Blackbaud, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Blackbaud provides cloud software, services and payment solutions to nonprofits, education, healthcare and other social-good organizations. The filing reports one operating segment. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $215.0m | $221.1m | $670.6m | $662.6m |
| Recurring revenue | $200.1m | $205.2m | $621.2m | $611.8m |
| Gross profit / margin | $116.3m / 54.1% | $119.3m / 54.0% | $362.1m / 54.0% | $360.7m / 54.4% |
| Operating income / margin | $10.1m / 4.7% | $7.9m / 3.6% | $38.1m / 5.7% | $23.6m / 3.6% |
| Net income | $4.9m | $4.6m | $21.3m | $10.6m |
| Diluted earnings per share | $0.10 | $0.09 | $0.44 | $0.22 |
- Q3 revenue fell 2.8% year over year; recurring revenue fell 2.5%. For the first nine months, revenue rose 1.2% and recurring revenue rose 1.5%.
- Q3 operating income increased 28.0%; nine-month operating income increased 61.7%. Management attributed improvement in part to lower compensation, travel, acquisition-related and amortization costs. Nine-month results also included a $4.3m impairment of capitalized software costs.
- Cash from operations was $109.2m for the first nine months, down from $122.1m. Capital spending was $25.8m for property and equipment and $32.0m for capitalized software; reported non-GAAP free cash flow was $51.3m, versus $78.0m.
- At September 30, cash and cash equivalents were $30.6m, while restricted cash was $203.7m, principally held for customers. Debt carrying value was approximately $508.3m; working capital was negative $207.6m. Management said available funding and expected operating cash flows were sufficient for at least the next 12 months.
- Net leverage was 1.95x at September 30, and the company reported compliance with its credit covenants. The 2017 Credit Facility had $229.6m of available borrowing capacity at quarter-end.
Changes, outlook and management commentary
- COVID-19 pressured event-related and other transactional revenue as customer events moved online, were postponed or canceled. Q3 also saw lower maintenance revenue as customers migrated from legacy on-premises products to cloud solutions. Management said bookings were below budget and expected a significant 2020 bookings shortfall to weigh more on 2021 revenue; the near-term operating environment could remain challenging through 2021 and potentially beyond.
- Management reported recurring-contract customer retention of approximately 92% for the 12 months ended September 30, unchanged from full-year 2019. Remaining performance obligations were approximately $812m, with about 60% expected to be recognized in the next 12 months.
- The company shifted emphasis toward profitability and cash flow, reduced travel and headcount, suspended its 401(k) match temporarily, and ended cash dividends beginning in Q2 2020. Q3 operating results included $6.8m of costs related to real estate and workforce changes. Management expected related real estate transactions to require a one-time cash outlay of $20m–$25m during Q3 and Q4 2020.
- In August, Blackbaud purchased its Charleston headquarters, paying $15.2m in cash and assuming $61.1m of real estate loans. In October, after quarter-end, it refinanced the 2017 facility with a $900m senior secured credit facility maturing in October 2025, comprising a $500m revolver and $400m term facility. Proceeds repaid the prior term loan and $124.4m of revolving borrowings.
- The May 2020 ransomware incident remained under investigation. Blackbaud reported approximately 160 customer claims, 23 putative consumer class actions and inquiries from U.S. and international authorities. It recorded $3.6m of incident expenses and $2.9m of accrued insurance recoveries for the first nine months; recoveries had not yet been received. It had not recorded a liability because it could not reasonably estimate a loss or range of loss.
Key investor verification points
- Track bookings, pipeline, customer renewals and payment behavior; management warned of revenue pressure, particularly in 2021.
- Assess the persistence of COVID-related transactional weakness, bad-debt increases and the effect of customer payment deferrals.
- Monitor the security incident investigation, customer and class-action claims, regulatory inquiries, insurance coverage and any eventual quantified exposure.
- Review the terms, borrowing costs and covenant headroom of the October refinancing, alongside debt maturities and leverage.
- Reconcile cash generation with working-capital movements, capitalized software spending, real-estate cash outlays and the continued suspension of dividends.
- Distinguish GAAP results from non-GAAP measures: non-GAAP adjustments include stock compensation, acquired-intangible amortization and restructuring or real-estate costs.