Blackbaud, Inc. — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017, and was filed February 20, 2018. Blackbaud provides cloud and on-premises software, payment processing and related services to nonprofits, education and healthcare institutions, corporations, foundations and other social-good organizations. It reported more than 40,000 customers in over 50 countries. In Q4 2017, the company changed its internal reporting structure and now reports one operating and reportable segment; prior-period information was restated accordingly.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $788.3 million | $730.8 million |
| Gross profit / gross margin | $426.4 million / 54.1% | $391.6 million / 53.6% |
| Operating income / operating margin | $64.0 million / 8.1% | $61.8 million / 8.5% |
| Net income / diluted EPS | $65.9 million / $1.38 | $41.5 million / $0.88 |
| Cash flow from operations | $176.3 million | $153.6 million |
| Non-GAAP free cash flow | $137.7 million | $109.6 million |
Revenue grew 7.9%. Subscriptions revenue increased 21.9% to $522.9 million, while maintenance revenue declined 12.8% to $128.2 million and services and other revenue declined 11.4% to $137.3 million. Subscription gross margin improved to 53.6% from 50.1%. GAAP operating margin fell to 8.1% from 8.5%, as higher sales, customer-success, stock-compensation, rent and acquisition-related costs partly offset revenue growth.
Year-end cash and cash equivalents were $29.8 million; carrying value of debt was $438.2 million, and net leverage was 2.13x. The company had $254.2 million of available capacity under its $700 million credit facility, due June 2022, and reported compliance with its covenants. Working capital was negative $181.9 million, but was positive $94.6 million excluding deferred revenue. Balance-sheet restricted cash of $610.3 million was held for customers and should not be viewed as freely available corporate cash. The company paid $23.1 million in dividends during 2017, or $0.48 per share.
Changes versus comparable periods
- Revenue growth reflected continued cloud-subscription adoption and payment-processing activity. Management said the transition to subscriptions can defer revenue recognition compared with upfront perpetual-license sales.
- Operating income rose 3.6%, slower than revenue, amid increased investment and acquisition, rent and severance costs. Non-GAAP operating income was $162.5 million, up 12.7%, and non-GAAP diluted EPS was $2.17, up 13.0%; these measures exclude specified items and are not GAAP substitutes.
- Net income rose 58.8%, substantially aided by a $11.7 million income-tax benefit versus a $9.4 million tax provision in 2016. The 2017 benefit included a $20.0 million discrete benefit from revaluing deferred taxes after U.S. tax reform and a $12.5 million benefit related to stock-based compensation.
- Q4 revenue was $217.0 million versus $198.3 million a year earlier. Q4 operating income was $18.7 million versus $24.0 million; net income was $30.7 million versus $17.3 million, with diluted EPS of $0.64 versus $0.36. The unusually large Q4 net-income increase should be considered alongside the tax effects described above.
- AcademicWorks and JustGiving were acquired in 2017 for approximately $52.1 million and $137.2 million, respectively. Acquisition-related cash outlays totaled $146.8 million net of acquired cash and restricted cash.
Outlook, risks and unusual items
- Management expected available funding and operating cash flow to cover operations, debt obligations, planned capital expenditures and dividends for at least the next 12 months. Estimated 2018 capital expenditures, including capitalized software development, were $45–55 million. The board approved a 2018 annual dividend rate of $0.48 per share, but dividends remain discretionary and subject to credit-facility restrictions.
- Management expects continued subscription growth, while the cloud transition may keep pressuring maintenance and services revenue in the near term. It also expects near-term interest expense to increase following the JustGiving acquisition.
- Key risks include competition and customer renewals; cybersecurity, payment-card and donor-data protection; compliance with privacy rules, including GDPR effective May 2018; cloud-service interruptions; dependence of customers on charitable giving; acquisition integration; and substantial debt and credit-facility covenants.
- The company disclosed $751.2 million of contractual obligations, including $440.3 million of debt principal, $189.3 million of operating leases, $54.8 million of estimated interest and $66.8 million of purchase obligations. The debt schedule includes $409.3 million due in 2022.
- Management said no pending or threatened legal matter was expected to have a material adverse effect; the filing also describes ordinary-course claims and indemnification obligations. A 2017 office-relocation restructuring plan incurred $0.8 million of costs, with total expected costs through 2019 still under evaluation. The auditor and management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether subscription growth and renewals can offset continuing declines in maintenance and services revenue, and whether retention remains near the reported 93%.
- How much of the increase in reported earnings reflects recurring operations versus tax benefits and other adjustments; compare GAAP results with the company’s non-GAAP reconciliations.
- Debt repayment capacity, interest-rate exposure, 2022 maturities, covenant headroom and the sustainability of dividends alongside acquisitions and capital spending.
- Integration and performance of AcademicWorks and JustGiving, including the effect of acquired intangibles and the preliminary nature of parts of their purchase-price allocations.
- Progress on GDPR and security controls, and any material service outages, privacy incidents, litigation or changes to restructuring and headquarters-lease commitments.