Business context and reporting period
Blackbaud, Inc. provides software and related services to nonprofit organizations. This Form 10-K covers the fiscal year ended December 31, 2012; quarterly data below highlights the fourth quarter. The company reported more than 27,000 active customers across 61 countries.
In May 2012, Blackbaud acquired Convio for total consideration of approximately $335.7 million, including assumed unvested equity awards. Convio contributed $50.7 million of revenue from acquisition through year-end. The deal expanded online and subscription offerings and was funded with cash and credit-facility borrowings.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $447.4 million | $370.9 million |
| Gross profit / margin | $245.0 million / 54.8% | $213.7 million / 57.6% |
| Operating income / margin | $19.4 million / 4.3% | $50.9 million / 13.7% |
| Net income | $6.6 million | $33.2 million |
| Diluted EPS | $0.15 | $0.75 |
| Cash from operations | $68.7 million | $85.5 million |
FY 2012 revenue rose 21%; excluding acquired-company revenue, management reported growth of 6%. Subscription revenue increased 57% to $162.1 million, with acquired companies contributing $45.6 million; excluding acquisitions, subscriptions grew 13%. License fees rose 6%, services 10%, and maintenance 4%.
Gross margin declined as the revenue mix shifted toward subscriptions and services, which have lower margins than license revenue. Subscription gross margin was 58% versus 59%; services gross margin fell to 19% from 27%; maintenance margin remained 81%. GAAP operating income declined 62%. Non-GAAP operating income was $75.5 million versus $76.5 million, and non-GAAP operating margin was 17% versus 21%.
Fourth-quarter revenue was $120.1 million, compared with $95.0 million in Q4 2011. Q4 operating income was $9.9 million versus $10.6 million, and net income was $3.3 million versus $6.4 million.
Operating cash flow was $68.7 million, down from $85.5 million. Investing activities used $302.5 million, primarily reflecting the $280.7 million net cash acquisition outflow for Convio and $20.6 million of property and equipment purchases. Year-end cash and cash equivalents were $13.5 million; an additional $68.2 million of donor-restricted cash was matched by donations payable and was not general-purpose liquidity.
Outstanding credit-facility debt was $215.5 million at year-end, including $10.0 million current debt; the facility has a $325.0 million capacity and matures in February 2017. The company reported compliance with covenants, including a 2.31x leverage ratio against a maximum of 3.00x. Working capital was negative $97.9 million, in part reflecting deferred revenue and matched donor funds/payables. The company paid $21.7 million in dividends in 2012 and approved a $0.48 annual dividend rate for 2013, subject to board discretion and credit-facility restrictions.
Material changes versus the prior period
- Acquisition-driven growth materially increased revenue, goodwill and intangible assets; year-end goodwill was $265.1 million and net intangible assets were $168.0 million.
- Operating income fell by $31.5 million. Management cited $23.1 million of increased acquisition-related, integration, restructuring, acquired-intangible amortization and stock-compensation costs; $4.3 million of strategic and accounting-process investment; and $8.3 million of higher hosting costs. The shift to ratable subscription revenue also pressured near-term profitability.
- Interest expense rose to $5.9 million from $0.2 million following acquisition-related borrowing. The effective tax rate increased to 50.6% from 35.2%, reflecting lower pretax income, reduced credits and nondeductible acquisition costs. Management expected the reinstated federal R&D credit to be recorded as a first-quarter 2013 tax benefit.
- International revenue increased to $61.0 million from $53.6 million; it represented approximately 14% of 2012 revenue.
Outlook, risks and unusual items
Management gave no specific numerical revenue or earnings guidance in the provided filing text. It described the near-term environment as challenging, citing continued customer spending caution and uncertain nonprofit-sector recovery. The company planned to expand subscription offerings and continue investing in hosting infrastructure, product development and back-office processes; management expected the subscription transition to dilute profitability in the near term. Management stated that available funding and expected operating cash flows should cover operations, capital spending, debt obligations and dividends for at least the next 12 months.
Principal risks include acquisition integration and realization of expected benefits, increased leverage and covenant restrictions, customer renewal and lengthy sales cycles, implementation execution, competitive pressure, cybersecurity and privacy exposure, service interruptions, and the lower margins and upfront investment associated with subscription offerings. Blackbaud expected the Convio acquisition to be accretive to non-GAAP EPS during the first full calendar year after closing, but emphasized that this expectation depended on estimated synergies and could fail to materialize.
Other notable items: the company planned to sunset Convio’s Common Ground product and consolidate event fundraising modules. It expected approximately $1.3 million of San Diego office-transition restructuring costs through June 2013. A January 2013 workforce realignment affecting approximately 130 positions was expected to result in an approximately $2.5 million charge in 2013. CEO Marc Chardon announced plans to resign by year-end 2013 or earlier if a successor is appointed; a search was underway. Management reported effective disclosure controls and internal control over financial reporting. The filing stated that pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Convio integration, product consolidation and expected synergies deliver the anticipated growth and non-GAAP accretion.
- Organic growth and renewal trends, particularly for subscriptions and maintenance, and the effect of the ongoing shift from licenses to subscriptions on margins and cash generation.
- Debt reduction, interest costs, covenant headroom and the capacity to sustain dividends while funding investment and acquisitions.
- Whether the services-margin decline, hosting investment and acquisition-related expenses moderate as integration progresses.
- The 2013 effects of the workforce realignment, restructuring plans and reinstated R&D tax credit, and whether subsequent results differ from management’s expectations.