Blackbaud, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Blackbaud provides cloud software, services and payment solutions to nonprofit, education, healthcare and other social-good organizations. This unaudited filing covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $223.6 million | $215.8 million; up 3.6% |
| Recurring revenue | $204.9 million | $198.1 million; up 3.4% |
| One-time services and other revenue | $18.8 million | $17.7 million; up 5.7% |
| Gross profit / gross margin | $118.8 million / 53.1% | $116.5 million / 54.0% |
| Income from operations / operating margin | $8.4 million / 3.8% | $2.2 million / 1.0% |
| Net income (loss) / diluted EPS | $4.6 million / $0.10 | $(1.1) million / $(0.02) |
| Cash used in operating activities | $(24.5) million | $(10.0) million |
| Non-GAAP free cash flow | $(38.3) million | $(22.5) million |
| Cash and cash equivalents at period-end | $25.0 million | $31.8 million at Dec. 31, 2019 |
| Total debt at period-end | $532.0 million | $468.3 million at Dec. 31, 2019 |
| Working capital | $(194.2) million | $(254.3) million at Dec. 31, 2019 |
Q1 cash flow from operations is seasonally low, according to management. Financing cash outflow included a $311.1 million decrease in amounts due to customers, which corresponded to a reduction in restricted customer cash; this should not be read as a comparable decline in unrestricted cash. Capital spending and capitalized software development totaled $13.8 million.
Management reported a 2.61:1 net leverage ratio and $150.9 million of available borrowing capacity under the credit facility at March 31. The facility matures in June 2022; the company was in compliance with its financial covenants. Management stated that pandemic-related actions were expected to create more than $300 million of additional annualized borrowing capacity.
Material changes and drivers
- Revenue growth reflected higher subscription and payment-services revenue, cloud demand and services embedded in renewable contracts. Subscription revenue gains were partly offset by a $3.9 million decline in maintenance revenue as customers migrate from legacy products.
- Recurring gross margin declined by 0.9 percentage points. Management cited higher software-development amortization, transaction costs and data-center costs, and expects further pressure during its cloud infrastructure migration.
- Operating income improved year over year, helped by lower severance, restructuring, acquisition-related and intangible-amortization costs. Non-GAAP operating income, however, declined 5.7% to $33.9 million, with non-GAAP operating margin at 15.2% versus 16.6%.
- Reported recurring revenue includes a $4.3 million reclassification from recurring to one-time services and other, effective January 1, 2020, for certain retained and managed services contracts. This presentation change affects category comparisons.
- Deferred revenue was $290.4 million, down 8.1% from year-end, primarily because of lower billings. Remaining performance obligations were approximately $811 million; about 60% was expected to be recognized within 12 months.
- Debt rose during the quarter, including a $58.6 million net increase in borrowings. The effective interest rate on total debt was 2.79% at quarter-end, versus 3.18% at year-end.
Outlook, risks and unusual items
- COVID-19 outlook: Management said the pandemic disrupted business beginning in March and that its full impact and duration were uncertain. Deal pipeline fell sharply in the second half of March, and management expected a significant 2020 bookings shortfall versus its original plan. It cautioned that bookings weakness could affect 2021 revenue more than 2020 because recurring contract revenue is recognized over time.
- Management reported renewal rates trending ahead of pre-pandemic expectations and no significant customer-payment deterioration to date. It also noted early declines in transactional volumes, followed by a recent rebound in online events and campaigns. Limited 60-day payment extensions and case-by-case zero-percent financing were offered to some customers.
- In response to COVID-19, the company stopped declaring cash dividends beginning in Q2 2020, temporarily suspended its 401(k) match, froze hiring, restricted travel and reduced costs. It replaced 2020 cash bonus plans and eligible merit increases with equity awards; subsequent May grants had stated fair values of $34.4 million for performance-based awards and $8.3 million for other restricted stock units.
- Management said available liquidity and anticipated operating cash flows should fund operations, capital expenditures and debt obligations for at least the next 12 months. This assessment is subject to pandemic uncertainty and customer renewals, market acceptance and customers’ ability to pay.
- Risks include weaker customer demand or payment capacity, service-provider disruption, workforce and technology challenges, covenant or refinancing pressure, and potential impairment of goodwill and other assets. The filing disclosed $76.7 million of remaining minimum purchase commitments through 2023 and $155.7 million of operating lease obligations. No material off-balance-sheet arrangements were reported; management said no material legal-loss provision was required at quarter-end.
- There was no clear numeric full-year revenue or earnings guidance in the filing. Management described the operating environment as likely to remain challenging for the rest of 2020 and potentially beyond.
Important facts for investors to verify
- How COVID-19 affected bookings, renewals, payment volumes, customer collections and demand after the reporting date, and whether the anticipated bookings shortfall materialized.
- Whether operating cash flow and unrestricted liquidity were sufficient as customer billings and deferred revenue changed; distinguish customer-restricted funds from available cash.
- Debt maturity, borrowing availability and covenant headroom, especially given the June 2022 credit-facility maturity and increased debt balance.
- Underlying revenue and margin trends after accounting for the $4.3 million revenue-category reclassification and ongoing cloud-transition costs.
- The realized costs, vesting and dilution effects of replacing cash compensation and dividends with equity awards and other cost-reduction measures.