Blackbaud, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Blackbaud provides cloud software, services, and payment solutions to nonprofits, education, healthcare, corporate social responsibility, and other social-good organizations. Results are unaudited; the company reports as one segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $221.1M | $209.5M | $662.6M | $627.4M |
| Recurring revenue | $205.2M | $188.7M | $611.8M | $562.3M |
| Gross profit / margin | $119.3M / 54.0% | $114.3M / 54.5% | $360.7M / 54.4% | $348.9M / 55.6% |
| Operating income / margin | $7.9M / 3.6% | $15.8M / 7.5% | $23.6M / 3.6% | $44.7M / 7.1% |
| Net income | $4.6M | $11.2M | $10.6M | $35.5M |
| Diluted EPS | $0.09 | $0.23 | $0.22 | $0.74 |
- Revenue mix and margins: Q3 revenue rose 5.5%; recurring revenue grew 8.8%, while one-time services and other revenue declined 23.9% to $15.9M. Recurring gross margin fell to 57.3% from 59.4%, reflecting higher hosting, data, compensation, software amortization, and payment-processing costs. Overall gross margin also declined.
- Cash flow: Nine-month operating cash flow was $122.1M, down from $137.8M. Capitalized software development and property/equipment spending totaled $44.1M; company-defined non-GAAP free cash flow was $78.0M versus $98.3M.
- Liquidity: September 30 cash and cash equivalents were $29.1M; working capital was negative $231.5M. The balance sheet also included $243.1M of restricted cash due to customers, which is not unrestricted corporate cash. Management said available funding and expected operating cash flows should cover operations, capital spending, debt obligations, and dividends for at least 12 months.
- Debt: Debt carrying amount was approximately $503.1M, up from $387.1M at year-end 2018, primarily reflecting acquisition financing. The credit facility had $175.6M of available borrowing capacity and matures in June 2022. Net leverage was 2.47x against a 3.50x covenant limit; the company reported covenant compliance. Nine-month interest expense rose to $16.2M from $12.0M.
- Other balance-sheet items: Deferred revenue was $323.0M, up 8.2% from December 2018. Operating lease liabilities totaled $119.5M following adoption of the new lease standard.
Material changes and management commentary
- Recurring growth was driven by cloud subscriptions, including $21.2M of subscription revenue growth in Q3; YourCause, acquired January 2, 2019, also contributed. Management reported 5.6% nine-month organic revenue growth and 3.4% organic growth on a constant-currency basis, both non-GAAP measures.
- Operating income declined as the company invested in sales capacity and product innovation, while stock-based compensation, hosting/data-center costs, and acquisition-related costs increased. Management expected sales and innovation investment to continue through the remainder of 2019.
- Management described the shift toward cloud subscriptions as ongoing and expected one-time services revenue to continue declining. Customer retention for recurring-revenue customers was approximately 92% for the twelve months ended September 30, unchanged from full-year 2018.
- Management estimated total facilities-optimization restructuring costs of $8.5M–$9.5M before tax, with substantially all remaining costs expected by year-end 2019, and projected annual before-tax savings of $5M–$6M beginning in 2020. $8.5M had been incurred cumulatively by September 30, including $1.3M of lease-asset impairments.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. The company cited a total addressable market above $10B and said it remained active in evaluating acquisitions and internal product development.
Risks, contingencies, and unusual items
- YourCause was acquired for $157.7M cash; its purchase-price allocation, including $87.3M of goodwill and $74.7M of identifiable intangibles, remained preliminary. Acquisition-related borrowing increased debt.
- Foreign exchange reduced nine-month revenue by $5.2M and operating income by $1.1M. Foreign-currency translation contributed to accumulated other comprehensive loss of $11.9M.
- The company had $87.7M of remaining minimum purchase commitments through 2023 and $167.3M of undiscounted operating lease payments. It reported ordinary-course legal proceedings but no provision or disclosure requirement for specific claims based on its assessment; unfavorable outcomes could still affect results.
- Operating results and cash flows are seasonal. Dividend payments are discretionary and subject to credit-facility restrictions. The company reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
- Adoption of lease accounting on January 1, 2019 added $121.6M of lease liabilities and $113.4M of right-of-use assets at transition; comparative periods were not restated.
Important facts for investors to verify
- Whether subscription growth can continue while recurring gross margins and operating profitability recover from their declines.
- How much of reported growth reflects organic demand versus the YourCause acquisition, and whether integration delivers expected benefits.
- Debt repayment capacity, covenant headroom, interest exposure, and cash available after customer-restricted funds are excluded.
- Progress against restructuring cost and savings estimates, and the continued shift in revenue away from one-time services.
- The assumptions underlying management’s liquidity assessment, dividend policy, and remaining performance obligations of approximately $785M.