Blackbaud, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Blackbaud provides cloud software, payment processing, data and related services to nonprofits, education and healthcare organizations, companies, foundations and other participants in the social-good sector. This annual report covers the fiscal year ended December 31, 2019; quarterly figures below identify the fourth quarter separately. The company reported one operating and reportable segment, served more than 45,000 customers in over 100 countries, and estimated its total addressable market at more than $10 billion.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $900.4 million | $848.6 million | +6.1% |
| Recurring revenue | $831.6 million | $762.2 million | +9.1% |
| One-time services and other revenue | $68.8 million | $86.4 million | -20.4% |
| Gross profit / gross margin | $482.0 million / 53.5% | $466.9 million / 55.0% | Margin down 1.5 percentage points |
| Operating income / operating margin | $27.1 million / 3.0% | $59.4 million / 7.0% | Operating income down 54.3% |
| Net income / diluted EPS | $11.9 million / $0.25 | $44.8 million / $0.93 | Net income down 73.4% |
| Cash from operations | $182.5 million | $201.4 million | Down 9.4% |
| Non-GAAP free cash flow | $124.1 million | $149.0 million | Down 16.7% |
Recurring revenue growth reflected cloud subscriptions, embedded services and YourCause, partly offset by an $18.4 million decline in maintenance revenue as customers moved from legacy products. GAAP results included $58.6 million of stock-based compensation and $5.8 million of restructuring costs. Management’s non-GAAP measures showed operating income of $151.6 million, a 16.8% margin, and diluted EPS of $2.24; these measures exclude specified items and are not substitutes for GAAP results.
At December 31, 2019, cash and cash equivalents were $31.8 million, debt carrying value was $467.1 million, and net leverage was 2.30x. The company had $209.6 million of available borrowing capacity and was in compliance with credit covenants. Restricted cash of $545.5 million was held for customers and should not be treated as unrestricted corporate liquidity. Working capital was negative $254.3 million. The annual dividend remained $0.48 per share; $23.6 million was paid in 2019.
Fourth-quarter revenue was $237.8 million versus $221.2 million a year earlier. Operating income was $3.6 million versus $14.7 million, and net income was $1.3 million versus $9.3 million.
Material changes versus the prior year
- Revenue grew, but profitability and cash generation declined. Operating expenses rose with sales and product investment, higher stock compensation, hosting costs, software amortization and restructuring.
- Recurring revenue became a larger share of sales, while one-time services and other revenue continued to contract as the company shifted toward cloud subscriptions and retained services.
- Recurring gross margin fell 3.0 percentage points, reflecting cloud-transition costs, including hosting and retained-service costs. Management expected further pressure from duplicate data-center costs during migration to public cloud providers.
- Blackbaud acquired YourCause on January 2, 2019, for $157.7 million in cash, primarily funded through its credit facility. The acquisition added $87.4 million of goodwill and was included in results from the acquisition date.
- Cash from investing activities included $109.4 million of net acquisition outlays and $46.9 million of capitalized software development costs. Debt increased from $387.1 million to $467.1 million.
Outlook, management commentary, risks and unusual items
Management provided no specific quantified revenue or earnings guidance in the supplied filing text. It expected 2020 operating cash flow to decline from 2019, primarily due to payment of higher accrued bonuses, modestly higher cash taxes and vendor-payment timing; it also expected capital expenditures to increase. Management cited positive sales momentum in church management, higher education and peer-to-peer fundraising, and said roughly 92% of customers with recurring-revenue contracts were retained in both 2019 and 2018.
The facilities-optimization program was substantially complete. Cumulative costs reached $11.2 million, exceeding the prior estimated range, mainly because certain unused offices could not be subleased. Management expected annual pretax savings of $5 million to $6 million beginning in 2020. The company also recorded $3.8 million of operating-lease asset impairment, $1.4 million of property-and-equipment impairment, and $0.9 million of finite-lived intangible-asset impairment during 2019. Adoption of the new lease standard added $121.6 million of lease liabilities and $113.4 million of right-of-use assets at transition.
Key risks include competition and execution of the cloud transition; customer renewals and the health of charitable giving; cybersecurity, service interruptions and privacy regulation; acquisition integration; and debt service and credit-facility restrictions. The filing states some solutions were not yet fully PCI DSS compliant, primarily due to the time needed to integrate acquired businesses. International operations also face currency, regulatory and Brexit-related uncertainty. Management identified no material pending legal matter, and the auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and customer retention can offset declining maintenance and one-time services revenue.
- Whether recurring margins recover after cloud infrastructure migration and whether 2020 cash-flow and capital-spending expectations are met.
- How leverage, interest expense, the June 2022 credit-facility maturity, covenant terms and dividend restrictions affect financial flexibility.
- Whether YourCause delivers expected growth and integration benefits, and whether acquisition-related goodwill and intangible assets remain recoverable.
- Progress on PCI DSS compliance, cybersecurity and data-protection controls, given the sensitivity of customer and donor data.
- The assumptions supporting the stated $5 million to $6 million in annual restructuring savings and the timing of their realization.