Blackbaud, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 4, 2013. Unless noted otherwise, financial amounts are in millions of dollars. Blackbaud provides cloud-based and on-premise software and related services to nonprofit organizations, serving more than 29,000 active customers.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $127.9 | $122.5 | $368.9 | $327.4 |
| Gross profit / margin | $71.7 / 56.1% | $67.3 / 55.0% | $202.6 / 54.9% | $180.7 / 55.2% |
| Operating income / margin | $18.0 / 14.1% | $6.2 / 5.1% | $36.9 / 10.0% | $9.6 / 2.9% |
| Net income | $9.4 | $2.8 | $18.7 | $3.3 |
| Diluted EPS | $0.21 | $0.06 | $0.41 | $0.07 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $78.0 | $39.7 |
- Q3 revenue grew 4%; nine-month revenue grew 13%. Subscription revenue rose 10% in Q3 and 34% year to date, while license fees declined 16% and 21%, respectively.
- Q3 subscription gross margin was 59%, unchanged year over year; services gross margin improved to 26% from 23%. Nine-month services margin fell to 18% from 20%.
- At September 30, cash and cash equivalents were $16.7, compared with $13.5 at year-end 2012. Donor-restricted cash of $41.8 was matched by donations payable and is not general-purpose liquidity.
- Total debt was $173.7, down from $215.5 at December 31, 2012; effective interest rate was 2.46%. Available credit capacity was $127.9. The company reported compliance with covenants, including leverage of 1.64 against a maximum of 2.75 and interest coverage of 16.85 against a minimum of 3.50.
- Current deferred revenue was $185.4, up from $173.9 at year-end. The company paid $16.5 in dividends during the first nine months and reported a 2013 annual dividend rate of $0.48 per share.
Material changes and management commentary
- Management attributed growth chiefly to demand for online and hosted products, including Convio’s Luminate Online, and higher payment-processing transaction volumes. Convio was acquired in May 2012 for $335.7; the acquisition makes nine-month comparisons less comparable, and management said the acquired business’s standalone contribution cannot be determined after integration and product rationalization.
- Operating income improved substantially, reflecting higher-margin Convio subscription offerings, online fundraising and payment processing, integration efficiencies, and lower acquisition-related and other prior-year costs. Q3 and nine-month results also include restructuring and CEO-related expenses.
- In August 2013, CFO Anthony Boor became interim President and CEO while retaining his CFO duties. The board was searching for a permanent CEO.
- Management expects to continue investing in products, sales and marketing, subscription infrastructure, and back-office processes. It cautioned that the shift from perpetual-license sales to subscriptions may dilute profitability in the near term. It gave no specific revenue or earnings guidance, and stated that operating results to date are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Cash from operations was $78.0 for the first nine months; investing outflow was $16.7 and financing outflow was $57.9. The company reduced debt by $41.8 and spent $13.4 on property and equipment and $2.4 on capitalized software development.
- Management said available funds and expected operating cash flows should be adequate for at least 12 months. Approximately $7.5 of cash was held outside the U.S.; repatriation may require taxes. Operating liquidity depends in part on customer renewals and market acceptance.
- Restructuring charges totaled $3.5 for the nine months, including a workforce reduction of about 135 positions and the San Diego-to-Austin transition. The company also incurred CEO search and severance costs. These and other specified items are excluded from management’s non-GAAP measures; Q3 non-GAAP operating income was $28.8 versus GAAP operating income of $18.0.
- Debt bears variable rates, with $150.0 notional value of interest-rate swaps used to hedge exposure. Other commitments include $92.6 of future lease payments in the financial-statement note and approximately $13.9 of minimum third-party purchase commitments through 2016. The filing reports ordinary-course legal claims and states that management does not expect them to materially affect results or financial condition.
- Key risks identified include economic conditions affecting nonprofits, long sales and implementation cycles, customer renewals, acquisition integration, retention of key personnel, technology and product competitiveness, debt-facility restrictions, and uncertainty around dividends and repurchases. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and payment-processing volumes persist, and whether subscription margins offset the costs of the business-model transition.
- How much reported growth and profitability reflects Convio, integration synergies, or changes in revenue presentation, and how comparable the periods are.
- Progress in the permanent CEO search and any further leadership or CEO-related costs.
- Debt repayment capacity, covenant headroom, variable-rate exposure, and restrictions affecting dividends or share repurchases.
- Usable cash and potential tax costs associated with repatriating foreign-held funds; the continuation of dividends is not guaranteed.
- Restructuring completion, remaining integration or investment costs, and the reconciliation of non-GAAP measures to GAAP results.