Blackbaud, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing was signed February 26, 2014. Blackbaud provides software and related services to nonprofit organizations and reported more than 29,000 customers in 69 countries.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $503.8 million | $447.4 million | +13% |
| Gross profit / gross margin | $271.2 million / 53.8% | $245.0 million / 54.8% | Margin down about 1.0 percentage point |
| Operating income / operating margin | $51.5 million / 10.2% | $19.4 million / 4.3% | Operating income +165% |
| Net income | $30.5 million | $6.6 million | Up from prior-year level |
| Diluted EPS | $0.67 | $0.15 | — |
| Cash from operations | $107.2 million | $68.7 million | +$38.6 million |
| Cash and cash equivalents | $11.9 million | $13.5 million | Down $1.6 million |
| Debt outstanding | $152.9 million | $215.5 million | Down $62.6 million |
| Deferred revenue | $190.6 million | $185.0 million | +3% |
Revenue mix shifted further toward subscriptions: subscriptions revenue rose 31% to $212.7 million, while license fees fell 19% to $16.7 million. Services revenue increased 6% to $126.5 million and maintenance increased 2% to $138.7 million. Subscriptions and services together were approximately two-thirds of revenue. Gross margins were 56% for subscriptions, 18% for services, 81% for maintenance, and 83% for license fees.
Operating cash flow funded $20.1 million of equipment and software purchases, $3.2 million of capitalized software development, $22.1 million of dividends, and substantial debt repayments. Working capital was a deficit of $126.9 million. This included $107.4 million of donor-restricted cash matched by donations payable; these funds are not unrestricted operating liquidity. The company reported $152.2 million of available borrowing capacity under its credit facility and was in compliance with its covenants.
Fourth-quarter 2013: Revenue was $134.9 million, gross profit $68.5 million, operating income $14.6 million, net income $11.8 million, and diluted EPS $0.26. Q4 subscription revenue included an $8.5 million increase from a change to gross presentation for certain payment-processing arrangements.
Material changes versus prior periods
- Revenue grew 13%, driven in part by inclusion of Convio for all of 2013 versus eight months in 2012, increased demand for online and hosted offerings, and payment-processing transaction growth.
- Operating income improved substantially as acquisition-related costs declined and management reported integration efficiencies and cost synergies. GAAP operating income also reflects non-cash acquired-intangible amortization and restructuring charges.
- Non-GAAP operating income increased 34% to $101.3 million, with non-GAAP margin rising to 20% from 17%. These company-defined measures exclude multiple costs, including stock compensation, acquired-intangible amortization, restructuring, and acquisition-related items.
- Gross margin declined modestly as the business mix continued to move from higher-margin licenses and maintenance toward subscriptions and services. Management noted that the 2013 subscription margin decline was largely related to gross presentation of payment-processing revenue and costs and acquired-intangible amortization; excluding the presentation change, subscription margin was relatively unchanged.
- The company reduced debt by $62.6 million during 2013. Interest expense remained approximately $5.8 million, reflecting debt incurred to finance the 2012 Convio acquisition.
- In January 2013, Blackbaud realigned its workforce, eliminating approximately 135 positions, and recorded $3.5 million in restructuring costs during the year.
Outlook, commentary, and risks
- Management expected continued investment in subscription products, hosting infrastructure, product development, sales and marketing, and scalable operations. It cautioned that the shift from upfront license revenue to ratable subscription revenue could dilute near-term profitability.
- Management expected incremental research and development expense in 2014. It stated that available funds and anticipated operating cash flows should be adequate for at least the next 12 months, including operations, capital expenditures, debt obligations, and planned dividends. The filing provides no specific revenue or earnings guidance.
- The board approved a 2014 annual dividend rate of $0.48 per share, or approximately $22.6 million in aggregate based on assumed shares outstanding. Dividends are discretionary and subject to credit-facility restrictions and cash needs.
- Key risks include customer renewal and adoption, lengthy sales and implementation cycles, execution of the subscription transition and achieving scale, service outages or security breaches, privacy and payment-card compliance, competition, acquisition integration, foreign-currency exposure, and debt and credit-covenant constraints.
- Blackbaud cited $96.5 million of future minimum operating lease commitments and $11.8 million of minimum third-party technology purchase commitments. Management did not believe pending or threatened legal matters would have a material adverse effect; no material off-balance-sheet arrangements were reported.
- CEO Michael Gianoni joined in January 2014 after the prior CEO’s departure in 2013. The 2013 statements were audited, and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth reflects underlying organic demand versus Convio’s full-year inclusion and the payment-processing gross-versus-net presentation change.
- Whether subscription growth can produce sustainable margins as hosting, personnel, and infrastructure costs rise; compare GAAP results with the company’s non-GAAP adjustments.
- Renewal trends for subscriptions and maintenance, particularly given the importance of recurring revenue and the decline in maintenance from nonrenewals and contract reductions.
- Debt repayment capacity, credit-facility covenant headroom, and the sustainability of dividends alongside investment and acquisition plans.
- Whether integration benefits, workforce realignment, and the new CEO’s strategy translate into durable operating improvements without impairing product development or customer service.