Blackbaud, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Blackbaud provides cloud software, services, and payment solutions to nonprofits and other social-good organizations. The company reports one operating segment.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $215.8 million | $204.2 million | +5.7% |
| Recurring revenue | $198.1 million | $180.8 million | +9.5% |
| One-time services and other revenue | $17.7 million | $23.3 million | -24.0% |
| Gross profit / gross margin | $116.5 million / 54.0% | $116.1 million / 56.9% | Margin down 2.9 percentage points |
| Operating income / margin | $2.2 million / 1.0% | $17.6 million / 8.6% | Operating income down 87.6% |
| Net income (loss) | $(1.1) million | $17.8 million | Turned to a loss |
| Diluted EPS | $(0.02) | $0.37 | Turned to a loss |
| Net cash from (used in) operations | $(10.0) million | $11.8 million | Down $21.8 million |
| Non-GAAP free cash flow | $(22.5) million | $(1.1) million | More negative |
- Recurring gross margin was 57.2%, versus 61.8% a year earlier. Non-GAAP operating income was $36.0 million, with a 16.6% margin, compared with $43.2 million and 21.1% in Q1 2018. Non-GAAP diluted EPS was $0.51 versus $0.66; these company-defined measures exclude specified items and are not substitutes for GAAP results.
- Cash and cash equivalents were $25.2 million at quarter-end. Total cash including $219.4 million of restricted customer funds was $244.6 million; restricted funds are associated with amounts due to customers.
- Debt carrying value was approximately $583.6 million, up from $387.1 million at December 31, 2018. Available borrowing capacity under the credit facility was $98.4 million. Net leverage was 2.98x against a 3.50x maximum covenant; the company reported compliance with its covenants.
- Working capital was negative $187.2 million. The company said available funding sources and anticipated operating cash flows should cover operations, capital expenditures, debt obligations, and dividends for at least the next 12 months.
Material changes and drivers
- Revenue growth reflected demand for cloud subscriptions and contributions from Reeher and YourCause, acquired after March 31, 2018. Organic revenue growth was 2.2% (3.1% on a constant-currency basis); organic recurring revenue growth was 5.7%.
- One-time revenue continued to decline as Blackbaud shifts customers toward cloud subscriptions that generally require less implementation and customization work. Management expects this decline to continue.
- Operating performance was pressured by investment in sales and product development, higher recurring-service costs, stock-based compensation, employee severance, rent, restructuring, and amortization of acquired intangibles. Sales, marketing, and customer-success expense rose 21.9%.
- Recurring revenue growth included subscription revenue gains, partly offset by a $4.5 million decline in maintenance revenue as customers migrate from legacy products. Recurring cost growth outpaced revenue growth, reducing recurring gross margin.
- Operating cash flow weakened partly due to lower earnings and working-capital movements. Investing cash outflow included $109.4 million for acquired businesses, primarily YourCause, and $11.3 million of capitalized software development.
Outlook, risks, and unusual items
- On January 2, 2019, Blackbaud acquired YourCause for approximately $157.7 million cash, funded primarily with credit-facility borrowings. The purchase-price allocation was preliminary; $87.7 million of goodwill was recorded.
- Management expected total facilities-optimization restructuring costs of $8.5–$9.5 million before tax, with substantially all remaining costs expected by year-end 2019. $7.3 million had been incurred through March 31. Expected annual pretax savings were $5–$6 million beginning in 2020.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing operating-lease right-of-use assets and liabilities. At March 31, lease liabilities totaled $119.6 million; the adoption materially affected the balance sheet, with no comparative-period restatement.
- Remaining performance obligations were approximately $739 million, with about 60% expected to be recognized over the next 12 months. This is not a revenue forecast and excludes certain short-term and usage-based arrangements.
- Q1 is seasonally weaker for revenue and operating cash flow, according to management. The filing provides no specific full-year revenue or earnings guidance.
- Commitments included $111.4 million of minimum purchase obligations through 2023 and $68.1 million of estimated future debt-interest payments. Legal matters arise in the ordinary course; the company said no additional material loss provision or disclosure was required based on its assessment, while noting outcomes can be unpredictable.
- Key risks include customer renewals and acceptance of cloud solutions, acquisition integration, debt and interest costs, foreign-exchange movements, and the ability to realize planned efficiency and growth benefits. Management reported no material changes to the risk factors in its 2018 Form 10-K.
Most important facts for investors to verify
- Whether recurring and organic revenue growth continues to offset declining maintenance and one-time services revenue.
- Whether recurring gross margin stabilizes as cloud hosting, payment-processing, and technology costs rise.
- Whether sales and R&D investment translates into improved growth and operating profitability, and whether restructuring savings are realized.
- YourCause integration, contribution, and final purchase accounting, alongside the impact of acquisition-related borrowing on leverage and interest expense.
- Operating cash-flow recovery, liquidity availability, covenant headroom, and the treatment of restricted customer funds when assessing liquidity.
- Customer retention was approximately 92% for the 12 months ended March 31, 2019; verify whether migration to newer cloud products supports future retention.