Blackbaud, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Blackbaud provides cloud software, payment processing and related services to organizations focused on social good; it reported approximately 35,000 customers. Financial statements are unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $195.5 million | $183.1 million | $571.3 million | $532.5 million |
| Gross profit / margin | $108.5 million / 55.5% | $99.7 million / 54.5% | $311.8 million / 54.6% | $285.7 million / 53.7% |
| Operating income / margin | $18.0 million / 9.2% | $13.5 million / 7.4% | $45.3 million / 7.9% | $37.8 million / 7.1% |
| Net income | $12.5 million | $8.9 million | $35.2 million | $24.2 million |
| Diluted EPS | $0.26 | $0.19 | $0.74 | $0.51 |
| Operating cash flow | Not presented quarterly | $123.4 million | $100.1 million |
Q3 revenue grew 6.8%; subscriptions rose 20.9% to $127.5 million, while maintenance fell 13.5% to $31.5 million and services and other fell 11.4% to $36.5 million. Subscription gross margin improved to 54.5% from 50.7%; maintenance and services gross margins declined to 81.9% from 84.8% and 36.3% from 37.3%, respectively. Nine-month revenue grew 7.3%, and diluted EPS rose 45.1%.
Management’s non-GAAP measures showed Q3 operating margin of 21.4% versus 18.6%, and nine-month margin of 20.4% versus 18.7%. These measures exclude specified items and should be considered alongside GAAP results.
Financial position, cash flow and debt
- At September 30, cash and cash equivalents were $17.1 million; debt was $340.2 million. Current deferred revenue was $277.0 million, and restricted customer cash of $139.1 million was matched by an equal amount due to customers.
- Nine-month investing cash outflow was $78.2 million, including $49.7 million for AcademicWorks and $20.6 million of capitalized software development. Financing cash outflow was $45.3 million, including $17.3 million of dividends.
- Blackbaud refinanced in June with a $700 million, five-year credit facility, comprising a $400 million revolver and $300 million term loan. At quarter-end it had $356.2 million of available capacity and was compliant with covenants. Reported net leverage and interest coverage ratios were 1.79x and 16.31x, against limits of 3.50x maximum and 2.50x minimum.
- Working capital was negative $181.1 million, but positive $95.9 million excluding deferred revenue. Management said available funding and anticipated operating cash flow were expected to cover operations, capital expenditure, debt obligations and dividends for at least 12 months.
Changes, outlook and notable items
- Growth reflected continued migration to cloud subscriptions, stronger demand and payment-processing activity. Subscription revenue growth outpaced related costs, supporting improved gross margin. Management noted that cloud migration generally reduces maintenance and implementation-services revenue and shifts recognition of some revenue over time.
- Recurring-customer retention was approximately 93% for the year ended September 30, 2017, relatively unchanged from full-year 2016. The company cited investments in sales and customer success, higher stock compensation, rent, acquisition/integration and severance costs as operating-expense pressures.
- Management expected to meet its aspirational goal of improving non-GAAP operating margin by at least 300 basis points on a constant-currency basis from its 2014 baseline by the end of 2017. The filing provides no specific revenue or EPS guidance. Management also expected near-term interest expense to rise following JustGiving.
- AcademicWorks was acquired April 3 for $52.1 million in cash; its purchase accounting remained preliminary. On October 2, after quarter-end, Blackbaud acquired JustGiving for approximately $127.4 million in cash, financed with a $138.7 million revolver borrowing. Post-borrowing, revolver borrowings were approximately $178.6 million, with approximately $169.8 million available.
- The nine-month effective tax rate was 7.8%, primarily reflecting a $9.0 million discrete tax benefit related to stock-based compensation; the comparable 2016 benefit was $4.3 million. Stock-based compensation expense was $31.1 million for the nine months.
- Risks and commitments include variable-rate debt, foreign-currency exposure, $190.4 million of operating lease commitments, $51.9 million of purchase commitments and ordinary-course litigation. The company reported no material change to its previously disclosed risk factors and no material off-balance-sheet arrangements. Disclosure controls were judged effective.
- The board declared a Q4 dividend of $0.12 per share, payable December 15, 2017. Dividends are discretionary and subject to credit-facility and other restrictions.
Important facts for investors to verify
- Whether subscription growth and improving subscription margins can continue to offset declines in maintenance and services revenue as customers migrate to cloud offerings.
- JustGiving’s final purchase accounting, integration performance, contribution to growth and margins, and resulting additional debt and interest costs.
- Cash generation quality: operating cash flow includes offsetting movements in restricted customer cash and amounts due to customers; assess underlying working-capital trends and capitalized software spending.
- Progress against the non-GAAP margin objective, including the definition and reconciliation of excluded costs, and the effect of acquisition and stock-compensation expenses.
- Debt covenant headroom, variable-rate exposure, future refinancing needs, and the sustainability of dividends given leverage and facility restrictions.