Blackbaud, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results; amounts below are U.S. dollars. Blackbaud provides cloud software and related services to nonprofits, education, healthcare, and other social-good organizations, serving more than 40,000 customers. It reports one operating segment.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $213.7m | $191.6m | $417.9m | $376.7m |
| Gross profit / margin | $118.5m / 55.5% | $104.6m / 54.6% | $234.6m / 56.2% | $204.2m / 54.2% |
| Operating income / margin | $11.4m / 5.3% | $16.5m / 8.6% | $29.0m / 6.9% | $29.8m / 7.9% |
| Net income | $6.6m | $11.0m | $24.3m | $24.2m |
| Diluted EPS | $0.14 | $0.23 | $0.51 | $0.51 |
- Revenue mix: Recurring revenue rose 15.8% in Q2 to $192.7m; one-time services and other revenue fell 17.0% to $20.9m. For the first half, recurring revenue increased 14.4% to $373.6m, while one-time revenue declined 11.9% to $44.3m. Management attributed growth mainly to cloud subscriptions and acquisitions, and the decline in one-time revenue to the shift toward cloud offerings.
- Margins and expenses: Q2 recurring gross margin was 60.4%, versus 60.2% a year earlier; first-half recurring gross margin was 61.1%, versus 60.2%. Q2 operating income fell 31.2%, as higher sales, customer-success, acquisition/integration, stock-compensation and restructuring costs more than offset revenue growth. First-half operating income declined 2.8%.
- Cash flow: First-half operating cash flow was $66.4m, up from $54.6m. Capitalized software development and property/equipment purchases totaled $25.9m, yielding company-defined non-GAAP free cash flow of $40.5m (up from $35.3m). Investing cash outflow was $71.2m. Financing cash outflow was $309.1m, largely reflecting a $309.2m decrease in amounts due to customers/restricted customer funds; this materially affected reported total cash movement.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $29.2m; restricted cash held for customers was $295.5m and should not be viewed as unrestricted liquidity. Total assets were $1.572bn and stockholders’ equity $348.2m. Working capital was negative $156.7m. Total debt principal was $481.7m (balance-sheet carrying amount, net of discount and issuance costs, was approximately $479.8m); available credit-facility borrowing capacity was $207.7m. Net leverage was 2.23x, within the 3.50x covenant limit; the company reported compliance with debt covenants.
- Debt and distributions: Debt under the five-year $700m credit facility matures in June 2022, with $454.4m of required principal maturities in 2022. The company paid $11.7m in dividends in the first half; the board declared a further $0.12-per-share dividend for September 2018.
Material changes and notable items
- Blackbaud acquired Reeher on April 30, 2018 for approximately $41.3m in cash, primarily funded by credit-facility borrowings. The acquisition added fundraising performance-management capabilities; purchase accounting remained preliminary. The company also cited JustGiving as contributing to growth and costs.
- Revenue grew 11.5% in Q2, while non-GAAP organic revenue growth was 4.8% (3.8% on a constant-currency basis). Non-GAAP organic recurring revenue growth was 8.0%. These measures exclude or adjust for acquisition effects and are not GAAP measures.
- Q2 net income was lower partly because operating expenses and interest expense increased. Interest expense rose 33.8% to $4.3m in the quarter, primarily due to higher average borrowings and modestly higher effective rates.
- The company adopted ASC 606 retrospectively from January 1, 2018. Management said the effect on total 2017 revenue was not material; adoption changed commission-cost deferral and amortization, among other presentation and accounting effects.
- At June 30, approximately $731m of remaining performance obligations was expected to be recognized as revenue; about 60% was expected within 12 months. This disclosure excludes certain short-term and usage/payment-service contracts under practical expedients.
Outlook, risks, and contingencies
- No formal full-year revenue or earnings guidance is provided in the supplied filing text. Management expects continued cloud-subscription demand, continued pressure on one-time services revenue, and plans to increase sales-account-executive hiring in the second half of 2018. It said recurring-revenue customer retention was approximately 93% for the 12 months ended June 30, 2018, with possible modest near-term declines during portfolio rationalization and customer migration.
- Management expects $6m–$8m of pretax facilities-optimization restructuring costs, with a significant portion of remaining costs through 2019; cumulative costs were $5.3m at June 30. Expected annual pretax savings are $3m–$4m beginning in 2020. Potential severance costs could not be reasonably estimated.
- Management believed available cash, borrowing capacity, and expected operating cash flows were adequate for at least the next 12 months. Risks include customer renewal and market acceptance, acquisition integration, foreign-exchange and variable-interest-rate exposure, and the ability to meet debt and dividend commitments. Approximately $16.9m of cash was held outside the U.S.; repatriation could entail taxes.
- Contractual commitments included $180.6m of operating lease payments, $63.3m of estimated debt interest payments, and $48.2m of purchase obligations. The company reported no material off-balance-sheet arrangements. It described ordinary-course legal proceedings but did not identify a required material loss provision; an unfavorable outcome could still affect results or cash flows.
- The company said there were no material changes to the risk factors in its 2017 Form 10-K. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether recurring-revenue growth and customer retention remain strong as maintenance customers migrate to cloud subscriptions, and whether one-time revenue and its margins continue to decline.
- Whether sales-force and customer-success investment, restructuring, and acquisition integration deliver the expected growth and cost savings without further margin pressure.
- Debt balance, interest costs, covenant headroom, and liquidity—distinguishing unrestricted cash from funds held for customers and reviewing the 2022 maturity concentration.
- The final Reeher purchase-price allocation and subsequent acquisition contribution, alongside management’s non-GAAP adjustments and organic-growth calculations.
- Any updates to restructuring costs/savings, tax estimates under the Tax Act, legal contingencies, and the company’s ability to sustain dividends.