Blackbaud, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Blackbaud provides software and related services to nonprofit organizations and reported approximately 24,000 active customers.
Financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $83.2 | $79.2 | $240.1 | $230.4 |
| Gross profit | $50.0 | $48.7 | $144.5 | $139.0 |
| Gross margin | 60.0% | 61.4% | 60.2% | 60.3% |
| Operating income | $13.1 | $13.9 | $33.9 | $32.5 |
| Net income | $8.5 | $9.8 | $21.3 | $20.5 |
| Diluted EPS | $0.20 | $0.22 | $0.48 | $0.47 |
| Operating cash flow | Not separately stated for the quarter | $48.9 | $60.4 |
Q3 operating margin was approximately 15.8% versus 17.5%; nine-month operating margin was approximately 14.1% in both periods. Nine-month net margin was approximately 8.9% in both periods. The company paid dividends of $0.11 per share each quarter through September; nine-month dividends were $0.33 per share.
Revenue mix and changes
- Q3 revenue increased 5% year over year; nine-month revenue increased 4% (3% excluding foreign-currency translation, per management).
- Recurring maintenance and subscription revenue together accounted for 64% of revenue. Nine-month maintenance revenue rose 7% to $93.0 million and subscriptions rose 13% to $60.8 million.
- License fees declined 14% in Q3 to $5.1 million and 10% for nine months to $17.2 million. Management cited customers shifting from perpetual licenses to hosted subscriptions, weaker mid-market license sales, and a smaller contribution from Enterprise CRM deals recognized upfront.
- Services revenue increased 5% in Q3 but declined 2% for nine months. Services gross margin fell to 32% in Q3 from 36%, and to 28% for nine months from 32%, reflecting added delivery capacity and non-billable implementation work for early Enterprise CRM adopters.
- Q3 net income declined despite higher revenue, with operating income down $0.8 million. Management attributed this primarily to Enterprise CRM implementation investments, added services headcount and higher sales commissions. Nine-month operating income increased $1.5 million.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $26.3 million, versus $22.8 million at year-end 2009. Donor-restricted cash of $18.9 million is separately reported and is matched by donations payable; it is not ordinary operating cash.
- Operating cash flow of $48.9 million was down $11.5 million year over year, with management citing slower receivable collections and less working-capital contribution.
- Investing cash outflow was $13.1 million, including $10.6 million of property and equipment purchases. Financing cash outflow was $32.4 million, including $22.6 million of share repurchases and $14.6 million of dividends.
- No borrowings were outstanding on the $90 million revolving credit facility, which matures in July 2012. The company reported $0.4 million of current debt related to an acquired equipment note due November 2010.
- Current liabilities totaled $192.0 million, including $143.1 million of deferred revenue. Management believed available funds and expected operating cash flows would cover operations, capital expenditures and dividends for at least 12 months.
Outlook, risks and notable items
- Management said the nonprofit market’s recovery remained uncertain and expected a challenging operating environment through the rest of 2010. It planned to continue investing in growth initiatives while controlling costs as needed. No quantified revenue or earnings guidance was provided.
- Risks identified include economic weakness, lengthy sales and implementation cycles, customer renewals and spending decisions, execution of integrated software implementations, acquisitions, retaining key personnel, competition and technology change, and the sustainability of dividends and repurchases.
- The board authorized a new $50 million repurchase program effective August 1, 2010, with no expiration date. The company repurchased 1,007,082 shares for $22.6 million during the first nine months.
- The filing records $0.2 million of net out-of-period expense adjustments, which management deemed immaterial to current and prior periods. It also reports a $0.5 million tax benefit from a revised estimate of 2009 research and development credits.
- Commitments include approximately $5.3 million of minimum third-party purchase commitments through 2013. The notes report approximately $60.0 million of minimum lease payments, net of stated reductions; MD&A separately cites $64.1 million of future minimum lease commitments.
- Legal proceedings arise in the ordinary course; management did not expect potential liabilities to materially affect financial position, results or cash flows. A possible $0.3 million reduction in unrecognized tax benefits within 12 months was also disclosed.
Important facts for investors to verify
- Whether subscription and maintenance growth can continue to offset declining perpetual-license sales, and how recurring-revenue growth affects margins.
- Whether services capacity and Enterprise CRM implementation work improve utilization and services margins.
- Why operating cash flow declined and whether receivable collections normalize; distinguish donor-restricted funds from available cash.
- The terms and remaining authorization of the new repurchase program, alongside dividend commitments and capital spending.
- The difference between the $60.0 million lease-payment total in the notes and the $64.1 million commitment figure in MD&A.
- The impact of the required January 2011 adoption of ASU 2009-13; the filing says the company was still evaluating it.