Blackbaud, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results for the three months ended December 31, 2010. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
Blackbaud provides software and related services for nonprofit organizations, including fundraising and constituent management, financial and school administration, analytics, payment processing, and hosted and subscription offerings. It reported approximately 24,000 customers across 83 countries. Effective January 1, 2010, it reorganized into Enterprise Customer, General Markets, and International business units.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $327.1 | $309.3 |
| Gross profit / margin | $195.3 / 59.7% | $188.4 / 60.9% |
| Operating income / margin | $46.3 / 14.1% | $45.8 / 14.8% |
| Net income | $29.8 | $28.4 |
| Diluted EPS | $0.68 | $0.65 |
| Cash provided by operations | $55.9 | $86.8 |
- Revenue grew 6% (5% excluding foreign-currency translation). Maintenance revenue rose 7% to $124.6; subscriptions rose 13% to $82.5. License fees fell 7% to $23.7. Services rose 2% to $89.6.
- Recurring maintenance and subscription revenue together represented approximately 63% of revenue. The shift toward hosted offerings supported recurring revenue growth, while lower-margin subscription growth and weaker services profitability contributed to lower gross margin.
- Services gross margin declined to 29% from 33%; management cited non-billable Enterprise CRM implementation work, added staffing, and discounting. Subscription gross margin was 66%, broadly stable.
- Fourth-quarter 2010 revenue was $87.0, gross profit $50.8, operating income $12.3, and net income $8.5; diluted EPS was $0.20. Versus Q4 2009, revenue increased from $79.0, gross profit from $49.4, operating income decreased from $13.3, and net income increased from $8.0.
Liquidity, debt, and capital allocation
- Year-end cash and cash equivalents were $28.0, up from $22.8. In addition, $16.4 of donor-restricted cash was matched by donations payable and should not be treated as unrestricted liquidity.
- Operating cash flow fell to $55.9 from $86.8, principally because of working-capital movements, including slower receivable collections and higher prepaid taxes. Capital expenditures were $10.8.
- There were no year-end borrowings under the $90.0 revolving credit facility, which matures in July 2012 and allows a potential increase of up to $35.0, subject to conditions. Working capital was negative $52.6, reflecting in part substantial deferred revenue.
- 2010 financing uses included $22.6 of treasury-stock purchases and $19.5 of dividends. The board approved a 2011 annual dividend rate of $0.48 per share, estimated at approximately $21.1 in total; payment remains discretionary and subject to credit-facility and legal restrictions.
Material changes, outlook, and risks
- Management said the nonprofit market and customer spending environment remained challenging and expected cautious expenditure decisions to continue in 2011. It provided no quantified 2011 revenue or earnings guidance in the supplied filing text, and said it would control costs if results remained pressured.
- Perpetual-license sales continued to weaken as customers shifted toward hosted, subscription-priced solutions. Management expects this transition to continue; subscription economics require scale and carry lower gross margins than license revenue.
- Enterprise CRM sales and implementations may involve long sales cycles and implementation periods of a year or more. Delays, unplanned work, or non-billable implementation effort could affect revenue timing and profitability.
- 2010 acquisitions of Target America and NOZA required $5.3 in cash in aggregate. Subsequent to year-end, Blackbaud acquired Public Interest Data Inc. for $17.5 in cash, with up to $2.5 in contingent payments.
- Unusual items included $1.0 of 2010 acquisition-related expense and a $0.8 out-of-period adjustment to deferred sales commissions recorded in Q2. The company reported a $49.8 net deferred tax asset and highlighted the risk that future taxable income may be insufficient to realize some tax benefits.
- Key risks include economic weakness affecting nonprofit budgets and donations; concentration in Raiser’s Edge and related offerings; renewal and customer-expansion risks; competition and technology changes; SaaS service interruptions, cybersecurity and privacy exposure; foreign-exchange and international operating risks; acquisition integration; and credit-facility covenants. Management reported no legal matters believed likely to have a material adverse effect and no material weakness in internal control over financial reporting.
Important facts for investors to verify
- Whether recurring-revenue growth can offset declining license fees without further gross-margin erosion.
- Receivables, collection timing, and operating cash flow trends after the 2010 working-capital-related decline.
- Enterprise CRM implementation costs, services margins, and customer acceptance of hosted offerings.
- Liquidity available after dividends, repurchases, capital spending, and the PIDI acquisition; confirm credit-facility renewal plans before its July 2012 maturity.
- Realizability of deferred tax assets and the impact of acquired tax attributes and ownership-change limitations.
- Acquisition integration and the contingent consideration attached to PIDI; also reconcile lease commitments, which are presented at different amounts depending on whether lease incentives and subleases are netted.