Blackbaud, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended March 31, 2017, unless otherwise noted. Blackbaud provides cloud software, services, and payment solutions to the social-good sector and reported more than 40,000 customers. Financial statements are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $204.2 million | $185.1 million | +10.3% |
| Recurring revenue | $180.8 million | $160.0 million | +13.0% |
| One-time services and other revenue | $23.3 million | $25.0 million | -6.7% |
| Gross profit / gross margin | $116.1 million / 56.9% | $99.6 million / 53.8% | Margin +3.1 percentage points |
| Operating income / margin | $17.6 million / 8.6% | $13.3 million / 7.2% | Income +32.5% |
| Net income | $17.8 million | $13.1 million | +35.1% |
| Diluted EPS | $0.37 | $0.28 | +32.1% |
| Operating cash flow | $11.8 million | $12.8 million | -7.9% |
| Non-GAAP free cash flow | $(1.1) million | $3.5 million | Declined |
Recurring gross margin was 61.8%, up from 60.1%. Management attributed recurring revenue growth primarily to demand for cloud subscriptions; subscription revenue rose $26.2 million, partly offset by a $5.4 million decline in maintenance revenue. The recurring margin improvement reflected revenue growth outpacing related costs, customer migration economics, a one-time third-party payment-services refund, and acquisitions.
Liquidity, debt, and cash flow
- At March 31, cash and cash equivalents were $25.0 million; total cash, cash equivalents, and restricted customer cash were $195.8 million. Restricted cash due to customers was $170.8 million and should not be viewed as freely available corporate liquidity.
- Gross debt was $469.2 million, including $173.7 million of revolving loans and $294.4 million of term loans. The weighted average effective interest rate was 3.25%, compared with 2.71% at year-end 2017. Available borrowing capacity was $222.0 million; the credit facility matures in June 2022.
- Working capital was negative $144.8 million. Management cited operating cash flow, available credit, and cash on hand as liquidity sources and believed they would be adequate for at least the next 12 months.
- Cash from operations was $11.8 million. Investing activities used $17.9 million, including $5.0 million for acquisitions, $7.1 million for capitalized software development, and $5.8 million for property and equipment. Financing activities used $438.9 million, primarily reflecting a $434.6 million decrease in amounts due to customers and related restricted-cash movements; the company also had a net $28.8 million increase in borrowings, paid $22.5 million for employee tax withholding on equity awards, and paid $5.8 million in dividends.
- Net leverage was 2.19x; the company reported compliance with its credit-facility covenants. Approximately $15.9 million of cash was held outside the U.S.; repatriation could result in taxes.
Material changes and notable items
- GAAP revenue growth was 10.3%; management reported non-GAAP organic revenue growth of 5.3%, or 4.2% on a constant-currency basis. Non-GAAP organic recurring revenue growth was 7.2%. Foreign currency increased reported revenue by approximately $2.0 million.
- Operating expenses increased, including sales, marketing, and customer success (+10.9%), research and development (+14.3%), and general and administrative (+14.3%). Management cited investments in sales effectiveness, customer success, product development, and employee costs.
- Interest expense rose 48.0% to $3.5 million, primarily due to higher average borrowings following the JustGiving acquisition and higher effective rates.
- The effective tax rate was a benefit of 24.8%, versus a benefit of 17.5% in Q1 2017. The tax benefit reflected stock-based compensation items and the lower federal corporate tax rate; the company said its transition-tax estimate remained insignificant and Tax Act accounting estimates could change.
- The company adopted the new revenue standard (ASC 606) retrospectively. Adoption did not materially affect total revenue in prior years and did not affect reported cash flows; it changed the treatment of contract acquisition costs, including amortization over an estimated five-year benefit period.
- Deferred revenue was $260.0 million, down 6.7% from year-end, primarily due to lower recurring-contract billings. About $619 million of remaining performance obligations was expected to be recognized, with approximately 60% over the next 12 months.
Outlook, risks, and contingencies
- Management expects the shift toward cloud subscriptions to continue pressuring one-time services revenue, partly because cloud offerings generally require less implementation work and consulting discounts have been used to encourage customer migrations. Recurring customer retention was approximately 93% for the 12 months ended March 31, 2018; management said it could modestly decline as legacy solutions are rationalized and customers migrate.
- The company reported no full-year revenue or earnings guidance in the provided filing text. It cited seasonal patterns: revenue and operating cash flow have historically been lowest in Q1, while customer renewals tend to be stronger in Q2 and Q4.
- A facilities consolidation and relocation plan is expected to incur $6 million to $8 million of pretax costs, with significant remaining costs expected through 2019; severance costs were not yet reasonably estimable. Management expects annual pretax savings of $3 million to $4 million beginning in 2020. Q1 restructuring expense was $0.8 million; cumulative costs were $1.6 million.
- On April 30, 2018, after quarter-end, Blackbaud acquired Reeher for $43.0 million, funded primarily with credit-facility borrowings. Initial purchase accounting was incomplete when filed.
- Contractual commitments included $180.6 million of operating leases, $68.7 million of purchase obligations, and $61.4 million of estimated debt interest payments. The company disclosed ordinary-course legal proceedings but no provision or specific loss estimate requiring disclosure, while noting an unfavorable resolution could affect results. It reported no material changes to its risk factors since its 2017 Form 10-K.
Important facts for investors to verify
- Whether subscription growth, customer retention, and cloud migrations continue to offset declining maintenance and one-time services revenue.
- Cash conversion and working-capital trends, including the effect of customer restricted funds, seasonal billings, and equity-award tax withholding.
- Debt, interest-rate exposure, covenant headroom, and the additional borrowing used for the Reeher acquisition.
- Reeher’s final purchase accounting, integration costs, and contribution to growth and margins; also monitor the stated restructuring costs and expected savings.
- Potential revisions to Tax Act accounting estimates and the effect of changes in foreign exchange rates.