Blackbaud, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the same 2016 periods. Blackbaud provides cloud and other software, payment processing, maintenance, and services to nonprofit, education, healthcare, corporate, and related organizations. It reported approximately 35,000 customers.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $192.2 million | $180.2 million | $375.8 million | $349.4 million |
| Gross profit / margin | $105.2 million / 54.7% | $96.6 million / 53.6% | $203.3 million / 54.1% | $185.9 million / 53.2% |
| Operating income / margin | $16.7 million / 8.7% | $13.6 million / 7.6% | $27.3 million / 7.3% | $24.2 million / 6.9% |
| Net income | $11.2 million | $9.1 million | $22.7 million | $15.3 million |
| Diluted EPS | $0.23 | $0.19 | $0.48 | $0.32 |
- Q2 revenue rose 6.7%; six-month revenue rose 7.5%. Subscriptions grew 20.4% in Q2 and 21.2% for the first half, while maintenance declined 12.1% and 10.6%, respectively, and services and other declined 12.1% and 11.2%.
- Q2 subscription gross margin increased to 54.2% from 49.9%. Maintenance gross margin declined to 82.2% from 84.8%; services and other gross margin declined to 30.2% from 33.5%.
- For the first half, operating cash flow was $54.6 million, versus $48.8 million in 2016. Investing cash outflow was $69.5 million, principally including $49.7 million for AcademicWorks; financing cash inflow was $15.3 million. Cash and cash equivalents ended at $17.3 million.
- At June 30, debt was $390.4 million gross principal ($387.7 million carrying value); the balance sheet reports $7.5 million current and $380.2 million long-term, net of discount and issuance costs. The company had $306.5 million of available borrowing capacity. Restricted cash of $289.2 million was matched by amounts due to customers and should not be treated as unrestricted liquidity.
- Working capital was negative $154.0 million, reflecting in part deferred revenue and customer funds; working capital excluding deferred revenue was positive $126.8 million.
Material changes and management commentary
- Growth was led by cloud subscription demand and payment processing; maintenance and service revenue continued to contract as customers migrated from perpetual-license offerings to subscriptions. Management noted that subscription revenue is recognized over contract periods, which can weigh on near-term reported growth compared with upfront license revenue.
- Q2 GAAP operating income grew 22.9%. Management cited subscription growth, partly offset by greater investment in sales and customer success, higher stock compensation, rent, and acquisition-related costs. First-half results also included $2.5 million more employee severance costs than the comparable period.
- Recurring-contract customer retention was approximately 93% for the year ended June 30, 2017, relatively unchanged from full-year 2016.
- The six-month income tax provision was $0.2 million and the effective tax rate was 0.7%, primarily reflecting a $7.3 million discrete tax benefit related to stock-based compensation. Q2’s effective tax rate was 22.2%, versus 16.4% a year earlier; tax-related period comparisons are therefore affected by discrete items.
Outlook, transactions, and risks
- Management said available funding and expected operating cash flows should be adequate for at least the next 12 months to operate, fund anticipated capital expenditures, meet debt obligations, and pay dividends. This is subject to customer renewals, market acceptance, and other assumptions; dividends are not guaranteed.
- Management reiterated an aspirational goal to increase non-GAAP operating margin by at least 300 basis points on a constant-currency basis from its 2014 baseline by the end of 2017, and said it expected to achieve that goal. This is a non-GAAP target, not a stated GAAP earnings forecast.
- AcademicWorks was acquired in April for $52.1 million cash, funded with revolving credit borrowings. Its purchase accounting remained preliminary; the company said the acquisition was not material to consolidated results.
- In June, Blackbaud agreed to acquire JustGiving for £95.0 million cash, subject to adjustments and closing conditions, including UK Competition and Markets Authority approval. Closing was anticipated later in 2017, financed with cash and credit-facility borrowings. A £100.0 million foreign-currency option was entered into to hedge the purchase-price exposure.
- In June, the company refinanced into a five-year $700 million credit facility and reported compliance with its financial covenants. Its leverage and interest-coverage ratios were 2.17x and 16.16x, respectively, against limits of no more than 3.50x and no less than 2.50x. The facility has restrictions on dividends and share repurchases. A $150 million interest-rate swap was entered into in July 2017.
- Risks include reliance on customer renewals and market acceptance, acquisition integration and closing risks, foreign-exchange and variable-rate debt exposure, and ordinary-course litigation. The company said there were no material changes to the risk factors in its 2016 Form 10-K and no material off-balance-sheet arrangements.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription growth and improving subscription margins can offset continued declines in maintenance and services revenue.
- JustGiving’s regulatory approval, closing, final purchase price, funding mix, and subsequent contribution to results and debt.
- Debt levels, covenant headroom, interest-rate exposure, and the effect of acquisition financing on liquidity and dividend capacity.
- The sustainability of reported earnings growth given the sizable discrete stock-compensation tax benefit in first-half 2017.
- Progress against management’s non-GAAP margin target, including the calculation and reconciliation of non-GAAP measures to GAAP results.