Blackbaud, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Blackbaud provides software and payment services to nonprofit, education and corporate social-impact organizations. Results are unaudited and are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $279.3 million | $261.8 million | Up 6.7% |
| Recurring revenue | $271.5 million | $252.7 million | Up 7.4% |
| Gross profit / margin | $153.0 million / 54.8% | $138.6 million / 53.0% | Margin up 1.8 percentage points |
| Operating income (loss) / margin | $10.7 million / 3.8% | $(9.9) million / (3.8)% | Improved |
| Net income (loss) | $5.2 million; diluted EPS $0.10 | $(14.7) million; diluted EPS $(0.28) | Returned to GAAP profitability |
| Operating cash flow | $64.6 million | $21.8 million | Up $42.8 million |
| Non-GAAP adjusted free cash flow | $53.3 million | $15.7 million | Company-defined measure |
GAAP gross margin was 54.8%; non-GAAP gross margin was 61.4%, and non-GAAP operating margin was 25.9%. Non-GAAP measures exclude specified items, including stock compensation, acquisition-related amortization and Security Incident costs, and should not be viewed as substitutes for GAAP results.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $26.4 million; restricted cash was $356.5 million, mostly funds held for customers and not equivalent to unrestricted corporate cash.
- Total debt was approximately $1.04 billion, versus $781.1 million at December 31, 2023. Debt increased chiefly to fund the share repurchase. The company reported a 2.72-to-1 net leverage ratio and compliance with its then-current debt covenants.
- Working capital was negative $285.5 million. The company said operating cash flow, available credit and cash on hand should be adequate for at least the next twelve months.
- Operating cash flow rose substantially, but management attributed much of the year-over-year increase to working-capital timing, including vendor payments and higher taxes payable. Financing cash flow included a $336.6 million decrease in amounts due to customers, $262.6 million of share repurchases and $52.7 million of employee-tax payments on vested equity awards.
- After quarter-end, on April 30, 2024, Blackbaud refinanced its facilities with a $700 million revolver and an $800 million term loan, extending maturity to April 30, 2029 and modifying certain covenants. This is a subsequent event, not the quarter-end debt structure.
Changes and operating trends
- Social Sector revenue rose 8.7% to $244.4 million, driven mainly by contractual recurring revenue, pricing and cloud-solution performance. Corporate Sector revenue fell 5.6% to $34.8 million, primarily reflecting EVERFI.
- Management cited a $13.3 million increase in contractual recurring revenue from the modernized contract and pricing initiative and cloud performance, and a $5.5 million increase in transactional recurring revenue, mainly from pricing initiatives and some volume growth.
- One-time services and other revenue declined 14.1% to $7.7 million, reflecting the shift toward cloud subscriptions and lower consulting and creative-services revenue. EVERFI Limited, a U.K. creative-services business with 2023 revenue of $8.4 million, was divested in March; Blackbaud recorded a $1.6 million loss on the disposition.
- Operating income improved year over year alongside higher revenue and lower Security Incident expense, severance, commissions and certain corporate costs. Higher stock-based compensation, advertising, hosting and data-center costs, acquisition-related amortization and disposition costs partly offset these benefits.
- Deferred revenue was $367.2 million, down from $394.9 million at year-end; management attributed the decline to seasonal renewal timing. Remaining performance obligations were approximately $1.2 billion, with about 50% expected to be recognized over the next 12 months.
Outlook, risks and unusual items
- Management expects the pricing and multi-year contract initiative to affect approximately half of 2024 total-company revenue growth and expects to renew approximately two-thirds of the relevant base into the new model by year-end. Management expects a larger contribution from the initiative in Q1 and Q2.
- Management expects Corporate Sector revenue to decline for full-year 2024, citing tighter corporate social-responsibility budgets, particularly in financial services. It expects declines in non-strategic one-time services revenue to slow in 2024. No overall revenue or earnings guidance is provided in the supplied filing text.
- Management expects 2024 interest expense of approximately $48 million to $52 million, citing incremental ASR-related borrowing and higher-than-previously-anticipated interest rates. The company uses swaps to hedge portions of variable-rate debt.
- The 2020 ransomware Security Incident remains a material contingency. Q1 2024 expense was $10.3 million, including $3.3 million of legal fees and $7.0 million of additional loss-contingency accruals; recorded aggregate loss-contingency liabilities were approximately $8.5 million at quarter-end. Management estimated 2024 ongoing legal-fee expense of $5 million to $10 million and related cash outlays of $8 million to $13 million; these estimates exclude prior settlements and current loss-contingency accruals. Potential additional losses from unresolved claims, class actions and investigations cannot currently be reasonably estimated and could be material. Insurance coverage had been exhausted in 2022.
- The FTC proposed settlement had not yet been finalized as of the filing; it provides for no fine or payment, but requires specified security, data-retention, assessment and reporting measures if finalized. Other investigations and litigation remain pending.
- The board expanded the repurchase authorization to $500 million. In Q1, Blackbaud repurchased 2.95 million shares for $262.6 million, including an accelerated share repurchase with a $200 million prepayment funded by revolving borrowings. Final ASR settlement was scheduled by Q4 2024. Repurchases and debt increase leverage and reduce financial flexibility.
- Other commitments include approximately $239.8 million of minimum purchase obligations through 2029 and $122.0 million of estimated future debt interest based on quarter-end assumptions.
Important facts for investors to verify
- How much of the operating cash-flow improvement persists after working-capital timing effects, and how seasonal renewals affect cash flow and deferred revenue.
- The final terms, borrowing costs, covenant headroom and debt balances following the April 2024 refinancing.
- The ASR’s final share delivery and settlement, total repurchases, and the effect of repurchase-related borrowing on leverage and per-share results.
- Developments in Security Incident litigation and investigations, the status of the FTC order, and whether losses exceed recorded accruals or management’s legal-cost estimates.
- Whether Social Sector growth and pricing initiatives offset Corporate Sector weakness, customer retention trends (reported gross dollar retention was approximately 89%), and continued cost growth in cloud infrastructure and cybersecurity.