Blackbaud, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Blackbaud provides cloud-based and on-premise software and services to nonprofit, education, healthcare, and other philanthropic organizations. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $158.8 million | $144.6 million | $462.1 million | $411.6 million |
| Gross profit | $84.6 million | $76.5 million | $242.6 million | $215.4 million |
| Gross margin | 53.3% | 52.9% | 52.5% | 52.3% |
| Operating income | $14.0 million | $13.5 million | $36.4 million | $38.8 million |
| Operating margin | 8.8% | 9.3% | 7.9% | 9.4% |
| Net income | $7.9 million | $10.4 million | $19.2 million | $23.5 million |
| Diluted EPS | $0.17 | $0.23 | $0.41 | $0.51 |
- Q3 subscription revenue increased 20.7% to $80.9 million; maintenance rose 3.8% to $38.2 million; services were nearly flat at $35.9 million; license fees and other declined 22.4% to $3.8 million.
- Subscription gross margin improved to 51.2% in Q3 from 50.3%; maintenance gross margin declined to 82.5% from 83.4%; services gross margin improved to 27.0% from 24.3%.
- For the nine months, operating cash flow was $85.3 million, essentially unchanged from $85.5 million. Investing cash outflow was $26.5 million, versus $47.9 million; financing cash outflow was $54.8 million, versus $4.7 million of inflow.
- Cash and cash equivalents were $17.6 million at September 30, 2015, compared with $14.7 million at December 31, 2014. Donor-restricted cash of $63.5 million was matched by donations payable and is not equivalent to unrestricted operating cash.
- Debt principal was $243.4 million at September 30, 2015, down from $282.4 million at year-end; carrying value was $241.7 million. The effective interest rate was 2.49%. The company reported compliance with its debt covenants.
- Total deferred revenue was $234.5 million, up 6.0% from year-end. Working capital was negative $144.4 million, but positive $82.8 million excluding deferred revenue.
Changes versus the prior comparable period
- Q3 revenue grew 9.8%; nine-month revenue grew 12.3%. Subscription growth reflected cloud adoption, more clients and payment-processing volume, and acquired businesses.
- MicroEdge contributed $8.3 million of Q3 and $22.2 million of nine-month revenue. WhippleHill also contributed to nine-month growth; acquisition effects limit direct comparability.
- ECBU revenue grew 14.4% in Q3 and GMBU grew 10.1%; IBU revenue fell 14.5%, partly reflecting lower perpetual Raiser's Edge sales and the RLC disposition.
- Nine-month operating income fell 6.2%, and net income fell 18.3%. Increased amortization, stock-based compensation, severance, interest expense, and a business-sale loss weighed on results. The Q3 effective tax rate was 35.9%, versus 15.4% a year earlier, primarily because of discrete tax benefits in the prior-year quarter.
- Foreign exchange reduced nine-month revenue by $7.2 million, according to management. The company recorded $17.9 million of stock-based compensation for the nine months, up from $12.5 million.
Outlook, management commentary, and risks
- Management is prioritizing organic growth, migration to cloud subscriptions, expansion of addressable markets, back-office optimization, and margin improvement. It expects cloud-based subscriptions to support higher long-term revenue growth and says the transition may weigh on near-term revenue growth as subscription revenue is recognized over time and legacy license, maintenance, and implementation revenue declines.
- Management stated that available funding and expected operating cash flow should be adequate for at least the next 12 months to fund operations, capital expenditures, debt obligations, and dividends. No specific revenue or earnings guidance was provided.
- On October 2, 2015, after quarter-end, Blackbaud acquired Smart Tuition for $187.8 million in cash and borrowed $186.0 million under its revolving facility. Post-acquisition debt principal was approximately $429 million, with about $85 million of revolving capacity remaining after issued letters of credit. Management expects interest expense to increase near term.
- The company declared a Q4 dividend of $0.12 per share; dividends are discretionary and subject to credit-facility restrictions. It also entered into a $75 million interest-rate swap in October 2015.
- Other considerations include variable-rate debt and interest-rate exposure, foreign-exchange fluctuations, execution and integration risks from acquisitions, dependence on subscription renewals and market acceptance, and the possibility that cloud migration or reduced legacy sales affects growth and margins. The filing reports no material change to previously disclosed risk factors and no material ordinary-course legal contingency accrual.
- Unusual items included a $2.0 million loss on the May 2015 sale of RLC, $2.2 million of nine-month employee severance, and $0.8 million of Smart Tuition acquisition-related expenses through September 30.
Most important facts for investors to verify
- Whether subscription growth and payment-processing activity can offset declines in perpetual-license, maintenance, and related services revenue as the cloud transition continues.
- The acquired Smart Tuition business’s contribution, integration costs, purchase accounting, and the effect of materially higher post-acquisition debt and interest expense.
- Whether operating cash flow and covenant headroom remain adequate after the acquisition, planned investment, and dividend payments.
- The sustainability of margin performance given rising stock-based compensation and amortization, and the gap between GAAP and management’s adjusted non-GAAP measures.
- The assumptions underlying management’s liquidity assessment, including renewal trends, foreign-exchange exposure, and any future need to repatriate foreign cash.