Blackbaud, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Blackbaud provides cloud-based and on-premise software and services to nonprofit, charitable giving, and education organizations; it reported more than 30,000 active customers. Financial statements are unaudited.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $156.3m (+12.1%) | $139.4m | $303.3m (+13.6%) | $267.0m |
| Gross profit / margin | $82.8m / 53.0% | $74.7m / 53.6% | $158.0m / 52.1% | $139.0m / 52.1% |
| Operating income / margin | $14.5m / 9.3% | $16.0m / 11.5% | $22.5m / 7.4% | $25.3m / 9.5% |
| Net income | $7.0m | $9.3m | $11.3m | $13.1m |
| Diluted EPS | $0.15 | $0.20 | $0.24 | $0.29 |
Revenue mix, Q2: Subscriptions $80.0m (+23%); maintenance $38.6m (+6%); services $33.7m (+6%); license fees and other $4.0m (-34%). Subscription gross margin was 51%, unchanged year over year; maintenance gross margin fell to 82% from 84%, while services gross margin rose to 23% from 20%.
Cash flow and liquidity: Operating cash flow for the first half was $47.6m, versus $45.1m a year earlier. Investing used $14.5m (versus $42.0m), including $7.0m of property and equipment purchases and $7.0m of capitalized software development. Financing used $33.6m, including $23.3m net debt repayment and $11.3m of dividends. Cash and cash equivalents were $13.2m at June 30, 2015; this excludes $61.1m of donor-restricted cash, offset by donations payable of the same amount. Working capital was negative $138.6m, but $86.5m excluding deferred revenue.
Debt: Total debt was $259.1m, down from $282.4m at year-end 2014; weighted-average effective interest rate was 2.39%. The company had $158.0m of available borrowing capacity at June 30, was compliant with covenants, and reported net leverage of 1.92x against a maximum of 3.50x. The credit facility matures in February 2019.
Changes and notable items
- Growth was led by subscription demand, payment processing volume, and acquisitions. MicroEdge contributed $7.4m of Q2 and $14.0m of first-half revenue; WhippleHill also contributed to year-over-year growth. Acquisition effects limit comparability.
- Revenue rose, but GAAP operating income declined 9% in Q2 and 11% for the first half. Management cited higher acquisition-related intangible amortization and stock compensation; first-half results also included $1.6m of employee severance.
- Q2 and first-half net income included a $2.0m loss on the May sale of Netherlands-based RLC Customer Technology. The sale generated $0.4m gross proceeds; no tax benefit was recognized on part of the loss.
- International revenue fell 12% in Q2 and 9% in the first half, partly due to lower perpetual license and related maintenance sales. Management expected further near-term reductions as customers transition to Raiser's Edge NXT.
- On July 14, 2015, after quarter-end, Blackbaud announced general availability of Raiser's Edge NXT. On July 17, it increased revolving commitments by $100m, bringing aggregate commitments to $350m.
Outlook, risks, and contingencies
No quantified revenue or earnings guidance is provided. Management said it expects to continue investing in cloud offerings, payment processing, analytics, sales and marketing, and operating infrastructure while pursuing profitability and efficiency. It believes available funds and anticipated operating cash flow are adequate for at least 12 months to fund operations, capital expenditures, debt obligations, and dividends. The board may change or suspend dividends; the stated annual rate was $0.48 per share, subject to credit-facility restrictions.
Key business trends include customers shifting from perpetual licenses and maintenance toward subscriptions, which may pressure license, maintenance, and consulting revenue over time. Other disclosed exposures include variable interest rates, foreign currency movements, customer renewals and market acceptance, and potential inability to offset inflation-related cost increases. Management reported no material change in risk factors from the 2014 Form 10-K, no material ordinary-course legal loss contingencies recorded, and no material off-balance-sheet arrangements. The company had $84.2m of future minimum operating lease payments and approximately $8.1m of remaining minimum third-party technology purchase commitments.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess how much reported growth reflects organic demand versus MicroEdge and WhippleHill contributions, and monitor subscription and payment-processing growth.
- Track whether the subscription transition offsets declines in perpetual licenses, maintenance, and consulting, including the adoption and economics of Raiser's Edge NXT.
- Reconcile operating-income and net-income declines with acquisition amortization, stock compensation, severance, and the RLC disposal loss; review management’s non-GAAP adjustments alongside GAAP results.
- Monitor debt repayment, borrowing availability, covenant headroom, interest costs, and the sustainability of dividends relative to cash generation.
- Review deferred revenue and donor-restricted cash separately from unrestricted liquidity; confirm the impact of the post-quarter credit commitment increase.