BLACKBAUD, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the condensed consolidated financial statements and related notes which are primarily denominated in thousands of dollars. Executive Summary We are the world's leading cloud software company powering social good. Serving the entire social good community-nonprofits, higher education institutions, K-12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, companies and individual change agents-we connect and empower organizations to increase their impact through cloud software, services, expertise and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility, school management, ticketing, grantmaking, financial management, payment processing and analytics. Serving the industry for more than three decades, we are headquartered inCharleston, South Carolina , and have operations inthe United States ,Australia ,Canada ,Costa Rica and theUnited Kingdom . Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud and hosted environments; (ii) providing payment and transaction services; (iii) providing software maintenance and support services; and (iv) providing professional services, including implementation, consulting, training, analytic and other services. COVID-19 Impact The outbreak of COVID-19 in numerous countries across the globe, including each country in which we currently operate, has adversely impacted theU.S. and global economies. We began 2020 with strong execution against our financial plan. InMarch 2020 , we began to experience disruptions to our business from COVID-19, and the pandemic continues to impact each of our markets. To better enable us to weather the extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of our employees, and to further effect our long-term strategy to deliver the greatest value to our stockholders, we have taken several actions. These initial measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. See Note 2 to our condensed consolidated financial statements in this report for a discussion of some of these actions. In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed. The economic impact of COVID-19 on the social good industry remains uncertain and, consequently, we expect that our operating environment may continue to be challenging for the remainder of 2020, and potentially beyond, as existing and prospective customers remain cautious in their purchase decisions. Notwithstanding these conditions, we remain focused on continuing to execute our four-point growth strategy and strengthening our leadership position.
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Four-Point Growth Strategy1 Delight Customers with Innovative Cloud Solutions 2 Drive Sales Effectiveness 3 Expand Total Addressable Market 4 Improve Operating Efficiency
1. Delight Customers with Innovative Cloud Solutions
Our solutions are already equipped with features that are lending themselves to the current environment and we have quickly acted upon customer feedback to add enhancements and new functionality to serve our customers, so they can continue to focus on their missions during this time. For example, we built new integration between our peer-to-peer fundraising and donor management solutions simplifying the process of raising donations and acquiring new supporters through pandemic-friendly virtual events and peer-to-peer campaigns. We simplified donation forms to expedite fundraising by allowing organizations to create campaigns quickly and easily, which is critical in the current environment. We also added new financial management capabilities, further easing the transition to working from home with tools that support collaboration and efficient cash flow management and financial operations from the cloud. 2. Drive Sales Effectiveness The investments we have made to enhance our digital footprint are enabling us to be more prescriptive and cost-effective in our marketing efforts and to quickly adapt to changing market conditions, and over the longer term we believe the impact of COVID-19 will accelerate the existing trends driving adoption of modern cloud solutions in our market. We also introduced new pricing and financing offers based on the changing needs of our customers. Despite our optimism over the long-term, the uncertainty of the current environment has created near-term challenges in our ability to build new pipeline and bookings are falling short of budgeted expectations, which we expect to put pressure on near-term revenues. As a result, we have begun shifting investment towards digital marketing aimed at lead generation and put a greater emphasis on selling solutions with the highest lifetime value. In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives. After temporarily freezing our hiring efforts due to COVID-19, we have since began backfilling sales positions with a focus on 2021 bookings. 3. Expand TAM While we remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product development, our top priority in the near-term is protecting our employees and continuing to support our customers at a very high standard. We have significant opportunities in front of us as we are less than 10% penetrated into a total addressable market of over$10 billion . 4. Improve Operating Efficiency We have made transformational changes to our business over the last several years, which allowed us to immediately switch to a virtual work environment in March and supported our global employees' ability to work effectively from home. We are re-evaluating elements of our workforce strategy based on the lessons learned over the past few months. We have been soliciting feedback from our employees to help shape our approach to the future of work at Blackbaud.
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Financial Summary
Total revenue ($M) Income from operations ($M)
YoY Growth (%) YoY Growth (%)
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Total revenue increased by $6.4 million and $14.1 million during the three and
six months ended June 30, 2020 , respectively, when compared to the same periods
in 2019, driven largely by the following:
+ Growth in recurring revenue related to increases in transactional revenue,
positive demand from customers across our portfolio of cloud solutions and
increases in services embedded in our renewable cloud solution contracts
- Decreases in one-time consulting revenue primarily from less of one-time
sales related to COVID-19
- Decreases in one-time analytics revenue as analytics are generally
integrated in our cloud solutions
Income from operations increased by $6.1 million and $12.3 million during the
three and six months ended June 30, 2020 , respectively, when compared to the
same periods in 2019, driven largely by the following:
+ Growth in total revenue, as described above
+ Reduced overall compensation costs primarily associated with the decision to
replace our 2020 cash bonus plans with grants of performance-based equity
awards
+ Decrease in restructuring costs of $0.7 million and $2.6 million , as our
facilities optimization plan was largely completed as of December 31, 2019
+ Decrease in acquisition-related expenses and integration costs of $0.8
million and $1.9 million + Decrease in amortization of intangible assets from business combinations of
- Increases in cost of revenue from a
the three months ended
software development costs, resulting from our decision to accelerate the
end of customer support for certain solutions
- Increases in employee severance of
a modest and targeted headcount reduction during the three months ended June
30, 2020, in response to the COVID-19 pandemic
- Increases in corporate costs of
related to increases in bad debt expense
- Other increases in cost of revenue related to increases in data center
costs, amortization of software development costs and transaction-based
costs
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There are three primary revenue categories with related business drivers that we continue to monitor closely in light of the COVID-19 pandemic: 1. Contractual Recurring Revenue (approximately two thirds of total revenue in
2019)
Recurring subscription contracts are typically for a term of three years at contract inception, billed annually in advance, and we have been for several years successfully shifting our legacy customer base away from annual renewals and moving them onto multi-year renewal contracts. Approximately one-half of our contracted recurring revenue will be up for renewal during 2020, with the seasonal high for renewals and collections during the third quarter driven largely by mid-year fiscal year-ends and timing of the academic school year. While our renewal rates have trended ahead of our expectations through July, our contracted recurring revenue has fallen short of our original plan due to bookings falling short of our budgeted expectations. We are closely monitoring our customer receivable balances, payment terms, and creditworthiness. We have started to experience an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic. 2. Transactional Revenue (approximately one quarter of total revenue in 2019) Transactional revenue is non-contractual and less predictable given the susceptibility to certain drivers such as timing and number of events and marketing campaigns, as well as fluctuations in donation volumes and tuition payments. We have historically experienced seasonal highs during the fourth quarter due to year-end giving campaigns and during the second quarter when a large number of events are held. The early disruptions caused by COVID-19 in the first quarter drove sharp initial declines in our transactional volumes. During the second quarter, many in-person events shifted online, had to be postponed or even canceled. Social good organizations are being forced to employ new strategies to maintain momentum with current supporters while capturing the attention of potential new donors. We saw a rise in virtual campaigns and events and we remain committed to supporting our customers in adapting to the new circumstances. 3. Bookings Given our ratable revenue recognition model for our recurring subscription contracts and implementation periods, we expect that declines in our 2020 bookings performance will have a greater impact on our 2021 revenue than 2020 revenue. Of the three primary revenue categories discussed above, bookings represents the smallest potential impact on recurring revenue in 2020. One-time services and other revenue, which is tied to bookings, would have a more immediate impact on our total revenue. Our first quarter has historically been the seasonal low for bookings, with the second and fourth quarters historically being seasonally higher, and our bookings tend to be back-end loaded within individual quarters given our quarterly quota plans. Although our bookings have performed slightly better than our initial COVID-19 scenario planning, we are currently expecting a significant shortfall in 2020 bookings compared to our original plan for the year as we continue to see challenges in building pipeline. The magnitude of our 2020 bookings shortfall is expected to be impacted by the depth and duration of the COVID-19 pandemic. Our strategy has historically relied on a balanced approach to growth and profitability. As discussed above, the pandemic has created short-term uncertainty in our revenue outlook and the early impacts on pipeline and bookings will likely limit our ability to drive near-term revenue growth at our originally planned levels. Therefore, in line with our strategy, we have made a pivot to greater emphasis on delivering shareholder value through increased profitability and cash flow, which are more controllable.
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Customer retention
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Our recurring revenue contracts are generally for a term of three years at
contract inception with one to three-year renewals thereafter. We anticipate a
continued decrease in maintenance contract renewals as we transition our
solution portfolio and maintenance customers from a perpetual license-based
model to a cloud subscription delivery model. In the long term, we also
anticipate an increase in recurring subscription contract renewals as we
continue focusing on innovation, quality and the integration of our cloud
solutions, which we believe will provide value-adding capabilities to better
address our customers' needs. Due primarily to these factors, we believe a
recurring revenue customer retention measure that combines recurring
subscription, maintenance and service customer contracts provides a better
representation of our customers' overall behavior. For the twelve months ended
June 30, 2020 , approximately 92% of our customers with recurring revenue
contracts were retained. This customer retention rate is unchanged from our rate
for the full year ended December 31, 2019 .
Balance sheet and cash flow
At June 30, 2020 , our cash and cash equivalents were $30.5 million and the
carrying amount of our debt under the 2017 Credit Facility was $484.2 million .
Our net leverage ratio was 2.21 to 1.00.
During the six months ended June 30, 2020 , we generated $37.5 million in cash
from operations, primarily from operating cost reductions put in place in
response to COVID-19 and the increased use of stock-based compensation. During
the six months ended, June 30, 2020 , we had a net increase in our borrowings of
$16.9 million , down from a net increase of $58.6 million during the three months
ended March 31, 2020 . Historically, due to lower revenues in our first quarter,
combined with the payment of bonuses from the prior year in our first quarter
and the payment of certain annual vendor contracts, our cash flow from
operations has been lowest in our first quarter.
During the six months ended June 30, 2020 , we also had aggregate cash outlays of
$27.6 million for purchases of property and equipment and capitalized software
development costs.
Recent Developments
Pending headquarters facility purchase
In June 2020 , we entered into a binding purchase and sale agreement with HPBB1,
LLC , a Georgia limited liability company (the "Seller"), for the purchase and
sale of the building, fixtures and other improvements and parcels of land of our
headquarters facility (the "Headquarters Facility") in Charleston, South
Carolina (the "Transaction"). We currently lease the Headquarters facility from
the Seller. At the closing of the Transaction, we would pay the Seller a
purchase price of $76.3 million , which includes the assumption of the Seller's
obligations in the aggregate principal amount of $63.0 million and cash, which
we expect to fund by borrowings under the 2017 Credit Facility. The Transaction
is expected to close during the second half of 2020.
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Results of Operations
Comparison of the three and six months ended June 30, 2020 and 2019
Revenue and Cost of Revenue
Recurring
Gross profit ($M)
Revenue ($M) Cost of revenue ($M) and gross margin (%)
YoY Growth (%) YoY Growth (%)
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Recurring revenue is comprised of fees for the use of our subscription-based
software solutions, which includes providing access to cloud solutions, hosting
services, online training programs, subscription-based analytic services, such
as donor acquisitions and data enrichment, and payment services. Recurring
revenue also includes fees from maintenance services for our on-premises
solutions, services included in our renewable subscription contracts, retained
and managed services contracts that we expect to have a term consistent with our
cloud solution contracts, and variable transaction revenue associated with the
use of our solutions.
Cost of recurring revenue is primarily comprised of compensation costs for
customer support and production IT personnel, hosting and data center costs,
third-party contractor expenses, third-party royalty and data expenses,
allocated depreciation, facilities and IT support costs, amortization of
intangible assets from business combinations, amortization of software
development costs, transaction-based costs related to payments services
including remittances of amounts due to third-parties and other costs incurred
in providing support and recurring services to our customers.
We continued to experience growth in sales of our cloud solutions as our
customers continue to prefer cloud subscription offerings with integrated
analytics, training and payment services. Recurring subscription contracts are
typically for a term of three years at contract inception with one to three-year
renewals thereafter. We intend to continue focusing on innovation, quality and
integration of our cloud solutions, which we believe will drive future revenue
growth.
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Recurring revenue increased by $7.8 million or 3.7%, and $14.6 million or 3.6%,
during the three and six months ended June 30, 2020 , respectively, when compared
to the same periods in 2019, driven primarily by the following:
+ Increases in subscriptions revenue of
related to increases in transactional revenue, positive demand from
customers across our portfolio of cloud solutions and increases in services
embedded in our renewable cloud solution contracts
- Decreases in maintenance revenue of
related to our continuing efforts to migrate customers from legacy
on-premises solutions onto our solutions powered by Blackbaud SKY, our
modern cloud platform
Partially offsetting the increases in subscriptions revenue were decreases in
the mix of retained and managed services contracts we present in recurring.
Revenue from retained and managed service contracts that we do not expect to
have a term consistent with our cloud solution contracts is included in one-time
services and other revenue beginning January 1, 2020 . This change in
presentation resulted in decreases in recurring revenue and offsetting increases
to one-time services and other revenue of $4.2 million and $8.5 million during
the three and six months ended June 30, 2020 , respectively.
Cost of recurring revenue increased by $4.7 million or 5.4%, and $9.6 million or
5.6%, during the three and six months ended June 30, 2020 , respectively, when
compared to the same periods in 2019, driven primarily by the following:
+ Impairment charge of
2020, against certain previously capitalized software development costs that
reduced the carrying value of those assets to zero. The impairment charge
resulted primarily from our decision to accelerate the end of customer
support for certain solutions.
+ Increases in hosting and data center costs of
as we are migrating our cloud infrastructure to leading public cloud service
providers
+ Increases in amortization of software development costs of
$2.2 million due to investments made on innovation, quality and the integration of our cloud solutions + Increases in transaction-based costs of$0.7 million and$3.0 million related to payment services integrated in our cloud solutions
+ For the six months ended
costs of
delivering services embedded in our renewable cloud solution contracts
- Decreases in compensation costs primarily associated with the decision to
replace our 2020 cash bonus plans with grants of performance-based equity
awards
- Decreases in costs associated with certain retained and managed services
contracts for which revenue is included in one-time services and other
revenue beginning
The 0.7% and 0.8% decreases in recurring gross margin for the three and six months endedJune 30, 2020 , respectively, when compared to the same periods in 2019, were primarily the result of the impairment of previously capitalized software development costs, and incremental costs associated with our continued shift toward selling cloud solutions, including data center costs and amortization of software development costs. We expect continued pressure on recurring gross margin largely driven by duplicate data center costs as we migrate our cloud infrastructure to leading cloud service providers.
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One-time services and other
Gross profit ($M)
Revenue ($M) Cost of revenue ($M) and gross margin (%)
YoY Growth (%) YoY Growth (%)
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One-time services and other revenue is comprised of fees for one-time
consulting, analytic and onsite training services, fees for retained and managed
services contracts that we do not expect to have a term consistent with our
cloud solution contracts, revenue from the sale of our software sold under
perpetual license arrangements, fees from user conferences and third-party
software referral fees.
Cost of one-time services and other is primarily comprised of compensation costs
for professional services and onsite training personnel, other costs incurred in
providing onsite customer training, third-party contractor expenses, data
expense incurred to perform one-time analytic services, third-party software
royalties, costs of user conferences, allocated depreciation, facilities and IT
support costs and amortization of intangible assets from business combinations.
One-time services and other revenue decreased by $1.4 million , or 8.4%, and $0.4
million , or 1.2%, during the three and six months ended June 30, 2020 ,
respectively, when compared to the same periods in 2019, driven primarily by the
following:
+ Increases in the mix of retained and managed services contracts we present
in one-time services and other. Revenue from retained and managed service
contracts that we do not expect to have a term consistent with our cloud
solution contracts is included in one-time services and other revenue
beginning
to one-time services and other revenue and offsetting decreases in recurring
revenue of
ended
- Decreases in one-time consulting revenue of
respectively, primarily from less one-time sales related to COVID-19 as well
as services increasingly being embedded in our renewable cloud solution
contracts. Our embedded services are recorded as recurring revenue.
- Decreases in one-time analytics revenue of
analytics are generally integrated in our cloud solutions
- For the six months ended
training services and license fees
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Cost of one-time services and other decreased by $0.6 million , or 4.1%, during
the three months ended June 30, 2020 , when compared to the same periods in 2019,
driven primarily by the following:
+ Increase in costs of associated with certain retained and managed services
contracts for which revenue is included in one-time services and other
revenue beginning
- Reduced amount of compensation costs primarily associated with the decision
to replace our 2020 cash bonus plans with grants of performance-based equity
awards
Cost of one-time services and other remained relatively consistent during the six months endedJune 30, 2020 , when compared to the same period in 2019. The 3.9% and 1.5% decreases in one-time services and other gross margin during the three and six months endedJune 30, 2020 , respectively, when compared to the same periods in 2019, were primarily the result of the reductions in one-time consulting and analytics revenue discussed above outpacing declines in the related costs. Operating Expenses Sales, marketing and General and customer success ($M) Research and development ($M) administrative ($M) Percentages indicate expenses as a percentage of total
revenue
[[Image Removed: chart-6fa101fd81445f8690d.jpg]][[Image Removed: chart-3e5decf7a43054648c2.jpg]][[Image Removed: chart-496d59f7ccf6521c840.jpg]] [[Image Removed: chart-d4ec9f58f4c7812cfd3.jpg]][[Image Removed: chart-ad587f80cbbf5b94317.jpg]][[Image Removed: chart-4fb9acc9ac99cf203c0.jpg]] Sales, marketing and customer success Sales, marketing and customer success expense includes compensation costs, variable sales commissions, travel-related expenses, advertising and marketing materials, public relations costs, variable reseller commissions and allocated depreciation, facilities and IT support costs. We see a large market opportunity in the long-term and will continue to make investments to drive sales effectiveness, which is a component of our four-point growth strategy. We have also implemented software tools to enhance our digital footprint and drive lead generation. In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives. After temporarily freezing our hiring efforts due to COVID-19, we have since began backfilling sales positions with a focus on 2021 bookings.
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Sales, marketing and customer success expense decreased by $3.1 million or 5.6%,
during the three months ended June 30, 2020 , when compared to the same period in
2019, primarily driven by the following:
+ Increase in employee severance costs of
in our sales headcount in response to the COVID-19 pandemic as discussed
above
- Decrease in travel costs of $1.9 million due to our restriction on
non-essential employee travel in response to the COVID-19 pandemic
- Decrease in compensation costs of $1.7 million primarily related to the
decision to replace our 2020 cash bonus plans with grants of
performance-based equity awards
- Decrease in commissions expense of $0.7 million related to a decrease in
commissionable sales.
Sales, marketing and customer success expense remained relatively consistent
during the six months ended June 30, 2020 , when compared to the same period in
2019, primarily driven by the following:
+ Increase in employee severance costs of
in our sales headcount in response to the COVID-19 pandemic as discussed
above
+ Increase in compensation costs of
elevated headcount of our direct sales force and our lead generation teams,
beginning in the fourth quarter of 2018. The increase in compensation costs
related to elevated headcount was partially offset by the decision to
replace our 2020 cash bonus plans with grants of performance-based equity
awards
- Decrease in travel costs of $1.4 million due to our restriction on
non-essential employee travel in response to the COVID-19 pandemic
Research and development
Research and development expense includes compensation costs for engineering and
product management personnel, third-party contractor expenses, software
development tools and other expenses related to developing new solutions or
upgrading and enhancing existing solutions that do not qualify for
capitalization, and allocated depreciation, facilities and IT support costs.
We continue to make investments to delight our customers with innovative cloud
solutions, which is a component of our four-point growth strategy. Research and
development expenses decreased by $1.0 million or 3.9%, and $4.5 million or
8.3%, during the three and six months ended June 30, 2020 , respectively, when
compared to the same periods in 2019, primarily driven by decreases in
compensation costs of $1.8 million and $3.5 million , respectively, associated
with the decision in March 2020 to replace our 2020 cash bonus plans with grants
of performance-based equity awards.
Not included in research and development expense for the three months ended
June 30, 2020 and 2019 were $10.6 million and $11.7 million , respectively, and
for the six months ended June 30, 2020 and 2019 were $21.4 million and $22.8
million , respectively, of qualifying costs associated with development
activities that are required to be capitalized under the internal-use software
accounting guidance such as those for our cloud solutions, as well as
development costs associated with acquired companies. Qualifying capitalized
software development costs associated with our cloud solutions are subsequently
amortized to cost of subscriptions revenue over the related asset's estimated
useful life, which generally range from three to seven years. We expect that the
amount of software development costs capitalized will be relatively consistent
in the near-term as we continue making investments in innovation, quality and
the integration of our solutions, which we believe will drive long-term revenue
growth.
General and administrative
General and administrative expense consists primarily of compensation costs for
general corporate functions, including senior management, finance, accounting,
legal, human resources and corporate development, third-party professional fees,
insurance, allocated depreciation, facilities and IT support costs,
acquisition-related expenses and other administrative expenses.
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General and administrative expense increased by $1.3 million or 4.6%, during the
three months ended June 30, 2020 and remained relatively consistent during the
six months ended June 30, 2020 , when compared to the same periods in 2019,
primarily driven by the following:
+ Increases in corporate costs of
related to increases in bad debt expense
- Decreases in bonus expense of
related to the decision to replace our 2020 cash bonus plans with grants of
performance-based equity awards
Restructuring
During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial commitments, which was substantially completed as ofDecember 2019 . During the three and six months endedJune 30, 2019 , we incurred$0.7 million and$2.7 million , respectively, in before-tax restructuring charges related to these activities. Such charges during the three and six months endedJune 30, 2020 were insignificant. Interest Expense Three months ended Six months ended June 30, June 30, (dollars in millions) 2020 2019 Change 2020 2019 Change Interest expense$ 3.9 $ 5.8 (32.9 )%$ 8.1 $ 11.1 (27.6 )% % of total revenue 1.7 % 2.6 % 1.8 % 2.5 % The decreases in interest expense in dollars and as a percentage of total revenue during the three and six months endedJune 30, 2020 , when compared to the same periods in 2019, were primarily due to decreases in our average daily borrowings and our weighted average effective interest rates. Deferred Revenue The table below compares the components of deferred revenue from our consolidated balance sheets: June 30, December 31, (dollars in millions) Timing of recognition 2020 2019 Change Recurring Over the period billed in advance, generally one year$ 322.1 $ 302.8 6.4 % One-time services and other As services are delivered 15.1 13.4 12.8 % Total deferred revenue(1) 337.2 316.1 6.7 % Less: Long-term portion 4.6 1.8 156.7 % Current portion(1)$ 332.6 $ 314.3 5.8 %
(1) The individual amounts for each year may not sum to total deferred revenue or
current portion of deferred revenue due to rounding.
To the extent that our customers are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue. Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter, billed annually in advance and non-cancelable. We generally invoice our customers with recurring revenue contracts in annual cycles 30 days prior to the end of the contract term. Deferred revenue from recurring revenue contracts increased during the six months endedJune 30, 2020 , primarily due a seasonal increase in customer contract renewals and new subscription sales of our cloud solutions. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter. Deferred revenue from one-time services and other increased during the six months endedJune 30, 2020 , primarily due an increase in the mix of retained and managed services contracts we present in one-time services and other beginningJanuary 1, 2020 , as discussed above. We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue from customer arrangements predating the acquisition to
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fair value, which resulted in lower recorded deferred revenue as of the
acquisition date than the actual amounts paid in advance for solutions and
services under those customer arrangements. Therefore, our deferred revenue
after an acquisition will not reflect the full amount of deferred revenue that
would have been reported if the acquired deferred revenue was not written down
to fair value. Further explanation of this impact is included below under the
caption "Non-GAAP financial measures".
Income tax provision
Three months ended Six months ended
June 30, June 30,
(dollars in millions) 2020 2019 Change 2020 2019 Change
Income tax provision $ 4.5 $ 2.7 64.5 % $ 5.2 $ 0.9 477.5 %
Effective income tax rate 27.6 % 27.7 % 24.0 % 13.0 %
The increase in our effective income tax rate during the six months ended
June 30, 2020 , when compared to the same period in 2019, was primarily
attributable to improved 2020 profitability and changes in jurisdictional mix
and reduced 2020 non-deductible costs. Furthermore, our 2020 effective tax rate
was negatively impacted by a decrease in the total discrete benefit to income
tax expense related to stock-based compensation.
Non-GAAP Financial Measures
The operating results analyzed below are presented on a non-GAAP basis. We use
non-GAAP revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP income
from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP
diluted earnings per share internally in analyzing our operational performance.
Accordingly, we believe these non-GAAP measures are useful to investors, as a
supplement to GAAP measures, in evaluating our ongoing operational performance.
While we believe these non-GAAP measures provide useful supplemental
information, non-GAAP financial measures should not be considered in isolation
from, or as a substitute for, financial information prepared in accordance with
GAAP. In addition, these non-GAAP financial measures may not be completely
comparable to similarly titled measures of other companies due to potential
differences in the exact method of calculation between companies.
We have acquired businesses whose net tangible assets include deferred revenue.
In accordance with GAAP reporting requirements, we recorded write-downs of
deferred revenue under arrangements predating the acquisition to fair value,
which resulted in lower recognized revenue than the contributed purchase price
until the related obligations to provide services under such arrangements are
fulfilled. Therefore, our GAAP revenues after the acquisitions will not reflect
the full amount of revenue that would have been reported if the acquired
deferred revenue was not written down to fair value. The non-GAAP measures
described below reverse the acquisition-related deferred revenue write-downs so
that the full amount of revenue booked by the acquired companies is included,
which we believe provides a more accurate representation of a revenue run-rate
in a given period and, therefore, will provide more meaningful comparative
results in future periods.
The non-GAAP financial measures discussed below exclude the impact of certain
transactions because we believe they are not directly related to our operating
performance in any particular period, but are for our long-term benefit over
multiple periods. We believe that these non-GAAP financial measures reflect our
ongoing business in a manner that allows for meaningful period-to-period
comparisons and analysis of trends in our business.
Second Quarter 2020 Form 10-Q [[Image Removed: bblogo.jpg]] 33
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Three months ended Six months ended
June 30, June 30,
(dollars in millions) 2020 2019 Change 2020 2019 Change
GAAP Revenue $ 232.0 $ 225.6 2.8 % $ 455.6 $ 441.5 3.2 %
Non-GAAP adjustments:
Add: Acquisition-related
deferred revenue write-down - 0.7 (100.0 )% - 1.4 (100.0 )%
Non-GAAP revenue(1) $ 232.0 $ 226.4 2.5 % $ 455.6 $ 442.9 2.9 %
GAAP gross profit $ 127.1 $ 124.8 1.8 % $ 245.8 $ 241.4 1.8 %
GAAP gross margin 54.8 % 55.3 % 54.0 % 54.7 %
Non-GAAP adjustments:
Add: Acquisition-related
deferred revenue write-down - 0.7 (100.0 )% - 1.4 (100.0 )%
Add: Stock-based compensation
expense 2.6 0.8 224.9 % 3.4 1.8 94.6 %
Add: Amortization of
intangibles from business
combinations 9.7 11.3 (14.5 )% 20.6 22.7 (9.4 )%
Add: Employee severance 0.8 - (19,625.0 )% 0.8 1.1 (27.1 )%
Subtotal(1) 13.0 12.8 1.6 % 24.9 27.1 (8.1 )%
Non-GAAP gross profit(1) $ 140.1 $ 137.7 1.8 % $ 270.7 $ 268.4 0.8 %
Non-GAAP gross margin 60.4 % 60.8 % 59.4 % 60.6 %
(1) The individual amounts for each year may not sum to non-GAAP revenue,
subtotal or non-GAAP gross profit due to rounding.
34 [[Image Removed: bblogo.jpg]] Second Quarter 2020 Form 10-Q
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Blackbaud, Inc.
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Three months ended Six months ended
June 30, June 30,
(dollars in millions, except per
share amounts) 2020 2019 Change 2020 2019 Change
GAAP income from operations $ 19.6 $ 13.5 45.1 % $ 28.0 $ 15.7 78.7 %
GAAP operating margin 8.4 % 6.0 % 6.1 % 3.6 %
Non-GAAP adjustments:
Add: Acquisition-related deferred
revenue write-down - 0.7 (100.0 )% - 1.4 (100.0 )%
Add: Stock-based compensation
expense 20.1 15.0 34.0 % 33.7 28.8 17.2 %
Add: Amortization of intangibles
from business combinations 10.4 12.5 (16.6 )% 22.1 25.3 (12.6 )%
Add: Employee severance 4.3 0.2 2,132.5 % 4.4 3.6 20.7 %
Add: Acquisition-related
integration costs (0.1 ) 0.5 (115.3 )% (0.1 ) 1.2 (108.7 )%
Add: Acquisition-related expenses 0.1 0.4 (76.7 )% 0.2 0.8 (72.3 )%
Add: Restructuring costs 0.1 0.7 (93.2 )% 0.1 2.7 (97.2 )%
Subtotal(1) 34.9 30.0 16.3 % 60.4 63.7 (5.3 )%
Non-GAAP income from
operations(1) $ 54.5 $ 43.5 25.3 % $ 88.4 $ 79.4 11.3 %
Non-GAAP operating margin 23.5 % 19.2 % 19.4 % 17.9 %
GAAP income before provision for
income taxes $ 16.3 $ 9.9 65.3 % $ 21.7 $ 6.9 213.1 %
GAAP net income $ 11.8 $ 7.1 65.6 % $ 16.5 $ 6.0 173.5 %
Shares used in computing GAAP
diluted earnings per share 48,418,378 48,160,684 0.5 % 48,465,077 48,101,212 0.8 %
GAAP diluted earnings per share $ 0.24 $ 0.15 60.0 % $ 0.34 $ 0.13 161.5 %
Non-GAAP adjustments:
Add: GAAP income tax provision 4.5 2.7 64.5 % 5.2 0.9 477.5 %
Add: Total non-GAAP adjustments
affecting income from operations 34.9 30.0 16.3 % 60.4 63.7 (5.3 )%
Non-GAAP income before provision
for income taxes 51.2 39.8 28.5 % 82.0 70.7 16.1 %
Assumed non-GAAP income tax
provision(2) 10.2 8.0 28.5 % 16.4 14.1 16.1 %
Non-GAAP net income(1) $ 41.0 $ 31.9 28.5 % $ 65.6 $ 56.5 16.1 %
Shares used in computing non-GAAP
diluted earnings per share 48,418,378 48,160,684 0.5 % 48,465,077 48,101,212 0.8 %
Non-GAAP diluted earnings per
share $ 0.85 $ 0.66 28.8 % (1) The individual amounts for each year may not sum to subtotal, non-GAAP income
from operations or non-GAAP net income due to rounding.
(2) We apply a non-GAAP effective tax rate of 20.0% when calculating non-GAAP net
income and non-GAAP diluted earnings per share.
Non-GAAP free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development, and capital expenditures for property and equipment.
Six months ended
June 30,
(dollars in millions) 2020 2019 Change
GAAP net cash provided by operating activities
$ 9.9 $ 15.5 (36.0 )%
Second Quarter 2020 Form 10-Q [[Image Removed: bblogo.jpg]] 35
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Blackbaud, Inc.
(Unaudited)
Non-GAAP organic revenue growth
In addition, we discuss non-GAAP organic revenue growth, non-GAAP organic
revenue growth on a constant currency basis and non-GAAP organic recurring
revenue growth, in analyzing our performance. We believe that these non-GAAP
measures are useful to investors, as a supplement to GAAP measures, for
evaluating the periodic growth of our business on a consistent basis. Each of
these measures of non-GAAP organic revenue growth excludes incremental
acquisition-related revenue attributable to companies acquired in the current
fiscal year. For companies, if any, acquired in the immediately preceding fiscal
year, each of these non-GAAP organic revenue growth measures reflects
presentation of full year incremental non-GAAP revenue derived from such
companies as if they were combined throughout the prior period, and they include
the non-GAAP revenue attributable to those companies, as if there were no
acquisition-related write-downs of acquired deferred revenue to fair value as
required by GAAP. In addition, each of these non-GAAP organic revenue growth
measures excludes prior period revenue associated with divested businesses. The
exclusion of the prior period revenue is to present the results of the divested
businesses within the results of the combined company for the same period of
time in both the prior and current periods. We believe this presentation
provides a more comparable representation of our current business' organic
revenue growth and revenue run-rate.
Three months ended Six months ended
June 30, June 30,
(dollars in millions) 2020 2019 2020 2019
GAAP revenue $ 232.0 $ 225.6 $ 455.6 $ 441.5
GAAP revenue growth 2.8 % 3.2 %
Add: Non-GAAP acquisition-related revenue
(1) - 0.7 - 1.4
Non-GAAP organic revenue (2) $ 232.0 $ 226.4 $ 455.6 $ 442.9
Non-GAAP organic revenue growth 2.5 % 2.9 %
Non-GAAP organic revenue (2)$ 232.0 $ 226.4 $ 455.6 $ 442.9 Foreign currency impact on Non-GAAP organic revenue (3) 2.0 - 2.3 - Non-GAAP organic revenue on constant currency basis (3)$ 234.0 $ 226.4 $ 457.9 $ 442.9 Non-GAAP organic revenue growth on constant currency basis 3.4 % 3.4 % GAAP recurring revenue$ 216.3 $ 208.5 $ 421.1 $ 406.6 GAAP recurring revenue growth 3.7 % 3.6 % Add: Non-GAAP acquisition-related revenue (1) - 0.7 - 1.4 Non-GAAP organic recurring revenue$ 216.3 $ 209.2 $ 421.1 $ 408.0 Non-GAAP organic recurring revenue growth 3.4 %
3.2 %
(1) Non-GAAP acquisition-related revenue excludes incremental acquisition-related
revenue calculated in accordance with GAAP that is attributable to companies
acquired in the current fiscal year. For companies, if any, acquired in the
immediately preceding fiscal year, non-GAAP acquisition-related revenue
reflects presentation of full-year incremental non-GAAP revenue derived from
such companies, as if they were combined throughout the prior period, and it
includes the non-GAAP revenue from the acquisition-related deferred revenue
write-down attributable to those companies.
(2) Non-GAAP organic revenue for the prior year periods presented herein will not
agree to non-GAAP organic revenue presented in the respective prior period
quarterly financial information solely due to the manner in which non-GAAP
organic revenue growth is calculated.
(3) To determine non-GAAP organic revenue growth on a constant currency basis,
revenues from entities reporting in foreign currencies were translated to
foreign currency exchange rates. The primary foreign currencies creating the
impact are the Australian Dollar, British Pound, Canadian Dollar and EURO.
36 [[Image Removed: bblogo.jpg]] Second Quarter 2020 Form 10-Q
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Blackbaud, Inc.
(Unaudited)
Seasonality
Our revenues normally fluctuate as a result of certain seasonal variations in
our business. Our transaction revenue has historically been at its lowest in the
first quarter due to the timing of customer fundraising initiatives and events.
Our revenue from payment services has historically increased during the fourth
quarter due to year-end giving. Our revenue from professional services has
historically been lower in the first quarter when many of those services
commence and in the fourth quarter due to the holiday season. As a result of
these and other factors, our total revenue has historically been lower in the
first quarter than in the remainder of our fiscal year, with the fourth quarter
historically achieving the highest total revenue. Our expenses, however, do not
vary significantly as a result of these factors, but do fluctuate on a quarterly
basis due to varying timing of expenditures. Our cash flow from operations
normally fluctuates quarterly due to the combination of the timing of customer
contract renewals including renewals associated with customers of acquired
companies, delivery of professional services and occurrence of customer events,
the payment of bonuses, as well as merit-based salary increases, among other
factors. Historically, due to lower revenues in our first quarter, combined with
the payment of bonuses from the prior year in our first quarter and the payment
of certain annual vendor contracts, our cash flow from operations has been
lowest in our first quarter. Due to the timing of customer contract renewals and
student enrollments, many of which take place at or near the beginning of our
third quarter, our cash flow from operations has been lower in our second
quarter as compared to our third and fourth quarters. Partially offsetting these
favorable drivers of cash flow from operations in our third and fourth quarters
are merit-based salary increases, which are generally effective in April each
year. In addition, deferred revenues can vary on a seasonal basis for the same
reasons. Our cash flow from financing is negatively impacted in our first
quarter when most of our equity awards vest, as we pay taxes on behalf of our
employees related to the settlement or exercise of equity awards. These patterns
may change as a result of the continued shift to online giving, growth in volume
of transactions for which we process payments, or as a result of acquisitions,
new market opportunities, new solution introductions, the COVID-19 pandemic or
other factors.
Liquidity and Capital Resources
The following table presents selected financial information about our financial
position:
June 30, December 31,
(dollars in millions) 2020 2019 Change
Cash and cash equivalents $ 30.5 $ 31.8 (4.0 )%
Property and equipment, net 36.5 35.5 2.8 %
Software development costs, net 106.0 101.3 4.7 %
Total carrying value of debt 488.1 467.1 4.5 %
Working capital (191.8 ) (254.3 ) 24.6 %
The following table presents selected financial information about our cash
flows:
Six months ended June 30,
(dollars in millions) 2020 2019 Change
Net cash provided by operating activities $ 37.5 $ 45.1 (16.9 )%
Net cash used in investing activities (27.6 ) (138.5 ) (80.1 )%
Net cash (used in) provided by financing activities (132.5 ) 30.8 (529.7 )%
Our principal sources of liquidity are our operating cash flow, funds available under the 2017 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription and maintenance arrangements, market acceptance of our solutions and services and our customers' ability to pay. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures and meet our debt obligations. To the extent we undertake future material acquisitions, investments or unanticipated capital expenditures, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure including through potential debt or equity issuances.
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To better enable us to weather the extraordinary business challenges brought
about by the global COVID-19 pandemic, to protect the safety and welfare of our
employees, and to further effect our long-term strategy to deliver the greatest
value to our stockholders, we have taken several actions. These initial measures
taken are expected to provide us the financial flexibility needed to manage a
wide array of outcomes that may result from the pandemic. Some of these actions
include the following:
• Rescinded our previously announced policy to pay an annual dividend at a
rate of
payment of all cash dividends, beginning with the second quarter of 2020 and
thereafter until such time, if any, as our Board of Directors may otherwise
determine in its sole discretion;
• Temporarily suspended our 401(k)-match program, whereby we have historically
matched 50% of qualified
to 6% of their salaries, effective with the payroll period commencing April
1, 2020;
• Temporarily froze our hiring efforts and implemented a modest and targeted
headcount reduction, though we have since began backfilling sales positions;
•
forego receipt of all but that portion of his base salary necessary to fund,
on a pre-tax basis, his contributions to continue to participate in our
health benefits plan, between April 1, 2020 and June 16, 2020 ;
• Restricted non-essential employee travel and put in place other operating
cost containment actions;
• All of our employees with a base salary equal to or less than
received financial support in the form of a one-time bonus of
• On
salary merit increases in lieu of such increases, which will vest on
2021 subject to the recipient's continued employment with us; and
• On
2020 cash bonus plan in lieu of such cash bonus, which may be earned and
become eligible for vesting on
performance conditions and the recipient's continued employment with us.
In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed. We have started to experience an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic. We have received short-term payment relief requests as a result of COVID-19, most often in the form of payment deferral requests. We are evaluating each request on a case-by-case basis to assess the customer's ability to pay. Not all customer requests will ultimately result in modified payment terms, nor are we forgoing our contractual rights under customer agreements. We are continually monitoring our customer receivable balances, payment terms, and creditworthiness for changes that could have a significant impact on the collectability of our accounts receivables, our operating results and financial position. AtJune 30, 2020 , our total cash and cash equivalents balance included approximately$21.8 million of cash that was held by operations outside theU.S. While these funds may not be needed to fund ourU.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside theU.S. Operating Cash Flow Net cash provided by operating activities decreased by$7.6 million during the six months endedJune 30, 2020 , when compared to the same period in 2019, primarily due to a$28.0 million decrease in cash flow from operations associated with working capital, partially offset by a$20.4 million increase in net income adjusted for non-cash expenses. Throughout both periods, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash expenses such as depreciation, amortization, stock-based compensation, amortization of deferred financing costs and debt discount and adjustments to our provision for credit losses and sales returns; and (ii) changes in our working capital. The increase in net income adjusted for non-cash expenses was primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation.
38 [[Image Removed: bblogo.jpg]] Second Quarter 2020 Form 10-Q
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Blackbaud, Inc.
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Working capital changes are composed of changes in accounts receivable, prepaid
expenses and other assets, trade accounts payable, accrued expenses and other
liabilities, and deferred revenue. The decrease in cash flow from operations
associated with working capital during the six months ended June 30, 2020 , when
compared to the same period in 2019, was primarily due to:
• an increase in current period bonus payments as a result of an increase in
amounts accrued as of December 31, 2019 for over-performance against 2019
targets;
• a decrease in the current period bonus accrual due to our decision toreplace cash payments for our 2020 bonus plans with performance-based
equity awards; and
• fluctuations in the timing of vendor payments.
Investing Cash Flow Net cash used in investing activities of$27.6 million decreased by$110.9 million during the six months endedJune 30, 2020 , when compared to the same period in 2019. During the six months endedJune 30, 2019 , we used net cash of$109.4 million for our acquisition of YourCause and we did not make any similar investments during the same period in 2020. During the six months endedJune 30, 2020 , we used$21.7 million for software development costs, which was relatively consistent with cash spent during the same period in 2019. We continue to invest in our innovative cloud solutions, as well as development activities for Blackbaud SKY, our modern cloud platform. We also spent$5.9 million of cash for purchases of property and equipment during the six months endedJune 30, 2020 , which was relatively consistent with cash spent during the same period in 2019. Financing Cash Flow During the six months endedJune 30, 2020 , we had a net increase in borrowings of$16.9 million , down from a net increase of$58.6 million during the three months endedMarch 31, 2020 . Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from prior year in our first quarter and the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter. We paid$21.0 million to satisfy tax obligations of employees upon settlement of equity awards during the six months endedJune 30, 2020 compared to$19.8 million during the same period in 2019. The amount of taxes paid by us on the behalf of employees related to the settlement of equity awards varies from period to period based upon the timing of grants and vesting, as well as the market price for shares of our common stock at the time of settlement. Most of our equity awards currently vest in our first quarter. In addition, during the six months endedJune 30, 2020 , we paid dividends of$6.0 million , down from$11.8 million during the same period of 2019, as we discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020. Cash used in financing activities associated with changes in restricted cash due to customers decreased$13.8 million during the six months endedJune 30, 2020 when compared to the same period in 2019, as the amount of restricted cash held and payable by us to customers as ofDecember 31, 2019 was larger than at the same date in 2018. 2017 Credit Facility We have drawn on our credit facility from time to time to help us meet financial needs, such as financing for business acquisitions. AtJune 30, 2020 , our available borrowing capacity under the 2017 Credit Facility was$190.7 million . The 2017 Credit Facility matures inJune 2022 . The 2017 Credit Facility includes an option to request additional term loans in an aggregate principal amount of up to$200.0 million . AtJune 30, 2020 , the carrying amount of our debt under the 2017 Credit Facility was$484.2 million . Our average daily borrowings during the three and six months endedJune 30, 2020 were$526.3 million and$508.9 million , respectively.
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Blackbaud, Inc.
(Unaudited)
The following is a summary of the financial covenants under the 2017 Credit
Facility:
Financial Covenant Requirement Ratio as of
Under the 2017 Credit Facility, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. In order to pay any cash dividends and/or repurchase shares of stock: (i) no default or event of default shall have occurred and be continuing under the 2017 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2017 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. AtJune 30, 2020 , we were in compliance with our debt covenants under the 2017 Credit Facility. Commitments and Contingencies As ofJune 30, 2020 , we had contractual obligations with future minimum commitments as follows:
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