Business context and reporting period
Blackbaud, Inc. provides cloud and on-premise software, services, analytics and payment processing to nonprofits, education institutions, foundations, corporations and other organizations. This Form 10-K covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. The company reported approximately 35,000 customers in more than 60 countries.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $730.8 million | $637.9 million | +14.6% |
| Gross profit / margin | $391.6 million / 53.6% | $333.3 million / 52.2% | Margin +1.4 percentage points |
| Operating income / margin | $61.8 million / 8.5% | $46.7 million / 7.3% | Income +32.3% |
| Net income | $41.5 million | $25.6 million | +61.9% |
| Diluted EPS | $0.88 | $0.55 | +60.0% |
| Operating cash flow | $153.6 million | $129.2 million | +18.9% |
- Subscriptions revenue grew 29.3% to $429.0 million and represented 58.7% of revenue, versus 52.0% in 2015. Maintenance revenue fell 4.5% to $146.9 million; services rose 5.0% to $139.7 million; license fees and other revenue fell 21.7% to $15.2 million.
- Subscription gross margin increased to 50.1% from 49.6%; services gross margin rose to 30.9% from 22.7%. Maintenance gross margin was 85.0%, versus 82.4%.
- GAAP diluted EPS was $0.88. Management’s non-GAAP diluted EPS was $1.92, compared with $1.50; non-GAAP operating margin was 19.6%, compared with 18.8%. These non-GAAP measures exclude specified items, including stock compensation and acquisition-related amortization, and should not be treated as substitutes for GAAP results.
- GAAP revenue increased 14.6%; management reported non-GAAP organic revenue growth of 9.2%, or 9.8% on a constant-currency basis. Non-GAAP recurring revenue growth was 11.5%. Acquisition adjustments and the company’s non-GAAP definitions affect comparability.
- Cash and cash equivalents were $16.9 million at year-end. Debt carrying value was $342.4 million (gross borrowings $343.9 million); borrowings declined $66.4 million during the year. Available capacity under the credit facility was $165.8 million. Restricted cash of $353.8 million was matched by amounts due to customers and is not ordinary available cash.
- Working capital was negative $172.2 million, but positive $72.3 million excluding deferred revenue. The company paid $22.8 million in dividends and spent $44.1 million on property, equipment and capitalized software development.
Material changes versus prior comparable period
- Revenue growth was driven primarily by cloud subscriptions and payment-processing activity, with Smart Tuition contributing $39.8 million of 2016 revenue. Excluding Smart Tuition’s stated contribution, management attributed $61.6 million of the increase to other growth drivers.
- The shift from perpetual licenses and maintenance to cloud subscriptions continued: subscriptions’ share of revenue rose, while maintenance and license revenue declined. Management noted this transition can defer revenue that would otherwise be recognized upfront.
- Operating income improved with subscription growth and better consulting utilization, partly offset by higher sales and customer-success spending, stock-based compensation and amortization. Sales, marketing and customer-success expense rose 26.0% to $155.8 million.
- Net income benefited from a $7.7 million income-tax benefit following early adoption of stock-compensation accounting guidance. The effective tax rate was 18.5%, versus 30.6% in 2015; this benefit makes the year-over-year net-income increase less indicative of underlying operating growth.
- Customer retention among customers with recurring subscription or maintenance contracts was approximately 93%, down from 94%. Management attributed the decline primarily to rationalizing legacy products and migrating customers to cloud offerings.
Outlook, management commentary and risks
- Management’s long-term priorities are cloud-based integrated solutions, sales effectiveness, expansion into adjacent markets and operating efficiency. Its stated 2017 outlook includes capital expenditures of approximately $37.5 million to $42.5 million and an expectation that IBU revenue will remain relatively unchanged near term. The filing does not provide a clear consolidated revenue or EPS forecast.
- A three-year margin-improvement plan targets a 300–600 basis-point increase in non-GAAP operating margin, on a constant-currency basis, from a 17.5% 2014 baseline by exit 2017. Management reported 19.6% for 2016; achievement of the target remains prospective.
- Management said expected operating cash flows and available funding should cover operations, capital spending, debt obligations and dividends for at least the next 12 months. The $0.48 annual dividend rate for 2017 is intended, not guaranteed, and remains subject to board discretion and credit-facility restrictions.
- Key risks include customer renewals and retention, successful cloud migration, competition, service interruptions and cybersecurity or privacy incidents, reliance on third-party technology, acquisition integration, foreign-exchange exposure, and substantial debt and credit-facility covenants. Goodwill and intangible assets were $438.2 million and $253.7 million, respectively; no impairment was recorded in 2016.
- The company entered a 20-year lease for a new Charleston headquarters, expected to be completed in 2018; Phase One rent payments are estimated at $102.1 million over the lease term. No material legal loss contingency was recorded, and the company reported effective internal controls over financial reporting.
Important facts for investors to verify
- How much future subscription growth is organic versus acquisition-related, and whether cloud migration sustains revenue growth as legacy maintenance and license revenue contract.
- Whether customer retention stabilizes or improves, and whether non-GAAP margin targets are achieved without relying on exclusions that materially widen the gap from GAAP results.
- Debt repayment, covenant headroom and refinancing plans ahead of the credit facility’s February 2019 maturity; confirm how debt service and dividends affect cash available for investment.
- The durability of earnings after separating the $7.7 million stock-compensation tax benefit from recurring operating performance.
- Costs and commitments for the new headquarters, future capitalized software spending, and the eventual financial-statement impact of adopting the new revenue-recognition and lease-accounting standards.