Blackbaud, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; compared with Q1 2015 for income and cash-flow results and December 31, 2015 for balance-sheet changes. Amounts are in U.S. dollars.
Business context and results
Blackbaud provides software and services to the philanthropic community, serving approximately 35,000 active customers. Its strategy emphasizes cloud subscriptions, payment processing, sales effectiveness, acquisitions, operational efficiency, and margin improvement. The company continued shifting customers from perpetual-license and maintenance offerings toward cloud-based subscriptions.
- Revenue: $169.3 million, up 15.2% from $147.0 million. Subscriptions rose 33.7% to $96.9 million; maintenance fell 4.4% to $37.2 million; services increased 3.5% to $32.4 million; and license fees and other declined 34.9% to $2.8 million.
- Acquisition contribution: Smart Tuition, acquired in October 2015, contributed $9.2 million of revenue and $1.2 million of operating income in the quarter. Excluding it, management cited subscription growth and payment-processing activity as key revenue drivers.
- Profitability: Gross profit was $89.3 million, up 18.8%; gross margin was 52.8%, versus 51.1%. Operating income was $10.4 million, up 30.0%; GAAP operating margin was 6.2%, versus 5.5%. Net income was $5.0 million, versus $4.3 million; diluted EPS was $0.11, versus $0.09.
- Margins by business line: Subscription gross margin declined to 48.7% from 50.1%, partly due to a greater mix of lower-margin payment processing and acquisition-related costs. Maintenance gross margin rose to 85.7% from 80.7%; services gross margin rose to 25.0% from 13.8%, reflecting improved consulting utilization and fewer non-billable implementation hours.
- Non-GAAP results: Non-GAAP revenue was $171.0 million, up 13.6%; non-GAAP operating income was $31.6 million and margin 18.5%, versus $26.5 million and 17.6%. Non-GAAP diluted EPS was $0.42, versus $0.32. These measures exclude specified items and are not substitutes for GAAP results.
Cash flow, debt, and liquidity
- Operating cash flow: $0.1 million, down from $4.2 million in Q1 2015. Management attributed the decline principally to working-capital timing, including bonus and employee-tax payments, vendor-payment timing, and seasonally lower customer billings.
- Investing and financing: Investing used $13.6 million, including $7.8 million for property and equipment and $5.8 million for capitalized software development. Financing provided $9.5 million; net borrowing increased $14.1 million, while dividends paid were $5.7 million.
- Cash and working capital: Cash and cash equivalents were $12.1 million at March 31, down from $15.4 million at year-end. Working capital was negative $143.7 million, largely reflecting deferred revenue and customer funds; working capital excluding deferred revenue was positive $78.7 million. Restricted cash due to customers of $115.0 million was matched by amounts due to customers and should not be treated as freely available cash.
- Debt: Credit-facility principal was $424.4 million; balance-sheet debt carrying value was approximately $422.4 million. The weighted-average effective rate was 2.30%. The facility matures in February 2019; available borrowing capacity was $88.5 million. The company was in compliance with its covenants, with a net leverage ratio of 2.77 against a maximum of 3.50 and interest coverage of 16.41 against a minimum of 2.50.
- Liquidity assessment: Management said available funds and anticipated operating cash flows should be sufficient for at least 12 months to fund operations, capital expenditures, debt obligations, and dividends. Approximately $5.2 million of cash was held outside the United States.
Changes, outlook, and risks
- Reported growth includes Smart Tuition; management reported non-GAAP organic revenue growth of 7.6%, or 8.6% on a constant-currency basis, and non-GAAP organic recurring revenue growth of 10.3%.
- Foreign exchange reduced Q1 revenue by an estimated $1.5 million and operating income by $0.8 million. Approximately 10% of quarterly revenue came from outside the United States.
- Management expects the cloud transition to support longer-term growth but noted that, near term, it can weigh on reported growth as subscription revenue is recognized over time and maintenance, license, and implementation revenue decline. Management also expected continued near-term reductions in certain international license, consulting, and maintenance revenue as customers migrate to Raiser's Edge NXT.
- The company reiterated its three-year margin-improvement plan: increase non-GAAP operating margin by 300–600 basis points, on a constant-currency basis, from its 2014 baseline of 17.5% by the end of 2017. No specific quarterly or full-year 2016 revenue or earnings guidance is provided in the filing text.
- Key exposures include customer renewal and market acceptance, execution of the cloud transition and acquisitions, foreign-exchange and variable-rate debt risk, and seasonal revenue and cash-flow patterns. The filing says risk factors were not materially changed from the 2015 Form 10-K.
- No material loss contingency was recorded for ordinary-course legal matters; management said such matters were not reasonably likely to have a material adverse effect. The filing reports no material off-balance-sheet arrangements and says disclosure controls were effective.
Important facts for investors to verify
- How much subscription growth is organic and recurring, and whether payment-processing mix continues to pressure subscription margins.
- Whether cloud migrations and renewals offset continued declines in maintenance, perpetual licenses, and implementation services.
- Whether operating cash flow improves after Q1 seasonal and working-capital effects, given debt, investment spending, and dividend commitments.
- Progress toward the 2017 non-GAAP margin target, including the effect of exclusions and the company’s non-GAAP tax-rate assumptions.
- Debt-covenant headroom, refinancing needs ahead of the February 2019 maturity, and sensitivity to interest rates and foreign exchange.