Blackbaud, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Blackbaud provides on-premise and cloud software and related services to nonprofit organizations, with more than 28,000 active customers. Results include Convio from its May 2012 acquisition, so year-over-year comparisons are affected.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $115.6 million | $94.7 million | +22% |
| Gross profit / margin | $62.0 million / 53.7% | $53.6 million / 56.6% | Margin down about 2.9 points |
| Operating income / margin | $4.6 million / 4.0% | $5.3 million / 5.5% | Down 13% |
| Net income / diluted EPS | $2.7 million / $0.06 | $2.8 million / $0.06 | Net income down 3% |
| Operating cash flow | $12.9 million | $4.0 million | Up $9.0 million |
Revenue mix shifted toward subscriptions: subscriptions rose 70% to $47.8 million; services rose 20% to $28.8 million; maintenance increased 2% to $34.1 million; license fees fell 58% to $3.0 million. Subscription gross margin improved to 57% from 54%, while services gross margin declined to 12% from 17%. Maintenance gross margin was 83% versus 82%.
Cash and cash equivalents were $8.4 million at March 31, versus $13.5 million at December 31, 2012; this excludes $26.3 million of donor-restricted cash matched by donations payable. Total debt was $211.0 million, down from $215.5 million at year-end, with a 2.65% effective interest rate. The company reported $149.4 million of current assets and $250.5 million of current liabilities; deferred revenue and the matching restricted-cash/payable balances are significant components. Stockholders’ equity was $149.7 million.
Capital spending on property and equipment was $6.3 million; investing cash outflow totaled $7.9 million, including $0.9 million for acquired net assets and $0.8 million of capitalized software development. Financing cash outflow was $9.9 million, including $5.5 million in dividends and a $4.5 million net debt reduction. The quarterly dividend was $0.12 per share; the board approved an annual 2013 rate of $0.48 per share.
Material changes and management commentary
- Revenue growth reflected Convio’s Luminate Online offering, continued demand for hosted subscription products, higher payment-processing transaction fees, and growth in consulting and education services. Management said the shift from perpetual licenses to subscriptions supports customer preferences but recognizes revenue over time and is expected to dilute near-term profitability.
- GAAP operating income declined despite higher revenue, principally due to $3.2 million of restructuring costs, higher Convio-related integration and acquired-intangible amortization costs, and the subscription transition. Management cited integration efficiencies and stronger subscription mix as offsets. Non-GAAP operating income was $20.9 million versus $13.3 million, but excludes stock compensation, amortization, restructuring, acquisition-related items and other adjustments.
- In January, Blackbaud began a workforce realignment affecting approximately 130 positions. Q1 restructuring expense was $3.2 million; management expected total 2013 pretax restructuring costs of approximately $3.8 million, including the San Diego office transition to Austin.
- The CEO announced he would resign by year-end 2013 or earlier if a successor is appointed; the board had begun a search. Management also cited continued investment in back-office systems, subscription infrastructure and product development.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management stated that available funds and expected operating cash flows should be adequate for at least the next 12 months to fund operations, capital expenditures, debt obligations and dividends. It cautioned that nonprofit-market recovery remains uncertain and that dividends are discretionary and subject to credit-facility restrictions.
The $325 million credit facility matures in February 2017. At March 31, Blackbaud reported compliance with covenants: leverage ratio 2.07 versus a maximum of 3.00, and interest coverage 14.38 versus a minimum of 3.50. Risks highlighted include sales and implementation cycles, renewals and customer demand, acquisition integration, product execution and technology changes, key-personnel retention, economic conditions, foreign exchange, and restrictions on dividends and repurchases. The company said ordinary-course legal matters were not expected to materially affect its financial position, results or cash flows. About 13% of Q1 revenue came from outside the United States; management did not consider currency exposure material. The effective tax rate was 11.7%, compared with 42.5%, mainly reflecting research and development credits and fewer nondeductible acquisition costs.
Investor facts to verify
- How much of subscription growth and margin improvement is organic versus attributable to Convio, given the acquisition’s effect on comparability?
- Whether the subscription transition, services costs and acquired-intangible amortization continue to pressure GAAP margins and cash generation.
- Execution and final costs of the 130-position workforce realignment and San Diego-to-Austin transition.
- Debt repayment capacity, covenant headroom, and the sustainability of the $0.48 annual dividend amid credit-facility restrictions.
- CEO succession timing and the impact of the leadership transition on operating priorities.