Blackbaud, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; filed August 2, 2019. Blackbaud provides cloud software, services and payment solutions to nonprofit, education, healthcare, corporate and other social-good organizations. It reports one operating segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $225.6M (+5.6%) | $213.7M | $441.5M (+5.6%) | $417.9M |
| Recurring revenue | $208.5M (+8.2%) | $192.7M | $406.6M (+8.8%) | $373.6M |
| Gross profit / margin | $124.8M / 55.3% | $118.5M / 55.5% | $241.4M / 54.7% | $234.6M / 56.2% |
| Operating income / margin | $13.5M / 6.0% | $11.4M / 5.3% | $15.7M / 3.6% | $29.0M / 6.9% |
| Net income | $7.1M | $6.6M | $6.0M | $24.3M |
| Diluted EPS | $0.15 | $0.14 | $0.13 | $0.51 |
- Revenue mix and margins: Subscription growth, including contributions from acquisitions, was partly offset by declining maintenance revenue and one-time services. One-time services and other revenue fell 18.0% in Q2 and 21.1% for the six-month period. Recurring gross margin declined to 58.4% in Q2 from 60.4%, and to 57.8% for six months from 61.1%, reflecting cloud hosting, personnel and software-amortization costs.
- Cash flow: Six-month operating cash flow was $45.1M, down 32.1% year over year. Investing cash outflow was $138.5M, including $109.4M net cash used for acquisitions and $23.2M of capitalized software development. Financing provided $30.8M. Company-defined non-GAAP free cash flow was $15.5M, down 61.7%.
- Liquidity and debt: June 30 cash and cash equivalents were $32.7M; restricted cash held for customers was a separate $354.1M. Working capital was negative $190.4M. Debt carrying value was $561.3M (gross debt $562.7M), versus $387.1M carrying value at year-end 2018. Available credit-facility capacity was $119.0M. The company reported compliance with covenants, including net leverage of 2.74x against a 3.50x maximum.
- Other balance-sheet items: Total assets were $1.874B and stockholders’ equity was $372.7M. Adoption of lease accounting added $107.2M of operating lease right-of-use assets and $116.3M of lease liabilities at June 30; this materially affected the balance sheet.
Material changes and management commentary
- January’s $157.7M YourCause acquisition expanded Blackbaud’s corporate social responsibility and employee-engagement offerings. The purchase was funded primarily with revolving credit borrowings; purchase-price allocation remains preliminary. Management said the acquisition was not material enough to require separate revenue, earnings or pro forma presentation.
- Management attributed revenue growth to demand for cloud subscriptions and acquisitions, including Reeher and YourCause. Organic revenue growth excluding acquisition effects was 2.6% in Q2 and 2.4% for six months; constant-currency organic growth was 3.6% and 3.3%, respectively.
- Management expects the shift toward cloud subscriptions to continue weighing on one-time services revenue. It is investing in sales hiring, product innovation and cloud integration, and described the U.S. rollout of Peer-to-Peer Fundraising as progressing positively. The church-management cloud solution was in an early-adopter program, with general availability expected soon.
- The company cited a total addressable market above $10B and said it remains active in evaluating acquisitions and product investments. It provided no specific revenue or earnings guidance in the supplied filing text.
Outlook, risks and unusual items
- Management expects continued sales and innovation investment in 2019 and beyond. It expects facilities-optimization restructuring costs of $8.5M–$9.5M in total, with substantially all remaining costs expected by year-end 2019; it cited expected annual pretax savings of $5M–$6M beginning in 2020.
- Six-month operating income and net income fell substantially year over year, partly due to higher sales and innovation investment, stock-based compensation, severance, rent and acquisition-related amortization. The prior-year six-month tax benefit also makes the net-income comparison less favorable.
- Debt is predominantly variable-rate; interest-rate swaps hedge portions of the exposure. Foreign-exchange movements reduced six-month revenue by $3.8M and operating income by $1.1M. Management said it believed available funding and expected operating cash flows would cover operations, capital expenditures, debt obligations and dividends for at least 12 months.
- Other obligations include $165.4M of operating lease payments and approximately $106.5M of minimum technology and service purchase commitments. The credit facility matures in June 2022, with the bulk of scheduled principal due then. Legal claims arise in the ordinary course; the company reported no provision or disclosure requirement for claims beyond what it had recognized, while noting litigation outcomes are uncertain.
- The board approved a $0.48 annual dividend rate; quarterly payments are discretionary and subject to credit-facility restrictions. A $0.12-per-share third-quarter dividend was declared after quarter-end.
Important facts for investors to verify
- Whether recurring-revenue growth and customer retention (about 92% for the 12 months ended June 30) persist, and whether cloud migration stabilizes recurring margins.
- Whether sales, product and integration investments translate into improved organic growth and operating leverage.
- YourCause integration, realized contribution and final purchase-price allocation, including acquired goodwill and intangibles.
- Debt repayment and refinancing capacity ahead of the June 2022 maturity, covenant headroom, and the effect of interest rates on borrowing costs.
- Cash conversion, deferred-revenue seasonality, restricted customer funds, and the delivery of projected restructuring savings and cash costs.