Blackbaud, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise stated. Blackbaud provides cloud and related software and services primarily to nonprofit, education and corporate social-impact customers. It reports one operating segment. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date | Change or context |
|---|---|---|---|
| Total revenue | $261.8 | $257.1 | Up 1.8%; organic growth was 2.3%, or 3.4% on a constant-currency basis |
| Recurring revenue | $252.7 | $244.7 | Up 3.3%; organic recurring growth was 3.8%, or 4.9% on a constant-currency basis |
| One-time services and other revenue | $9.0 | $12.5 | Down 27.7%, reflecting the shift toward cloud subscriptions |
| Gross profit / margin | $138.6 / 53.0% | $133.8 / 52.0% | Margin up 1.0 percentage point |
| Operating loss / margin | $(9.9) / (3.8)% | $(6.0) / (2.3)% | Operating loss widened |
| Net loss / diluted loss per share | $(14.7) / $(0.28) | $(10.4) / $(0.20) | Net loss increased |
| Non-GAAP net income / diluted EPS | $38.3 / $0.72 | $29.5 / $0.57 | Non-GAAP measures; see filing reconciliations and exclusions |
| Operating cash flow | $21.8 | $24.5 | Down 11.0% |
| Non-GAAP free cash flow | $6.5 | $7.6 | Down 14.3%; non-GAAP adjusted free cash flow was $15.7 versus $8.4 |
| Cash and cash equivalents | $24.1 | $31.7 at Dec. 31, 2022 | Additionally, $364.1 of restricted cash, primarily customer funds |
| Debt | $880.6 total debt balance; $817.1 under credit facility | $862.0 total debt balance at Dec. 31, 2022 | Net leverage ratio 2.99x; $298.2 of available credit-facility capacity |
| Working capital | $(284.5) | $(312.0) at Dec. 31, 2022 | Negative working capital, partly reflecting customer funds and deferred revenue |
Recurring revenue growth reflected higher transaction volumes at Blackbaud Tuition Management and JustGiving, pricing changes and cloud performance. Contractual recurring revenue increased, while maintenance revenue declined as customers migrated to cloud offerings. Revenue from the United States was $221.7 million, the United Kingdom $26.0 million and other countries $14.0 million.
Material changes and management commentary
- General and administrative expense rose 20.7% to $52.8 million, primarily due to higher Security Incident-related costs. The incident contributed $17.8 million of net pre-tax expense in Q1 2023, versus $7.2 million net in Q1 2022.
- Interest expense increased to $10.7 million from $7.6 million, principally because of higher effective interest rates. The filing estimates full-year 2023 interest expense of $37–$41 million.
- Management reported strong Q1 bookings versus the prior year, with corporate-sector bookings more than doubling and sales-representative productivity up over 30%. Bookings can vary by quarter.
- Gross dollar retention was approximately 90% for the 12 months ended March 31, 2023, relatively unchanged from the 2022 full-year rate.
- Management said customer renewals and the shift to standard three-year renewal terms, with differentiated pricing and compounding annual increases, were progressing well. It expects pricing initiatives to support faster growth in the second half of 2023 and greater impact in 2024 and beyond; no overall full-year revenue or earnings guidance is provided in the supplied filing text.
- Management expects financial performance to improve each successive quarter in 2023, with meaningful improvement beginning in Q2 as pricing and cost initiatives take hold. It also expects one-time services and other revenue to continue declining in 2023.
- Headcount was reduced by approximately 14% since Q3 2022. Management said it intends to maintain roughly this level for the foreseeable future, while continuing investment in product innovation, cybersecurity, customer success and cloud infrastructure.
Liquidity, debt and unusual cash-flow items
Management believes available funding and expected operating cash flows will be adequate for at least the next 12 months. It is targeting near-term net leverage of 2.0x. The company was in compliance with its credit-facility and real-estate-loan covenants at March 31, 2023; the credit facility matures in October 2025. Q1 investing cash use was $15.3 million, including $14.0 million for capitalized software and content development. Financing cash use of $353.2 million was heavily affected by a $337.2 million decrease in restricted cash due to customers, as well as $31.4 million of employee-tax payments related to equity awards. The restricted-cash movements should not be read as ordinary operating cash use or as freely available company cash.
Risks, contingencies and other notable items
- Security Incident: The 2020 ransomware incident remains subject to customer claims, 19 putative consumer class actions and governmental investigations. The SEC matter was settled on March 9, 2023, with a $3.0 million civil penalty paid; the company consented to the order without admitting or denying its findings. Other proceedings remain unresolved.
- As of March 31, 2023, Blackbaud had recorded approximately $30.2 million in aggregate liabilities for Security Incident-related loss contingencies. The company says additional losses could materially exceed accruals, but it cannot reasonably estimate possible additional losses. Insurance coverage limits were exceeded in Q1 2022.
- For 2023, management expects $20–$30 million of net pre-tax expense and $25–$35 million of net cash outlays for ongoing Security Incident legal fees. These estimates exclude prior settlements and current loss-contingency accruals.
- Other commitments include $280.7 million of remaining minimum purchase obligations through 2027 and $63.5 million of operating lease payments. The company also disclosed exposure to higher interest rates and foreign-exchange movements, and expects currency fluctuations to have a significant negative effect on full-year 2023 revenue.
- Blackbaud reported that access to its cash held at Silicon Valley Bank, temporarily inaccessible after the bank entered receivership in March 2023, was fully restored by March 13; it said those balances were insignificant.
- The company reported effective disclosure controls and procedures and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether renewal retention, three-year contract adoption and pricing increases support the expected growth acceleration, without materially worsening customer attrition.
- How much of the reported non-GAAP earnings and adjusted free cash flow depends on excluding stock compensation, Security Incident costs and other adjustments; compare with GAAP results.
- Developments in Security Incident litigation and investigations, potential additional losses beyond the $30.2 million accrued, and remaining insurance coverage (which the filing says has been exhausted for these costs).
- Debt, interest expense, covenant headroom and progress toward the 2.0x net-leverage target, particularly if rates rise or cash outlays exceed expectations.
- The distinction between company cash and restricted customer funds, and the seasonal effects on deferred revenue, bookings and cash flow.
- The scale and timing of foreign-exchange headwinds and the effect of continued declines in one-time services revenue.