Blackbaud, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; fourth-quarter results are also summarized below. Blackbaud provides cloud-based and on-premise software and services for nonprofit, charitable giving, and education organizations. It reported more than 30,000 customers in over 60 countries.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $564.4 million | $503.8 million |
| Gross profit / margin | $291.0 million / 51.6% | $271.2 million / 53.8% |
| Operating income / margin | $46.4 million / 8.2% | $51.5 million / 10.2% |
| Net income | $28.3 million | $30.5 million |
| Diluted EPS | $0.62 | $0.67 |
| Cash from operations | $102.3 million | $107.2 million |
| Cash and cash equivalents | $14.7 million | $11.9 million |
| Debt, carrying amount | $280.6 million | $152.9 million |
| Deferred revenue | $221.3 million | $190.6 million |
Subscriptions and services generated nearly 70% of 2014 revenue. Reported subscription gross margin was 49% versus 56% in 2013; excluding the payment-processing presentation change, it was 54% versus 56%. Maintenance gross margin was 83% versus 81%, while services gross margin was 17% versus 18%.
Fourth quarter: Revenue was $152.8 million versus $134.9 million in Q4 2013. Gross profit was $75.5 million versus $68.5 million; operating income was $7.6 million versus $14.6 million; and net income was $4.8 million versus $11.8 million. Diluted EPS was $0.10 versus $0.26.
Material changes and drivers
- Revenue rose 12% year over year. Management attributed underlying growth primarily to recurring subscriptions and maintenance, including increased cloud and hosted solution demand and payment-processing volume. After removing $21.1 million from a gross-versus-net payment-processing presentation change and $10.3 million of revenue from WhippleHill and MicroEdge, management said revenue grew 6%.
- Operating income declined 10%, and net income declined about 7%. Management cited $17.5 million of incremental strategic investments, higher acquisition-related amortization, $1.3 million of net acquisition-related expenses, and a $1.6 million software-development impairment.
- Blackbaud acquired WhippleHill in June for $35.0 million and MicroEdge in October for $159.8 million, expanding into private-school technology, grant management, corporate social responsibility, and foundation management.
- Revenue presentation changed prospectively for certain payment-processing arrangements beginning in October 2013. The change increased reported 2014 revenue and costs by $21.1 million, without affecting gross profit or operating income; it limits direct comparability with prior periods.
Liquidity, outlook, risks, and unusual items
- Operating cash flow was $102.3 million. The company used $188.9 million net cash for acquisitions, paid $22.1 million in dividends, and spent $22.4 million on property, equipment, and capitalized software development.
- At year-end, available borrowing capacity under the 2014 Credit Facility was $136.9 million. The company was compliant with its covenants; net leverage was 2.20 versus a maximum of 3.50, and interest coverage was 16.57 versus a minimum of 2.50. Debt matures in February 2019. Interest expense is expected to increase in 2015 because of higher borrowings.
- Management said available funding and expected operating cash flows should meet needs for at least 12 months. It expected 2015 capital expenditures of $24–$26 million and anticipated a $0.48 annual dividend per share, subject to board discretion and credit-facility restrictions.
- Management plans to accelerate organic growth and cloud migration, integrate acquisitions, optimize back-office operations, and implement a three-year margin-improvement plan. It cautioned that payment processing and the continued shift toward subscriptions and services may pressure margins; these offerings generally have lower gross margins than licenses and maintenance.
- Key risks include competition, customer renewals and lengthy sales and implementation cycles, cloud-service interruptions and cybersecurity or privacy incidents, payment-card compliance, acquisition integration, leverage and covenant restrictions, and foreign-currency exposure. No material pending legal matter was identified. The filing reported effective internal control over financial reporting; MicroEdge was excluded from the 2014 internal-control assessment because it was acquired late in the year.
- Unusual items included a $1.0 million loss on debt extinguishment and termination of derivatives and the $1.6 million capitalized software impairment. Annual goodwill impairment testing identified no impairment.
Important facts for investors to verify
- Reconcile reported growth with the payment-processing gross-up and acquired-company contributions; assess organic growth and recurring-revenue retention.
- Track subscription and services margins, payment-processing economics, and progress against the three-year margin-improvement plan.
- Review acquisition integration, realized growth and synergies, and final purchase-price allocations, which were still preliminary for the 2014 acquisitions.
- Assess debt service, covenant headroom, refinancing needs, and the sustainability of dividends alongside planned investment and capital spending.
- Monitor cloud reliability, data security, privacy and payment-card compliance, and customer renewal rates.