Blackbaud, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results. Blackbaud provides on-premise and cloud software and related services to nonprofit organizations, with more than 28,000 active customers. Comparisons are affected by the May 2012 Convio acquisition.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $125.5 million | $110.2 million | $241.1 million | $204.9 million |
| Gross profit | $68.9 million | $59.7 million | $130.9 million | $113.3 million |
| Gross margin | 54.9% | 54.2% | 54.3% | 55.3% |
| Operating income (loss) | $14.3 million | $(1.9) million | $18.9 million | $3.4 million |
| Net income (loss) | $6.6 million | $(2.3) million | $9.3 million | $0.5 million |
| Diluted EPS | $0.15 | $(0.05) | $0.21 | $0.01 |
- Revenue mix: Q2 subscriptions revenue rose 37% to $52.0 million; six-month subscriptions revenue rose 51% to $99.7 million. License revenue increased 33% in Q2 but declined 23% for the six-month period. Services revenue was nearly flat in Q2 and up 8% for six months; maintenance revenue increased 1% in both comparisons.
- Margins: Subscription gross margin increased to 58% for both periods from 56% in Q2 2012 and 55% for the first half of 2012. Services gross margin fell to 16% in Q2 and 14% for six months, from 20% and 19%, respectively. Maintenance gross margin was 81% in Q2 and 82% for six months.
- Cash flow: Six-month operating cash flow was $37.5 million, versus $10.9 million in 2012. Investing used $12.6 million, including $10.1 million for equipment and software; financing used $30.7 million, including $11.0 million of dividends and a $20.0 million net debt reduction. Cash and cash equivalents declined $6.2 million to $7.3 million.
- Liquidity and debt: Total debt was $195.5 million, down from $215.5 million at year-end 2012; the effective interest rate was 2.40%. The $325.0 million credit facility had $111.4 million of available capacity and matures in February 2017. The company reported compliance with covenants; leverage was 1.97x against a limit below 3.00x, and interest coverage was 14.65x against a minimum of 3.50x. Donor-restricted cash of $27.1 million is matched by donations payable and should not be viewed as unrestricted liquidity.
- Balance sheet: Total assets were $653.2 million and stockholders’ equity was $153.4 million at June 30, 2013. Current and long-term deferred revenue totaled $191.5 million, up 4% from year-end.
Changes, outlook, and risks
- Revenue increased 14% in Q2 and 18% for the first half, primarily from subscription growth, Luminate Online and online payment-processing fees. Management cited continued customer demand for hosted and online offerings.
- Operating income improved substantially versus 2012, partly because Convio acquisition and integration costs were lower and prior-year optimization expenses did not recur. Results also reflected higher subscription contribution and operational efficiencies. Convio’s acquired operations are integrated, so standalone acquired-business results are not available.
- Management plans to continue shifting toward subscriptions and investing in product integration, product development, back-office systems and subscription infrastructure. It expects the transition from upfront license recognition to ratable subscription recognition to dilute profitability in the near term. No numerical earnings or revenue guidance was provided.
- Management stated that available funds and anticipated operating cash flows should cover operations, capital expenditures, debt obligations and dividends for at least the next 12 months. Dividends are discretionary and subject to credit-facility restrictions; the board declared a Q3 dividend of $0.12 per share.
- The company recorded $3.4 million of restructuring charges in the first half, principally for a workforce reduction of approximately 135 positions and the San Diego office transition; it expected another $0.2 million of restructuring costs during the remainder of 2013. The CEO announced plans to resign by year-end or earlier if a successor is appointed.
- Key risks include uncertain economic recovery in the nonprofit market, long sales and implementation cycles, customer renewals and product acceptance, acquisition integration, competition and technology change, foreign-exchange exposure, and credit-facility restrictions. Management reported no material market-risk exposure at quarter-end and effective disclosure controls.
Important facts for investors to verify
- Whether subscription growth and payment-processing volume continue to offset declining six-month license revenue, and how the shift affects realized margins and cash collections.
- Whether services-margin pressure and planned infrastructure and product investments affect profitability as management pursues growth.
- Debt repayment capacity, covenant headroom and access to the undrawn credit facility, particularly as the leverage limit tightens to below 2.75x effective September 30, 2013.
- The durability of operating cash flow, given the period’s working-capital movements and low reported cash balance; distinguish donor-restricted cash from funds available for general use.
- Completion and cost of restructuring, CEO succession, and the continuation of dividends under credit-facility and cash-flow constraints.