Blackbaud, Inc. — Q2 2011 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2011. Blackbaud provides software and related services to nonprofit organizations and reported approximately 24,000 active customers. Financial amounts below are in U.S. dollars; amounts are in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $93.4 | $80.7 | $180.7 | $156.9 |
| Gross profit | $54.3 | $49.0 | $105.3 | $94.6 |
| Income from operations | $13.8 | $11.2 | $24.1 | $20.8 |
| Net income | $8.9 | $6.8 | $16.5 | $12.7 |
| Diluted EPS | $0.20 | $0.15 | $0.38 | $0.29 |
| Operating cash flow | Not separately presented for quarter | $37.8 | $24.7 |
- Revenue increased 16% in Q2 and 15% for the half year. Excluding foreign currency effects and acquired-company revenue, management reported growth of approximately 12% for both periods.
- Q2 GAAP gross margin was approximately 58%, versus 61%; operating margin was approximately 14.7%, versus 13.8%. For the first half, gross margin was approximately 58%, versus 60%, and operating margin was approximately 13.3%, essentially unchanged.
- Revenue mix shifted toward subscriptions and services. Q2 subscriptions grew 27%, services 34%, and maintenance 6%; license fees fell 27%. For the first half, these categories grew 30%, 27%, and 5%, respectively, while license fees declined 20%.
- Cash and cash equivalents were $33.4 at June 30, up from $28.0 at December 31, 2010. Operating cash flow was $37.8 for the half year; capital expenditures were $7.7, implying approximately $30.1 of operating cash flow less capital expenditures.
- No borrowings were outstanding under the new $125 million five-year revolving facility. The facility may be increased by up to $75 million, subject to conditions. Current assets of $147.8 were below current liabilities of $198.9, largely including deferred revenue and donations payable.
Changes, outlook, and notable items
- Management attributed growth to demand for hosted solutions, online fundraising, data management, and consulting and training. It expects the shift from perpetual licenses toward subscription-based pricing to continue.
- Management said nonprofit customers remained cautious and the pace and impact of economic recovery were uncertain. It provided no specific revenue or earnings forecast in the supplied filing text; it expected 2011 capital expenditures of $15–$20 and said available liquidity should fund operations, planned capital spending, and dividends for at least 12 months.
- Blackbaud acquired Public Interest Data, Inc. (PIDI) on February 1 for $16.6 cash, with possible additional consideration of up to $2.5 tied to revenue targets. PIDI contributed $3.6 of revenue in the first half; acquisition-related costs were $1.0. The acquisition added $13.0 of goodwill.
- The company recorded a prior-period revenue and commission adjustment in the first half that increased operating income by $0.8 ($0.5 after tax), which management considered immaterial to prior periods and expected to be immaterial to full-year 2011 results. MD&A also describes a $1.7 increase to subscription revenue and a $0.8 reduction to consulting services revenue from out-of-period adjustments; investors should confirm how these items reconcile.
- First-half dividends paid were $10.7; the board declared a third-quarter dividend of $0.12 per share. The annual 2011 dividend rate was $0.48 per share, but future dividends are not assured. No program repurchases occurred in the half year; $50.0 remained available under the repurchase authorization.
- Key risks cited include uncertain economic conditions and customer renewals, lengthy sales and implementation cycles, acquisition integration, competition and technological change, retaining key personnel, and restrictions under the credit facility. The company reported no material adverse effect expected from ordinary-course legal matters and no material market-risk exposure. Operating lease commitments totaled $62.1; minimum third-party purchase commitments were $4.4 through 2013.
- Disclosure controls were concluded to be effective; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Whether subscription growth and services demand can offset continued declines in perpetual license revenue, and the resulting effect on gross margins.
- The reconciliation and period attribution of the out-of-period revenue and commission adjustments, including their net impact on reported results.
- Acquisition performance and contingent consideration for PIDI, including integration progress and contribution to growth.
- Actual 2011 capital expenditures relative to the $15–$20 outlook, operating cash generation, and capacity to sustain dividends.
- Liquidity needs and compliance with credit-facility terms, particularly given current liabilities exceeding current assets and the company’s stated dependence on operating cash flows.