Blackbaud, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Blackbaud provides cloud-based and on-premise software and related services for nonprofit organizations and reported more than 30,000 active customers.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $127.6 | $115.6 | +$12.0; +10% |
| Gross profit | $64.3 | $62.0 | +$2.2 |
| Gross margin | 50.4% | 53.7% | Down 3.3 percentage points |
| Operating income | $9.3 | $4.6 | +$4.7; +102% |
| Net income | $3.8 | $2.7 | +$1.1; +43% |
| Diluted EPS | $0.08 | $0.06 | +$0.02 |
| Operating cash flow | $13.3 | $12.9 | +$0.3 |
- Revenue mix: Subscriptions $58.3 (+22%); services $28.1 (−2%); maintenance $35.7 (+4%); license fees $3.9 (+30%); other revenue $1.7 (−11%).
- Revenue comparability: A contractual change effective October 2013 moved certain payment-processing revenue and costs from net to gross presentation. It added $6.1 million to reported Q1 2014 revenue and cost of revenue, with no effect on gross profit or operating income. Excluding this presentation change, revenue growth was 5%.
- Cash and liquidity: Cash and cash equivalents were $32.6 at March 31, up from $11.9 at year-end. Donor-restricted cash was a separate $43.5 and was matched by donations payable. Cash from operations was $13.3; capital expenditures were $6.1 and capitalized software development costs were $1.2. Dividends paid were $5.5.
- Debt: In February, Blackbaud refinanced into a five-year, $325 million credit facility and drew $175 million in term loans. At quarter-end, principal debt was $175.0 million and the balance-sheet carrying amount was approximately $173.1 million, net of discount and current portion. Available borrowing capacity was $147.9 million. The company reported compliance with covenants.
- Margins and expenses: Subscription gross margin was 48% reported, versus 57% in Q1 2013; excluding the gross-presentation effect, it was 54%. Services gross margin fell to 6% from 12%. GAAP operating margin was approximately 7% versus 4%; non-GAAP operating margin was 16% versus 18%.
Material changes and management commentary
- Reported revenue growth reflected increased demand for online and hosted offerings, higher payment-processing transaction volumes, and greater license and maintenance contributions from Blackbaud CRM and Raiser's Edge. All reported segments grew: ECBU 12%, GMBU 9%, IBU 15%, and Target Analytics 8%.
- Operating income improved partly because Q1 2013 included $3.2 million in restructuring charges, $0.8 million in acquisition integration costs, and higher stock-based compensation. Q1 2014 also included $1.0 million of debt-extinguishment and derivative-termination losses.
- Net income growth was moderated by a higher effective tax rate: 42.2% versus 11.7%. Q1 2013 benefited from a $1.9 million discrete research-and-development tax credit benefit; the filing attributes the 2014 increase primarily to reduced R&D credit benefits.
- Management intends to invest in products, sales and marketing, subscription infrastructure, and operating scalability. It expects near-term profitability pressure as the business shifts toward subscription revenue recognized over contract terms, and anticipates payment-processing growth may weigh on subscription gross-margin percentage.
- Management stated that available funds and expected operating cash flows should be adequate for at least the next 12 months. It approved a 2014 annual dividend rate of $0.48 per share, while cautioning that dividends are not guaranteed and are subject to credit-facility restrictions and board discretion.
Risks, contingencies, and unusual items
- Key risks include sales and implementation cycles, customer renewals and growth, acquisition integration, retention of key personnel, product execution and technological change, foreign-exchange and interest-rate movements, and credit-facility restrictions.
- The new credit facility has net-leverage and interest-coverage covenants and limits on dividends and repurchases. The company reported quarter-end ratios of 1.47-to-1.00 net leverage against a 3.50 maximum, and 20.98-to-1.00 interest coverage against a 2.50 minimum.
- Future commitments included $95.2 million of operating leases, $193.2 million of debt and interest payments, and $10.2 million of purchase obligations. The filing reports ordinary-course legal matters and states that potential liability is not expected to materially affect financial position, results, or cash flows.
- Q1 cash flow includes offsetting changes in donor-restricted cash and donations payable; these funds should not be treated as unrestricted operating liquidity. The company also reported approximately $6.9 million of cash held outside the U.S., which may incur tax if repatriated.
- The company identified first-quarter seasonality in services, transaction revenue, and operating cash flow. No specific full-year revenue or earnings guidance is provided in the filing.
Important facts for investors to verify
- Assess underlying revenue growth and subscription economics apart from the $6.1 million gross-presentation change, including its effects on reported revenue and margin comparisons.
- Track subscription and payment-processing growth against related support, hosting, and infrastructure costs, as well as the continued decline in services gross margin.
- Review cash available for corporate use separately from donor-restricted cash, and monitor debt, borrowing capacity, covenant headroom, and scheduled repayments.
- Evaluate whether operating investments and the shift to ratable subscription revenue can sustain growth while restoring or maintaining margins.
- Monitor effective tax-rate variability, dividend affordability and credit-facility limitations, and the timing and renewal trends in deferred revenue.