Blackbaud, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited consolidated results; comparisons are with Q1 2011 unless otherwise noted. Blackbaud provides on-premise and cloud software and related services to nonprofit organizations and reported more than 26,000 active customers.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $94.7 million | $86.6 million | +9% |
| Gross profit | $53.6 million | $50.5 million | +$3.1 million |
| Income from operations | $5.3 million | $9.8 million | −46% |
| Net income | $2.8 million | $7.3 million | −62% |
| Diluted EPS | $0.06 | $0.17 | Down $0.11 |
| Operating cash flow | $4.0 million | $17.5 million | −$13.5 million |
| Capital expenditures | $6.3 million | $1.1 million | +$5.2 million |
| Dividends paid | $5.4 million | $5.3 million | +$0.1 million |
- Revenue mix: subscriptions $28.1 million (+18%); license fees $7.2 million (+57%); maintenance $33.6 million (+5%); services $24.0 million (−4%). Subscription growth reflected increased demand for online fundraising, hosted applications and data management.
- Gross margin was approximately 56.6%, compared with 58.3%. Subscription gross margin fell to 54% from 62%; services margin fell to 17% from 24%. License and maintenance margins improved to 92% and 82%, respectively.
- GAAP operating expenses increased to $48.4 million from $40.7 million, including general and administrative expense of $14.5 million versus $9.2 million. Management cited higher professional fees, acquisition costs, staffing and hosting investment.
- Cash and cash equivalents were $46.0 million at March 31, down from $52.5 million at year-end. Current assets were $164.3 million and current liabilities $213.6 million; these include matching donor-restricted cash and donation payable balances of $20.9 million.
- No credit-facility borrowings were outstanding at March 31. The amended five-year facility provided $325 million of capacity and matures in February 2017. After quarter-end, Blackbaud borrowed approximately $295 million to fund the Convio acquisition.
Material changes and unusual items
- Revenue increased 9% overall (8% excluding acquired-company revenue), while GAAP operating income declined $4.5 million. Non-GAAP operating income, as defined by the company, decreased 17% to $13.3 million, and non-GAAP operating margin fell to 14% from 18%.
- Management attributed lower operating performance to $2.4 million more in professional fees for business optimization and accounting-process re-engineering, increased Convio-related costs, higher hosting costs, and non-billable implementation work for early Blackbaud CRM customers. Q1 2012 acquisition-related costs were $2.2 million.
- Cash from operations declined partly because of weaker working-capital contribution, including higher days sales outstanding, increased cash taxes and timing of vendor payments. Capital spending supported subscription infrastructure.
- The effective tax rate was 42.5%, versus 26.2%. The filing attributes the increase to reduced availability of R&D tax credits and non-deductible acquisition-related costs; the prior-year rate benefited from a $1.0 million state tax valuation-allowance decrease.
- The company revised prior-period financial information for errors principally involving revenue recognition, income taxes and software-development-cost capitalization. Management said the errors were not material to individual prior periods, but the cumulative correction would have been material if recorded entirely in Q4 2011. Q1 2011 comparative figures in this filing are revised.
Outlook, risks and contingencies
- Management said nonprofit customers remained cautious and the pace and effect of economic recovery were uncertain; it expected a challenging operating environment for the remainder of 2012. It emphasized growth initiatives, profitability, back-office processes, subscription infrastructure and product development. No specific revenue or earnings forecast is stated.
- Expected 2012 capital expenditures were $20–25 million. Management believed available funds and anticipated operating cash flow would cover operations, planned capital spending and dividends for at least 12 months, while noting dividends are discretionary and subject to credit-facility terms and cash generation.
- On May 4, 2012, Blackbaud completed its Convio acquisition for approximately $308 million tender-offer consideration, with approximately $17 million additional consideration due for untendered shares and vested options, plus about $9.7 million in third-party fees. It was funded with cash and approximately $295 million of credit-facility borrowings. Purchase accounting was not complete; Convio results will be included from the acquisition date.
- Commitments included $58.3 million of future minimum operating lease payments and approximately $6.8 million of minimum third-party purchase commitments through 2013. The company reported ordinary-course legal proceedings and stated it did not expect them to materially affect financial position, results or cash flows.
- Risks highlighted include economic conditions, customer renewals and spending, long sales and implementation cycles, acquisition integration, key-personnel retention, product and technology competition, growth management, dividend policy and credit-facility restrictions. Approximately 15% of Q1 revenue came from outside the U.S.; management said foreign exchange had not materially affected results.
Most important facts for investors to verify
- Convio’s final purchase accounting, integration costs and effect on earnings, cash flow and leverage; verify debt outstanding and repayment terms after the acquisition.
- Whether subscription growth can translate into improved subscription margins as hosting capacity and staffing investments expand.
- Whether operating cash flow and collections recover after the sharp year-over-year decline and higher days sales outstanding.
- The impact of the disclosed prior-period revisions and the company’s accounting-process re-engineering on future reported results.
- Progress against the $20–25 million capital-expenditure expectation, dividend plans and the stated challenging nonprofit-market outlook.