the first half moved to an operating loss. Q2 GAAP operating margin was approximately 0% versus 5.7%; first-half margin was (1.1)% versus 4.4%.
• Non-GAAP Q2 adjusted EBITDA was $70.6 million, up 7.2%, with a 26.6% margin; non-GAAP diluted EPS was $0.75 versus $0.82. These company-defined measures exclude specified costs and should not be treated as substitutes for GAAP results.

Cash flow, balance sheet and liquidity

• First-half cash from operations was $81.8 million, down 18.2% from $99.9 million. Capital spending was $34.7 million, including $27.2 million of capitalized software and content development. Non-GAAP free cash flow was $47.1 million versus $73.9 million.
• Cash and cash equivalents were $29.0 million at June 30, down from $55.1 million at year-end. Restricted cash was $449.5 million, mostly customer funds, with a corresponding $449.4 million due-to-customers liability; restricted cash is not equivalent to freely available corporate cash.
• Total debt carrying value was $939.8 million, versus $956.2 million at December 31, 2021; principal debt before unamortized discounts and issuance costs was $943.7 million. The weighted-average effective rate was 3.72%. Credit-facility debt was $880.9 million, with $245.2 million of available borrowing capacity.
• Net leverage was 3.42:1; the company reported compliance with its debt covenants. Working capital was negative $267.3 million, compared with negative $258.7 million at year-end. Management said available liquidity and expected operating cash flows should cover operations, capital expenditures and debt obligations for at least 12 months.
• First-half financing cash outflow was $194.1 million, including a $141.0 million decrease in restricted customer funds and $35.6 million of employee tax payments related to equity awards. The company made no stock repurchases during the period; $250 million remained authorized.

Material changes and management commentary

• EVERFI contributed $26.8 million of Q2 revenue and $53.8 million for the first half. Management attributed much of the reported growth to the acquisition; it cited EVERFI-related headcount and integration costs as contributors to higher expenses.
• Operating expenses rose faster than revenue. Management cited increased compensation, contractors, hosting and security investment, payment transaction costs, acquisition-related amortization, and higher Security Incident legal expenses. Research and development spending also increased; more development costs were capitalized.
• Recurring revenue growth reflected cloud subscriptions and transactional services, including online giving and virtual fundraising. The company is shifting customers from legacy license and maintenance offerings to cloud subscriptions; recurring-customer retention was approximately 92% for the 12 months ended June 30, 2022, materially unchanged from full-year 2021.
• The company reported a $2.3 million noncash impairment of capitalized software costs after ending support for certain solutions, and a $2.0 million noncash impairment of customer relationship intangible assets held for sale.
• Deferred revenue rose to $416.3 million from $378.7 million at year-end, primarily due to seasonal customer renewals. About $1.0 billion of remaining performance obligations was expected to be recognized as revenue; approximately 60% was expected over the next 12 months.

Outlook, risks and contingencies

• Management expected foreign-exchange movements to have a significant negative impact on full-year 2022 revenue. It also noted softness in EVERFI bookings, while saying the near-term revenue impact would be limited by ratable revenue recognition and that it would focus on closing the bookings gap. One-time services and other revenue was expected to be relatively flat year over year.
• Full-year 2022 interest expense was expected to be approximately $34–$37 million; management cautioned that variable-rate debt costs could rise in a higher-rate environment. Cloud infrastructure migration and increased security investment were expected to continue through 2024.
• The May 2020 ransomware incident remains a significant exposure. For 2022, the company expected $30–$35 million of net pretax expense and $15–$25 million of net cash outlays for ongoing incident-related legal fees. Costs expected to be recoverable had exceeded the $50 million insurance limit. No liability was recorded for the incident-related loss contingency because the possible loss or range could not be reasonably estimated.
• Related matters include 19 putative consumer class-action cases, customer reimbursement requests and reservations of rights, insurer subrogation claims, and investigations or inquiries by U.S. and foreign authorities, including the FTC, SEC, HHS, state attorneys general, and privacy regulators. The company warned that outcomes, fines, penalties or further claims could materially affect results, cash flows or financial condition.
• Other obligations include $241.3 million of minimum purchase commitments through 2027 and $144.0 million of estimated future debt interest payments. COVID-19 effects on customer markets remained uncertain. The company stated disclosure controls were effective; its control evaluation excluded EVERFI, which it was integrating.

Most important facts for investors to verify

• Whether organic recurring growth, customer retention and EVERFI bookings develop as management expects, and how much reported growth depends on acquisition contribution.
• Whether expense growth, cloud migration and security investments improve over time, given the decline in GAAP operating margins and first-half operating loss.
• The eventual cost and cash impact of the Security Incident, insurance recoveries, class actions, customer claims and governmental investigations; the filing does not provide a clear estimable total loss.
• Debt-service capacity and covenant headroom if interest rates rise, foreign exchange further pressures revenue, or incident-related costs exceed expectations.
• Cash-flow quality and availability: distinguish unrestricted cash from restricted customer funds, and assess seasonal renewal-related movements in deferred revenue and customer balances.